The Hidden Entitlements

10. Financial institutions (non-insurance)

Before the 1986 Tax Reform Act, it was rare to find a bank (or savings and loan or credit union) that paid any significant amount in federal income taxes. Reforms have lessened the tax breaks for financial institutions(most notably limits on their ability to deduct their interest costs for carrying tax-exempt bonds). But financial institutions still enjoy substantial tax subsidies, including the ability to take phony deductions. The major breaks listed in the official tax expenditure budget include:

Bad debt reserves. Commercial banks with less than $500 million in assets, mutual savings banks, and savings and loan associations are permitted to deduct so-called "additions to bad debt reserves" that exceed their actual losses on bad loans. The deduction for additions to loss reserves allowed qualifying mutual savings banks and savings and loan associations is 8 percent of otherwise taxable income. To qualify, the thrift institutions must maintain a specified fraction of their assets in the form of mortgages,primarily residential.

Credit union income. Unlike banks and thrifts, the earnings of credit unions not distributed to members as interest or dividends are exempt from income tax.


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