The arrogance of the banking lobby has to be seen to be believed. As the House Ways and Means Committee was working on President Reagan's tax reform bill this week, the lobbyists succeeded in turning a majority of the members around and, instead of abolishing one particularly dubious tax break for the banks, they actually voted to widen it. It is not as though the commercial banks are overtaxed. To the contrary, banks already pay very little in the way of taxes precisely because of their skill in wedging loopholes into the law.
This one involves the provision that banks make for defaulted loans. Any business can take a deduction for a bad loan. But present law allows banks to set up special reserves -- in amounts not necessarily related to their actual losses -- and take their deductions when they put money into the reserves rather than when the losses actually take place. As the White House pointed out last spring, this obscure little rule means that banks enjoy more favorable tax treatment of bad debts than other businesses that lend to their customers -- department stores, for example. The banks like it that way.
This fragment of tax law may seem esoteric to the point of invisibility, but it means a very substantial amount of money to the banks -- $2.9 billion over the next three years. The president's tax bill would abolish this special preference and put the banks on the same footing as other businesses. The parallel bill put forward by the chairman of Ways and Means, Rep. Dan Rostenkowski, would do the same thing. But when it came up last Tuesday for a decision, the committee, over Mr. Rostenkowski's vehement protests, voted not only to preserve the present tax break for the bankers but also to expand it by an additional $4.7 billion over the next three years.
It's not only an example of greed on the part of the banks. It's also a bad omen for tax reform. The president's plan is to reduce tax rates without losing revenue by abolishing expensive loopholes such as this one. You don't have to be told that the people who currently enjoy these preferences are going to fight to keep them. This week they seem to be winning.