pressed by Mr. Thomas E. Lyons, Chairman of the Wisconsin Tax Commission, as follows: "1 "What we, *** who desire an amendment of 5219, are demanding is to restore to the States the power to tax national banks as they see fit, providing they do not discriminate against those banks, in favor of other classes of property."

**

The position of the bankers, as expressed in discussions with the State officials and in the hearings was equally clear, They did not want a change in section 5219.42 If State laws were out of harmony with this, as interpreted in the Richmond decision, let the States change them They were satisfied with the share tax option as it was. They would even favor an amendment fixing the maximum rate at which the shares of national banks could be taxed. They were willing, if necessary, to concede an amendment to § 5219 to permit States to adopt an income tax. The advantages to private bankers, particularly as they existed in New York and Boston, should be removed. At all costs the national banks had to be protected, especially to prevent the Federal Reserve System from being undermined by the exodus of national banks to State systems a move that would be fostered by excessive taxation and the lure of the more liberal powers granted to State banks." The banks also feared that changes in section 3219 might establish in the tax laws a separate classification for national banks and thus make it easy for them to be singled out for discriminatory taxation. In short, the typical banker's attitude was that the less change in section 5219, the better.

4 In Proceedings of National Tax Association, 1922, p. 30. His testimony at the hearings was of similar import. Hearings, H. R. 9579 (1922), pp. 57-66.

Their position is shown in the following quotations from Hearings, HR 970 at the pages indiested Mr. Sands: "Our position is that 5219 remains as it is, but it is amended it should only hasmended to the extent of income tax (p. 114).

Mr. McAdams: I believe it is fundamental that this section should remain unchanged (s. 119).

Mr. Divet: the bankers association are opposed to any change in the principle that is involved in section 5219" (p. 123)

Mr. Favinger: "We are amply protected by section 5210 Add to th, if you will, the thesmen du

that is all; do not change the principle involved" (p. 130y.

Mr. Heim: "Lam opposed to it (the McFadden billl here it goes e no heat for pintaction and m parison, if you are left solely with the State banks, beanse the legalene has shown is willingness where classification is possible, to classify State banks going the title companies and others outside of that (p. 157)

Mr. Freemant I frankly say that the present method of taxation is satisfactory to the heaks of New Jersey (p. 170).

Mr. Garme we would like to see 5219 maintainer or the patiofole maintainer or file ny make some amendments to accommodate the States that have different gates of taxation, an inone of classified-property tax, then we would favor the amendment clowne henk shares the care of their mesmet aines the Tetelman Talon your

S. 3695, introduced by Senator Kellogg, was said to have been drafted by tax officials interested in amending section 5219.48 This bill proposed to limit the share tax to the rate "assessed upon other moneyed capital employed in the business of banking" rather than that applied to intangibles in the hands of individual citizens. Where the income tax alternative was used, the tax upon the bank "shall not be at a greater rate than is assessed upon the net incomes of such other moneyed capital." The bill also would permit the validation of share taxes already imposed, provided such taxes were not greater than those upon State banks and trust companies.49

4. Senate action.-Little progress was being made in advancing any of the bills in the Senate. On December 22, 1922, Senator Kellogg threatened to move that the subcommittee be discharged if his bill was not reported immediately. He was of the opinion that States should not be able to discriminate in favor of State banks and trust companies and other moneyed capital which came into competition with national banks, but to say that banks shall not be taxed more than individuals on their intangibles was "an absurdity in legislation." He also inserted into the Record a letter from the First National Bank of Minneapolis indicating that they would be satisfied if State and national banks were treated alike." 50

Shortly thereafter, on January 4, 1923, Senator Pepper submitted a report of the Committee on Banking and Currency on H.R. 11939, with an amendment in the nature of a substitute. In his summary of the bill he pointed out that the current interpretation of section 5219 by the courts "furnished a poor basis upon which to build the tax laws of the States in the future." He told the Senate that the Kellogg bill would end all discrimination among banks-national and State banks, and trust companies and private banks. The bill sponsored by the Committee went further and proposed not only "that the rate of taxation applied to national bank shares shall not be higher than the rate applied by the State to capital engaged in the banking business in the State, but that it shall not be higher than the average of the rates applied by the State to shares in business, manufacturing and commercial corporations." The matter of averaging and the computation of such averages came up for considerable discussion in the debate.51 Senator Pepper explained that H.R. 11939 provided not only

48 62 C.R., p. S8399 (June 8, 1922); Woosley, op. cit., p. 58; Proceedings of the National Tax Association, 1922, p. 253. 49 The bill is reprinted in ibid., p. 254.

