Cadence’s trade association, the powerful American Bankers Association, is waging a war against a key component of the Biden administration’s economic agenda: a requirement that financial institutions report to the Internal Revenue Service each year the gross inflows and outflows on accounts at or above a certain threshold. The financial institutions are doing it by insisting that the proposal, if enacted, would be costly and that marginalized communities would pay the disproportionate price.
According to three individuals close to the discussions, financial institutions lobbying the Hill, including minority banks, have stressed that the provision could be problematic for households of color, who have long been disproportionately left out of the banking system. They’ve emphasized that additional disclosure requirements would create privacy concerns, which in turn would be an additional barrier for marginalized groups or prompt existing customers to leave.
For critics, it’s a misleading and whiplash-inducing effort by the finance industry to claim the moral high ground after decades of being accused of discriminatory practices. But there is some indication that the argument is resonating. The Biden administration had advocated for that minimum threshold to be set at $600, but lawmakers have reached a tentative agreement that the new threshold will be $10,000. Under that agreement, the total will not include deposits by payment processors, according to a Democratic aide.
For the banks, that’s not enough. They say nearly every American will be subject to the reporting, and they want to eliminate the potential requirements altogether. They are fighting to roll the requirements back even further.
“Banks and other stakeholders have made progress in reducing the number of unbanked in the country, and we are concerned that this proposal could deter individuals who would benefit from a bank account from even applying,” said Ian McKendry, a spokesperson for the American Bankers Association, in a statement. “That’s not an outcome anyone should want.”
Advocates of the disclosure provision say it is intended to ensure that the wealthiest pay their fair share. And experts say the financial institutions’ argument is flawed, at best. At worst, said Darrick Hamilton, founding director of the Institute for the Study of Race, Stratification and Political Economy at The New School, the banks are trying to take advantage of a moment of national reckoning over racism and police brutality.
“If banks and financial institutions are concerned about Blacks and Latinx households and Indigenous households being able to access their services, then the foci needs to be on fines, fees and products that are affordable,” Hamilton said. “To use race as a mechanism to skirt this requirement, regardless of whether you think this requirement is good or not, becomes disingenuous, and perhaps even a stronger word: just sad. Manipulative, cooptation, those are the words that come to mind.”
The disclosure provision that Biden’s team had sought to put into the reconciliation bill was considered low-hanging fruit to raise money to pay for the party’s social spending and climate agenda, upon which the president’s legacy hinges. The administration argues that its plan would raise $460 billion over the next decade, at least in part as a result of increased compliance once taxpayers realize the IRS has more of their information. And it wouldn’t be burdensome to implement, they add. New data, the Biden administration postulates, would simply build upon the existing reporting required of financial institutions by the federal government.
In a statement, Sen. Ron Wyden (D-Ore.), chair of the Senate Finance Committee, maintained that the provision was intended to target “extremely wealthy tax cheats who are able to steal from working taxpayers,” not the working class.
“For the high fliers who make most of their money through pass-through businesses and the like, there’s virtually no reporting at all,” he said. “So, they think they can get away with cheating and often do. This proposal is about them and ensuring they pay the taxes they already owe. … Working folks know the tax system is mandatory for them and optional for the wealthy and they support fixing it.”
The banks have marketed their opposition to the measure as a matter of protecting privacy. But opponents have also misconstrued the reach of the provision, arguing that it would require banks to report every transaction over $600. In a hearing earlier this week, Sen. Cynthia Lummis (R-Wyo.) pressed Biden’s Treasury Secretary Janet Yellen on what she incorrectly believed to be a provision that required the reporting of transactions $600 or more, like the purchase of a “couch” or a “cow.” (The measure does not require the reporting of individual transactions, just cumulative annual totals.)
“This is not a proposal to provide detailed transaction-level data by banks to the IRS,” Yellen told lawmakers. “We have a tax gap that’s estimated at 7 trillion dollars over the next decade, that is taxes that are due and are not being paid to the government that deprive us of the resources we need to do critical investments to make America more productive and competitive.”
She also argued that the $600 figure, though low, was necessary so that individuals could not game the system through multiple accounts.
Both Sen. Mike Crapo (R-Idaho), ranking member on the Senate Finance Committee, and Rep. Kevin Brady (R-Texas), the ranking member on the House Ways and Means Committee, have introduced legislation that would block the new reporting requirements. Democrats in August blocked Crapo’s budget bill amendment that opposed the reporting requirement. Brady is retiring. Crapo is not. This year, he received $5,000 from the Mortgage Bankers Association PAC and $2,500 from the Independent Community Bankers of America PAC, which have both opposed the measure.
In addition to those privacy concerns, financial institutions argue that the measures, namely the new infrastructure they would require, would be costly, and could create a security risk for vast quantities of personal financial information.
All told, the new requirements “would almost certainly undermine efforts to reach vulnerable populations and unbanked households,” a coalition of business and financial associations wrote to congressional leaders last month.
A household is “unbanked” if no one has a checking or savings account at a bank or credit union, a term often correlated with worse economic outcomes. A 2019 report from the Federal Deposit Insurance Corporation, an independent government agency, found that an estimated 5.4 percent of American households were unbanked that year. But rates varied widely among racial and ethnic groups. Among Black households, that number is 13.8 percent, and among Hispanic households, 12.2 percent.
Some evidence does suggest that skepticism of financial institutions turns away potential banking customers. The FDIC report found that 36 percent of the unbanked respondents said avoiding banks afforded more privacy, and 48.9 percent said they did not have enough money to meet minimum balance requirements.
But 36.3 percent of the unbanked respondents reported that they did not trust the banks, which experts say is a residual impact of the history of banks’ discrimination against people of color. As illustrated by the case against Cadence Bank, which declined to comment for this story, there is a long and fraught history of banks refusing to issue loans to Black communities, which contributed to the country’s spawning racial wealth gap. A 2018 study from the National Community Reinvestment Coalition found that the legacy of redlining, the practice whereby banks would deny services to certain neighborhoods, persists today.
When asked about the history of financial institutions marginalizing people of color, Ryan Donovan, executive vice president and chief advocacy officer at Credit Union National Association, argued that credit unions had made significant strides in diversity, equity and inclusion in recent years. And, he added, a policy requiring additional reporting and disclosure from financial institutions was not the solution to help.
But Jacob Faber, an associate professor at New York University, said financial institutions have long argued that the cost of new regulations would fall disproportionately on low-income people. Today, communities of color are less likely to have commercial banks, and those relatively few commercial banks are more likely to have higher fees and more stringent requirements for their accounts, he said, maintaining that the financial institutions’ arguments about distrust with the system are cyclical.
“The banks are the ones who are stoking this undue fear so that any kind of fear associated with that is just their own fault,” he said. He also argued that redlining is far from a dead practice — pointing to the discrimination case against Cadence Bank. “This is something that’s kind of persistent across the whole history of the financial services industry.”