TABLE 2.-LIKELY FUTURE STATE AND LOCAL BANK TAX DEVELOPMENTS REPORTED Category of change, and State Income taxes: Comment Alaska.. Delaware.. Florida Montana.. New York.. Ohio Texas. Rate increase of business license tax on financial institutions, proposed in General corporate income tax may be considered, 1971. "Almost certain" that corporation license tax will be extended to banks, 1971; [and this has occurred]. Taxable base (income attributable to operations in the State) will probably lag behind bank profits as international operations expand. Corporate franchise tax rate on banks may be raised to that on other corporations. Comptroller may rule franchise tax applicable to banks after Jan. 1, 1972, in addition to bank stock tax. [Net income taxes will be extended to national banks after Jan. 1, 1972, in Illinois, Maine, and New Hampshire. Bank taxes more like those on other businesses are likely in Alabama, California, and Missouri. Income tax laws are pending in Indiana (gross income tax on national banks), Iowa (adjusted gross income tax), West Virginia (extension of gross income tax to banks), and Wyoming (bank asset tax measured by income).] Taxes on value of shares or capital structure: North Carolina 2. Wyoming..... Capital stock tax, on all corporations, is likely to be considered, 1971. Banks might become subject to franchise tax on capital used in State and to intangibles tax, but both are unlikely. Bank shares tax may be replaced in 1971 biennial legislature by a "more equitable excise tax on total resources"; [the 1971 legislature, however, adjourned without passing this legislation]. [Tax may be extended to national banks after Jan. 1, 1972, in Ohio and Puerto Rico, replaced by a net income tax in New Jersey, replaced by tangible property tax in Maine.] Other specified taxes: Hawaii. Indiana. North Carolina 3_ General excise (sales) tax and use tax may be extended to national banks. Banks may become subject to tangible personal property tax under State-local [Sales taxes may be enacted in New Hampshire, extended to banks in North Dakota. Repeal of personal property tax is pending in Wisconsin and is recommended in lowa. Real estate transfer taxes are pending in Arkansas, Missouri, North Dakota, and Texas. Indiana may repeal its intangibles tax effective July 1, 1972.) Manner and extent of State and local taxation of banks are under consideration. Tax changes under permanent amendment, involving reductions of compensatory rates, could appear to reduce bank taxes, thus "open the door for flagrant discrimination among the various States in the taxing of financial institutions as against other business corporations." Complete bank tax review resulting in increased taxation of both State and national banks is probable. Tax bill affecting banks is being presented. "Tax reform will be an issue in the 1971 legislative session." "Some though[t] should perhaps be given to some means-through taxation or otherwise to further discourage holding company acquisitions and hypothecated ownership." 1 Information in brackets covers other likely developments reported by tax administrators or in Commerce Clearing House reports. In addition, widespread rate increases are reported as likely. 2 The North Carolina Bankers' Association reports that this "could conceivably" happen, but the department of tax research letter reports that there is "no movement to remove the exemption of banks from the franchise tax'' and that "there is considerable sentiment for repealing the [intangibles] tax entirely.' 3 According to the letter from department of tax research, "Such property is now exempt under an 'in-lieu' provision in the bank excise tax law." V. SUMMARY AND CONCLUSIONS (1) State banking supervisors strongly support P.L. 91-156 as it stands The response from the supervisors of State banks was strongly in favor of permanently amending section 5219 of the Revised Statutes in the form provided in section 2 of P.L. 91-156. Support for the permanent amendment came from supervisors in a large number of States, including New York, California,16 and indeed all of the larger banking States except Florida, Texas, and Missouri. For the most part, the respondents focused their answers on the position of State banks relative to national banks, although topic (2) below shows that some went beyond this consideration. This concern with State banks vis-a-vis national banks is understandable, given the tenor of P.L. 91-156, the commitment of State bank supervisors to the dual banking system, and the wording of the Board's letter. A general commitment to State and local taxing automony was also evident in the supervisors' letters, and it is significant on this point that the Congressional directive to the Board, in section 4 of P.L. 91-156, mentions "the achievement of . . . local automony in meeting the fiscal needs of the States and their political subdivisions." Most respondents seemed to feel that as long as the law required equal treatment of State and national banks, that would be a sufficient safeguard against abuse of State or local taxing