PAGENO="0001" 72~oz4~ / 92d Congress ~ COMMITTEE PRINT 2d Session STATE AND LOCAL TAXATION OF BANKS PARTS I, II, III, AND IV Report of a Study Under Public Laws 91-456 and 92-213 Pi~EPARED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS UNITED STATES SENATE w JUNE 1972 Printed for the use of the Committee on Banking, Housing and Urban Affairs U.S. GOVERNMENT PRINTING OFFICE 79-421 0 WASHINGTON : 1972 PAGENO="0002" COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS JOHN SPARKMAN, Alabama, Chairman WILLIAM PROXMIRE, Wisconsin JOHN TOWER, Texas HARRISON A. WILLIAMS, JR., New Jersey WALLACE F. BENNETT, Utah THOMAS J. McINTYRE, New Hampshire EDWARD W. BROOKE, Massachusetts WALTER F. MONDALE, Minnesota BOB PACKWOOD, Oregon ALAN CRANSTON, California WILLIAM V. ROTH, JR., Delaware ADLAI E. STEVENSON III, Illinois BILL BROCK, Tennessee DAVID H. GAMBRELL, Georgia ROBERT TAFT, JR., Ohio DUDLEY L. O'NEAL, Jr., ~Staff Director and General Counsel MICHAEL E. BURNS, Minority Counsel (II) PAGENO="0003" STATEMENT OF THE CHAIRMAN During consideration of legislation to clarify the liability of Na- tional banks for certain taxes (Public Law 91-156, approved Decem- ber 24, 1969), the committee was particularly concerned about the effect that possible increased intangible personal property taxation of banks may have on the banking systems. The committee's concern arose because of the uncertainty about the magnitude of the impact of the sudden imposition of additional such taxes on banks. Accordingly, the committee required, in section 4 of Public Law 91-156 (see p. VII), that ". . . the Board of Governors of the Federal Reserve System shall make a study to determine the probable impact on the banking systems and other economic effects of the changes in existing law to be made by section 2 of this act governing income taxes, intangible property taxes, so-called doing business taxes, and any other similar taxes which are or may be imposed on banks. . . ." The Board completed its study in April 1971. The study contained three parts. Part I contained the recommendations, of the Board of Governors. Part II contained a Federal Reserve Board staff study covering the following subjects: (1) The history and effects of section 5219, Revised Statutes (12 TJ.S.C. 548). (2) The amounts of State and local taxes paid by cGmmercial banks and potential changes in their taxes under the new legislation. (3) The economic and legal background of the study. (4) Views expressed by the bahkers, State tax administrators and State bank supervisors in the course of the study. (5) Major issues that require examination. (6) Possible alternative methods of dealing with the issues. Part III contained the supporting documentation in considerable detail on the topics covered in parts I and II. Parts I and II were subsequently included in a committee print entitled "State and Local Taxation of Banks," which was published by the committee in May 1971. In November 1971, part III of the Board's study, which contained all the appendices and supporting data surro~tnding the study were received by the committee and in December 1971, were included in a committee print entitled "State and Local Taxation of Banks-Ap- pendices to a Report of a Study Under Public Law 91-156." Congress was unable to make a detailed review of this entire matter after receiving all of the Board's study in November 1971, and before the permanent provisions of Public Law 91-156 were to become effec- tive in January 1, 1972. Accordingly, the date that the permanent (III) PAGENO="0004" Iv provisions of PublTc Law 91-156 were to become effective was post- poned for 1 year, until January 1, 1973, by Public Law 91-213, ap- proved December 22, 1971 (see p. VIII). In addition, section 4(b) of that act required study of the probable impact on State and local government revenues from the 1-year extension of the prohibition of an intangible personal property tax for national banks. This addi- tional study was to be submitted to the committee 6 months after enactment of Public Law 92-213-by mid-June 1972. The Board of Governors transmitted the additional study to the committee on June 12, 1972. For the convenience of the committee, as well as all concerned with this matter, it was agreed that parts 1,11, and III of the original report from the Board of Governors as well as the additional study required by Public Law 92-213 should be printed in one volume. This committee print then is a reprint of parts I, II, and III of the Board's original study and the additional study described above, which for the sake of clarity will be called part IV of this committee print. 4Li~ JOHN SPARKMAN. PAGENO="0005" Pn~LIc LAW 91-156, 91ST CONGRESS, H.R. 7491- DECEMBER 24, 1969 AN ACT To clarify the liability of national banks for certain taxes. Be it enacted by the Senate and House of Representa- tives of the United States of America in Congress assemled, § 1. Temporary amendment of section 5219, Revised ~ Statutes States. (a) Section 5219 Of the Revised Statutes (12 U.S.C. 548) is amended by adding at the end thereof the follow- ing: "5. (a) In addition to the other methods of taxation authorized by the foregoing provisions of this section and subject to the limitations and restrictions specifically set forth in such provisions, a State or political subdivi- sion thereof may impose any tax which is imposed gen- erally on a nondiscriminatory basis throughout the jur- isdiction of such State or political subdivision (other than a tax on intangible personal property) on a na- tional bank having its principal office within such State in the same manner and to the same extent as such tax is imposed on a bank organized and existing under the laws of such State. "(b) Except as otherwise herein provided, the legis- lature of each State may impose, and may authorize any political subdivision thereof to impose, the following taxes on a national bank not having its principal office located within the jurisdiction of such State, if such taxes are imposed generally throughout such jurisdiction on a nondiscriminatory basis: "(1) Sales taxes and use taxes complementary thereto upon purchases, sales, and use within such jurisdiction. "(2) Taxes on real property or on the occupancy of real property located, within such jurisdiction. "(3) Taxes (including documentary stamp taxes) on the execution, delivery, or recordation of documents within such jurisdiction. "(4) Taxes on tangible personal property (not including cash or currency) located within such jurisdiction. (V) PAGENO="0006" VI "(5) License, registration, transfer, excise, or other fees or taxes imposed on the ownership, use, or transfer of tangible personal property located with- in such jurisdiction. "(c) No sales tax or use tax complementary thereto shall be imposed pursuant to this paragraph 5 upon pur- chases, sales, and use within the taxing jurisdiction of tangible personal property which is the subject matter of a written contract of purchase entered into by a na- tional bank prior to September 1, 1969. "State." "(d) As used in this paragraph 5, the term `State' means any of the several States of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, and Guam." Effective date. (b) The amendment made by subsection (a) of this section shall be effective from the date of enactment of this Act until the effective date of the amendment made by section 2(a) of this Act. § 2. Permanent amendment of section 5219, Revised Statutes (a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read: "SEc. 5219. For the purposes of any tax law enacted under authority of the United States or any State, a na- tional bank shall be treated as a bank organized and ex- isting under the laws of the State or other jurisdiction within which its principal office is located." Effective date. (b) The amendment made by subsection (a) becomes effective on .Janua.ry 1, 1972. 83 Stat. 435 § 3. Saving provision (a) Except as provided in subsection (b) of this sec- tion, prior to January 1, 1972, no tax may be imposed on any class of banks by or under authority of any State legislation in effect prior to the enactment of this Act unless (1) the tax was imposed on that class of banks prior to the enactment of this Act, or (2) the imposition of the tax is authorized by af- firmative action of the State legislature after the en- actment of this Act. (b) The prohibition of subsection (a) of this section does not apply to (1) any sales tax or use tax complementary there- to, (2) any tax (including a documentary stamp tax) on the execution, delivery, or recordation of docu- ments, or (3) any tax on tangible personal property (not including cash or currency), or for any license, reg- istration, transfer, excise or other fee or tax imposed on the ownership, use or transfer of tangible per- sonal property, PAGENO="0007" VII imposed by a State which does not impose a tax, or an increased rate of tax, in lieu thereof. §4. Study by Board of Governors of the Federal Re- serve System (a) The Board of Governors of the Federal Reserve System (hereinafter referred to as the "Board") shall make a study to determine the probable impact on the banking systems and other economic effects of the changes in existing law to be made by section 2 of this Act gov- erning income taxes, intangible property taxes, so-called doing business taxes, and any other similar taxes which are or may be imposed on banks. In conducting the study the Board shall consult with the Secretary of the Treas- ury and appropriate State banking and taxing author- ities. (b) The Board shall make a report of the results of its study to the Congress not later than December 31, ~ 1970. The report shall include the Board's recommenda- tions as to what additional Federal legislation, if any, may be needed to reconcile the promotion of the economic efficiency of the banking systems of the Nation with the achievement of effectiveness and local autonomy in meet- ing the fiscal needs of the States and their political sub- divisions. Approved December 24, 1969. Legislative history-House Reports: No. 91-290 (Comm. on Banking & Currency) and No. 9i-728 (Comm. of Conference). Senate Report No. 91-530 (Comm. on Banking & Currency). Congressional Record, Vol. 115 (1969) : July 17-Considered and passed House. Nov. 21- Considered and passed Senate, amended. December 10-House agreed to conference report, December 12-Senate agreed to conference report. PAGENO="0008" Public Law 92-213, 92nd Congress, S.J. Res. 176-December 22, 1971 JOINT RESOLUTION To extend the authority of the Secretary of Housing and Urban Development with respect to interest rates on insured mortgages, to extend and modify certain provisions of the National Flood Insurance Act of 1968, and for other purposes. Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, * * * * * * EXTENSION OF DATE5 APPLICABLE TO CERTAIN PROVISIONS OF LAW RELATING TO THE TAXATION OF NATIONAL BANK5 SEC. 4. (a) The Act entitled "An Act to clarify the liability of national banks for certain taxes", approved December 24, 1969 (83 Stat. 434), is amended by striking out "1972" in sections 2(b) and 3(a) and inserting in lieu thereof "1973". (b) The Board of Governors of the Federal Reserve System shall make a study of the probable impact on the revenues of State and local governments of the extension under subsection (a) of the termination date of interim provisions regarding intangible personal property taxes of State and local govern- ments on national banks. The Board shall report the results of its study to the Congress not later than six months after the date of approval of this joint resolution. * * * * * * * Approved December 22, 1971. (VIII) PAGENO="0009" CONTENTS Page Statement of the Chairman iii Public Law 91-156 V Excerpt from Public Law 92-213 viii Letter of transmittal ix Aknowledgments 69 PART I Recommendations of the Board of Governors 1 PART II Introduction 9 Statutory history (1864-1969) 10 Effects of section 5219 10 The 1969 amendment 12 Bank taxes paid in 1969 and subsequent changes 14 Information and views from State bank supervisors 19 Information and views from State tax administrators 20 Concerns expressed by bankers 22 Intangible personal property 22 Multistate jurisdiction to tax 23 Local taxation 24 Discriminatory or disproportionate burdens 24 Attributes of the financial sector and their implications for taxation 25 Role of financial institutions 25 Attributes relevant to evaluation of t~x impacts 28 Implicationsfortaxation 29 Legal setting for analysis of major issues 30 Intangibles 31 "Doing business" taxes 32 Exposure to multistate taxation 33 Discriminatory taxation of out-of-State banks 35 Interstate division of the tax base 36 Separate accounting 36 Specific allocation 37 Formula apportionment 37 The unitary concept 38 Multicorporate banking enterprises 39 Statutory limitations on taxation of interstate nonfinancial business 40 Public Law 86-272 40 Proposed interstate taxation act 40 Model State law 41 Multistate compact 42 Ad hoc committee plan 42 Potential changes in bank taxes and their impacts 42 Intangible personal property owned by banks 43 Share taxes 44 Taxes measured by net income 45 Multistate taxation... 