By Peter Eavis
U.S. banks have been reporting steady growth in earnings since soon after the financial crisis. With the latest reports rolling in, analysts think the banks’ first-quarter profits will be their best ever.
But as welcome as such profits are to the banks, they may also become a source of discomfort. The ballooning bottom lines could embolden the lawmakers and regulators who want to introduce additional measures to overhaul the nation’s banking system.
After the financial crisis, many officials involved in the regulatory revamping feared that tougher rules, like caps on bank assets, could destabilize the U.S. financial system and harm economic growth. It is a view that prominent bankers and lobbyists have also voiced.
Despite industry opposition to new rules, the buoyant bank profits could add to the ammunition that influential figures in Washington are using to advocate for more radical ideas to overhaul the banks.
‘‘I hope the regulators move forward with tougher regulations,’’ said Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, and now a senior adviser at the Pew Charitable Trusts. ‘‘This wouldn’t endanger the economic recovery.’’
Much has been done to strengthen banks since the financial crisis. The Dodd-Frank legislation, which Congress passed in 2010, and international banking standards known as the Basel III rules are forcing banks to hold safer assets, curtail trading activities and set aside more capital to absorb potential losses.
Even so, there is bipartisan support in Washington to do more. Most recently, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, said that they planned to introduce a bill that would require banks to hold considerably more capital. If passed, such a requirement is likely to prompt the largest banks to shrink in size. While a draft of the legislation does not stipulate a maximum size for banks, it requires financial firms with more than $400 billion in assets to hold additional capital. Big banks like Citigroup and Bank of America well exceed that amount, as do Wall Street firms like Morgan Stanley, but regional lenders would fall below that threshold.
The restlessness over the big banks extends beyond Congress.
Daniel K. Tarullo, the Federal Reserve governor who oversees regulation, floated an idea last year for limiting bank size. And Thomas M. Hoenig, vice chairman at the F.D.I.C., has been pushing for the overhaul of large, complex banks, as well as more rigorous capital standards.
The banking industry might be able to bear more regulations, given how it has fared under earlier measures. In some ways, the banks have thrived despite the added costs of all the new rules and demands since 2008.
Dick Bove, a bank analyst at Rafferty Capital Markets, estimates that F.D.I.C.-insured banks will earn $39 billion in the first quarter of this year, which would be a record quarterly showing. ‘‘No one can argue that banks were hurt from a profit standpoint by regulation,’’ he said.
The financial overhauls of the past four years do not appear to have held banks back from indulging in activities that facilitate economic growth. Helped by Wall Street financial firms, U.S. companies have raised huge amounts in capital markets since the crisis. Last year, corporations issued $940 billion worth of bonds, a record amount, according to Dealogic, a data provider. This has happened even as investment banks have scaled back their operations to get ready for regulations they vocally oppose, like the so-called Volcker Rule.
The overhaul does not appear to have hurt the U.S. housing market, either. Large lenders like Wells Fargo have profited well from the recent boom in mortgage refinancing. That activity has also helped homeowners, through sharply lower borrowing rates.
Banks are also making significantly more loans to companies, which bolsters the economy and job growth in many parts of the country. There is even evidence that the overhaul may have helped the banks become better run. Citigroup, which was subject to much regulatory pressure, is more streamlined and reported strong first-quarter earnings this week.
Little of this might have been expected after past warnings from bankers. In 2011, Jamie Dimon, chief executive of JPMorgan Chase, said that the proposed rules to overhaul derivatives, a commonly used financial instrument, ‘‘would damage America.’’ He also said that the Basel rules were ‘‘anti-American.’’ Comment letters filed by lobbyists with regulators used sophisticated-looking models to show how rules could hold back the economy.
‘‘As far as the banks are concerned, there is never a good time to raise capital or increase regulation,’’ Ms. Bair said. ‘‘When times are bad, they say it could hurt things, and when times are good, they say they don’t need it.’’
Some analysts, however, caution against reading too much into the banks’ strong profits. Though banks have been preparing for new rules for months, many of them have not been fully executed, which means the true costs of the measures is not yet known.
Mr. Bove says that, while bank profits have hardly suffered from new regulation, their customers have. Lenders have simply passed on many of the costs, mostly in the form of new fees, he said. ‘‘The government aimed a Stinger missile at the banking industry and missed and hit the consumer instead,’’ said Mr. Bove, who also notes that loans to small business are still weak.
In addition, bank profits may not be as strong as they look, some analysts say. Earnings appear less impressive when taking into account the new capital that banks have to hold. This can be seen when applying a metric called return on equity, which reflects the extra capital.
Financial companies in the Standard & Poor’s 500-stock index had a 7.9 percent return on equity last year, according to data from S.&P. That is below the 10 percent return last year for utilities, also a regulated industry. And the banks’ return is down from the 16 percent return that they achieved in 2006.
That is why some analysts argue that it would be a mistake to force U.S. banks to hold even more capital than they already will under Dodd-Frank and Basel III. They argue that it would depress returns on equity and therefore prompt banks to exit certain businesses, reducing credit in the economy. In a research note last week, a Goldman Sachs bank analyst estimated a Brown-Vitter bill could remove $3.8 trillion worth of credit from the U.S. banking system.
But considering that past dire forecasts have not materialized, advocates for tougher rules may be tempted to press on.