powers. (2) There is some reason to expect heavier taxation of banks relative to other businesses Many of the respondents 17 mentioned that their States are already treating State and national banks equally for tax purposes, whether required to by State law or simply as a matter of practice. This has meant that State-chartered banks have been granted the same tax exemptions as national banks, or else that they have special tax credits or other arrangements, but often this has not resulted in light taxation of banks but has been offset by in-lieu taxation of banks. Three States reported legal conflicts or the payment of taxes by banks on a "voluntary" basis.18 The sketchy information on the bank tax situation provided in response to question 4 and to the other questions indicates that the level of bank taxation has been increasing while the temporary arrangements of Public Law 91-156 have been in effect and that further increases are anticipated when the permanent amendment of section 5219 goes into effect. Recent or expected tax rate increases were reported in several States,19 while additional taxes of minor revenue importance have been applied to banks in various States. There is also a noticeable trend toward changing tax structures to eliminate special treatment of banks. It is difficult to say to what extent banks will be simply paying more taxes, in the same way that other State and local taxpayers are facing increased tax burdens, or to what extent the tax increase on banks will outstrip that faced by other businesses. Furthermore, there is no satisfactory measure of the relative tax burdens on banks and other businesses. Most of the banking superintendents who discussed this aspect expressed concern that the States and localities would, intentionally or not, proceed to overtax banks relative to other businesses under the permanent amendment. The pressure for increased State and local revenues is indisputable, and Public Law 91-156 mentions as an explicit goal "effectiveness . . . in meeting the fiscal needs 16 The superintendent of banks in California supported the permanent amendment. The California Bankers' Association on the other hand, went on record as favoring continuation of the "interim" provisions because of fears regarding intangibles taxation and multistate taxation. 17 Arkansas, California, Colorado, Florida, Georgia, Louisiana, Maryland, Mississippi, Montana, New Mexico, Rhode Island, Texas, and Virginia. 18 Arkansas, California, and South Carolina. 19 Louisiana was the only State reporting a reduction in tax rates affecting banks. 20 of the States and their political subdivisions." In addition, Public Law 91-156 eases restrictions on State and local taxation that apply specifically to banks. Misunderstanding regarding the taxable capacity of banks or regarding the elimination of compensatory or in-lieu bank taxes 21 could, under the circumstances, result in discriminatory taxation of banks. Respondents from three States 22 expressed a fear of serious economic results, and it was further pointed out in the letter from Texas that even apparently even-handed tax treatment might prove especially hard on banks Since most of the respondents were in favor of the permanent amendment section of P.L. 91-156, little was said about the possibly undesirable consequences of subjecting banks and other financial institutions to intangibles taxation, but this is the area in which the uneven impact of taxes between financial and non-financial businesses might be most serious. Replies from Florida and Missouri urged statutory restrictions against intangibles taxation applicable to banks, and the North Carolina memorandum cited it as a possible source of serious economic distortion. (3) Interstate aspects of bank taxation will be of increasing importance Despite restrictions against branching beyond State lines or even within some States, there has been considerable expansion of banking activity across State lines in recent years, and more is expected. Except as provided in the interim arrangements, national banks are currently immune to taxation by nondomiciliary States even where their operations provide a strong basis for a claim to taxing jurisdiction. State-chartered banks do not share this immunity. This situation was cited as a reason for supporting the easing of restrictions on national bank taxation in section 2 of P.L. 91-156, in letters from California, Iowa, Michigan, Nebraska, and New York.23 Only the North Carolina response considered unfettered multistate taxation of banks to be a serious prospect. Many factors influence the extent of banking activity in a State in which out-of-State banks are involved: the attractiveness of opportunities for financial transactions in the State, the types of activity involving out-of-State banks which are tolerated in the State, and the tax consequences of the various sorts of activity possible in the State. No comprehensive information on these points can be derived from the letters of the banking supervisors, but it seems clear that States differ considerably in their posture toward out-of-State banks. Finally, there are considerable differences among States regarding banking operations and the taxation of banks. Coordination of State taxing policies has become a matter of considerable interest, and this aspect may gain in importance with the expansion of interstate banking activity and the easing of restrictions on the taxation of nondomiciliary national banks. This is, however, a separate question that was not covered in the inquiry to State bank supervisors. 