Treasury and Tax and Loan Program

  • Under the Treasury Tax and Loan (TT&L) program, tax payments by individuals and businesses go into accounts at depository institutions, rather than directly to the Treasury's accounts at the Federal Reserve.
  • TT&L accounts help to stabilize the supply of reserves in the banking system, increasing the stability of financial markets and simplifying the implementation of monetary policy.
  • Over 80 percent of the TT&L institutions are collectors that transfer funds to the Treasury's accounts at the Federal reserve the same day, or after, they receive them. The remainder are "note option" depositories, which hold the tax funds longer.

Purpose of the TT&L Program
Treasury Tax and Loan (TT&L) accounts consist of federal tax payments made directly by business firms, and other federal payments that are deposited in TT&L accounts indirectly. The TT&L program aids in maintaining the stability of financial markets by reducing uncertainty about the supply of reserves in the banking system and simplifying the Fed's implementation of monetary policy. This is accomplished by having tax payments deposited into TT&L accounts at depository institutions, rather than in the Treasury's accounts at the Federal Reserve, thereby allowing the tax payments to remain in the banking system. In the absence of TT&L accounts, tax payments would generate abrupt changes in depository reserves.

Taking Part in the TT&L Program
To qualify as a TT&L depository, an institution must file an application. The application, when approved, is a formal agreement requiring the depository institution to follow the Treasury's rules and regulations concerning TT&L accounts. The primary regulation is that TT&L depositories must provide collateral against all deposits over the maximum insurance coverage provided by the Federal Deposit Insurance Corporation and the National Credit Union Share Insurance Fund.

As of April 2, 2007, 8,950 depository institutions throughout the United States maintained TT & L accounts for the Treasury Department, taking in an estimated $2.0 trillion in tax revenue in 2006. These funds came directly from employee income tax withholding, Social Security/Medicare taxes (FICA), and corporate income taxes that are paid on a quarterly basis. However, not all funds in TT&L accounts are placed there directly. About one-third of all funds in the accounts come indirectly from other sources, such a individual income tax payments.

Remit Option Depositories
Depository institutions participate in two types of TT&L programs, which are distinguished by the timing of the transfers from the TT&L account to the Treasury's account.

Under one such program, collector depositories transfer some payments to a Treasury account at the Federal Reserve the same day they receive them, and transfer all other payments to the Treasury's account a day later. An increasing share of all payments received by collector depositories have been transferred electronically. Companies with annual tax payments of more than $200,000 each are required by law to transfer their tax payments electronically. Under the collector option program, all funds transferred into TT&L accounts electronically must move the same day from the depository institutions at which they were deposited to the Treasury's Federal Reserve accounts.

Electronic payments accomplish three objectives. First, the Internal Revenue Service has much less paperwork to process. Second, the Treasury is able to obtain data more quickly on the amounts of funds transferred to its accounts at the Federal Reserve Banks. Third, since electronic tax payments arrive in the Treasury's Federal Reserve accounts the same day they are deposited, the Treasury is able to earn interest on these funds by immediately placing them in "note option" depositories.

Individual income tax payments do not go directly to collector option depositories. Rather, these tax payments go from individuals to the Internal Revenue Service, which forwards the payments to about 160 "lockbox" commercial banks nationwide. The lockbox banks process the checks and forward the payments to the Federal Reserve Bank of New York. If the Treasury does not need the funds immediately, they are transferred to the TT&L program and placed, when possible, in note option depositories.

Under the collector option program, depository institutions are classified according to the amount of funds in their TT&L accounts. Class 1 depositories are those that receive more than $10 million in their TT&L accounts annually; depositories that receive less than $10 million in their TT&L accounts annually are designated Class 2 depositories.

Note Option Depositories
When the Treasury needs funds in order to make payments, the Federal Reserve Banks tell TT&L note option (those classified as retainers and investors) depositories, generally medium-to-large size banks, to transfer funds to the Treasury's accounts at the Fed. The Treasury may request, or "call," the full amount or a percentage of the amount in an account. Treasury calls, which normally are announced in advance and specify the date of the withdrawal and the percentage of the balance to be withdrawn, allow funds to move back into private hands as a consequence of government spending.

Unlike collector depositories, note option depositories may hold TT&L balances for an extended time period. As a result, note option banks have use of the Treasury's funds for loans and investments and are required to pay interest to the Treasury. The interest rate is determined by subtracting twenty-five basis points (one-quarter of a percentage point) from the average federal funds rate for the week during which the balances are held.

Note option depositories establish a balance limit that they are willing to hold in their TT&L accounts, usually based upon their anticipated flow of tax deposits and their ability to maintain adequate collateral to secure a given level of deposits. All tax deposits received in excess of the lesser of the balance limit or collateral value are transferred automatically to the Treasury. During most of the year, TT&L capacity, defined as the sum of the lesser of the balances limit or the collateral value of the 1,282 note option depositories, exceeds the supply of tax payments. The regular exception is a two-week period around April 15, when the Treasury receives a large influx of individual income tax payments. During this time, the potential flow of tax payments into TT&L accounts exceeds the supply of maximum balances, and the Treasury must hold balances in its Federal Reserve accounts involuntarily. April 2007

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