50 64 C.R. pp. S846, 847, 850 (December 22, 1922). Van Alstine in Proceedings of National Tax Association, 1922, p. 383, saw no reason "banks should have a special law protecting them against higher taxation than the average of other classes of property, any more than the manufacturer, the butcher or the broker." 51 64 C.R.. p. S1218 (Senate report 986; January 4, 1923): p. S1455 (January 9, 1923). Senator Glass thought that 11939 did the same thing. Ibid., p. S1458. Senator Kellogg said it this way: "All moneyed capital engaged in banking must be taxed at the same rate at which bank stock is taxed and at which bank capital is taxed." Ibid., p. S1463.

Sen. McCormick asked how the averaging would work. To this Sen. Pepper replied: "It is extremely difficult to answer the question of the Senator, for the reason that the several States have divergent practices in regard to the taxation of the other forms of corporate activities. In some States no tax at all is imposed on capital invested in manufacturing It is, therefore, provided in the measure reported by the Committee that in case a State does not tax any or all corporations other than banks, the average of the rates ceases to be the limit, and the only limit left is the one suggested by the Senator from Minnesota." 64 C.R., p. S1455.

Sen. Lenroot asked: "How was the average to be determined without valuing every share of stock in the State?" (p. 81456).

Sen. Pepper: "It is a mere mathematical calculation to ascertain in any given State what is the average of the rates in force within that State applicable to corporations of the classes specified."

Still not satisfied, Sen. Lenroot wanted to know if the local rates used in the computation would be the rates in the current or the preceding year, since the bill was silent on that subject. Sen. Pepper thought it would be "the last average ascertainable under the last pre-existing State legislation." Ibid., p. S1456. But averaging was no problem for Sen. Kellogg, "it is not difficult to find the average rate imposed in the State. It is done every day by tax commissions." Sen. Pepper agreed. Ibid., p. S1455.

for the taxation of shares but also the case in which the State may desire to tax the income of a national bank and the case in which the State may desire to include dividends upon shares in national banks in the taxable income of the citizens, the provision being that any one of those forms of taxation of national banks shall be in lieu of the others.” The “in-lieu" feature was a new addition to the provisos in section 5219 but it was not followed up by the Senate. The bill was debated on January 9, 22, and 23, 1923.52

On January 10, 1923, Senator Calder submitted an amendment to section 5219 which was ordered printed. On January 16, in the House, Mr. MacGregor favored a study of the Senate bill, so that when the Senate passed it the House could "act speedily." He informed the House that the Senate bill was a vast improvement over the House bill.53

In the Senate, H.R. 11939 was amended to provide that "the rate applied by said taxing district to the shares in banking associations shall not exceed the average of the rates applied by it to the shares of such other corporations or to the shares of such of them as are taxed therein," the "other corporations" being mercantile, manufacturing and business concerns. A validation provision covering both State and municipal taxes was approved. The bill was passed January 23, 1923, with 50 yeas, 18 nays, and 28 Senators not voting 54 Disagreements between the House and Senate had to be composed. Conferees were appointed. But almost a month later it was reported in the House that the conferees could not agree. They had met with State officials and bankers' representatives over more than a year in an attempt to develop a workable plan for State taxation of national banks. They had agreed on practically everything except what should be done about the share tax option. And it was now only four days before final adjournment of the 67th Congress. Mr. McFadden moved that the House recede and concur in the Senate amendments except for the validation provision. Thereupon, some parliamentary maneuvers took place to assure the House that the validation provisions would be voted upon separately; and each side was given an hour to debate its case.55

5. Nature of debate. Perhaps at this point it would be well to indicate the nature of the debate in Congress on amendment of section 5219, without observing the actual sequence of remarks in either house, or confining the discussion to the debate on a single day. The debates, as is to be expected, were mostly a restatement of the testimony and positions taken by the two sides in the hearings summarized above. Proponents were sure that individual deposits did not constitute "other moneyed capital" coming in competition with national banks, as had been held in the Richmond case. Both Senator Glass and Mr. Mills disputed any supposition that individuals' bank deposits were in competition with the business of the banks. Mr. Wingo said that deposits were not involved in section 5219.56 The benefits to the States of low-rate taxes on intangibles were repeatedly cited but the opposition contended that these laws were based only on

52 Ibid., p. 81456.

53 64 C.R., p. S1563 (January 10, 1923), and p. H1843 (January 16, 1923).