Phillip L. Swagel, a professor at the University of Maryland School of Public Policy, sees risks in adopting higher capital reserves, but he says he thinks the industry’s gloominess can be overdone.‘‘I do understand the frustration of the bank critics when they see pieces like the one from Goldman Sachs saying that the world will end under Brown-Vitter,’’ said Professor Swagel, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.Despite the sharp debate, he says he thinks there is growing agreement among policy makers, and even banks, that more capital might be needed. ‘‘I see consensus on the top-line issue of more capital,’’ he said.
The Obama administration submitted a budget proposal on April 10 that asks for $1 trillion in new revenue and hundreds of tax changes. The overwhelming majority of the proposed tax provisions are recycled from previous proposals, including a number of modifications to the U.S. international tax system, proposals to limit the benefit of deductions to 28%, the Buffett Rule minimum tax, the repeal of the last-in, first-out (LIFO) method of accounting and the repeal of tax benefits for oil, gas and coal producers. The budget also includes several new proposals, including provisions to:
limit retirement plan contributions after accounts exceed certain thresholds,
require derivatives to be marked to market with gain or loss treated as ordinary,
eliminate the deduction for employee stock ownership plan (ESOP) dividends for orporations with more than $5 million in annual gross receipts,
increase tobacco and other excise taxes,
impose shareholder liability for certain corporation “intermediary transaction tax shelters,”
exempt businesses with $10 million or less in annual gross receipts from uniform capitalization (UNICAP) rules,
adopt “chained CPI” to provide shallower annual adjustments for tax items pegged to inflation,
repeal technical terminations of partnerships, and
repeal anti-churning rules of Section 197.
The administration’s budget proposal is typically released in February but arrived late this year. The House and Senate have already approved competing budget proposals and are not expected to reach a resolution. The administration’s budget will not affect the budget process and should instead be viewed as a set of policy goals. It largely represents the president’s position in the ongoing debt negotiations. The latest extension of the federal debt limit is set to expire May 19.
The budget generally seeks to raise $1 trillion in new revenue. This figure is consistent with the president’s offers of a potential “grand bargain” on the deficit, which would have raised more than $1.5 trillion in new revenue. The American Taxpayer Relief Act (ATRA) enacted in January already raised $620 billion in new revenue toward the president’s goal.
Republicans have consistently rejected the administration’s call for more revenue and argue that the revenue fight ended when they agreed to the tax increases in ATRA. The budget includes both revenue-raising provisions and tax benefits, but divides them into three distinct groups: baseline adjustments, general budget proposals and proposals to be included as part of revenue-neutral tax reform.
The baseline adjustments would make permanent several individual tax provisions that would otherwise expire after 2017, including the American Opportunity Tax Credit, the increased refundability of the child tax credit and the enhanced earned income tax credit provisions. These changes are estimated to increase the deficit by $100 billion over 10 years. The baseline does not include the extension of “extender” tax provisions scheduled to expire at year-end. The research credit and some other extender provisions are included in the tax reform section, but the administration did not indicate whether it actually supports allowing the other extender provisions to expire.
The budget describes the tax reform proposals as meant for a revenue-neutral tax reform package to be developed by Congress that would eliminate loopholes and subsidies, broaden the base and cut the corporate tax rate. The proposals include both tax cuts and revenue offsets that together would raise an estimated $94 billion over 10 years. This would not allow for more than a single point to be cut from the corporate rate, so Congress is expected to need to make other changes for the tax reform effort to be meaningful. The tax reform package includes many proposals the president has offered before, including provisions that would:
reform the U.S. international tax system,
establish a permanent research credit,
eliminate fossil fuel preferences,
repeal LIFO, and
make a series of changes benefiting small business and addressing various perceived loopholes.
The budget proposals are described as supporting job creation and investment in infrastructure and reducing the deficit by eliminating tax loopholes and reducing tax benefits for higher-income taxpayers. The net effect of these proposals would raise $1 trillion over 10 years. The lion’s share of new revenue would come from controversial provisions to:
provide shallower inflation adjustments through the use of the chained consumer price index (CPI);
impose a new Buffett Rule minimum tax of 30% on income exceeding $2 million (phasing in beginning with $1 million in income); and
limit the value of deductions and other benefits to 28%.
The president has proposed the Buffett Rule and the limit on the value of tax benefits before, but has never proposed using the chained CPI to slow inflation adjustments. The proposal is unpopular with many congressional Democrats because of its effect on entitlement benefits such as Social Security.
The division of the tax provisions into three groups does not appear very meaningful. Administration officials indicated the decision was more presentational than substantive. Provisions that would normally be grouped by common topics – such as the promotion of small business, elimination of tax loopholes and incentives for investment – are divided into different sections in several cases. Many provisions could have been placed in either the tax reform or budget section, and should be viewed simply as the president’s tax proposals regardless of their section. Accordingly, the following summary of the proposals is organized by topic regardless of where a particular item was placed.
General Business Incentives
The budget again proposes to make the existing research credit permanent and to increase the alternative simplified credit rate from 14% to 17%, effective for research costs paid or incurred after 2012.
Credit for ‘insourcing’
The president is again proposing a new 20% general business credit for the otherwise deductible expenses incurred in connection with “insourcing” a trade or business, effective for expenses occurred after enactment. The Treasury description defines insourcing as reducing or eliminating a trade or business (or line of business) currently conducted outside the United States, and starting or expanding the same trade or business within the United States to the extent this action generates U.S. jobs. The cost of severance pay and other assistance to displaced workers in the foreign jurisdiction would not be eligible for the credit. This provision is paired with a revenue offset described in the following that disallows deductions for “offshoring transactions.”
