Supporters of ending a tax break for banks are struggling to win the votes they need in the Legislature.
Majority Democrats are looking for exemptions to purge from the state’s tax code to help close a $2.8 billion budget shortfall, and making banks pay taxes on part of the interest they earn on home mortgages would raise $50 million.
But banks have made the case that targeting Wall Street giants will have unintended casualties closer to home, for medium-size local banks and anyone trying to buy a house.
Amplified by lobbyists patrolling the Legislative Building, the banks’ message has persuaded enough Senate Democrats so far to stifle proposed changes.
Rep. Ross Hunter and other House Democrats are trying to persuade them to tax earnings above $120 million from interest on a home’s first mortgage, along with all earnings from mortgages that banks have resold. Most local banks would not be affected.
Of the nearly 20 community banks in Washington, only the two largest – Washington Federal and Sterling Savings Bank – would be affected by the cap.
“We’re really trying to be careful with the community banks,” Hunter said, “but I think it’s unreasonable that these big hunking banks get to do business in Washington and don’t pay taxes here.”
No other state entirely exempts first mortgages from taxation, the Medina Democrat said. The decades-old deduction appears to have started to help now-defunct Washington Mutual, he said.
Capping banks’ mortgage deduction is one of several controversial tax ideas prolonging the special session in Olympia. House Democrats also want to collect sales tax on custom software and make shoppers from out of state pay sales tax. Senate Democrats prefer raising the sales tax by a fraction of a penny.
Some senators who support raising taxes are worried about the fallout from taxing mortgage earnings at a time when some local banks are folding and homeowners are struggling. Tacoma-based, 78-year-old Rainier Pacific Bank failed last month.
The tax “will get really passed through to the homebuyers,” said Sen. Rosa Franklin, a Tacoma Democrat, “and they already are having a lot of problems as it is.”
Citigroup, KeyBank, Wells Fargo, Bank of America, JPMorgan Chase: Many of the large, out-of-state banks have lobbyists looking out for their interests in Olympia as lawmakers threaten tax hikes.
Big and small banks and their trade associations have at least 17 lobbyists registered to represent them this year, not counting others who represent mortgage brokers, credit unions and other financial firms. Many of those lobbyists split their time between banks and other clients.
The financial industry as a whole spent $243,000 on lobbying in January and February as the session geared up, according to the most recent state Public Disclosure Commission findings.
“I know a lot more people working for the banks this year than there has been in normal years,” Hunter said. “I think they’ve hired a bunch of the heavy hitters this year.”
If there are more lobbyists, said Dave Fisher, a spokesman for the Washington Bankers Association, it’s a sign of the concerns banks have about the effect of taxes on their bottom lines in a “challenging time” for the industry.
TAXES HIT BANKS DIFFERENTLY
Capping the mortgage deduction would be “devastating” for Washington Federal Savings, the state’s largest bank, its chief executive said. The bank earned three times the level where the exemption is proposed to be capped.
CEO Roy Whitehead said the bank earns about $3,600 over the life of a $100,000 home mortgage and would see that drop to roughly $2,700 under the cap.
Banks say they would be hit hard enough by the rest of legislators’ tax increases.
A proposal to raise as much as $84 million by changing how the state taxes out-of-state companies, including banks, has widespread support among Democratic lawmakers. Companies that do significant business in Washington would have to pay business and occupation taxes even if they don’t have a physical presence here.
Banks say $72 million of those new B&O tax revenues would come from their industry. That would be more than the total B&O tax bill for commercial banks in 2007.
While those changes would hit large, out-of-state banks, Hunter says in-state banks would actually see their tax burden decrease.
The effect on community banks is at the center of the debate over the mortgage exemption. Supporters say capping it would mostly hit big banks.
“This benefit has been flowing to large, out-of-state banks that are largely responsible for creating the financial crisis and precipitating the current economic downturn,” said Sandeep Kaushik, a spokesman for the pro-revenue Rebuilding our Economic Future Coalition.
Kaushik said big banks are hiding behind small ones to preserve their tax break.
Kaushik’s coalition, including labor and health care groups, ran newspaper ads asking whether banks bailed out by taxpayers and allowed to hand out bonuses need another tax break.
“There’s no differentiation now in the minds of the public between Washington Federal and Goldman Sachs or JPMorgan,” Whitehead complained. “They sort of paint us all with that same broad brush, but here we are, a company that didn’t participate in any of the abuses.”
Jordan Schrader: 360-786-1826