20 This was pointed out as a possibility by respondents from Missouri and North Carolina. 21 This was stressed by the Georgia superintendent. 22 Missouri, North Carolina, West Virginia. 23 The same point was also made in a statement by Frank Wille, which was included with the New York return. This statement was published in "Taxes on National Banks," Hearing before the Senate Committee on Banking and Currency, 91st Congress, 1st session, on S. 2065, and H.R. 7491 (September 24, 1969), pp. 52-57. APPENDIX 6 The History and Impact of Section 5219 on the Taxation of National Banks SIMEON E. LELAND Professor of Economics and Dean Emeritus of the College of Arts and Sciences of Northwestern University * I. THE EVOLUTION OF SECTION 5219 Conflicts between the States and the Federal Government over State and local taxation of national banks are as old as the national banking system itself. Sometimes the issues were hot; at other times they were quiescent; now and then they smoldered and it took very little in the way of legislation or administrative practice to revive them. Moreover, through the mainstream of the history of the nation, State banks have always competed with banks chartered by the Federal Government. Even before the national banking system was created, State banks were jealous of their powers, privileges, and prestige. The populace took sides, too, as if it were in a struggle of the underprivileged against the privileged. State legislatures responded to these pressures, as did tax collectors when they could. A. National Currency Act of February 25, 1863 The national banking system owes its origin to the national currency act approved February 25, 1863.1 One purpose of the act was to provide for a stable currency while another was to assure a market for sale of the bonds issued by the Federal Government. The banking associations provided for by this act could issue circulating notes equal to 90 percent of the market value of the bonds deposited with the U.S. Treasury. A limit of $300 million was fixed for the notes, to be apportioned among the States according to population. Supervisory responsibility was given to a bureau of currency in the Treasury. Nothing was said in the Act of 1863 about taxation of national banks or their shares. "This aspect of the matter was apparently not ACKNOWLEDGEMENTS: In the preparation of this history my obligations for assistance are too numerous to acknowledge adequately. I am especially indebted, to Mr. Robert W. Baumgartner, head of the Documents Room in the Northwestern University Library, and his assistants-Mr. Wilfred Danielson, Mrs. Anne Hubbard, and Miss Gail Porter-for help in locating fugitive documents and for making other source material available to me. To the Traffic Institute of Northwestern, and to Mrs. Alice Gibbs, Librarian, I owe thanks not only for access to court decisions but for help in locating them. Mr. Charles F. Conlon, Executive Director of the Federation of Tax Administrators, gave similar aid and discussed with me numer ous points made in this study. Mr. Lynn A. Stiles, Vice President of the Federal Reserve Bank of Chicago, helped me throughout the study, and in addition made both books and staff available to me. My greatest debt is to Miss Judith A. Cunningham, of the Research Department of the Federal Reserve Bank of Chicago, who not only typed most of the manuscript but compiled the list of cases on which "Recent Court Decisions: 1926-1970" is based. My wife and family cheerfully accepted, too, months of neglect while this history was being written. None of these people can be blamed for the errors of commission or omission in the following pages. They are my responsibility. For them I am deeply apologetic. I hope they are not too SIMEON E. LELAND. numerous. 112 U.S. Statutes at Large (Boston, Little, Brown & Co., 1865, edited by George P. Sanger), 37th Congress, 3d session ch. LVIII, pp. 665f1. Cf. Davis Rich Dewey, Financial History of the United States (New York: Longmans, Green, 47th ed., 1920), pp. 310-11, 320-28. considered important at that time, and no reference was made to it in the House." Nevertheless, shares were assessed in some States, such as Ohio and Maine, especially since the Act of 1863 did not prohibit such taxation. 