Section 179 expensing
This proposal would permanently set the Section 179 small business expensing limit at $500,000, with the phaseout range starting at $2 million. Both figures would be indexed to inflation.
Grant Thornton insight: These amounts are greater than the $250,000 and $800,000 in the tax reform discussion draft from House Ways and Means Char Dave Camp, R-Mich.
QSB stock exclusion
The budget proposes to provide a permanent 100% exclusion for gains on qualified small businesses (QSBs). Last year’s budget would only have extended the 100% exclusion instead of making it permanent. The budget again proposes to extend the rollover period from 60 days to six months for QSB stock acquired. Additional reporting requirements will be provided to ensure compliance.
New credit for manufacturing in areas affected by job losses
This proposal, new in last year’s budget, would again create a new credit program to support investments in communities that have suffered a “major job loss event,” described as a military base closure or reduction or closure of a major employer that results in a “long-term mass layoff.” Similar to the new markets tax credit and Section 48C advanced energy manufacturers credit, taxpayers would have to apply for a limited credit allocation. The president is proposing a $2 billion yearly allocation in 2014, 2015 and 2016.
New job creation credit
The budget again proposes a temporary employer credit equal to 10% of the difference between an employer’s eligible wages in the 12 months following the date of enactment and its 2012 eligible wages, up to a maximum credit of $500,000 per employer. Eligible wages would be those subject to OASDI (old age, survivors and disability insurance) taxes (up to $110,100 in wages in 2012 and $113,700 in 2013). Self-employment income would not count. All corporations that are members of a controlled group would be treated as a single employer, and all employees under common control would be treated as employees of the same employer. The credit would be available to both taxable and tax-exempt employers other than states, political subdivisions or any of their instrumentalities. Public institutions of higher education would be eligible for the credit.
America Fast Forward bonds
The budget proposes a new permanent America Fast Bond program similar to the existing Build America bond program. Interest on America Fast forward bonds would not be taxable, but Treasury would make direct payment to state and local issuers equal to 28% of the coupon interest on the bonds. The proposal would also allow a temporary 50% subsidy rate in 2014 and 2015 for school construction.
The budget again proposes to permanently increase the amount of start-up expenditures that can be deducted, from $5,000 to $10,000, effective for tax years beginning after enactment. The deduction would be phased out dollar-for-dollar for start-up expenditures exceeding $60,000. A similar rule in the discussion draft from House Ways and Means Chair Dave Camp, R-Mich., would apply a $10,000 limit to combined startup and organizational expenditures.
Work opportunity tax credit
The budget proposes to make the work opportunity tax credit permanent.
Exclude small businesses from UNICAP on self-constructed property
Under this new proposal, taxpayers whose average annual gross receipts do not exceed $10 million would not be required to apply the UNICAP rules of Section 263A to property they construct (or have constructed on their behalf) for use in their trade or business. Property that is constructed for sale in their trade or business would continue to be subject to the UNICAP rules. The budget proposal would be effective for costs incurred in taxable years beginning after 2013.
The budget would enhance or expand many bond provisions, including provisions to:
authorize refunding of all state and local bonds if the refunding does not increase the amount of principal or lengthen the weighted average maturity of the refunded bonds;
repeal $150 million limit on the volume of outstanding, nonhospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization; and
increase the limit on qualified highway freight transfer facility bonds.
Energy production and property credits
The budget would expand the Section 45 production tax credit to energy produced from new solar facilities and make the credit permanent. The credit would be refundable for projects whose construction begins after 2013. Unlike last year’s budget, this budget does not propose to extend the grant in lieu of the Section 48 tax credit.
New $2.5 billion Section 48C allocation
The president is again proposing to revive the 30% Section 48C credit for investment in property used to manufacture renewable energy equipment with a new allocation of $2.5 billion, down from the $5 billion proposal in the last budget. The 2009 stimulus bill created the credit but with a one-time allocation of only $2.3 billion.
Replacement for the plug-in electric vehicle credit
The president is again proposing to replace the Section 30D plug-in electric drive motor vehicle with a broader credit for vehicles that operate on alternatives to petroleum using technology currently not in wide use (to be determined by the Treasury and the Department of Energy), as long as the technology exceeds the footprint-based target miles-per-gallon gasoline equivalent by 25%. The credit would be based on the vehicle’s efficiency and would be capped at $10,000, and phase out from 2018 to 2020.
Credit for alternative fuel heavy vehicles
The budget again proposes a new credit for alternative fuel vehicles weighing more than 14,000 pounds, equal to 50% of the incremental cost of the vehicles compared to the cost of comparable diesel or gas vehicles. The credit would be capped at $25,000 for vehicles weighing up to 26,000 pounds and $40,000 for vehicles weighing more than 26,000 pounds. The credit would be allowed for vehicles placed in service from 2014 to 2019.
Energy-efficient commercial building credit
The budget proposes to replace the existing $0.60 to $1.80-per-square-foot deduction for property expenditures for energy-efficient commercial buildings to a deduction ranging between $1 per square foot to $3 per square foot, depending on the type of property. The proposal would also create a new deduction based on energy savings performance in a retrofit on a sliding scale from $1 to $4 per square foot. Special rules would be provided to allow the credit to benefit a real estate investment trust (REIT) or its shareholders. This provision differs slightly from the proposal on the Section 179D credit from last year’s budget.
Incentives to Promote Regional Growth
New markets tax credit
The budget for the first time proposes making permanent the new markets tax credit, with a yearly allocation of $5 billion. The new markets tax credit would also be allowed to offset the AMT.
