Florida banks are rightly alarmed over a new IRS reporting requirement because it involves losing job-creating capital that banks lend to small businesses in this state and throughout our country.
Today, our nation finds itself scrambling to create jobs and attempting to recover from a double-dip recession, making this IRS rule the latest example in a classic case of the wrong issue at the wrong time. Not only does the regulation overturn 90 years of policy, but it stands to drive large amounts of capital out of America, harming U.S. financial markets in the process.
Foreign money makes up 20 percent to 30 percent of all deposits in South Florida, and the U.S. Commerce Department estimates foreigners have $10.6 trillion passively invested nationwide. Foreign depositors, fearful of the life-or-death consequences associated with the release of this sensitive information being shared with corrupt governments like Hugo Chávez’s Venezuela, are already considering moving money out of America’s financial institutions. Such a mass withdrawal would leave many banks unable to lend.
Suggesting this provision would strengthen our economy is bewildering as it will do just the opposite. The Guidance on Reporting Interest Paid to Nonresident Aliens is a classic example of “trust us” regulation, failing to provide set standards on what constitutes adequate confidentiality safeguards or how the Department will assess which countries are eligible for “automatic exchanges.”
A 2004 study by the Mercatus Center at George Mason University estimated that a similar proposal offered by the Clinton administration would have driven $88 billion from U.S. financial institutions. Given the current state of the economy coupled with the broader scope of the new regulation. This will be far more devastating than even the most exaggerated projection eight years ago.
Regardless of whether the IRS actually shares the information with particularly suspect countries, our foreign depositors have no reason to wait around to find out.
Foreign depositors rely on the confidentiality and stability of our nation’s banking system as a safe haven from political unrest in their home countries. Although the Treasury Department contends it has no intention of sharing information with radicals like Chávez, the fact remains that the regulation applies to more than 80 countries including Mexico, a country notorious for kidnapping and extortion. European countries are the most likely recipients, but even our European neighbors fail to demonstrate any sort of stability right now. With daily rumors that Greece will withdraw from the European Union with Spain not far behind, there is no telling what could happen next.
The global market for NRA deposits is extremely competitive and highly sensitive. The subtlest of differences among regulatory regimes can affect the flow of NRAs and this regulation is anything but subtle. Depositors on the global level rationalize no differently than the average U.S. citizen trying to pick a bank — constantly weighing safety and convenience.
Despite Washington’s current contentious atmosphere, this issue has garnered bipartisan support in both the House and the Senate. While Sen. Marco Rubio and Rep. Bill Posey, both Florida Republicans, have proven instrumental, they are by no means fighting this alone. Sen. Bill Nelson, a Florida Democrat, has joined Rubio in sponsoring legislation that would prevent these additional banking requirements. U.S. Rep. Gregory Meeks, D-N.Y., who serves on the House Financial Services Committee, is the lead co-sponsor on similar legislation in the House. U.S. Rep. Debbie Wasserman Schultz of Florida’s 20th District, chair of the Democratic National Committee, has been involved too, spearheading a letter to the president signed by all 25 members of Florida’s congressional delegation — Republicans and Democrats. This is evidence of the strong bi-partisan opposition to the IRS rule proposed by the Obama administration.
Even the Ways and Means Subcommittee on Oversight has weighed in, issuing a letter to Treasury Secretary Tim Geithner last week that demanded answers as to why his department refuses to perform an economic impact analysis. Large coastal states like Texas and California have expressed strong opposition as well, proving the point that although Florida’s voice may ring the loudest, this is far from being a single state issue.
No matter how many half-hearted assurances the Treasury Department offers suggesting they will use extreme caution, nonresident alien depositors are not buying it. The Florida Bankers Association will continue to oppose over-burdensome regulation such as this which does nothing more than hurt Florida banks’ ability to lend to the job creators, small businesses.
Alex Sanchez is president and CEO of the Florida Bankers Association.