Bank taxes would backfire on state economy

Banks are struggling to respond to the worst economic conditions in 80 years. But that challenge pales in comparison to watching our industry become the target of a misinformation campaign that could further erode the financial footing of community banks and impair out ability to serve families, small businesses and communities across our state.

In recent days, a number special interest groups have claimed that the banking industry is escaping taxation in the current revenue proposals being considered by the Legislature. Nothing could be further from the truth.

One of the new tax proposals that is likely to make it into the final budget is the “economic nexus” standard for the business and occupation tax. Of the $72 million that new tax is projected to generate in 2011, approximately $63 million will be paid by banks. No one likes higher taxes, but our industry recognizes that this additional tax is an important contribution toward balancing the state budget. Other, smaller tax proposals will also hit our industry.

But activists are now waging an all-out campaign to eliminate the business and occupation tax exemption on first mortgage interest income. This is not some new, secret tax loophole. First mortgage interest has never been taxed in our state, because the Legislature has always wanted to encourage home ownership. Today, with the housing industry in the tank, why would we want to make it more expensive?

Despite the clear negative economic consequences, proponents claim that repealing this exemption is the right thing to do because it would “send a message” to greedy fat-cats on Wall Street. You have to admit, it’s a catchy sound-bite.

Reality is not nearly so attractive. While the proposal is aimed at big banks, it is virtually impossible to separate the impacts of tax and regulatory policy; measures designed to target larger institutions inevitably have consequences for smaller, community banks. In this case, some community banks would get caught in its cross-hairs. Even if the impact somehow could be limited to big, out-of-state institutions, we must recognize that these banks generally are in the best position to provide loans to first-time homebuyers and those with more challenging finances. Creating a new tax on first mortgages will mean that these loans will become both harder to get and more expensive.

Another proposal would impose a three-year surcharge on the B&O tax rate for service businesses. This would represent a significant tax increase for all banks in Washington state and would impair banks’ ability to provide the capital that will be required to fuel economic recovery.

I recognize that the weak economy creates challenges for everyone. It’s natural to try to find someone to blame for these problems. But trouble arises when all financial institutions are painted with the same brush. The vast majority of subprime, no-documentation loans — the kind of irresponsible lending practice that caused our current financial crisis — were made by entities outside of the traditional banking industry.

As banks all across the state are struggling with the economic aftershocks caused by these non-bank lenders, they continue to serve Washington customers and communities. Their ability to do so is crucial, as our state economy will require a healthy supply of capital from the financial sector if it is to improve. But capital — and the job creation it fuels — is portable. If lawmakers want to “send a message,” a more productive one would be to let all banks — both in-state and national — know that our state is a productive place to continue investing capital. The debate about the root causes of our nation’s current financial crisis and ancillary — and inflammatory — issues like CEO salaries rightfully belongs in Washington, D.C., not in Olympia.

The discussion here should be how to get our state economy moving again. Adopting punitive banking taxation in our state isn’t the way to do it, and would harm the families, small business employers, and communities across Washington.

James M. Pishue is president and CEO of the Washington Bankers Association.

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