Growth zone incentives
The budget again proposes the establishment of 20 “growth zones” (14 urban and six rural), to be chosen through a competitive application process based primarily on the strength of each applicant’s “competitiveness plan” and its need to attract investment and jobs. For 2015 through 2018, (i) an employment credit equal to 20% of the first $15,000 of wages paid a qualifying growth zone resident (10% if employed outside of the zone) would be available and (ii) 100% bonus depreciation would be available for new property placed in service within the zone.
Low-income housing credits
The budget again proposes changes to reform and expand the low-income housing tax credit, but there are several differences from last year’s version. The budget proposals would generally allow REITs that receive low-income housing tax credits to designate an aliquot portion of their dividends as tax-exempt, to establish new criteria allowing for a wider range of tenants in rent-restricted units and to provide a “basis boost” for a limited number of projects with a federal investment protection designation.
The budget again proposes additional incentives to benefit the transportation infrastructure in or connecting to the New York Liberty Zone. The budget also includes proposals that would modify the rules applicable to tribal economic development bonds.
General Revenue Raisers
Limit the value of tax benefits
The budget includes a proposal to limit to 28% the benefits of many deductions and exclusions. This proposal has been included in the last several budgets, but was expanded last year to include above-the-line deductions and exclusions. It is unchanged this year.
The proposal would require all taxpayers with more than $2 million in gross income to pay at least 30% in tax, with payroll taxes (including the new Medicare tax net investment income) counting toward the 30% tax rate. A charitable credit would be provided equal to 28% of the itemized deduction allowed for charitable contributions. The tax would be phased in on a sliding scale between $1 million and $2 million. The Buffett Rule (coined for investor Warren Buffett’s claim that his administrative employees pay a higher tax rate than he does) was first proposed by the president but has been added to the budget for the first time. This version follows the bill introduced by Sen. Sheldon Whitehouse (DR. I.).
The budget again proposes the repeal of the last-in, first-out (LIFO) method of accounting, effective for tax years beginning after 2013. Taxpayers would be required to include any LIFO reserve in income ratably over 10 years.
The budget again proposes to prohibit the use of lower-of-cost-or-market (LCM) and subnormal goods methods, effective for tax years beginning after 2013. Any Section 481(a) adjustment resulting from an accounting method change away from these methods would be included in income ratably over a four-year period from the year of the change.
Deny deductions for outsourcing
This provision would disallow deductions for expenses related to moving operations overseas, which is defined by inverting the definition of “insourcing” for purposes of the new credit on moving operations back to the United States, discussed previously. It is meant to complement the insourcing credit.
The budget again includes a broad proposal to change the taxation of “carried interest” in certain partnerships. The proposal generally follows the approach taken in previous budgets. Income and gain attributable to an “investment services partnership interest” would be taxed as ordinary income and subject to self-employment tax. An investment services partnership interest would be any interest in an investment partnership held by a person who provides services to a partnership that cannot be attributed to “invested capital.” Invested capital is money or property contributed to the partnership for an interest that is allocated capital in the same manner as other capital interests held by partners who do not hold an investment services partnership interest. Broad anti-abuse authority is contemplated, particularly in identifying nonpartnership interests that are the equivalent of an investment services partnership interest.
Other partnership provisions
The budget includes a proposal designed to prevent the duplication of losses exceeding $250,000 where a partner transferee is allocated a substantial loss but the partnership does not have a substantial built-in loss, effective for sales and exchanges after the date of enactment. The budget also includes a proposal limiting a partner’s deduction for its distributive share of expenditures that are not deductible or chargeable to a capital account of the partnership only to the extent of basis, effective for tax years beginning on or after the date of enactment. Finally, the budget includes repeal of Section 708(b)(1)(B), concerning technical terminations of partnerships, effective on or after Dec. 31, 2013.
Deny deduction for punitive damages
Under this proposal, which has been included in the budget for several years, no deduction would be allowed for the payment of punitive damages upon judgment or settlement of a claim, and any recovery of such damages through insurance would be required to be included in income, effective for damages paid or incurred after 2014.
Deny deduction for dividends paid to an ESOP
This new proposal provides that a deduction would no longer be allowed for dividends paid to an ESOP by a C corporation with more than $5 million in annual gross receipts, effective for dividends paid after the date of enactment. The proposal would not affect an ESOP’s ability to distribute such dividends to plan participants without triggering the 10% early distribution penalty.
Limit on contributions to retirement accounts
This year’s budget proposes for the first time to limit the amount that can be contributed by or on behalf of a taxpayer to a tax-favored retirement plan if the balance in all the taxpayer’s tax-favored retirement plans (e.g., IRAs, 401(k) plans, qualified defined benefit and defined contribution plans) exceeds an actuarially determined amount. The budget proposal would not limit earnings in a tax-favored retirement plan, even if contributions are limited under the proposal.
The proposed rule would apply whenever the balance in all of the taxpayer’s tax-favored retirement plans exceeds the amount necessary to provide the taxpayer with the maximum annuity that could be paid from a qualified defined benefit plan under current law. The current maximum annual annuity amount is $205,000 per year. Additional contributions would be allowed for any year in which plan earnings were less than actuarial assumptions. Excess contributions would be taxed currently but could be withdrawn from the plan without further tax during a post-year grace period. The proposal would be effective for tax years beginning on or after Jan. 1, 2014.
