Financial institutions, which have paid a very low effective tax rate in past years, would be hit with sizeable increases under President Reagan's tax proposal, according to figures presented yesterday at a House Ways and Means committee hearing.
The most substantive change would be to require financial institutions to pay taxes retroactively on money they have set aside as reserves for bad debts.
Under the Reagan plan, the practice of setting aside untaxed reserves against future losses from loans that go sour would be ended, and all financial institutions would be allowed to deduct only their current charge-offs. The previously deducted reserves would have to be taken back into income over a 10-year period. The total bill for repeal of the loan-loss reserve deduction for both banks and thrifts would amount to $5.1 billion by 1990, the Treasury estimates. The Joint Committee on Taxation puts the figure at $5.3 billion.
The savings industry, which is already facing a serious capital shortage, would be required immediately to subtract an additional $2 billion from its shrinking capital base of $28-37 billion, depending on the accounting system used.
Credit unions, which have been exempt from taxes since the 1930s, would have to begin paying taxes. The Treasury Department's original plan would have taxed all credit unions, but industry objections succeeded in continuing the exemption for credit unions with assets under $5 million in the plan. Nevertheless, one-fifth of all these nonprofit cooperatives, representing 80 percent of credit unions' total assets, would become subject to tax on their retained earnings or reserves. That would increase revenues for fiscal years 1986-90 by $1.7 billion.
Representatives of trade organizations for big banks, savings institutions and credit unions all denounced the provisions yesterday. The only support came from Finn M. W. Casperson, chairman of Beneficial Corp. He said that although it contains some unpleasant increases for finance companies, the reduction in taxes for the low-income consumers they serve would benefit the companies in the end.
According to the Joint Committee on Taxation, financial institutions in 1983 paid an effective U.S. tax rate on U.S. income of 6.4 percent, compared with an average for all companies of 16.7 percent. The average for the years 1980-83 was only 3.8 percent. (Their tax rate on worldwide income was also smaller, 24.3 percent versus an average of 29.2 percent.)
In 1981, the latest year for which an Internal Revenue Service breakdown is available, the share of total corporate tax receipts collected from banks and thrifts amounted to 2.63 percent, or $1.5 billion out of a total of $58.4 billion. The financial industry paid lower taxes than usual that year becuase of unusually heavy loan losses caused by high interest rates.
The administration proposes to increase the financial institution's share measurably. Under Treasury II, depository institutions would pay $9 billion more, or 7.5 percent of $120.2 billion in new corporate taxes. (The Joint Committee calculates the figure at $10 billion, or 8 percent of $122.2 billion in additional business levies.)
Michael P. Esposito, executive vice president of Chase Manhattan Bank, also criticized the president's plan for not offering more incentive to increase savings, for failing to foster international competitiveness, and for its possible revenue losses which would adversely affect the deficit. However, an accountant who has studied the proposals observed privately, "Apart from the recapture provision, I don't think banks would be truly harmed by the entire package."