54 Ibid., pp. 82219, 2224 (January 23, 1923). Cf. ibid., pp. 82172, 2178 January 22),

58 Conferees were appointed January 26, 1923. For the House, conferees were Messrs. McFadden, Dale, and Wingo; and for the Senate, Senators McLean, Pepper, and Fletcher. 64 C.R., pp. 12504, 162472 January 26, 1923), and pp. H4779-4783 (February 27, 1928),

Ibid., pp. 81458, 1459, 1460, H4800 1. The 1891 act was not mentione1 in either the hearings or the de bates.

expediency." The same could not be said of the income tax, an option not permitted until after adoption of the 1923 amendment. New York, however, had adopted a personal income tax and exempted personal property, tangible and intangible, in the hands of individuals. This exemption invalidated taxes on national banks because of the restrictions imposed by section 5219. Under a ruling of the State attorney general, bank dividends were included in the net income taxable to individuals and partnerships. New York also retained the share tax on national banks, capitalizing income to arrive at the value of shares.58 Since private banks in New York were partnerships, they were exempt on personalty but taxed on income at not over 3 percent. Although the Massachusetts law was different from that of New York, it too taxed private banks at lower rates than national banks. Such discriminations were referred to again and again during the debates,59 Nothing else received quite as much attention. Regardless of the reason many regarded the situation as "scandalous." 60 Fears were expressed that this competition would drive State and national banks out of existence. And to preserve the Federal Reserve System, national banks needed Federal protection.61

This last argument was answered, first, by those who trusted State legislatures to act fairly: 62 and second, by those who thought that the banks desired either to escape taxation or to maintain a preferential status. On the other hand, it was frequently pointed out that many bankers voluntarily paid the taxes assessed against them and willingly worked out compromises with State officials. No evidence was offered to show that national banks were discriminated against in comparison with general business, mercantile or manufacturing corporations.

There was no agreement either on the yardstick by which national bank taxes were to be measured. Some supported the bankers' contention that equal taxation of "individually-owned intangibles coming into competition with banks or the business of banking" was proper. This was the position of the Supreme Court in the Richmond case.

64

57 There is "no morality in intangible property tax favoritism." Mr. Wingo, 64 C.R., p. H1542. As to the nature of intangibles and taxes upon them, see Leland, op. cit., pp. 117ff. 68 Welch, op. cit., p. 40; 64 C.R., p. H1541.

59 Cf. Sen. Kellogg, ibid., p. S1463, Mr. Mills also pointed out that before the New York income tax was adopted, $6-7 million had been collected; afterwards collections were $35 million. Ibid., p. H4785.

In New York an institution like Kuhn, Loeb & Co. will pay $80,000; on the same basis a bank like the Hanover National will pay $240,000. Mr. Jones (Texas) 64 C.R. H1542. Mr. Garner asked, should national banks pay more than J. P. Morgan & Co? No, said Mr. Mills; ibid., p. H1540. The New York law exempts "from like taxes such poor taxpayers as J. P. Morgan & Co., Kuhn, Loeb & Co. and other poor concerns engaged in the banking business." Sen. Shortridge, ibid., p. S847. In Massachusetts national banks paid $2,999,000 in taxes, but if taxed as were Lee Higginson & Co., Kidder, Peabody & Co., and other international bankers, their tax would have been $490,000. Mr. Stevenson, ibid., p. H954 and cf. p. H4788. For other references to taxes on private bankers, cf. ibid., pp. H1545, 1546, 1659, 1842, 4803.

60 Mr. Mills in ibid., p. H1540. Mr. Wingo agreed but added that it was not the fault of Congress. Ibid., p. H1659. Senator Glass thought the national banks had a real grievance. Ibid., pp. S1458, 1459. One writer, however, thought that private banks were hardly competitive, "for very few private banks have a capital sufficiently large to enable them to organize under the national-bank act." George E. Barnett, State Banks and Trust Companies since the Passage of the National Bank Act, 61st Congress, 3d session, Senate document 659, p. 205. He indicated that in large cities they were adjuncts to brokerage businesses; in small communities, chiefly in agricultural sections, they furnished credit. Ibid., p. 206.

61 Mr. Wingo in 64 C.R., p. H1542.

62 Sen. Smith wanted to know if there was any evidence before the Committee "to show that in any of the States, to any extent, there was any discriminatory legislation for or against capital engaged in banking as distinguished from capital engaged in other industries?" Sen. Pepper: "*** I cannot say there was because no witnesses were examined in the ordinary way, although representatives of a great many points of view were given ***; but *** in North Dakota there was legislation of such a sort as to give pause to the question of whether or not there might be such hostile legislation as I have referred to." Ibid., p. S1457. [North Dakota had a comprehensive classification system, including low rates on individually-owned intangibles.] Also Mr. MacGregor in House, ibid., pp. H1842-3.