Grant Thornton observation: Although the budget proposal does not cap the total amount that can be held in tax-favored retirement plans, it potentially limits or eliminates the ability to make further contributions to such plans if significant balances have been accumulated in the past.
‘Boot within gain’ repeal
The proposal would repeal the “boot within gain” limitation under Section 356 for reorganizations in which the shareholder’s exchange has the effect of the distribution of a dividend, as determined under Section 356(a)(2).
The budget again proposes to make several changes to tighten the rules for classifying workers as employees or independent contractors. The administration would direct the IRS to issue new guidance on worker classification that includes narrowly defined safe harbors and rebuttable presumptions. The IRS could prospectively reclassify misclassified workers whose reclassification is prohibited under current law. Service recipients would be required to disclose to independent contractors the tax and benefit implications of their classification, and independent contractors could request withholding on their payments. The changes are generally proposed to be effective on enactment, but reclassification would not be effective until the first calendar year beginning at least one year after the date of enactment. A transitional period of at least two years would be provided to independent contractors with existing written contracts establishing their status.
Extension of FUTA
The budget again proposes several significant changes to the Federal Unemployment Tax Act (FUTA) tax system, which would:
reinstate and make permanent the federal 0.2% unemployment surtax, effective for wages paid related to employment in 2013 and later,
raise the FUTA wage base from $7,000 to $15,000 in 2016 and index that amount for inflation in subsequent years,
reduce the net federal unemployment income tax to 0.37% effective in 2015, and
suspend interest payments on state unemployment insurance debt and the FUTA credit reduction for employers in borrowing states in 2012 and 2013.
The budget would again reinstate superfund taxes, including superfund excise taxes and the superfund environment income tax of 0.12% of corporate income subject to the AMT in excess of $2 million, effective from 2014 through 2023.
Increase tobacco taxes
This new proposal would increase the tax on cigarettes from just under $1.01 per pack to approximately $1.95 per pack and increase all other excise taxes on tobacco products and cigarette papers and tubes by roughly the same proportion beginning in 2014. These amounts would be indexed to inflation.
Repeal tax credit for distilled liquor additives
The budget proposes to repeal the tax credit for distilled spirits with flavor and wine additives.
Deduction for easement contributions for golf course
The budget would prohibit a charitable deduction for the contribution of a partial interest in property for a golf course, effective on the date of enactment.
General aviation passenger aircraft depreciation
Effective for property placed in service after 2013, the budget would require airplanes primarily used to carry passengers to be depreciated using a seven-year life. Airplanes primarily engaged in nonpassenger activities such as crop dusting and aerial surveying would continue to be depreciated using a five-year life.
Financial and insurance industry revenue raisers
This proposal would generally require derivatives to be reported on a mark-to-market basis annually, and all resulting mark-to-market gain or loss would be ordinary. In effect, it would expand the mark-to-market treatment under Sections 475 and 1256 to nearly all derivatives, while denying the 60-40 split of capital gains and losses available for Section 1256 contracts.
Taking on two of Tallahassee’s most influential interest groups, the Florida Senate is advancing plans this spring to eliminate a pair of decades-old tax breaks for banks and insurance companies.
One measure would repeal a tax deduction for international banking, which critics say has become a gaping loophole that does nothing to encourage investment in Florida and primarily benefits big, multistate banks such as Citigroup and Bank of America.
The other would wipe out a tax credit for insurance companies and use the resulting revenue to reduce the car-registration fees paid by Florida drivers. Lobbyists say the break currently saves $32.5 million a year for health insurer Blue Cross Blue Shield and more than $25 million annually for property insurer State Farm.
The repeals began with Senate President Don Gaetz, R-Niceville, who has pledged to scrutinize the many breaks and incentives that dot Florida’s tax code. Gaetz, who earned a 97 percent rating from the Florida Chamber of Commerce last year, is especially critical of the insurance tax break, calling it “an antiquated government subsidy for the insurance industry.”
But both proposals face much longer odds in the state House of Representatives, which has yet to act on either idea with just two weeks remaining in this year’s legislative session. House Speaker Will Weatherford, R-Wesley Chapel, appeared lukewarm when asked by reporters about the measures.
Read more here Big Tax Breaks For Banks and Insurance Companies Could Be Wiped Out
A credit score is either a blessing or a curse cast down upon you from the digital cloud. A score of 740 qualifies you for the best interest rate on a conventional mortgage. A score under 640 means ugly interest, and a number under 620 makes it very hard to get a mortgage at all. This measure of your worthiness — generated by a soulless computer — also affects the deals available for car loans, credit cards and auto insurance.
But there are ways to tweak that score higher.
Such tweaking is part of George DeMare’s business. He is managing partner of Midwest Mortgage Capital, a mortgage lender in west St. Louis County. “I deal with people with 640 scores all day long,” he said, and he looks for ways to push them up.
His main advice: Pay your bills on time, and borrow sparingly. That’s the best way to fix credit over time. But if time is short, there are other maneuvers you can make.
First, a word about scoring: Most of the blessing and cursing comes from king of credit scoring Fair Isaac Corp. The company, better known as FICO, provides the software used by many major lenders and credit reporting companies. FICO uses five variables for scoring credit; its main rival, called Vantage, uses six.
The scores are derived from information on your credit report. The report tells how much you owe, how close you are to maxing out your credit lines, and whether you pay bills on time. The report also scans public records for bankruptcies and court judgments against you.