46 Nature of interstate banking activity 46 Potential effects of nondomiciliary State taxation 48 Criteria for evaluating proposals. 49 (ix) PAGENO="0010" x Page Issues and alternatives 52 Intangible property owned by banks 52 Arguments for letting the "permanent amendment" take effect without change 53 Arguments against allowing the States to tax intangibles 54 Taxation by States other than the State of the principal office 57 "Permanent amendment" without change 60 Modified "permanent amendment" 62 Retain the interim provisions for multi-State taxation 63 Related issues 64 Discrimination 64 Local taxation 65 Interest on Federal obligations 66 Classification of coin and currency 67 Tables: 1. State and Local Tax Expenses of All Insured Commercial Banks, by Measure of Tax and Charter Status of Bank: 1969 15 2. Percentage Distribution of State and Local Tax Expenses of All Insured Commercial Banks, by Measure of Tax and Charter Status of Bank: 1969 15 3. State and Local Tax Expenses of All Insured Commercial Banks in Selected States, by Major Types of Taxes (Other Than on Real Property) and Charter Status of Bank: 1969 17 PART III APPENDIXES-GENERAL OUTLINE Appendix 1-Federal Statutes Relevant to Study of State and Local Taxation of Banks 71 Appendix 2-General Statistical Data with Respect to Commercial Banks and Other Financial Institutions 81 Appendix 3-Survey of State and Local Tax Expenses of Insured Com- mercial Banks, 1969 (by James B. Eckert) 89 Appendix 4-Information and Opinions on State and Local Taxation of Banks and Other Financial Institutions, Supplied by State Tax Adminis- trators (by Sally M. Hey) 143 Appendix 5-Responses of State Bank Supervisors to the Board's Inquiry Concerning State Taxation of Banks (by Sally M. Hey) 199 Appendix 6-The 1-listory and Impact of Section 5219 on the Taxation of National Banks (by Simeon E. Leland) 215 Appendix 7-Economic Impacts of Particular State and Local Taxes on Banks, with Special Reference to Neutrality (by Carl S. Shoup) 425 Appendix 8-Treatment of Intangible Personality in the State-Local Taxation of Banks (by Lynn A. Stiles) 463 Appendix 9-Comparing State and Local Taxation of Banks and Other Business Enterprises (by Harvey E. Brazer and Marjorie C. Brazer) - - - 469 Appendix 10-Liability of National Banks for Generally Applicable State and Local Taxes (by Charles F. Conlon) - 485 Appendix 11-Federal Constitutional Limitations on State Taxation of Multistate Banks (by Jerome R. Hellerstein) 505 Appendix 12-Multiple State Taxation of National Banks: Division of Tax Base-Income Taxes and Doing Business Taxes (by J. Nelson Young) - - 551 Appendix 13-Repeal of Restrictions on State Taxation of National Banks: Effects on Multi-Corporate Banking Organizations (by William R. Bollow) - 585 Appendix 14-The Question of Possible Discrimination Against Out-of- State National Banks (by Sheldon L. Azine) 593 APPENDIXES-DETAILED OUTLINE Appendix 1-Federal Statutes Relevant to Study of State and local Taxa- tion of Banks: A. Section 5219, Revised Statutes (12 U.S. Code 548), Before Amend- ment by Public Law 91-156 71 PAGENO="0011" XI B. Public Law 91-156, an Act to Clarify the Liability of National Banks for Certain Taxes: Section 1. Temporary amendment of section 5219 72 Section 2. Permanent amendment of section 5219 72 Section 3. Saving provision 73 Section 4. Study by Board of Governors of the Federal Re- serve System 73 C. Earlier Forms of Section 5219: 1864 73 1868 74 1923 74 1926 74 D. Federal Statutory Provisions Relating to State and Local Taxation of Financial Institutions Other Than National Banks: (1) Federal reserve banks 74 (2) Banking corporations authorized to do foreign banking business 75 (3) Federal land banks and associations 75 (4) Joint-stock land banks 75 (5) Federal and joint-stock land banks 75 (6) Federal intermediate credit banks 75 (7) Central Bank for Cooperatives, Production Credit Asso- ciations, and Banks for Cooperatives 76 (8) Federal home loan banks 76 (9) Federal savings and loan associations 76 (10) Federal National Mortgage Association 76 (11) Federal credit unions 77 (12) Federal Deposit Insurance Corporation 77 E. Exemption of Federal Government Obligations From State and Local Taxation 77 F. State and Local Taxation of Currency 78 G. State Net Income Taxes on Income Derived From Interstate Commerce, P.L. 86-272 78 Appendix 2-General Statistical Data with Respect to Commercial Banks and Other Financial Institutions: Tables in Appendix 2 Table 1. Commercial banks-number, banking offices, assets, and deposits, by class of bank, 1968 and 1969 81 Table 2. Commercial banks-assets, liabilities, and capital accounts, 1950 to 1969 82 Table 3. Insured commercial banks-ae~ets and liabilities, States and other areas: 1969 83 Table 4. Number of commercial banks and trust companies, by type of bank, by States and other areas, as of Dec. 31, 1969 84 Table 5. Nu~mber of commercial banks and trust companies by deposit size, in States and other areas, as of Dec. 31, 1969 85 Table 6. Selected income items and equity capital, insured commercial banks by States and other areas, 1969 86 Table 7. Selected income items and equity capital of insured commercial banks, by deposit size, totals for States and other areas, 1969 86 Table 8. Selected income items and equity capital, by type of bank, insured commercial banks, totals for States and other areas, 1969 87 Table 9. Money supply and time deposits; 1950 to 1969 87 Table 10. Interest bearing deposits, by type: 1950 to 1969 87 Table 11. Number of banks, selected income items, and surplus accounts, insured mutual savings banks, by States and other areas, 1969 88 Table 12. Income and franchise taxes, insured mutual savings banks, by States and other areas, 1969 88 Appendix 3-Survey of State and Local Tax Expenses of Insured Com- mercial Banks, 1969 (by James B. Eckert): Summary of Survey Results 89 Need for the Survey - 92 Reporting Form and Bank Sample 92 Reporting Difficulties and Limitations of the Data 94 Patterns of Bank Taxation 95 Within-State Tax Distribution 98 PAGENO="0012" XII Impact of Section 5219 100 Comparisons of National and State-Chartered Banks 101 Out-of-State Taxes 105 Changes in Taxes After December 24, 1969 106 Relation of Bank Taxes to Total State-Local Tax Revenue 109 Other Relationships 112 Reporting form and instructions 112 Tables in Appendix 3 Table 1. State and local tax expenses of all insured commercial banks, 1969 95 Table 2. Percentage distribution of 1969 State and local tax expenses of all insured commercial banks, by measure of tax and size of bank 97 Table 3. Number of States distributed by the ratio of State and local taxes of each type to total State and local taxes on all insured commercial banks in 1969 98 Table 4. Principal bank tax categories, by number of States, 1969 98 Table 5. Percentage of total State and local tax expenses of all insured commercial banks accounted for by the two largest tax categories within each State, 1969 99 Table 6. Types of bank taxes comprising 2 largest categories within each State, 1969 100 Table 7. State and local tax expenses of all insured commercial banks in 1969, by measure of tax and charter status of bank Table 8. Ratios of total State and local tax expenses in 1969 to selected balance sheet and income statement aggregates for all insured commercial banks, by charter status and size of bank 102 Table 9. State/national bank ratios for selected measures of State-local tax expense 103 Table 10. Percentage distribution of State and local tax expenses of all insured commercial banks in 1969, by measure of tax, charter status of bank, and size of bank 104 Table 11. State and local tax expenses of all insured commercial banks in 1969 payable in jurisdictions outside the home State, by measure of tax and class of bank 105 Table 12. Banks reporting information on changes in taxes between De- cember 1969 and the survey date (December 1970), by size of bank and charter status 107 Table 13. Estimated effects of changes between December 1969 and date of survey in State and local taxes payable in the home State by insured commercial banks, by measure of tax 108 Table 14. Relation of commercial bank State-local tax expenses to total tax revenue of State and local governments, by measure of tax: Calendar year 1969 110 Table 15. Distribution of ratios of bank taxes to total State-local tax revenue, by region, 1969 111 Table 16. State indexes of total tax revenue compared with total State- local taxes on insured commercial banks 112 Supplemental Tables for Appendix 3 Table A. State and local tax expenses of all insured commercial banks in 1969, by State and charter status of bank 116 Table B. Tax status of parent holding company of insured commercial banks in 1969 118 Table C. }~ercentage distribution of the number of insured commercial banks that prepared their 1969 consolidated report of income on a cash and on an accrual basis, by size and charter status of bank 118 Table D. Percentage distribution of State and local tax expenses of all insured commercial banks in 1969, by State, charter status of bank, and measure of tax 119 Table E. Ratios of total State and local tax expenses of all insured com- mercial banks to selected income statement and balance sheet items, 1969 123 Table F. Selected ratios relating to level of bank taxes and of total State and local tax revenue, by State 125 Table G. State and local tax expenses of insured commercial banks, by State, measure of tax, and charter status of bank TT~ 126 PAGENO="0013" XIII Appendix 4-Information and Opinions on State and Local Taxation of Banks and Other Financial Institutions, Supplied by State Tax Admin- istrators (by Sally M. Hey): I. Introduction 143 II. Current State Taxation of Domestic State and National Com- mercial Banks, and Recent Changes 144 A. The Situation on November 15, 1970 144 B. Bank Tax Changes Reported between December 24, 1969 and November 15, 1970 151 III. Forthcoming Changes in State Taxes on Commercial Banks Domiciled in the State 153 A. Extension of Taxes to National Banks 154 B. Tax Changes Affecting Both National and State Banks_ 154 IV. How States Currently Tax Out-of-State Financial Businesses_ - - 155 A. The Kinds of Taxes Levied and the Bases for Asserting Jurisdiction to Tax Out-of-State Financial Businesses__ 155 B. Interstate Division of the Tax Base 158 C. Consolidation or Combination of Affiliated Corporatioi~ for Tax Purposes 158 V. Opinions as to Probable Tax Treatment of Out-of-State National and State Banks under the Permanent Amendment 159 A. Extent and Certainty of Response 159 B. Patterns of Responses Nationwide 161 C. Patterns of Responses of Individual States 162 D. Intangibles Taxation 163 VI. Local Taxation and Other Matters 164 A. Local Taxation of Banks 164 B. Concluding Comments 165 Supplement A: Letter and questionnaire sent by the Board to State tax administrators -~r--- 166 Supplement B: List of State names and abbreviations; tabulated results of the questionnaire returns (list of tables follows) 181 Text Tables in Appendix 4 Table 1. Treatment of Bank Dividends under Individual Income Taxes, Related to Major State Taxes on Banks as of November 15, 1970 147 Table 2. State Sales and Use Taxes Reported to be Applicable to Domestic Commercial Banks, November 15, 1970 150 Table 3. States Reporting Documentary Taxes, Tangible Personal Property Taxes, and Motor Vehicle Taxes Applicable to Domestic Commercial Banks, November 15, 1970 131 Table 4. States in which Taxes have Initially Become Applicable to State or National Banks or Both Since December 24, 1969, by Measure of Tax~ 152 Table 5. Number of States Reporting Criteria for Claiming Tax Jurisdic- tion over Out-of-State Financial Institutions 157 Table 6. Method of Interstate Division of Tax Base by Kind of Business and Measure of Tax 158 Table 7. Opinions of State Tax