Other States Follow Lead Of Texas On More Than Just Taxes

Texas, at least when it comes to its tax climate, has been the subject of flattery in recent months and years as lawmakers in other states seek to reform their tax codes to be more like that of Texas, particularly its 0.0% state income tax rate. Considerable progress has been made on this front in recent years. Over the past half-decade, New Hampshire and Tennessee have joined the ranks of the no-income-tax states with the phaseout of their investment income taxes. More recently, Mississippi Governor Tate Reeves (R-Miss.) signed legislation in March that will completely phase out the Magnolia State’s income tax in the coming years based on revenue triggers being met. Similar proposals are pending elsewhere, as governors and lawmakers in nearly a dozen other states are now competing to become the next no-income-tax state.

Tax policy, however, isn’t the only area where many consider Texas to be a policy trendsetter. Take the resolution introduced by Texas Senator Tan Parker (R-Flower Mound), which expresses support of the effort by the White House and Congress “to stop federal regulators from leveraging their authority to pressure banks to debank individuals and businesses.”

The phenomenon of debanking, despite being dismissed by some as a conspiracy theory, is a well-documented problem. “Several tech leaders within the cryptocurrency space have been outspoken about their experience being debanked,” U.S. House Banking Committee Chairman James Comer (R-Ky.) explained in a letter sent to a group of tech sector executives back in January.

“In 2022, Uniswap Labs Founder and CEO Hayden Adams explained that his bank closed his accounts ‘with no notice or explanation,’ and that ‘I know many individuals and companies who have been similarly targeted simply for working in the crypto industry,’” noted Comer’s letter, which was sent on January 24. “Coinbase Co-Founder and CEO Brian Armstrong confirmed thirty tech founders were debanked.” Coinbase’s Chief Legal Officer, Paul Grewal, said that financial regulators “have used multiple tools at their disposal to try to cripple the digital-asset industry.”

The debanking of executives in the crypto space is the most recent instance in which federal regulators have come under fire for pressuring financial institutions to debank individuals in a manner viewed by many as suspect and possibly even corrupt. This problem, however, has existed for more than a decade, as evidenced by the Obama administration’s Operation Choke Point, which was launched in 2013.

“One of the more egregious examples of regulatory abuse was Operation Choke Point, which pressured banks to stop doing business with ammunition and gun sellers, payday lenders, and other industries,” explained James Erwin, director of innovation policy at Americans for Tax Reform, in a recent blog post. Erwin adds that both of these recent debanking initiatives “demonstrate the potential for regulatory abuse, where the actions of unelected bureaucrats can have a devastating impact on industries and individuals simply going about their business.”

Banks Are Not To Blame For Debanking

Erwin and others are quick to point out that banks are not at fault for instances of debanking. “Under the guise of ‘reputational risk,’ regulators often issue vague guidelines about which accounts should be exited and fine banks for not shutting enough Americans out of the financial system, even if they are engaged in legal commerce,” explains Erwin. “This creates a climate of fear, leaving banks with no choice but to sever relationships with innocent customers to avoid retribution.”

Many see Senator Tim Scott’s (R-S.C.) FIRM Act as a federal proposal that would help rectify the matter of unjustified debanking. The FIRM Act would remove reputational risk from regulators’ jurisdiction. This change, writes Erwin, would “stop overzealous regulators from leveraging their authority to unjustly harm legitimate industries and individuals.”

Bills have been filed in state legislatures across the country this year seeking to thwart and penalize debanking. Even opponents of debanking who would like to snuff out the practice, however, believe a federal solution is the optimal way to address the problem. Just as many who believe it makes sense to have a national regulatory framework for Artificial Intelligence (AI) also think it would be counterproductive to have a patchwork of 50 state regulatory bodies issuing varying and potentially conflicting rules for AI, some of those who are most committed to stopping the regulatory abuse that leads to unjustified debanking would prefer holistic national solutions over a scattershot of various and potentially conflicting state-level rules.

Even if state legislatures are not the appropriate venue for rectifying federal regulatory abuse that leads to improper debanking, that doesn’t mean there is no way for state lawmakers to take action on the matter, as Senator Parker’s resolution underscores. Erwin and others see that proposal as “a model for other states to emulate in standing against federal overreach.”

“At the end of the day, this is a problem for federal regulators,” Erwin says, adding that “it’s a better use of state legislators’ time to pass resolutions like Parker’s to get their congressional delegations on board with the federal solutions like Tim Scott’s bill.”