So the first step in boosting a score is to make sure the credit report is accurate. It’s often not. In a recent Federal Trade Commission study, a quarter of consumers found errors on their reports that could affect their scores. A clerk’s finger slips on a key, and somebody else’s debt is reported as yours. The system confuses similar names. It has trouble telling John Doe from John Doe Jr. and John Doe III. “We see a lot of Junior’s accounts reported on the Third’s credit,” DeMare said. Court judgments often stay on reports after they’ve been paid off, DeMare said. Collection agencies are not diligent about reporting satisfied debts.
You’re entitled to a free report once a year from each of the three major credit bureaus — Experian, TransUnion and Equifax. You can get it at www.annualcreditreport.com or by calling 877-322-8228. If you’re denied credit because of your report, you’re entitled to another free one. If you find a mistake, contact the reporting agency. The Federal Trade Commission found that 4 out of 5 consumers who complained won a change in their report. The credit reporting agencies don’t know how much money you make or how big your savings are. They don’t know the rent you’re paying. So the scoring companies can’t judge your ability to carry your current debt. They do look at the amount you owe and at how much of your available credit you are using. The smaller the debt, the better. For instance, if you have a $10,000 maximum limit on your credit cards, and you owe $1,000, that’s OK. A $9,900 debt would be awful. FICO likes to see debt at 30 percent or less of available credit, said spokesman Anthony Sprauve.
Tweaks to try:
If you can’t pay down the debt, call the credit card company and ask for a higher credit limit. A bigger limit makes your debt percentage smaller.
Shuffle debt around. Suppose you have two credit cards with $10,000 limits, with $9,000 owed on one and nothing on the other. Moving half the debt to the unused card will help. The formula judges you on how close you are to maxing out a card.
Make sure your creditors report your credit limit to the credit agencies. If they don’t, it makes your debt percentage look bigger than it is.
Pay debts before they’re sent to debt collectors, which is poison for a credit score. If your debt does go to a collection agency and it’s new debt, try to pay it off. But the older a “collection item” gets, the less it counts, and they disappear after seven years. So, if the debt is very old, you’re better off not paying it. A payment turns it fresh again in the scoring system.
If you’re divorced, better divorce your debts, too. If you’re on your ex’s credit cards, any payment problems will show up on your credit report. Closing jointly held accounts is best. Get some credit and use it. Some people are dinged for being too responsible with their money. They hardly ever use credit, preferring cash. “You’ll have a harder time getting credit than the guy who has debt,” DeMare said. But debt isn’t necessary. If you simply pay off a credit card in full every month, you’ll establish good credit. If you’re shopping for a loan, do it quickly. Many credit checks from lenders raise worry that you’re about to go on a borrowing binge. But if the inquiries arrive quickly, the scorers think you’re shopping for a single loan.
If you have a short history, don’t open a bunch of new credit accounts in a hurry. That behavior hurts the scores of young people more than people with established credit, according to FICO.
U.S. Fed News
NEW YORK, April 16 — The Federal Reserve Bank of New York issued the text of the following speech:
It is always a pleasure to speak with the business community given your important role in the community and in the region. I am particularly pleased to have the opportunity to speak to the Staten Island Chamber of Commerce and to be part of this distinguished panel. Thank you for inviting me today.
As you know I have the honor of serving as the president and CEO of the New York Fed, one of the 12 Federal Reserve Banks that together with the Board of Governors in Washington make up the Federal Reserve System, our nation’s central bank. As head of the New York Fed I am vice-chairman of the Federal Open Market Committee (FOMC), the body that sets our nation’s monetary policy.
The Fed was founded 100 years ago in 1913 to advance economic and financial stability. Over this century our nation’s economic output and standard of living has increased greatly, but the United States also faced many different challenges-ranging from the Great Depression of the 1930s to the Great Inflation of the 1970s and most recently the financial crisis.
The Federal Reserve is independent from politics and the national government but is subject to oversight by Congress, which has set our dual mandate to promote maximum sustainable employment and price stability. The Federal Reserve is structured to ensure that the economic needs of people and businesses in every part of our country are fully considered in our policy deliberations. What I learn in my visit to Staten Island today is an important input to our policymaking process.
As New York Fed president I try to get out of my New York City office as much as I can to get a sense of regional economic conditions across what is known as the second Federal Reserve District. I’ve traveled throughout New York, New Jersey and Puerto Rico in recent years and plan to visit Fairfield County, upstate New York and Queens later this year.
These visits give me the opportunity to explain what the Federal Reserve is doing and to get your thoughts about the state of our economy and the challenges that you face.
Today, I will focus on the economic outlook regionally and nationally. After that, I’ll be happy to answer any questions you have about what the Fed does, and about the economic outlook. As always, my views are my own and do not necessarily reflect those of the FOMC or the Federal Reserve System.
REGIONAL ECONOMIC CONDITIONS
The financial crisis underscored the fact that the world is a complicated place and that the insights of professional economists and financial experts must be supplemented with a broader set of perspectives from households and businesses. Today’s visit is in that spirit-I want to talk about what we are seeing in the economy but also to hear from you firsthand about your assessment of economic conditions.
So what do we see? Let me start with basic economic characteristics. While Staten Island is the city’s least populous borough, its population has grown steadily and rapidly, more than doubling in the last half-century to close to one-half million residents. On its own, Staten Island is larger than all other cities in the entire New York-New Jersey region, with the obvious exception of New York City.