Administrators Regarding Taxation of Out-of-State Banks after January 1, 1972, Based on Lending Activity~ - 160 Table 8. Opinions of State Tax Administrators Regarding Taxation of Out-of-State Banks after January 1, 1972, Based on Activities Other than Lending 161 Table 9. Probable State Taxation of Intangible Personal Property of Out- of-State Banks after January 1, 1972 163 Table 10. States Reporting Local Taxes Applicable to Commercial Banks, November 15, 1970 164 Supplemental tables in Appendix 4, Supplement B 1 Key table. State names and abbreviations 181 Table B-i. States reporting changes in tax treatment of commercial banks after December 24, 1969. [1.1, 1.2, 1.3, 1.41 through 1.441 181 Table B-2. State taxes reported applicable to commercial banks, by measure of tax and extent and timing of applicability. [1.5110 through 1.660] 182 - 1 For each table, the items tabulated from the Questionnaire for State Tax Administrators (reproduced in Supplement A) are listed in brackets. PAGENO="0014" XIV Table B-3. Treatment of dividends received from commercial banks under State individual income taxes, since December 24, 1969. [1.71, 1.72, 1.73; also 1.5121 through 1.620] 184 Table B-4. Statcs reporting review of tax laws or official tax law pro- posals affecting commercial banks. [2.11, 2.12, 2.13, 2.21, 2.22, 2.3] 184 Table B-5. Opinions of State tax administrators regarding taxation of out-of-state commercial banks after January 1, 1972, by type of bank operation and measure of tax. [3.110 through 3.233] 185 Table B-6. Status of State taxation of out-of-state banks and other finan- cial institutions as of November 15, 1970. [3.4l0through3.426] 192 Table B-7. Basis of jurisdiction for taxation of out-of-state banks and other financial institutions, November 15, 1970. [3.43; also 3.410 through 3.426] 194 Table B-8. State practice regarding interstate division of the tax base in taxing out-of-state banks and other financial institutions. [3.44 and to some extent 3.45] 196 Table B-9. Method of interstate division of the tax base, by kind of busi- ness and measure of tax. [3.451 through 3.454] 197 Table B-b. State positions on consolidation or combination of affiliated corporations in determining the tax base. [3.51, 3.52, 3.53, 3.54] 198 Appendix 5-Responses of State Bank Supervisors to the Board's Inquiry Concerning State Taxation of Banks (by Sally M. Hey): I. Introduction 199 II. Questions 1 and 2 199 III. Question 3 204 IV. Question 4 209 V. Summary and Conclusions 212 Tables in Appendix 5 Table 1. Recent Changes or Developments Reported by State Banking Supervisors which Affect State or Local Taxation of Banks 210 Table 2. Likely Future State and Local Bank Tax Developments Reported by State Banking Supervisors 212 Appendix 6-The History and Impact of Section 5219 on the Taxation of National Banks (by Simeon E. Leland): I. The Evolution of Section 5219: A. National Currency Act of February 25, 1863 215 B. National Bank Act of June 3, 1864 216 C. Tax on State bank notes: 1865 218 D. Act of February 10, 1868 218 E. Enter Section 5219: 1875 219 F. Taxation of Notes and Deposits: 1894 220 G. The Federal Reserve Act of 1913 224 H. The years of litigation: 1864-1921 229 I. The Richmond decision: 1920 265 1. The facts 265 2. Opinion of the Court 265 3. A question of procedure 267 4. Attitudes of State officials and Members of Congress 268 5. Position of banks 269 6. Heimberger's criticism of decision 269 7. Effects of Richmond decision 271 J. The amendment of section 5219: 1923 272 1. Differences from acts of 1864 and 1868 272 2. Legislative history of 1923 amendment 274 3. Hearings on H.R. 9579 276 4. Senate action 278 5. Nature of debate 279 6. Validation controversy 282 7. Passage of amendment 282 PAGENO="0015" xv K. Further amendment of section 5219: 1926 283 1. Preliminary events 283 2. Eventsof 1924and 1925 285 3. Legislative history of 1926 amendment 285 4. The Guthrie Center case 286 5. Changes made by 1926*amendment 287 6. Defects of 1926 amendment 288 L. Attempts to amend section 5219: 1926-1969 291 1. The law and attempts at legislation 291 2. The share-tax push: 1927-1935 292 3. Second movement for change: 1941-1954 303 4. Banks and interstate commerce 308 5. A section 3219 for State banks: 1967 313 6. The latest change: 1968-1969 314 M. Court decisions: 1926-1970 319 1. Taxes on bank real estate 320 2. Taxes on personal property of banks 320 3. Classification of rates 320 4. The share tax 320 5. Taxes on dividends 324 6. Net income taxes 325 7. Excise taxes 325 8. Sales and use taxes 332 9. Gross receipts taxes 334 10. Other points of law 334 11. Conclusions -. 335 N. Public Law 91-156: 1969 336 1. Provisions of P.L. 91-156 337 2. Plan of discussion 337 3. Domiciliary taxation under P.L. 91-156 prior to 1972 337 4. Nondomiciliary taxation prior to 1972 338 5. Taxation under P.L. 91-156 after January 1, 1972 339 6. Federal reserve study 339 II. Conformity of Section 5219 to State Tax Systems: - A. Periods to be considered 341 B. State taxes in 1864 342 1. Property tax and section 5219 345 2. The debate on State taxation of banks: 1864~~ 347 C. State taxes in 1922 358 1. Low-rate taxes on intangibles 362 2. Bank deposit taxes 363 3. Comprehensive classification 365 4. State income taxes 365 5. Impact on section 5219 366 6. Impact of State practices on 1926 amendment~ 368 D. State taxes in 1968-1969 368 1. Sales taxes 371 2. Extension of State income taxes 373 3. Mortgage recording and transfer taxes 374 E. State bank tax legislation 378 F. Impact of State taxes on 1969 amendment 379 III. The Impact of section 5219 on the Taxation of National Banks: A. The background 380 B. Evolution of permissions and restrictions 382 C. Taxation of national bank real estate 384 D. The optional taxes 385 1. The share tax 385 a. Value determination 388 b. Deductions 390 c. Tax rates on shares 392 d. Burden of share taxes 393 e. Inclusion of deposits 394 f. Effects of share taxes 395 2. Net income taxes 395 a. Dividends taxed to shareholders 396 b. Direct net income tax on banks 397 3. Tax measured by all income (Excise tax) 401 PAGENO="0016" XVI D. The optional taxes-Continued 4. The fifth option 412 a. As to domiciliary banks 412 b. As to nondomiciliary banks 413 E. Taxes prohibited prior to the 1969 amendments 414 1. Taxes on tangible personal property 414 2. Taxes on bank intangibles 414 3. Taxes on bank deposits 414 4. Gross receipts taxes 415 5. Sales and use taxes 415 F. 1970 bank tax legislation 415 G. Possibilities for the future * 418 H. Uniformity in bank taxation? 421 I. Comparative tax burdens 422 Tables in Appendix 6 1. Assessed and true value of property in the United States, 1850-1890~. 343 2. Assessed valuation or real and personal estates, 1860-1890 343 3. Rankings of selected States in estimated per-capita wealth, 1850- 1880 343 4. "Grand list" of Connecticut, 1864 344 5. State and local government taxes, by type of government and tax: 1922 359 6. Estimated true value of all taxable property, 1850-1922 360 7. State receipts from special property taxes: 1922 361 8. Low-rate taxes on intangibles: 1927 362 9. Mortgage registry taxes: 1927 363 10. Low-rate taxation of bank deposits: 1927 364 11. State income taxes collected: 1922 366 12. Tax revenue: 1966-67 370 13. Governmentalrevenue, 1966-67 371 14. Year of adoption of State general sales taxes in States that used the tax January 1, 1970 372 15. Dates of adoption of State income taxes in States that used the tax January 1, 1970 373 16. State and local real estate transfer taxes, January 1, 1970 375 17. Methods of taxing banks: 1934, 1958, 1969-70 379 18. Bank share taxes: 1969-70 387 19. State net income taxes on banks: 1969-70 400 20. State taxes on banks according to or measured by net income (Excise taxes): 1969-70_ 403 20A. Treatment of interest received on governmental obligations as an element in State and local taxes measured by net or gross income of commercial banks, January 1, 1971 406 21. Gross income taxes on banks 416 Appendix 7-Economic Impacts of Particular State and Local Taxes on Banks, with Special Reference to Neutrality (by Carl S. Shoup): 1. Subject and Scope of the Present Study 425 (a) Tax Impact: Neutral or Unneutral, for Banks? 425 (b) How to Distinguish the Effects of a Tax from the Effects of the Use Made of Its Revenue 426 (c) The Three Aspects of Unneutrality Important to Banks. 426 (d) Relation between Tax Shifting and Tax Neutrality 427 (e) Supply and Demand in the Banking Industry 428 (f) Taxes Included in the Present Study 429 2. Corporation Income Tax 430 (a) Industrial Neutrality 430 (b) Geographical Neutrality 434 (c) Technical Neutrality 435 (d) Supplementary note to Section 2: Derivation of Formula for Net Additional Burden of State Income Tax 436 3. Taxation of Bank Dividends 437 (a) Under Individual Income Taxes 437 (b) Under Corporation Income Taxes 438 4. Franchise Taxes on Capital Employed in Taxing State 438 PAGENO="0017" XVII 5. Retail Sales Taxes and Gross Receipts Taxes .. - 443 (a) Retail Sales Taxes 443 (i) Industrial Neutrality 443 (ii) Geographical Neutrality 445 (iii) Technical Neutrality 445 (b) Gross Receipts Taxes 446 6. Taxation of Bank Assets 447 (a) Real Estate 447 (b) Tangible Personal Property 447 (c) Intangibles 447 (i) Industrial Neutrality 451 (ii) Geographical Neutrality 453 (iii) Technical Neutrality 453 7. Bank Shares Tax 453 (a) Industrial Neutrality 453 (b) Geographical Neutrality 454 (c) Technical Neutrality 455 8. Taxation of Bank Deposits 455 (a) Industrial Neutrality 456 (b) Geographical Neutrality 458 (c) Technical Neutrality 459 9. Unemployment Compensation Payroll Taxes 459 10. Other Taxes 459 11. In-Lieu Taxes and Built-Up Rates 460 12. Concluding Remarks 460 Tables in Appendix 7 1. Net Additional Burden from State Tax on Net Income of Commercial Banks 431 2. Interest on Government Obligations and Intercorporate Dividends: Treatment under State Corporation Income Taxes, as of November 1, 1963 432 3. Franchise Taxes Based on Capital Employed in the Taxing State, as of October 1, 1970 439 4. Tax Rates on Intangibles in States Employing Classified Property Taxes 448 5. Status of State-Local Taxation of Bank Deposits, as of October 1, 1970_ 456 Appendix 8-Treatment of Intangible Personalty in the State Local Taxation of Banks (by Lynn A. Stiles): Vulnerability of bank assets 463 Territorial confinement of banking 464 The issue of double taxation 464 Large holdings of intangibles 465 Summary and conclusions 467 Appendix 9-Comparing State and Local Taxation of Banks and Other Business Enterprises (by Harry E. Brazer and Marjorie C. Brazer): Introduction 469 Interpersonal comparisons 469 Bases for comparison 470 Measuring taxes paid 471 Intercorporate comparisons 472 Corporate tax incidence and tax burdens 472 Defining taxes paid by corporations 474 Bases for comparison 476 Conclusions 484 Table 1-Net income after tax per internal revenue code and per books of account, by major selected industry 479 Appendix 10-Liability of National Banks for Generally Applicable State and Local Taxes (by Charles F. Conlon): Introduction 485 "Doing business" types of taxes 486 Capital stock taxes 486 Gross receipts taxes 488 Intangibles 491 79-421 0 - 72 - 2 PAGENO="0018" XVIII Liability for taxes in two or more Statés_ ..J_ 492 Tangible property 494 Subsidiaries 495 Foreign operations 496 Intangibles 497 Capital stock and gross receipts taxes 498 Interstate commerce 498 Division of income 498 Prospects for standardization 499 Capital stock 501 Gross receipts 501 Verification of bank tax returns 502 Supplementary note: Transacting business in the State 503 Appendix 11-Federal Constitutional Limitations on State Taxation of Multistate Banks (by Jerome R. Hellerstein): Introduction: Summary of Major Facts as to How Multistate Banks Operate Outside Their Home States 505 Loans and Financing Activities 505 Services to Respondent Banks 510 Fiduciary and Related Activities 510 Underwriting and Distribution of Securities 511 Equipment Leasing 512 Credit Cards 513 Accounting, Data Processing and Miscellaneous Activities 515 Bank Affiliates 515 State Border Banks 516 Part I. Jurisdiction To Levy Income, Franchise, Capital Stock and Other Business Taxes 516 A. The Commerce Clause: Guiding Principles 516 1. Whether banking constitutes interstate commerce 516 2. The effect of Federal legislation on the Commerce Clause protection afforded banks 517 3. The interrelation of the subject and measure of taxes on doing business 519 4. The power of the States to impose direct net income