For more than 150 years, American consumers and businesses have benefitted from the national banking system’s uniform regulatory framework, due in part to the National Banking Act (NBA) signed into law by President Lincoln. Thanks to the NBA, American consumers and businesses follow a centralized banking framework rather than a confusing patchwork of state laws that would inhibit interstate commerce.
Unfortunately, the Arizona House is currently considering a bill [HB 2629] that could undermine the NBA — and the national banking system — while attempting to bypass federal regulation of interchange fees. If enacted, the bill would prohibit banks and networks from charging interchange fees on the sales tax portion of a given transaction. While proponents of the bill are framing it to protect consumers and provide relief to small businesses, the reality of implementing it is more complex and achieves the opposite.
The legislation ignores the fact that the existing payments system that merchant businesses and consumers use every time a purchase is made with a debit or credit card does not break up processed transactions to separate out applied tax. Compliance will require businesses to stand up entirely new card-processing systems or adopt cumbersome accounting practices, creating additional costs that will almost certainly be passed on to consumers.
Similar legislation has been considered routinely in a broad range of states, but typically, they fail when legislators realize the harm these proposals will inflict on small businesses and consumers. In fact, the only bill that has been signed into law — in Illinois, the Interchange Fee Prohibition Act (IFPA) — is already facing litigation.
The judge overseeing the case in Illinois issued a preliminary injunction, noting national banks — who comprise almost 90 percent of credit card transactions — are likely preempted under the NBA. As a result, state-charted and community banks, small businesses, and consumers — namely all those who can least afford it — will bear the brunt of this regulatory burden.
Some legal experts even expect the law could be struck down. But if it doesn’t, Illinois legislators are prepared to step in. The bill has proven to be so politically and fiscally toxic that legislation has already been introduced to repeal it entirely before it even goes into effect.
If Arizona’s law is also challenged in court, HB 2629 might evolve in a similar way like the IFPA. As a result, HB 2629 would saddle community and local banks with burdensome regulations, reducing the services they are able to provide to their local customers and businesses. It would also encumber taxpayers with the cost of unnecessary litigation.
Arizona should learn from Illinois’ mistake and avoid this dangerous precedent. If HB 2629 passes, the state’s consumers and businesses would operate under essentially a pre-Civil War regulatory regime.
Additionally, the bill states that if interchange on taxes cannot be removed at the point of sale, banks must provide the amount in credit later. Since networks and banks are unable to do that, barring any changes to the global payments system, the burden will fall on businesses to calculate how much money they’re owed after and then chase down every financial institution to get their credit. Wal-Mart and McDonalds may have resources to do this; a small business? Probably not.
We urge the Arizona Legislature to take note of the Illinois injunction. A fragmented regulatory system harms businesses and taxpayers, saddling them with duplicative regulations that contradict federal law, forcing businesses to prioritize compliance over growth, innovation and competition.
There is no reason to consider similar bills in Arizona’s legislature while litigation is pending in Illinois, particularly when, even without any ongoing litigation, the legislation would only overregulate the economy and undermine our free market system.
John Wittman is the executive director of Americans for Free Markets, a coalition of groups in support of free markets and economic growth.