In many ways-homeownership, educational attainment, income, and demographics-Staten Island more closely resembles the nation than the rest of New York City. For example, the homeownership rate on Staten Island is almost 70 percent, well above the 30 percent average homeownership rate citywide. Still, with a sizable proportion of the borough’s workers commuting to Manhattan (about one forth of the island’s workers or more than 50,000 people) Staten Island’s economy is closely tied to the rest of the city’s economy, as well as to northern New Jersey’s. Thus, when Manhattan sees brisk job growth, the residents of Staten Island have better opportunities.
The New York City economy continues to rebound strongly from the 2008-09 downturn-more strongly than the nation as a whole. The New York Fed’s index of economic activity for the city has grown solidly and steadily for the past three years, signaling a robust rebound in the local economy. This strength is reflected in strong job creation: while the U.S. economy has thus far recovered only about two-thirds of the jobs lost during the recession, New York City has recovered all its lost jobs and then some. In fact, total employment in the Big Apple recently surpassed not only its pre-crisis peak of 2008 but also its all-time peak of 1969.
Here on Staten Island job creation has not been quite as robust over the past couple years. It should be recognized, however, that Staten Island’s economy was actually more resilient than Manhattan’s during the recession, experiencing only minimal job losses. Staten Island’s key industries-local-market sectors like health, education and retail trade-tend to be less susceptible to sharp economic downturns than more cyclical sectors, like manufacturing, construction and finance.
Even so, not all indicators of the local economy are improving. Unemployment remains stubbornly high, at just over 8 percent. And home prices, though recovering gradually, are still down about 15 percent from where they were back in 2007. This compares to nationally where they are down about 25 percent on average.
The New York Fed’s quarterly measures of household credit conditions signal some recent improvement, though there clearly remain pockets of financial stress among families here. At year-end, for those people with a credit report, average debt per person in Staten Island ticked up, rising to about $67,000, after trending down for a number of years. A similar uptick in debt was observed nationwide, potentially signaling that households are now somewhat more willing to take on debt. Delinquency rates, however, are still fairly high: 9.7 percent of all debt in the county is seriously delinquent, well above the national rate. On a more positive note, delinquency rates on Staten Island are declining and are at their lowest level in 3.5 years. Mortgage delinquency rates, though still above the national rate, are also at a 3.5-year low.
Recently, of course, Staten Island’s greatest challenge has been the massive disruption and destruction caused by Superstorm Sandy. While many parts of the New York City metropolitan region were hard-hit by the storm, the devastation was particularly severe here on Staten Island. And this is something that has had large consequences for some of my colleagues at the Federal Reserve Bank of New York. Nearly 150 of our employees call Staten Island their home. While many, thankfully, were spared the full brunt of the storm, I know quite a few people whose homes were destroyed or severely damaged and others who lost many of their belongings.
Immediately following Sandy, our Regional and Community Outreach function reached out to all of the affected communities as part of a needs assessment. We asked: “How can the New York Fed best leverage our resources to help our community?”
After dozens of conversations with leaders of the community, we determined that pulling together key service providers under one roof would make a useful contribution. Our outreach team organized a free relief clinic in this very building. We brought together a wide variety of government agency representatives and other service providers. I would like to acknowledge what is a long list: Federal Emergency Management Agency (FEMA), the Small Business Administration (SBA), the Office of the New York Attorney General, the New York State Department of Financial Services, the New York Legal Assistance Group, Staten Island Legal Services, the Legal Aid Society, MFY Legal Services, various bar associations, New York City Department of Small Business Services, Center for New York City Neighborhoods, Neighborhood Housing Services of Staten Island and the Northfield Local Community Development Corporation. I’m proud to say we were able to assist over 150 Staten Islanders, including homeowners, tenants and small business owners.
We also heard that it could be challenging to find key recovery information and advice online. So once again, we pulled key resources under one roof-or I should say one URL. We developed a Sandy Information Center with the best information we could find for folks impacted by Sandy-including key deadline dates along with expert legal, finance and insurance guidance. Over 2,000 have benefited from our web resources.
While we are not yet back to normal in neighborhoods like Midland Beach, Oakwood Beach, New Dorp Beach and Tottenville, the situation is improving and I expect that this recovery will continue over the coming year. We are going to continue to examine where we can provide assistance in supporting this effort. One effort, for example, is to provide assistance in collecting detailed data on the areas that were impacted by the storm.
From talking to some local business people late last November, we know that many residents and businesses had to wait a long time for insurance claims and small business loans, as well as to get their heat and power restored. We also know that eight public schools were closed.
Unfortunately, timely statistics pertaining specifically to Staten Island’s economy are scarce, thus making it hard to accurately gauge the impact from Sandy or the strength and breadth of the ensuing recovery. So we truly value input from all of you-people on the front lines of the local economy-to assist us in gauging recent trends and developments in Staten Island’s economy.
NATIONAL ECONOMIC CONDITIONS
Turning to the national outlook, the U.S. economy remains on the slow growth track that has persisted since the recession ended in mid-2009. In fact, real gross domestic product (GDP) grew just 1.7 percent in 2012, below the 2.2 percent rate of the preceding two years. This lackluster and disappointing performance masks the fact that the underlying conditions that support growth have been gradually improving. However, in the near-term, this improvement in fundamentals is being offset by federal tax increases and spending cuts, which economists call “fiscal drag.” The most obvious example of this is the end of the partial payroll tax holiday at the beginning of this year. This reduced the take-home pay for all those that pay into the Social Security system.
In a recent speech to the Economic Club of New York, I discussed a number of areas where economic fundamentals have improved. Here, let me concentrate instead on some areas of the economy where the impact of this improvement in fundamentals has been most evident: consumer spending, the housing market, and investment in equipment and software.