taxes on income derived from an exclusively inter- state business 520 B. The Taxability by the Debtor's State of Income Realized by Out-of-State Corporations from Loans to Persons or Corp- orations Domiciled within the State 522 C. The Due Process Clause: Nexus 524 1. The insurance tax cases 525 2. Equipment leases as a basis for jurisdiction to levy income or business taxes 529 3. The exploitation of a local market as a jurisdictional basis for imposing an income tax on an out-of-state corporation 530 D. The Contours of "Intrastate Business", the Jurisdictional Foundationfora.DoingBusinessTax 532 E. The Application of the Constitutional Principles to the Busi- ness of Multistate Banks: Income and Business Taxes 534 F. The State Border Bank 538 G. Conclusions with respect to Jurisdiction to Impose Net Income and Business Taxes on Out-of-State Banks 540 Part II. Property Taxes 541 Conclusions as to Intangible Property Taxation 545 Part III. The Power of the States To Impose Discriminatory License or Other Doing Business Taxes on Out-of-State National Banks Under the Permanent Provisions of P.L. 91-156 545 A. Discriminatory License Taxes on Foreign Corporations 545 B. The Effect of P.L. 91-156 on Discriminatory License Taxes on Out-of-State National Banks 547 C. Conclusion with respect to Discriminatory Taxation of Out- of-State Banks 550 PAGENO="0019" XIX Appendix 12-Multiple State Taxation of National Banks: Division of Tax Base-Income Taxes and Doing Business Taxes (by J. Nelson Young): Income taxes 551 Development of underlying constitutional doctrine 551 In-state business activity sufficient to support apportionment of income from interstate business 555 Division of income-specific allocation 558 Division of income-formula method vs. separate accounting___ 559 Determining the unitary character of income of an interstate business 561 Affiliated corporations and the unitary rule Legislative limitations upon taxation of income derived from interstate commerce 570 Doing business taxes 572 Capital stock taxes-principal-office State 573 Capital stock taxes-other States 573 Gross receipts taxes 576 Conclusions and summary 580 National banks engaged exclusively in "intrastate" business_ - - - 580 National banks engaged in "interstate" banking operations 581 Net income taxes 581 Capital stock taxes 583 / Gross receipts taxes 583 Appendix 13-Repeal of Restrictions on State Taxation of National Banks: Effects on Multi-Corporate Banking Organizations (by William R. Bollow): Development of multi-corporate banking organizations 585 Applicability of the unitary business concept by States seeking to tax the income of multi-corporate banking organizations 587 Taxation of intercompany dividends 591 Appendix 14-The Question of Possible Discrimination Against Out-of- State National Banks (by Sheldon L. Azine) 593 PART IV Report to Congress of study by Board of Governors of Federal Reserve System under Public Law 92-213 601 Background 602 Boundaries and format of Study 603 Current status of ad valorem taxation of intangible personal property 604 Table: Status of taxation of intangible personal property by State and local governments and potential for taxation of bank-owned intangible prop- erty in 1972, by State 605 Potential for taxation of bank-owned intangibles in 1972 608 Inconsistency with prevailing tax policy 609 Implementation and timing difficulties 610 Conclusions 611 PAGENO="0020" PAGENO="0021" * STATE AND LOCAL TAXATION OF BANKS Part! Recommendations of the Board of Governors of the Federal Reserve System Regarding State and Local Taxation of Banks Pursuant to Section 4 of Public Law 91-156 Section 4(a) of Public Law 91-156 requests that the Board of Gov- ernors of the Federal Reserve System make a study- to determine the probable impact on the banking systems and * other economic effects of the changes in existing law to be * made by section 2 of this Act governing income taxes, intan- gible property taxes, so-called doing business taxes, and any other similar taxes which are or may be imposed on banks. Sectioq 4(b) requests that the report of this study shall include- the Board's recommendations as to what additional Federal legislation, if any, may be needed to reconcile the promotion of the economic efficiency of the banking systems of the * Nation with the achievement of effectiveness and local auton- omy in meeting the fiscal needs of the States and their politi- cal subdivisions. . . - The Board concludes that additional Federal legislation is needed before the "permanent amendment" of section 5219 of the Revised Statutes (12 U.S.C. 548) becomes effective on January 1, 1972. If that provision is allowed to go into effect without revision, the changed tax status of banks might openthe w-ay for State and local tax measures that could impair the ability of the banking system and, possibly the entire structure of financial intermediaries to contribute to the efficient allocation of the Nation's credit resources. Although the precise nature and magnitude of these impacts are not predictable, the prospect is that they would be sufficiently detrimental to economic efficiency to warrant Congressional action in 1971 to continue limited statutory restraints upon the taxing authority of the States and their political subdivisions as to national banks and to apply corresponding restraints for other depositary institutions. The two major areas which appear to warrant further legislation relate to the new authority in section 2 of Public -Law 91-156 for State and local governments to tax intangible personal property of national banks and for States othei than the State of the principal office to levy income or other "doing business" taxes on national banks. These are covered in liecominendations 1. and 2. An additional problem area re- lates to the possibility of discriminatory State and local taxes, an issue which is covered in Recommendation 3. Two subsidiary issues-the tax treatment of interest income on U.S. Government securities and of cash and currency-are covered in Recommendations 4 and 5. (1) PAGENO="0022" 2 The issues raised by section 2 of Public Law 91-156 deal exclusively with State and local powers to tax national banks. However, the Board recommends that any further legislation be addressed t~o a larger group of financial institutions. In view of the declared Congressional policy of seekino~ equal treatment of State and national banks under State tax laws, an~ the close competition between banks and other depositary institutions, it would be desirable that the restrictions proposed in our recommendations apply to all commercial banks (national and State) and all other depositary institutions (savings banks, savings and loan associations, and credit unions). Insofar as they relate to national banks, the Board's proposals con- template withdrawal of no authority to impose types of taxes that States have possessed heretofore; they would only limit new authority that is now scheduled to become available to States for the first time on January 1, 1972. Under the earlier section 5219 and the interim amendment now in force, States have not been permitted to tax in- tangible personal property of national banks or to impose on out-of- State national banks the taxes named in Recommendation 2. Nor would the proposals entail any appreciable curtailment of au- thority heretofore exercised by State and local governments with re- spect to taxation of State-chartered banks and other depositary institu- tions. Generally, those States that tax intangible personal property have accorded to State-chartered banks the same exemption from this tax that Federal law has required for national banks; and only infre- quently have States imposed "doing business" taxes on State-chartered banks from other States (exclusive of their subsidiaries). As to other depositary iiistitutions, the tax policies of the several States are quite varied, but there appears to be little direct taxation of the intangible assets or net income of mutual savings banks, savings and loan asso- ciations, and credit unions. - Recommendation 1. Intanqible personal property: Continue with- out time limit the present denial of authority for States and their sub- divi~ior~.s to impose taxes on intanqible personal property owned by na- tional ban1~s and extend that denial t~ zntanczb7e personal property owned In, State ban les and other depositary institutions. The case for prohibition of ad valorem taxation of intangible per- sonal Property of banks and other depositary institutions, in the Board's view, stands on firm ground in terms of both equity and eco- nomic impact. Moreover, the potential significance of action or inac- tion by the Congress at thi~ time is heightened by the prospect that if the Ccpermanent amendment" of section 5919 takes effect in its pre- sent form. States may decide, in their search for additional revenues, to reverse the 1on~-term trend toward abandonment of this ~enern11v undesirable form of tax. At present. taxation of intangibles yields little revel-we to State and local governments. With respect to the question of equity, it is widely recognized that a general tax on intangibles would hear with considerably greater weight on banks and other (iepositarv institutions than on nonfinancial businesses. Virtually all the assets of such institutions are in the forni of intangibles, whereas this class of property is much less important for nonfinancial businesses. Depositary institutions are unable to move their base of operations from State-to State; they are closely regulated PAGENO="0023" a. and supervised, with published balance sheets; and tax assessors can- not readily undervalue fixed claims, such as bank assel s, to the degree that they can and generally do undervalue other types of assets. I-Tow- ever equal the treatment provided in the tax laws, in practice deposi- tary institutions would be at a marked disadvantage compared with other businesses and individuals, particularly where intangibles are blanketed into a general property tax that purports to apply the same valuation standards and rates to real property and all varieties of tangible and intangible personal property. An intangibles tax applied to banks and other depositary institu- tions would have a number of adverse economic consequences, depend- ing in magnitude on the level and geographic coverage of the tax. In the first instance, the principal effects would be on the functioning of financial intermediaries in gathering savings and allocating funds for productive investment-locally, regionally, and nationally-but ulti- mately any impediments to this process would have a bearing on the performance of the entire economy. The process of financial intermediation performed by banks and other depositary institutions is particularly vulnerable to an intangi- bles tax since the duplication of financial assets that is inherent in the flow of savings, first into deposits of those institutions and then into custon~er loans, would expose savings flowing through intermediaries to an additional layer of taxation not encountered where funds flow directly from savers to ultimate borrowers. * A tax. on intangible assets would tend to induce banks and other de- positary institutions to divert funds from taxable to tax-exempt forms of assets-that is, from the financing of consumers and businesses, par- .ticularly local businesses, to the acquisition of Federal, State, and local obligations. If the tax were imposed in only a few States-as likely would be the case in the early years under the new law-inter- state competition would severely limit the ability of the taxed insti- tutions to recoup the tax by seeking higher rates on loans and invest- ments or paying lower rates on deposits. The flow of savings through banks and other depositary institutions into consumer and business financing would tend to be diverted from the taxing States into non- taxing States, with parallel effects on the volume of capital invest- ment and the level of economic activity in those States. If the tax were imposed quite generally, the effect would be to discriminate against the process of financial intermediation performed by depositary in- stitutions, thus tending to divert flows of savings into direct financing through the market, with. some consequent loss in economic efficiency. Another implicatic~n of an intangibles tax of concern to the Board is that it would fall more heavily on member banks in the Federal Re- serve System than on nonmember banks and thus