4 B. National Bank Act of June 3, 1864 Organization of national banks proceeded slowly. So did the issuance of circulating notes. The original act was therefore replaced by the law of June 3, 1864,5 which made numerous changes in the details of banking and made it easier for State banks to convert to the national system. Likewise provision was made for State and local taxation of national banks. "For in the few months which had already elapsed since the introduction of the system there had arisen a clamor that the banks were evading taxation altogether, inasmuch as there was some question whether States under the decision of McCulloch v. Maryland (1819) would have the right to tax." Here is where section 5219 began (although under a different name and number). The power of States to tax national banks was contained in “An Act to provide a national currency secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof." As the title indicates, the primary concern of the act and of Secretary of the Treasury Chase was to provide a national currency and a market for U.S. bonds. Interesting as is this phase of the history of the national banking system, it has been amply covered many times. So have the origins of State taxing powers over national banks been reviewed. The tax provisions of the Act of 1864 were as follows: 3 Harley L. Lutz, The Evolution of Section 5219, United States Revised Statutes," Bulletin of the National Tax Association, vol. XIII, no. 7, p. 206 (April 1928). 4 Ronald B. Welch, State and Local Taxation of Banks in the United States, Special Report of the New York State Tax Commission, no. 7, Albany, N. Y., 1934, pp. 14-15, citing E. L. Bogart, Financial History of Ohio, University of Illinois Studies in the Social Sciences, vol. 1, pp. 297-98 (1912), and Stetson vs. City of Bangor, 56 Me. 274 (1868). 5 Laws of the United States, Acts and Resolutions of the First Session of the Thirty-Eighth Congress, Washington, 1864, Public No. 85, pp. 106-124; 13 Stat. 106. Dewey, op. cit., p. 327. Cf., also: "On all sides during the debate on the first bill the exemption of the banks from State and local taxation had been taken for granted, on the imposing but really ineffective ground that the bank's capital would be invested in United States bonds. So far did the shadow cast by McCulloch v. Maryland reach!" Lutz, loc. cit., p. 206. 7 Albert S. Bolles, The Financial History of the United States from 1861 to 1885, New York: D. Appleton and Company, 1886, pp. 197-226, 341-72; Andrew McFarland Davis, The Origin of the National Banking System, Publications of National Monetary Commission, vol. v, no. 1, 2 parts, Senate document 582, 61st Congress, 2d Session, Washington, 1910, 213 pp.; Dewey, op. cit., chs. XIII and XVI; Leonard C. Halderman, National and State Banks: A Study of their Origins, Boston: Houghton Mifflin Co., 1931, 178 pp.; John Jay Knox, History of Banking in the United States, New York: B. Rhodes and Company, 1900, 880 pp.; Alexander Dana Noyes, History of National Bank Currency, Publications of National Monetary Commission, vol. v, no. 2, Senate document 572, 61st Congress, 2d Session, Washington, 1910; Oliver M. W. Sprague, History of Crises Under the National Banking System, National Monetary Commission Publications, vol. v, no. 3, Washington, 1910; William Walker Swanson, The Establishment of the National Banking System, Kingston: The Jackson Press, 1910, 117 pp.; Dwight B. Waldo, A Sketch of the Origin, Establish ment, and Working of the National Banking System, with special reference to issues, in Publications of the Michigan Political Science Association, vol. 1 (1893) pp. 23-39. 8 Lutz, loc. cit., pp. 206-10, traces the 1864 law, with various amendments, as it progressed through the House and Senate. On the history of taxation of national banks, see especially Lewis H. Kimmel, The Taxation of National Banks. National Industrial Conference Board, Inc., New York, 1934; Welch, op. cit.; John B. Woosley State Taxation of National Banks, Chapel Hill, University of North Carolina Press. 1935, especially ch. I and II; John D. Helmberger, State and Local Taxation of Banks, Ph.D. thesis, University of Minnesota, December 15, 1960, 163 pp. and appendix. See also George Bryan, "State Taxation of National Banks," Yale Law Journal, vol. 24, pp. 149-61 (1914-15); Samuel B. Chase, Jr., "State Taxation of Banks," Law and Contemporary Problems, Duke University School of Law, vol. 32, no. 1, pp. 149-67 (Winter 1967); Fred R. Fairchild, "State and Local Taxation of Banks," American Economic Review, vol. 6, pp. 851-868 (1916); Robert Murray Haig, "Should Banks Be Taxed and How?" Proceedings of the National Tax Association, 1929, pp. 385-386. Thomas J. Holdych, "Tax Immunity and Taxation of National Banks: One Hundred and Fifty Years after McCulloch v. Maryland," University of Illinois Law Forum, vol. 1969, No. 2, 1970, pp. 224-47; Walter W. Law, Jr., "The Taxation of Banks," Proceedings of National Tax Association, 1923, pp. 202-12, Thomas B. Paton, "State Taxation of Banks," Proceedings of National Tax Association, 1913, pp. 315-39: Paten, "The Effect of Decisions of the United States Supreme Court in the Case of the Merchants' National Bank," ibid., 1921, pp. 388-92; Martin Saxe, "Taxation of Banks in the State of New York," ibid., pp. 401-12; Saxe, "State Taxation of Banks" in Current Problems in Public Finance, Commerce Clearing House, New York, 1933, pp. 207-12. |