Bankers' Blitz

Tough talk on withholding

Few business groups can match the political muscle of the American Bankers Association, with 14,000 member banks and 80 million potential supporters in the form of depositors. Now the bankers and their allies are being accused of lobbying overkill, for practically burying Capitol Hill in mail.

At issue is a law that requires banks and other financial institutions, beginning July 1, to withhold 10% of interest and dividend payments for tax purposes. (The first $150 of interest income is exempt; the poor and the elderly get special treatment.) Unexpectedly passed last year as part of President Reagan's $98.3 billion tax package, the measure has provoked intense reaction. Spurred on by the A.B.A., banks posted flyers and distributed hundreds of thousands of postcards and letters to customers urging repeal. Sample slogan: "The Government will be picking the taxpayers' pockets."

The avalanche of mail followed. The Senate Finance Committee alone is getting 100,000 pieces a month. Says House Democrat Jim Shannon, a member of the Ways and Means Committee: "I can't think of an issue where the volume of mail was so great, or the misinformation so outrageous. It's crazy." Treasury Secretary Donald Regan, who is in the uncomfortable position of having opposed withholding when he was chairman of Merrill Lynch, was booed lustily last month for defending it at a Washington meeting of the Credit Union National Association.

Now the bankers' blitz is stirring a backlash. Senator Bob Dole, a central target of the lobbying effort for his role in the passage of the tax bill, has turned on his tormentors with particular vigor. At a meeting of the A.B. A. last month, he accused it of waging an "unscrupulous" campaign with lobbying tactics that had reached "a historic low." Both Dole and Regan have publicly suggested that banks already pay less than their fair share of taxes. A congressional report last year said that in 1981, commercial banks paid only 2.3% of their profits in federal Income taxes. BankAmerica Corp., for example, the second largest bank holding company, paid no federal income taxes for 1981. This week Dole will hold a hearing on "The Special Tax Preferences Enjoyed by Financial Institutions."

The Administration insists that it needs the withholding because carelessness and cheating rob the Government of 11% to 15% of taxes owed on interest and dividends. The Treasury believes the new rules will bring in an additional $5.8 billion during the first year.

The banks claim that withholding will cost them millions of dollars in bookkeeping costs. New York's Manufacturers Hanover, for instance, figures the initial expense at $3 million. Smaller banks, which have fought the hardest for repeal, say their cost per account would be higher because they have fewer depositors to share the expenses. Bankers contend that only a fraction of the outlay can be recovered on the "float," the interest banks can collect on withheld funds before the money is passed along.

More questionable is the banks' insistence that their customers will be deprived of large amounts of interest on money that is withheld, since those funds would otherwise be earning interest. Treasury calculates that a $1,000 account yielding 9% would lose only 4-c- a month in interest on interest if 10% were periodically socked away for taxes.

The Government made a conciliatory gesture last week by permitting taxes to be withheld annually on money-market and Super Now accounts, instead of monthly or quarterly. But banking and thrift-industry lobbyists have already induced some 360 members of Congress -- a clear majority in both houses -- to co-sponsor legislation to repeal the withholding measure. The smart money, however, is betting that Dole and other congressional leaders will bottle up repeal and keep it from coming to a vote. This file is automatically generated by a robot program, so viewer discretion is required.