would constitute an additional cost of membership. The Federal Reserve Act requires that all legal reserves of member banks be held either in the form of vault cash or balances at the Reserve Banks-both of which are nonearning assets-while nonmember banks generally may hold their reserves in earning forms or in balances with other banks for which correspond- ent banking services are received. * While many of the arguments in support of a prohibition of an in- tangibles tax upon depositary institutions would also support a similar ban for other financial institutions, any attempt to determine a broader PAGENO="0024" 4 area of application raises difficult problems in the setting of bound- aries and the definition of the institutions to be covered. In any event, since depositary iiistitutions account for the bulk of all intangibles held by the financial sector, and a large part of the remainder- namely, pension funds-would undoubtedly he exempt from. tax in any event., a prohibition limited only to depositary institutions prob- ably would serve effectively to protect the entire financial sector. If the Congress wished to broaden the prohibition, it. cOUl(l do so, for example, by extending it to cover all institutions that derive 50 per- cent or more of their income from interest or dividends on loans and investments. * Recommendation ~. Taxation by States other than the~S~tate of the principal office: Limit the circumstances in which national ban/cs, State ban/cs. and other depositai~y in~ititutions may be subject to State or local government taxes on or measured by net income, gross re- ceipts, or capital stock, or to other "doing business" taxes in a State other than. the State of the principal office, and prescribe rules for such taxation. As to the application of net income and "doing business" taxes in States other than the home-office State of a bank of other depositary :institution, the central problem relates not. to the aggregate sum of State and local taxes that may be collected from these institutions but rathdr to the methods for determining which States have a legal basis for imposing taxes and for dividing any given tax base between the home State and other States that have such claims. With the pos- *sible interstate division of the net income or other tax base of na- tional banks that is permitted under section 2 of Public Law 91-156 and which would also be permitted under the above recommendation, the home Sta.te may be required to divide the tax base of its domiciliary banks with other States. On the other hand, it may acquire jurisdic- tion over part of the tax base of non-domiciliary banks. With interstate division of the tax base, assurances are needed * that the sum of the taxable base on which two or more States levy taxes will not exceed 100 percent of the actual base. But even where * this limit is not exceeded, serious burdens may result when two or more States claiming jurisdiction to tax, for example, the same net income, use different rules for interstate division of the tax base and require different kinds of records and reports. If interstate division of the taxable net income of banks were to conform closely to procedures currently applied to other businesses by most States, there would be-with present lending practices-com- paratively little allocation or apportionment of the tax base to States other than the honu~ State of the banks. However, if all restrictions on taxing out-of-State institutions were removed, States could be ex- pected to modify their allocation procedures so as to apply their levies to an increasing proportion of the tax base of out-of-State banks. This could involve the introduction of new division-of-base measures tail- ored particularly t.o financial intermediaries. The aggregate of taxes paid by any individual bank or other depos- itary institution probably would be reduced by multiple State taxa- tion as compared with taxation confined to the headquarters State be- cause applicable tax rates in the home State (especially in the major banking center States) may be higher than in other States, and some PAGENO="0025" 5 States may not tax the out-of-State institution. However, in some in- stances the added costs of acquiring technical competence regarding the differing tax laws and procedures of all States where business is done~ maintaining records needed to determine which taxes are appli- cable and the amount of liability, and preparing and filing returns in all affected States may be even greater than the taxes. Important as it is to avoid overtaxation of any given tax base, it is at least equally important, ther'~ fore, to avoid excessive compliance costs and the erection of barriers to interstate credit flows. Such bar- riers would be raised not only by the imposition of the tax itself but also if there ensued uncertainty~ controversy~ and litigation of the sort that for decades have characterized taxation of interstate mercantile and manufacturing businesses. Uncertainties about potential tax lia- bilities and concern about compliance burdens could become material factors in decisions to make particular loans or investments. The imposition of income or other "doing business" taxes on the busi- ness done in a State by out-of-State institutions, together with the bur- dens and costs associated with compliance with the tax laws in that State, would tend to induce out-of-State lenders to divert credit flows away from ~tates imposing such taxes and into States with a more favorable tax climate or into marketable securities. Such reallocations might be particularly marked in the case of the iarge money market banks~ which in some cases appear to have placed half or more of their outstanding loans with out-of-State borrowers. But many smaller in- stitutions also handle considerable out-of-State business by virtue of their location close to State borders, and some of these might curtail their out-of-State lending to reduce the possibility of nondomiciliary taxation. While the amounts withdrawn from a particular State by any one lender might be small~ withdrawals by a large number of insti- tutions could mount to a sizable total. The impacts of such an exodus of funds on the economy of the af- fected State could be substantial, particularly in States that were rap- idly expanding and heavily dependent on outside sources of financing. But the impacts would not be uniform; rather they would tend to focus on intermediate sized local businesses which required outside fi- nancing but lacked the flexibility of large national corporations to shift their base for financing to a non-tax State or to obtain funds in the national money or capital markets. Smaller firms and other local borrowers, too, might be adversely affected, by having to pay higher rates on borrowed funds than they otherwise would, due to curtailment of supply. The Board's recommendation on out-of-State taxation is addressed to the problem of minimizing these barriers to interstate and interre- gional mobility of funds while recognizing also the congressional de- sire to minimize constraints on State taxing powers. It is intended to forestall the development of significant impediments to such mobility while safeguarding the authority of the States to collect taxes in cir- cumstances where an outside bank or other depositary institution has established a clear relationship to the taxing State or 1olitical ~ubdi- vision through a physical presence or a pattern of sustained and sub- stantial ol)eratiOns. If the Board's proposals are adopted, States would not be limited in their choice of tax measures applicable to banks and other depositary institutions (except as to intangible personal prop- PAGENO="0026" 6 erty). But the circumstances in which these taxes would be applied to out-of-State institutions would be clearly defined and circumscribed and certain State procedures for applying taxes to out-of-State insti- tutions would be standardized throughout the Nation. The Federal statute should establish uniform criteria for determin- ing when a State or its subdivisions may exercise jurisdiction to tax a bank or other depositary institution which has its principal office or is chartered in another State; principles and pi'ocedures that will govern the interstate division of each type of applicable tax base in circum- stances where the jurisdictional tests are met; and rules that will guide the States in their administrative procedures, such as the application of a unitary business concept, requirements of consolidated or corn- biñed tax returns from related or affiliated corporations, audits of out- of-State corporations, and other procedures. It may be desirable in such legislation to designate a Federal administrative agency to pro- vide interpretations and regulations. Like the present Federal statute that applies to net income taxes on business involving interstate sales of tangible personal property (Pub- lic Law 86-272), the law relating to depositary institutions might pro- vide that certain common occurrences do not, by themselves, constitute a sufficient tconnection with the State to establish jurisdiction to tax (e.g., mere solicitation or prospective borrowers by a depositary insti- tution or its representatives, the loans being approved or rejected out- side the State; the holding of security interests in property located in a State; or enforcement of obligations in the courts of a State). In establishing such criteria, the overriding objectives should be to avoid creation of tax impediments to the continued free flow of credit across State lines and unecoiiomic changes in the procedures that now gov- ern the overwhelming bulk of interstate lending by depositary institutions. Any jurisdictional standards and division-of-base rules that are ap- plied to State taxation of out-of-State depositary institutions should be applicable to local government levies as well. In this connection, the Congress may wish to examine whether additional restrictions would b~ needed to avoid imposition of a variety of local levies and record- keeping and other compliance requirements upon banks from other parts of the same State or from other States, which would tend to dis- courage banks and other depositary institutions from widening their service areas. Recommendation 3. Discriminatory `taxation: Proscribe the impo- stion of dicrinvinatory or more onerous license, privilege, or other similar "doing business" taxes upon out-of-state depositary institu- tions than would be imposed upon these institutions if chartered by the taxing State. The provision might take the forn-t of a specific limi- tation, under which an out-of-State corporation or association could not be required to pay a higher license, privilege, or other "doing business" tax O'i' fee than it would pay under the same circumetances if it were domiei7ed or chartered in the taxing State. Because constitutional doctrines in this field are not clear, there is at least a risk that States would have power to levy for the privilege of doing business in a State heavier taxes on out-of-State banks and other depositary institutions than they impose on those institutions PAGENO="0027" iticorporated or domiciled in the taxing States. This risk should be eliminated by a Federal statutory provision to avoid the creation of undesirable barriers to interstate credit operations. In the case of ad volorem taxes, direct corporate net income taxes, and gross income taxes, existing constitutional safeguards apparently suffice to prevent discrimination against out-of-State institutions. A related issue concerns possible classifications of banks for taxing purposes that could have the effect of discriminating between national and State banks. We assume that the principle of requiring equal treat- ment of national and State banks, incorporated in the "permanent amendment" of section 5219, will be retained in any further legisla- tion and that this provision will be interpreted as prohibiting dis- criminatory classifications. . Another related issue is the possible discriminatory taxation of banks or all depositary institutions as a class distinguished from other businesses. Under the expiring provisions of section 5219, property tax rates on national bank shares are not permitted to exceed those on "other moneyed capital" competing with the banks, and rates of net income taxes on national banks may not exceed those upon other finan- cial corporations nor the highest rates upon other businesses. Decades of litigation over these