APPENDIX 8 Treatment of Intangible Personalty in the State-Local LYNN A. STILES Vice President and Economist, Federal Reserve Bank of Chicago Certain spokesmen for commercial banking have urged the Federal Reserve Board to recommend to Congress that the "permanent amendment" to section 5219 be modified to continue indefinitely the present ban on State (and local) taxation of intangible personalty held by national banks. They argue that the imposition of State intangibles taxation on bank holdings could be unneutral in its effects on banking vis-a-vis other sectors of the economy. Among specific reasons advanced in support of continued exemption are these: (1) Bank assets are (relatively) easy to identify and to evaluate, at least in terms of book value. While this may also be the case with intangibles held by nonfinancial businesses, it seldom is true of the holdings of individuals. Here then would be a possible source of unneutrality in the tax treatment of banks. (2) Banks conduct their operations within individual states, so that unlike individuals and many nonfinancial enterprises they are not in a position to arrange the state-by-state distribution of their assets in the interest of minimizing tax liabilities. (3) There is the traditional multiple-taxation argument, in one of its forms: the real or tangible assets underlying formal claims upon them, that is, representative intangibles, are subject to taxation as a matter of course and to tax the intangibles as well, and further, to tax claims to these intangibles as the multiple "layering" of claims proceeds, would be to tax doubly (or multiply) the same thing, or a single underlying source of value.1 (4) Because intangibles constitute the overwhelming bulk of commercial bank assets, while looming much less importantly among the holdings of nonfinancial businesses, the banks would be particularly vulnerable under concerted attempts to tax such property effectively. The position of the banks might be especially difficult, moreover, if intangibles were made subject to tax rates at the levels applicable to real estate, as would be true under general property taxes. Vulnerability of bank assets. The balance sheets of commercial banks are routinely published in such readily accessible media as newspapers of general circulation in the banks' service areas. Although the Set aside as not within the scope of this statement is the problem of double taxation arising out of conflicting or overlapping claims by separate governments to tax a given base, as when both the domiciliary and nondomiciliary States assert the right to tax corporate net income, salos, or assets. detail provided by this source would not always suffice to enable a tax assessor to compile a definitive listing of a bank's taxable intangiblese.g., it might not separately identify holdings of Treasury or other tax-exempt securities-it could be useful in establishing a presumption that taxable assets were on hand to be returned. Comparable listings of the assets of certain nonfinancial businesses also are often available, if in less accessible form than the statements of banks. But similar information on holdings of individuals is not available. The possibility of discriminatory treatment of banks (and other financial institutions, such as mutual savings banks and savings and loan associations, for which balance-sheet information also is freely available) vis-a-vis nonfinancial business and individuals is clearly apparent. Although it is true that the book values shown for bank assets in published statements may depart from current market value-commonly the standard in ad valorem taxation-they will reflect adherence to a consistent method of asset appraisal prescribed by an official regulatory agency, one that probably generates valuations above market as frequently as it does valuations below the market, with the deviations seldom exceeding tolerance limits typically acceptable in property tax practice. These considerations appear to offer support for continued exemption of bank-held intangible assets, but it is support of a negative sort: bank-owned intangibles, which may be readily identified and appraised, nevertheless should be immune to taxation simply because comparable assets in the hands of other holders, and therefore not so readily identified and assessed, are in practice partially or wholly exempt. To prevent discrimination against banks (and nonbank financial intermediaries), it follows, the present exemption of this class of property should be continued. Territorial confinement of banking. The argument that banks, owing to their confinement to "doing business" in individual states only, are not able to move intangible assets about in the interest of avoiding (or evading) tax liability has a somewhat peculiar ring. It appears to rest on a tacit acceptance of tax avoidance (evasion) strategies undertaken to thwart the will of the legislatures and taxing authorities. Yet, it probably is true that the exposure of bank-owned intangibles to State and local tax jurisdiction would lead to considerably more effective, heavier taxation of these holdings than of intangibles in the hands of nonfinancial corporations-at least the larger ones engaged in interstate operations. Intangibles in their nature are mobile and the establishment of business situs in more than a single location ordinarily presents no great problem to firms conducting their operations over broad areas. Clearly, banks would be at a relative disadvantage compared to larger firms in nonfinancial business if barriers to the state-local taxation of intangibles were eliminated. The issue of double taxation. It is sometimes contended that the taxation of intangibles, or more specifically those of a representative sort, means taxing more than once a single ultimate source of taxable capacity or potential tax liability. Tangible personal property and real estate are subject to taxation routinely in virtually all jurisdictions. The premise underlying this practice appears to be that physical property per se is benefited by the availability of governmental larger than those of most other businesses seems unpersuasive at first blush. Intangibles-cash, deposits, loans, and investments-make up the bulk of the banks' earning assets; tangible properties-buildings, land, inventories, equipment, and machinery-are the counterpart holdings of other businesses. If the two classes of property are dealt with similarly, it is not obvious that the banks will suffer discrimination. Because tangible property is generally subject to ad valorem taxation, while intangible property is not, being taxed only in certain jurisdictions and then commonly at effective rates that are preferentially low either by law or by administrative practice the indifference of holders as between the two classes of property finds expression in the rough equivalence of after-tax yields on tangible assets and the (virtually) untaxed yields on intangibles. If taxation of intangibles at the same rate as tangibles were to become universal, the presumption is that before-tax yields of intangibles would be driven up so as largely to cover the tax liability. If, however, intangibles taxation were to occur only selectively, the attendant adjustment in before-tax yields would only partially compensate for the tax liability in those jurisdictions imposing such taxation, while tending to produce windfalls to holders of intangible assets in those jurisdictions that do not tax intangibles. The result could be disturbing to credit markets and a source of pronounced unneutrality in terms of its state-to-state impact on the banking system. In practice, the taxation of intangibles held by others than banks means the application of either special, low-rate ad valorem taxes or else the extension of relatively high nominal rates applicable to property in general to assessments on intangibles scaled to arbitrarily low fractions of full value. Deliberate undervaluation frequently has been resorted to simply in order to encourage the listing of intangible property. Such undervaluation, however, often is extra-legal and therefore of no assured permanence. It would seem distinctly undesirable to expose intangibles (or any other class of property) to the possibility that the tax authorities might elect abruptly, for whatever reason, to discard a pragmatically defensible practice in favor of literal adherence to a statutory full-value standard, with effects on property yields or income that could have disturbing allocational and equity implications. Perhaps no less undesirable, of course, is the exercise of administrative classification or debasement itself, because of the possibilities it presents for abuse. Moreover, in the absence of a general move toward ad valorem taxation of all intangibles, uncertainty over the possibility that some intangibles might be made subject to the nominal rates applicable to real estate and other classes of tangible property-rates in a range of, say, 2 to 4 percent of full value, or a sizable fraction of before-tax yields on intangible assets could hamper significantly the smooth and efficient functioning of the credit market. The existence of wide variations among States in methods of taxing businesses other than banks and of considerable dispersion of rates under common tax forms obviously has had no profoundly destructive effects. But, the differentials presently observable have developed slowly, over a period of many years. Their effects have become deeply |