According to the Treasury Department, banking is no longer a “financial service.” With this reclassification, a new Treasury Department proposal hands huge tax breaks to banks.
In 2017, the Tax Cuts and Jobs Act stated that financial services companies were not eligible for the tax breaks they were giving to other corporations. This move somewhat pacified critics, who at the time said the administration was trying to give greater tax cuts to big banks.
A joint report from Splinter News and the investigative-reporting blog Capital & Main points out that a new IRS rule issued by Treasury Secretary Steve Mnuchin on August 6 would change approximately 2,000 banks’ classification to S corporations, making them eligible for the tax cut.
“Commenters requested guidance as to whether financial services includes banking,” the Treasury Department rule now states. “The Treasury Department and the IRS agree with such commenters that this suggests that financial services should be more narrowly interpreted here.Therefore, proposed §1.199A-5(b)(2)(ix) limits the definition of financial services to services typically performed by financial advisors and investment bankers…”
“Financial services” now only includes business such as investment bankers and financial advisers.
“The notion that financial services excludes banking should be quite a surprise to members of the House Financial Services Committee, which thought that it had jurisdiction over banking,” Daniel Hemel, a University of Chicago tax law professor, told Capital & Main.
Hemel calculated that bank owners would reap huge profits from this reclassification.
“If you assume a return on assets of around one percent and S corporation bank assets in the range of $400 billion, then the move reduces the total tax liability of S corporation bank shareholders by $300 million per year for 2018 through 2025,” he said. “We’re talking about something like $2.5 billion total. Small in comparison to the magnitude of the rest of the December 2017 giveaway, but $2.5 billion isn’t chump change.”
The Center for American Progress’ Seth Hanlon, who served on President Obama’s National Economic Council, also criticized the bill.
“This is illustrative of the rigged process behind the bill, which was rushed through Congress without a single public hearing,” Hanlon said. “How many members of Congress, let alone members of the public, understood that ‘financial services’ didn’t mean banking, and therefore that bankers would get a massive tax cut? This is the opposite of real tax reform.”