provisions suggest that, although such compar- ative limitations do not dispel uncertainty and controversy, they may narrow its range. The Congress might wish to consider incorporating into the statute a declaration of policy on this question of the compara- tive treatment of banks (or all depositary institutions) and other businesses. Recommendation 4. Interest on Federal obligations: Amend the Federal public debt statutes to authorize States to include, in the meas- ure of otherwise valid direct net income taxes, the income realized by banks and other depositary institutions from Federal Government obligations. Under present law, States are permitted to include interest income derived from Federal obligations in the tax base for a franchise or excise tax "according to or measured by" net income, but they must exempt such interest from the base of a direct tax on net income. The problem is a general one that goes beyond depositary institutions. There is no economic difference between these two types of taxes. Apart from the treatment of tax-exempt interest, they are identical in all essential characteristics except the circumstances in which they may be imposed by States. Most States that tax banks with respect to their net income use excise taxes, and the number has gradually in- creased. Under present law, their choice among forms of taxation is influenced by the fact that banks and other depositary institutions have large holdings of Government obligations. To the extent that States other than the home State are to be per- mitted to participate in taxing net income under either the "permanent amendment" of section 5219 or our Recommendation 9, above, they should be authorized also to include in the base of the direct tax inter- est income received by banks and other depositary institutions on their holdings of Federal securities. In addition, elimination of the dis- tinction between direct and indirect taxes on net income would give the States considerably greater freedom in formulating tax legislation. PAGENO="0028" 8 The change could be made in the Federal public debt law (31 U.S.C. 742) and any other relevant statutes. Recommendation ô.-Olaxsiflcation. of coins and currency: K~tabiish, by statute, a nationwide rule f/tat coins and paper currenci, are to be considered intangible personal property for State and local tax purposes. At present, application of State and local ad valorein taxes to "cash or currency" holdings of national banks is prevented not only by the earlier section 5219 but also by provisions in the "temporary amend- ment" which continue the prohibition of taxes on intangible personal property and expressly exclude "cash or currency" from taxation as tangible property. Without further amendment, these restrictions will expire at the end of 1971. Some States classify cash or currency as tangibles and others treat them as intangibles under laws imposing taxes on personal property. But money held by other taxpayers generally is either exempted or not assessed. If the Congress adopts Recommendation 1, above, a con- tinuing prohibition of taxes upon "cash or currency" or "coins and paper currency" should be included in that amendment. But if the `Congress prefers to permit ad valorem taxation of intangibles owned by depositary institutions, it might consider enacting a limited exemp- tion for reserves of these institutions that are required to be held in the form of dep~sits or currency. Con~cluding comrnent.-The Congress undoubtedly will wish to make a detailed review of the proposed modifications of policy, with the result that definitive action may not be feasible before section 2 of Public Law 91-156 becomes effective on January 1, 1972. Unless action on the proposals can be completed this year, the Board would rec- ominend that the effective date of the "permanent amendment" be postponed beyond next January 1, since some of the potential adverse effects of the new statutory provisions in their present form might prove difficult to remedy. PAGENO="0029" Part II STAFF REPORT OF A STUDY UNDER PUBLIC LAW 91_1561 A Congressional act approved December 24, 1969, called upon the Board of Governors of the Federal Reserve System to make a study and submit recommendations relating to a "permanent amendment" of section 5219, Revised Statutes (12 U.S.C. 548).2 This amendment broadens the authority of States and their subdivisions to tax national banks. It replaces a longstanding statutory provision which prescribed several alternative methods of taxing national banks and prohibited the use of other methods. The "permanent amendment," which will iake effect January 1, 1972, unless Congress enacts further legislation, Teads as follows: For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or o1~her jurisdiction within which its principal office is located. The Board was directed "to determine the probable impact on the banking systems and other economic effects of the changes in existing law" to be made by the new provisions insofar as they govern "income taxes, intangible property taxes, so-called doing business taxes, and ~ny other similar taxes which are or may be imposed on banks." It was asked to recommend- what additional Federal legislation, if any, may be needed to reconcile the promotion of the economic efficiency of the banking systems of the Nation with the achievement of effec- tiveness and local autonomy in meeting the fiscal needs of the States and their political subdivisions. The Board's recommendations are presented in Part I. This report (Part II), presenting results of the staff study, covers the following subjects: the history and effects of section 5219; the amounts of State ~nd local taxes paid by commercial banks ~ and potential changes in their taxes under the new legislation; the economic and legal back- ground of the study; views expressed by bankers, State tax adminis- trators, and State bank supervisors in the course of the study; major issues that require examination; and possible alternative methods of dealing with these issues. 1 The contributions of numerous individuals and organizations to this study are acknowl- edged In an addendum at the end of this staff report, pp. 69-70. 2For the full text of section 5219 (before amendment) and Public Law 91-15G see Part III, appendices 1A and lB. Throughout this report, references to "commercial banks" include both national and State-chartered banks. The word "State" encompasses local governments as well as State governments unless the context indicates otherwise. (9) PAGENO="0030" 10 As supporting documentation for this report, papers on selected questions have been prepared by the staff and by consultants retained for the study. These provide considerably more detail on topics covered in the report. The papers and related compilations and statutory pro- visions appear in Part III. Statutory Mstory (1864-1969) For more than a century-since 1864, a year after passage of the original National Bank Act-the methods by which State and local governments might tax national banks have been specified in Fed- erl law, section 5219 of the Revised Statutes (12 U.S.C. 548). This law was amended only in 1868, 1923, 1926, and 196~, but it was the subject of frequent litigation and continuing controversy between States and banks. Under this statute, States always have been per- mitted to tax the real property of national banks as they do that of other owners, but State authority to apply other taxes has been nar- rowly circumscribed. From 1864 through 1923, States could tax (in addition to real prop- erty) only the value of shares of capital stock of national banks lo- cated within their borders. Beginning in 1923, a State could choose any one of three bases. It could tax the shares, or include dividends in the income of shareholders under an individual net income tax, or tax the net income of the national banking association. In 1926, an- other option was added: a State could choose, instead of the other measures, a franchise or excise tax according to or measured by the entire net income of the national bank. This enabled States to include tax-exempt interest in the tax base. Moreover, States were now per- mitted to tax national bank dividends to the stockholders under speci- fied conditions. That is, if a State which imposed a tax on net income or according t~ or measured by net income of national banks, also applied such an income, franchise, or excise tax on other business corporations and taxed the incomes of individuals, it could tax indi- vidual shareholders on dividends they received from (1) national banks within the State if dividends received from domestic corpora- tions were likewise taxed, and (2) national banks located outside the State if dividends from other foreign corporations were likewise taxed. In each version of this statute, limits were established to prevent taxation of shares, dividends, or income at higher rates than were imposed on comparable subjects of taxation.~ Whichever option a State selected, its authority to tax national banks or their shares was limited to banks with their principal offices within the State. The only exception was the 1926 provision permitting taxation of resident share- holders on dividends received from out-of-State national banks. Effects of section 5919 The concept of Federal statutory limitations on State taxation, devised to protect national banks as Federal instrumentalities, re- mained intact throughout the period 18~4-1969, although in the middle The comparative limits were expressed in several clauses, each of which acquired a special construction In the course of judicial interpretation. For the text of the statute and its history and interpretation, see Part III of this study, appendix i-A (12 U.S.C. 548), and appendix 6, a paper by Simeon E. Leland on "History and Influence of Section 52i9." PAGENO="0031" 11 of this period the Federal Res,erve System assumed a major l)art of the governmental-instrumentality functions (mainly currei icy issu- ance and fiscal agency services). Functional differences between na- tional and State-chartered banks substantially disappeared. Over the years, section 5219 has had a far-reaching impact on State tax structures extending well beyond the taxation of national banks. `Four aspects of the legislation were particularly significant: 1.' In limiting the methods by which States might tax na- tional banks, section 5219 indirectly imposed restraints on the taxation of State-chartered banks and, to a lesser extent, of other financial businesses. The section 5219 restrictions* on tax rates applicable to national banks relative to "other moneyed capital" encouraged parallel treatment, but the desire to promote equity and preserve competitive balance probably was another important. consideration. In any event, differences in tax treatment of na- tional and State banks have not been widespread or substantial. 2. The restricted range of alternatives made available to the States in section 5219 no doubt tended to limit diversity in bank taxation. In 1969, according to a survey conducted as part of the Board's study, net income and share taxes on banks accounted for 80 per cent of all commercial bank payments of State and local taxes other than on real property, with a somewhat higher percentage for national than for State banks. (See table 3 at (p.17.) 3. Though each State was limited to only one tax upon national banks in addition to that on real property, States resorted to various formulas and procedures designed to equalize taxes of State and national banks and of banks and other businesses. One device was to apply a higher income-tax rate to banks than to other businesses to compensate for the banks' exemption from some taxes paid by other businesses. Historians of section 5219 have commented that the statute apparently interfered consider- ably with efforts of various States to construct tax systems which they considered fair and rational, and that the process of adjust- ment complicated State tax structures. From the point of view of the banking business, the statute was regarded as affording some protection, though perhaps limited and uncertain, against disproportionate taxation. 