Despite the increase in payroll taxes and in high-income tax rates, real-that is, inflation-adjusted-personal consumption expenditures rose solidly in January and February. As has been the case for some time, the growth of consumer spending has been led by purchases of durable goods. Car and light truck sales in the first quarter were at the highest pace since the fourth quarter of 2007. This growth in consumer spending probably is due, in part, to improvements in labor market conditions, household balance sheets and household access to credit. However, retail sales were quite weak in March, suggesting that the tax increases that occurred at the start of the year may be beginning to have a material effect.
After a long period of being a drag on the economy, the housing market is now providing lift to economic activity, with upward trends evident in housing starts, home sales, and home prices. To see why this is so important, in 2009 residential investment exerted a 0.4 percentage point drag on GDP growth, while in 2013 it is likely to provide a boost to growth on the order of 0.5 percentage point-a swing of nearly a full percentage point. In addition, rising home prices can create positive spillovers to the rest of the economy as higher home prices lift household wealth and reduce the number of homeowners with negative equity.
Business investment in equipment and software, another component of private final demand, strengthened in the fourth quarter, and shipments and orders for nondefense capital goods suggest further growth in the first quarter. Moreover, indicators of the U.S. manufacturing sector, including the ISM manufacturing index and most Federal Reserve regional manufacturing indexes, point to continued moderate growth in the sector.
So why isn’t the U.S. economy growing more quickly? The most important reason is the sharp shift in federal fiscal policy from mild restraint in 2012 to much greater restraint in 2013. The increase in payroll tax rates, the rise in high income tax rates, the increase in taxes associated with the Affordable Care Act, and the sequester will result in fiscal drag of about 1 three forth percentage points of GDP in 2013, an unusually large amount of fiscal restraint when the economy doesn’t have strong forward momentum and unemployment is still elevated.
In terms of the labor market, we have seen only a moderate improvement in labor market conditions over the past six months or so. After an encouraging pick up in the pace of job creation around the turn of the year, the employment report for March showed a gain of only 88,000 jobs. While I don’t want to read too much into a single month’s data, this underscores the need to wait and see how the economy develops before declaring victory prematurely. I’d note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious.
Since September, payroll employment has increased an average of 188,000 per month, compared with an average of 172,000 per month over the previous two years. The unemployment rate has declined from a peak of 10 percent in October 2009 to 7.6 percent in March; however, much of the decrease is due to a fall in the number of people actively looking for a job. Furthermore, as of March there were still almost 3 million fewer jobs than at the end of 2007, and the ratio of employed Americans to the working age population was actually lower than it was at the end of the recession. Also, in an indication that employment is far from healthy, job finding rates have changed little since the recession. New York Fed staff research agrees with the broad consensus that cyclical factors are the major reason for the continued weakness in labor market conditions.
In sum, these developments lead me to expect sluggish real GDP growth over the course of 2013 of about 2 to 2.5 percent. As such, I anticipate that the unemployment rate will decline only modestly through the rest of the year.
In the near term, there is considerable uncertainty about the outlook, particularly because the multiplier effects from fiscal drag and sequestration are still unclear. This uncertainty should gradually decline-for better or for worse-over the coming months, as the sequester’s impact takes hold and more economic data come in, giving us a clearer picture of the forward momentum of the economy.
Inflation, as measured by the personal consumption expenditure deflator, is currently well below the Federal Reserve’s objective of 2 percent. There is substantial slack in the labor market and in the markets for goods and services, and underlying measures of inflation are subdued. Moreover, peoples’ expectations of inflation remain well anchored at levels consistent with our 2 percent longer-run objective. Thus, I conclude that the risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the economy were to strengthen considerably.
With inflation well below its longer-run goal and high unemployment, the FOMC decided at its March meeting to maintain a “highly accommodative” policy stance: a federal funds rate in a range of 0 to 25 basis points with forward guidance based on economic thresholds. Moreover, to support a stronger economic recovery, the FOMC is purchasing long-term Treasury securities at a rate of $45 billion per month and agency mortgage-backed securities (MBS) at a rate of $40 billion per month, and will continue purchasing assets until it sees substantial improvement in the outlook for the labor market, conditional on ongoing assessment of benefits and costs. Combined, these actions are intended to ease financial conditions and thereby help to establish a self-sustaining economic expansion.
As I stated in my recent Economic Club speech, the benefits of our asset purchases-as reflected in improving financial conditions and the quickening pace of interest-sensitive spending such as that on consumer durable goods, housing, and capital goods-exceeds the costs. Furthermore, the labor market outlook has yet to show substantial improvement. Consequently, I see the current pace of asset purchases as appropriate.
At some point, I expect that I will see sufficient evidence of improved economic momentum to lead me to favor gradually dialing back the pace of asset purchases. Of course, any subsequent bad news could lead me to favor dialing them back up again. As Chairman Bernanke said in his press conference following the March FOMC meeting “when we see that the…situation has changed in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook.”
Let me reiterate how pleased I am to be here on Staten Island and to have the opportunity to speak to the members of the Chamber. Parts of Staten Island were among the most devastated areas in the region and we at the Federal Reserve Bank are committed to doing all that we can to help people and businesses recover. Many obstacles remain to be overcome but I am confident that Staten Island will meet the challenges that lay ahead. For any query with respect to this article or any other content requirement, please contact Editor at firstname.lastname@example.org