63 The "whole proposition seems to be that the banks desire to escape taxation." Mr. McGregor, 64 C.R., p. H1842. There followed a satirical characterization of bankers. Mr. Mills said, "national banks are great, strong, prosperous corporations, and such a tax is wholly inadequate." State banks and other corporations paid higher rates. Ibid., p. H1540.

E.g., Sen. Walsh, 64 C.R., p. S1463. He would put all property in the same class. Mr. Webber, a banker, expressed a contrary view in the Hearings, H. R. 9579: *** the gentleman from Arkansas to whom I sold a mortgage for $20,000. He is not in competition with the national bank” (p. 179).

Others, as has been indicated, opposed this point of view. Many wanted State and national banks taxed ažké“ Otkers wanted all financial institutions included some siming especially at the private banks. And still others thought banks should be treated like other businesses. This point of view prevailed, for the Senate Committee recommended, as explained by Senator Pepper, that the rate upon national bank shares "shall not be greater than the rate applied *** to any money engaged in the banking business, *** superseding [sic: superimposing?) a further safeguard by providing that if a State taxes manufacturing, business, or commercial corporations at a rate or at a series of rates of which the average is lower than the rate applied to bank capital * * * that the the lower average rate applied by the State to other corporations shall be the limit of the exercise of its taxing power." 68

Suppose, however, asked Mr. Mills, New York wanted to encourage manufacturing in the State and sought to stimulate such investments by adopting a very low tax rate on manufacturing-lower than on other corporations-would not that policy invalidate national bank taxes? Mr. McFadden thought not, so long as banks and financial corporations were taxed alike. Mr. Wingo disagreed. Suppose, said Mr. Mills, a State did not tax manufacturing corporations under its income tax, would that invalidate national bank taxes? "No," replied Mr. McFadden, “because they are to be taxed at the same rate as other moneyed capital in the hands of citizens or financial institutions coming into competition with them are taxed." 69

Although this discussion did not raise the issue, some members held the belief that section 5219 legislation amounted to the coercion of the States as to taxing powers. This was vehemently denied by Mr. Wingo: Let the states "clean their own house and quit quarreling with Congress." 70 This view was expressed by an editorial in The New York World (January 12, 1923), twice reprinted in the Congressional Record. A point made by Helmberger in his State and Local Taxation of Banks is worth noting in this connection: Though the States chafed at Federal restrictions, few taxed national banks as heavily as section 5219 permitted.72

The provision in the proposed 1923 amendment giving States a choice of three methods of taxing national banks was questioned by Senator Trammel. To this Senator Kellogg replied that it restricted. States "to only one at the same time." However, to Senator Trammel this meant that all States would have to conform. "Under the decision of the Supreme Court," they would have to anyway, added Sen. Pepper.73 Thus, the consideration of alternatives or of complete freedom to tax banks did not get far.

65 Cf. Mr. Wingo, 64 C. R. p. H1542, including private banks; Williamson, ibid., p. H4793. However, Sen. Pepper was of the opinion that if the rate was limited to what the State does to State banks and trust com panies, "we would be segregating bank capital, as such, as an object of hostile taxation." II. R. 11989, he said, was an attempt to guard against that danger. Ibid., p. 81456.

66 Sen. Kellogg, ibid., p. S1455; Mr. Mills, ibid., p. H1540; Mr. Wingo, ibid., pp. 11542, 4803. At the Hear ings, H. R. 9579, Mr. Favinger, an American Bankers' Association representative, had said as to private bankers, "Those gentlemen are bankers; they call themselves 'bankers,' and they do a banking business" (p. 134).

67 Sen. Kellogg, 64 C. R., p. 81459 (January 9, 1923):

68 Ibid., pp. Š1455-6 (January 9, 1923).

69 Ibid., p. H4797.

70 Cf. Mr. Stevenson, ibid., p. H954; Sen. Swanson, ibid., p. 82175; Mr. Wingo, Ibid., p. 111542. Also of to same effect, pp. H1541, H1659.

71 Ibid., pp. 81622, H1660; favorably referred to by Mr. Wingo, p. 111659,

72 Helmberger, op. cit., pp. 19-20.

73 64 C.R., p. $1461.

66-236-72-pt. 3- -15