4. Section 5219 granted national banks immunity from taxa- tion on any basis, other than real property, outside the State in which the principal office is located. In practice, this protection was carried over to State-chartered banks as well, although they were not subject to the Federal law. Other classes of business were not afforded this immunity but, of course, most other bus- inesses are not subject to the kinds of regulatory limitations that govern the location of banking offices and activities. Whether because of section 5219, regulatory restrictions, or the limited scope of their activities in States other than the State of domicile, commercial banks as a class have paid only negligible amounts of taxes outside their home States. From time to time some States have collected from national banks as well as State banks certain other types of taxes not specified in sec- tion 5219, notably, taxes on sales, tangible personal property, docu- ment ~ecordat.ioim~ and deposits. When remitted by national banks, PAGENO="0032" 12 these taxes presumably were paid voluntarily or (in the case of sales or deposit taxes) were legally levied upon payers other than the banks, with the banks serving as collection agents and in practice generally absorbing the tax. The legally permitted share taxes also were con- sidered taxes on the shareholders, which the banks paid in their behalf. Omission from section 5219 of intangible personal property (that is, an ad valorem tax on intangible assets) as a permitted basis for taxation of nationa' banks probably was not a major influence limit- ing use of this form of tax for other taxpayers. Many States abandoned the tax for other reasons or, if they continued it, adopted systems of classification, special low rates, and other expedients to lighten its im- pact. In fact, the long period of concentration on share taxation alone (1864-1923) had lingering effects in keeping in use this selective form of intangibles tax on bank stockholders. At the beginning of 1971, bank shares were taxable at general property tax rates in several States that purported to have ad valoreim taxation of intangibles generally; and bank shares were taxable (often at special low rates) in 17 States that employed selective or classified taxes on intangibles.6 In 1962, taxed intangibles of all kinds probably yielded only about $300 million of property tax revenues for all State and local govern- ments ($180 million from special taxes and $120 million from general taxes); in 1969, the yield may have reached $425 million. A sizable proportion of this must have been taxes on bank shares and deposits. The ag~r~gate of these taxes paid by commercial banks in 1969 was $167 million; additional amounts may have been paid directly by shareholders of State banks and by owners of bank deposits.~ The 1969 aimendment In 1968, the tI.S. Supreme Court upheld the contention of a Massa- chusetts national bank that section 5219 protected it from sales and use taxes. In 1969, the court affirmed a decision that Florida could not require a national bank to pay a documentary tax. These rulings precipitated the Congressional intervention that produced Public Law 91-156. ~ States that appear to tax Intangibles generally (subject to enumerated exemptions) are Alabama, Alaska, Arkansas, Idaho, Tennessee, Texas, and Wyoming. Bank shares are taxed or legally taxable in Alaska (where national bank shares are exempt because of section 5219 but shares of State banks are not expressly exempted), Arkansas (under a voluntary arrangement since a court decision in 1961), Tennessee, Texas, and Wyoming, Although Arkansas law provides for local taxation of intangibles, in practj~~ the self- assessment requirements are not enforced; a statute relating to shares of banks and life insurance and trust companies was held Invalid in Pulaski County Board of Equalization ~. American Republic Life Insurance Company, 342 SW. 2d 660 (1961). In Illinois, ~ntanglbles, Including bank shares, were generally taxable through 1970; effective in 1971, till personal property of Individuals Is exempt but corporations remain subject to taxation of personal property, presumably including bank shares owned by corporate shareholders. 8 These States are Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maine, Mississippi, Montana. Nevada, New Hampshire, New Jersey, Ohio, Pennsylvania, South Dakota. Virginia, and W'est Virginia. The following 7 States, with selective or classified taxes on Intangthles, do not tax bank shares: Arizona, Iowa, Kansas, Michigan, Missouri, North Carolina, and Rhodes Island. In 18 States and the District of Columbia, all intangibles are exempt from property taxa- tion. `The estimate of intangible property tax yields In 1962 Is from Dick Netzer Economies of the Property Tax (The Brookings Institution, Studies of Government Finance, 1966), n. 143. The sum of ~i67 million estimated foe bank share and deposits taxes paid l)y banks fn 1969 Includes some other Items that cannot be separated Out-namely, franchise taxes on the capital structure or banks an(l also all payments of an Indiana tax that was based on depo~Its and share values and, for State banks, partly on gross earnings. On time deriva- tion of estimates for taxes paid by banks In 1969, see appendix 3, PAGENO="0033" 13 This measure makes a two-step revision of section 5219. For the pe. nod from December 24, 1969, through December 31, 1971, Public Law 91-156 added interim provisions that permit the home State to subject a national bank to any tax that is imposed generally on a nondiscrim- inatory basis throughout the taxing jurisdiction (other than a tax on intangible personal property). The interim provisions also au- thorize imposition of the following taxes on national banks that have their principal offices outside the taxing State, if the tax is imposed generally throughout the taxing jurisdiction on a nondiscriminatory basis: (1) Sales taxes and use taxes complementary thereto upon pur~ chases, sales, and use within the taxing jurisdiction. (2) Taxes on real property or the occupancy of real property located within the taxing jurisdiction. (3) Taxes (including documentary stamp taxes) on the execu~ tion, delivery, or recordation of documents within the taxing jurisdiction. * (4) Taxes on tangible personal property (not including cash or currency) located within the taxing jurisdiction; (5) License, registration, transfer, excise, or other fees or taxes imposed on the ownership, use, or transfer of tangible personal property lo~ated within the taxing jurisdiction. With the exception of real property taxes and certain sales taxes on sales to banks, none of these taxes was previously applicable to national banks either in thc4r home States or in other States.8 As to out-of-State banks, the principal substantive change affecting real property was a recognition of occupancy taxes; earlier law simply disclaimed exemption of real property of national banks from taxa- tion according to value. A State may apply its license and other taxes under the fifth clause only in connection with the ownership, use, or transfer of tangible personal property located within its borders. Thus, it may not tax an out-of-State national bank on net income or gross receipts or under an excise or other tax that does not relate specif- ically to the presence of personal property. Taxes on intangible per- sonal property remain on the forbidden list. Under the 1969 amendment, certain of the newly authorized taxes, such as sales, documentary, and tangible personal property taxes, could be applied to national banks more or less automatically prior to January 1, 1972. Others under certain circumstances required affirm- ative action by the State legislature to extend them to national banks. This requirement was designed to prevent undue burdens which might result if additional taxes previously applicable to other businesses were now applied automatically to national banks while all previous taxes on national banks continued without change. As indicated ear- lier, some States had imposed higher tax rates or made other adjust- ments in taxes on national banks or all banks, in an effort to equalize taxes among banks or between banks and other businesses. Affirmative legislative action was considered desirable to avoid impairing what- ever equality had been achieved by these earlier adjustments. All special restrictions and the statutory designation of alternatives will terminate at the end of 1971 if present law remains unchanged. Thenceforth, the only restraint. expressly provided in the National Bank Act will be the requirement, quoted at the beginning of this re- ~ The earlier law did not prevent collection of vendor-type sales taxes on sales made to national banks by taxable suppliers (such as public utilities). 79-421 0 - 72 - 3 PAGENO="0034" 14 port, that for tax purposes "a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdic- tion withiii which its principal office is located." This new provision has important implications for policy. It repre- sents for the States a release from the constraints placed upon them by the old language. It opens for national banks, and, in fact, for the banking community generally, a new exposure to State and local legis- lative aUthority. As viewed by the Senate Banking Committee, which initiated the request for a Fedei~al Reserve study, the most serious as- pects of the prospective exposure relate to taxation of intangible assets owned by banks and liability for taxes imposed by more than one State. Enactment of Public Law 91-156 had immediate effects upon bank taxation. The changes for natiOnal banks often carried with them simi- lar changes for State banks and other financial institutions. Beginning December 24, 1969, sales and use taxes applicable to pur- chases or sales made by national banks no longer were limited to vendor-type taxes collected from firms that made sales to the banks. Tangible personal property of national banks could be taxed. Docu- mentary and recordation taxes could be imposed on them. They could be subjected to various license, registration and transfer fees, excises, and other cl;:~rges and taxes. Not all the SI~ates moved into these newly opened areas at once, but enough took prompt action-either by administrative ruling or by statutory change-to have a noticeable impact on the. tax liabilities of banks. Another immediate effect of Public Law 91-156 was to expose na- tional banks to designated types of out-of-State taxes (enumerated above) if they had tangible property or transactions outside the home State. Data on the quantitative impact of these changes are not available. However, the major part of the impact of the new Federal legisla- tion lies ahead, as States, in recasting their tax structures, use the broader authority that-in the absence of new Congressional action- will become available on January 1, 1972. Analysis of the legislation, development of proposals, and completion of legislative action all take time, and in many States this process is only getting under way or has not begun. In some cases, there may be a tendency to defer major action until 1972 in order to determine whether the Congress is likely to limit the permanent authority before it goes into effect at that time. Bank taxes paid in 1969 and subsequent changes To establish a quantitative b~isis for this study, the Federal Reserve System collected from national and State-chartered banks informa- tion about their State and local tax expenses in 1969. Banks were asked to report the amounts of their expenses for each major type of tax and to differentiate between payments in (1) the State in which the bank is located and (2) all other States. Where tax laws orregulations with- in the home State had been revised to a significant degree since 1969, respondents were asked the amount of the affected tax that would have been paid in 1969 if the change had been in effect in that year. The survey was conducted during December, 1970.° ~ The survey Is described and resulting data are presented in detail in appendix 3. PAGENO="0035" 15 The aggregate of State 10 ta.xes paid by commercial banks and their domestic subsidiaries in 1969 was $623 million, as shown in table 1, which provides a breakdown of total tax expense by major types of taxes. This was eight-tenths of 1 percent of all State and local govern- ment tax revenues of $83 billion in that calendar year. (State payroll taxes for unemployment compensation are excluded from both totals.) TABLE 1.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS. BY MEASURE OF TAX AND CHARTER STATUS OF BANK: 1969 (In millions of dollars) . Measure of tax All banks National banks Stat e banks Total taxes 623. 1 Real property taxes 179. 4 Total taxes other than on real property -- 43.7 Net income taxes 235. 2 Taxes on shares of bank stock or capital structure 120. 5 Bank deposits taxes 38.9 Sales and use taxes i 23.6 Gross income or receipts taxes 7. 6 Tangible personal property taxes 4.7 All other taxes i 13. 2 354. 8 268.2 112. 5 242.3 66.9 201.3 125. 6 74.9 21.3 9. 1 2. 2 1.7 7. 5 109. 5 45. 6 17. 5 14. 5 5. 4 3. 0 5. 8 I "Sales and use" taxes include and `all other' * taxes exclude some sales and use taxes paid by banks as customers of public utilities and other suppliers of goods and services that were reported in "miscellaneous" or "other" taxes in the survey responses. Source: Federal Reserve Survey of State and Local Tax Expenses of Insured Commercial Banks, 1969. (See app. 3 for details and description.) Amounts shown are estimates for all insured commercial banks in the 50 States and the District of Columbia. Eighty-six percent of all the bank payments were in three cate- gories-net ~income, real property, or shares and capital structure taxes.1' Every State obtained a. significant amount of r~venue from the real property tax, and this tax accounted for 29 percent of the total col- lected from banks. (See table 2.) TABLE 2.-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS, BY MEASURE OF TAX AND CHARTER STATUS OF BANK: 1969 . Measure of tax Al I banks National banks State banks Total taxes Real property taxes Taxes other than on real property Total taxes other than on real property Net income taxes Taxes on shares of bank stock or capital structure Bank deposits taxes Sales and use taxes Gross income or receipts taxes Tangible personal property taxes All other taxes 100. 0 100. 0 100.0 28. 8 71. 2 31. 7 68. 3 25. 0 75.0 100. 0 100. 0 100. 0 53. 0 27. 2 8. 8 5.3 3. 7 1.1 2.9 53. 8 30.9 8. 8 3. 8 .9 .7 3. 1 54. 4 22.7 8.7 7. 2 2.7 1.5 2. 8 Source: Table 1. With respect to national banks, each State was limited to one addi- tional tax, either an income or a. shares tax. Over half the States levied an income tax and it accounted for more than half of all taxes °°References to "State taxes" include local Government taxes unless the context indi- cates otherwise. Where a reference to an outside source is involved, local taxes are men- tioned specifically to avoid ambiguity. "The survey questionnaire called for separate reports of (el ad valorem taxes on shares of bank stock, which are typically local p~overnnient taxes imposed as part of the property tax, and (b) franchise or other taxes mensureil by capital structure (capital. surplus, undivided profits, etc.3, which are typically State taxes at flat or graduated rates. How- ever, respondent banks in ninny instances made no distinction between these taxes. To avoid mislntepretation of responses, payments reported for the Iwo categories are merged in the text tables and in summary tables In appendix 3. PAGENO="0036" 16 other than those on real property. Most of the remaining States taxed bank shares. Thus, a combination of real property plus an income or shares tax accounted for the bulk of all taxes paid by national banks in most States, and the same pattern generally prevailed for State banks as well. Ranking next in general importance for both national and State banks were taxes on deposits, generally levied on the depositor, hence not prohibited by section 5219 even though they were collected from and absorbed by the bank. Appreciable added amounts were paid in sales and use, gross income or receipts, and tangible personal property taxes. These were legally enforceable only against State banks but in many cases were paid also by national banks on a voluntary basis. In some States, however, such taxes were collected only from State banks. As a result partly of such differences, State and local taxes in the ag- gregate were somewhat heavier for State than for national banks when measured by various ratios, such as total tax payments to income, assets, or equity. Practically all State and local taxes paid by banks went to their respective home office States, presumably reflecting in large part the influence of section 5219 in confining national bank taxation to the State of domicile, except for taxes on real property. Total payments to other States were less than $1.4 million, one-fifth of 1 percent of the total. Nearly three-fifths of the out-of-State payments were in- come taxes. Real property taxes accounted for most of the remainder. These out-of-State tax expenses were heavily concentrated at large national banks and were mainly associated with the operations of sub- sidiaries. The se~tion 5219 immunity for national banks did not ex- tend to these affiliates. As noted earlier, enactment of Public Law 91-156 has already sparked. changes in State tax laws, some of them designed to take effect in 1972. Most adjustments were increases, though there were exceptions. Some 585 banks in 41 States reported in the survey of bank tax expenses that if tax laws applicable to them in 1970 had been in effect in 1969, their State and local tax expenses would have been dif- ferent. The net overall increase estimated by these banks was 9 per- cent. The bulk of the increase was in sales and use taxes, which P~ :hlic Law 01-156 authorized States to apply to national banks more or less automatically. Also important were the shares tax (New Jersey), the gross receipts tax (WTashingt~), and tangible personal property tax (reported by banks in about one-third of the States). The 9 percent increase is over and above any expansion attributable to growth in the tax base during this period of rising incomes and prices.12 Of $443.6 million of taxes other than on real property paid by all insured commercial banks in 1969. $242.3 million was paid by na- tional banks and $201.3 million by State banks. (See table 3.) For na- tional banks this represented 68 percent of aggregate State and local tax expenses, and for State banks, 75 percent (as indicated in table 2). `~ The 585 banks that reported tax changes were one-fourth of all respondents in the survey. The response rate for this question was much higher among larce than small banks and was uneven within States. Banks with total deposits under $15 million were given the option of omitting this question and under 10 peroent replied. Also, a much higher response rate prevailed for national than State banks. as might be expected in view of the change In Federal law. For responding national banks, the average increase in tax payments waa 12 percent, compared with 3 percent for State banks. PAGENO="0037" 17 Total taxes_ other than on, real prop- erty [In State and charter thousands status of bank of dollars[ Total 443,643 National banks 242, 340 `State banks 201, 304 New York 99,573 National banks 38, 942 State banks 60, 631 `California 45, 659 National banks 33,904 State banks 11, 756 `Ohio 34, 699 National banks 18, 041 State banks 16, 658 Pennsylvania 30, 131 National banks 17, 800 State banks 12, 331 Texas 26,448 National banks 20, 446 State banks 6, 002 Illinois 19,557 National banks 11, 175 State banks 8, 382 Michigan 18,340 National banks 9, 383 State banks - 8,957 `Massachusetts 14, 768 - National banks 9, 198 State banks 5, 570 indiana 12, 277 National banks 6, 350 State banks 5, 928 Minnesota 11, 165 National banks 7, 043 State banks 4, 122 Missouri 10, 392 National banks 3, 587 State banks 6, 805 Total, 11 States 323, 009 National banks 175,869 State banks 147, 142 All other States 120,634 National banks 66,471 State banks 54, 162 Percentage distribution by type of tax Taxes on shares of Net bank stock income or capital Total taxes structure 100.0 53.0 27.2 100.0 51.8 30.9 100. 0 54. 4 22. 7 100.0 91.3 (1) 100.0 98.3 100.0 86.8 (1) 100.0 93.9 (1) 100.0 94.3 (1) 100.0 92.6 100.0 (1) 10.0 100.0 (1) 8.8 100.0 11.2 100.0 .1 91.4 100 99.3 100.0 .3 80.0 100.0 . 98.0 100.0 98.9 100.0 94.8 100. 0 13. 7 76. 8 100.0 3.7 87.6 100. 0 27. 0 62. 4 100.0, 54.5 .9 100.0 54.9 .4 100.0 54.1 1.5 100.0 97.9 100.0 98.7 100.0 96.7 100.0 100.0 100.0 100.0 96.0 100.0 95.7 100.0 96.5 100.0 91.3 .7 100.0 95.8 .1 100.0 88.9 1.0 100.0 56.1 22.3 100.0 54.1 28.0 100.0 58.5 15.5 44.7 40.1 100.0 46.0 38.4 108.0 43.2 42.1 TABLE 3.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN SELECTED STATES, BY MAJOR TYPES OF TAXES (OTHER THAN ON REAL PROPERTY) AND CHARTER STATUS OF BANK: 1969 Other 19. 8 17.3 22. 9 8.7 1.7 13.1 6. 1 5. 7 7.4 290.0 91.3 88. 8 8. 5 19: 2.0 1. 1 5.2 9.5 8.7 10.6 2 44.6 44.7 44.4 2. 1 1.3 3. 3 3100.0 100.0 100. 0 4.0 4.3 3. 5 8. 0 4. 1 10.1 21.6 17.9 26.0 15.2 15.6 14.7 I Less than 0.05 percent. 2 The major portion of this is a tax on bank deposits. a The entire amount represents a tax based on deposits and share values and, for State banks, partly on gross earnings. Source: Same as table 1. States named in this table are those in which all insured commercial banks paid more than $10 million in all State and local taxes, other than taxes on real property, in 1969. For data for other States and additional `detail for these States, see appendix 3. PAGENO="0038" 18 Within the nationwide total, some 73 percent of all bank tax pay- ments other than on real property were reported by banks in Ii States where totals exceeded $10 million for the year. In five of these States- New York, California, Massachusetts, Minnesofit, and Missouri- nearly all these taxes (more than 00 percent) were on a net income base. In Pennsylvania and Texas, there was a similar heavy emphasis on taxation of shares of stock or capital structure. The Ohio taxes were mainly on deposits; and the Indiana payments were entirely a combination of deposits, share values and (for State banks) gross earnings taxes. For the 11 States as a group, taxes measured by net income were relatively more important, and share or capital stock taxes consider- ably less important, than for all other States as a group. Although the detailed analysis of the bank tax expense survey in- cludes ratios of tax payments to selected financial measures,13 this report does not include a comparison of tax treatment of banks with that of other depositary institutions or other businesses. Exploration of this area does not appear to have been contemplated by the legis- lative history or the express language of the Congressional request for a study o~ bank taxation. Moreover, any serious effort to make ob- jective comparisons encounters áomplex conceptual and analytical dif- ficulties.14 As remarked by one analyst who expored alternative methods of testing business tax burdens, there is no "simple and ob- jective process from which impartial and informed investigators are bound, or even likely, to emerge with a single answer." 15 Even if the concepts were clear, the data necessary for comparisons do not exist. The Federal Reserve survey produced information about the tax expenses of commercial banks, but similar comprehensive data are not available for other sectors of financial business or for business generally. Some of the greatest conceptual difficulties in attempts to make interindustry comparisons arise from the multiplicity of purposes that may be served by various taxes on business or even by various elements of a given tax. Some taxes on business enterprise are in the nature of charges for particular governmental services related to the taxed transactions or rendered to the taxed business establishment, some are charges on the enterprise for general governmental services necessary to enable it to conduct its business, some are essentially sub- stitutes for taxes on stockholders, and some are in the nature of in- direct levies upon customers and suppliers of the taxed business. Dif- ferences in the economic structure of industries further complicate tax comparisons. The incidence of business taxes is a matter on which ana- lysts disagree strongly. * In the case of depositary institutions, their special economic role as financial intermediaries (described in a later section) poses diffi- cult questions for any effort to compare their tax burdens with those of other industries, particularly nonfinancial industries. It may even be true, as is sometimes suggested, that interindustry comparisons could prove more misleading than helpful for policy determinations because 13 See appendIx 3. ~` See appendix 9, Harvey E. Brazer and Marjorie C. Brazer, "Comparing State and Local Taxation of Banks anti Other Business Enterprises." `~ Ronald B. Welch in "Carrier TaxatIon" (79th Congress, 1st sessIon. House Document 160, Letter from the Board of Investigation and Research . . ., Sept. 19, i944), p. 394. PAGENO="0039" 19 they are unavoidably crude and vague, yet ascribe equalities or in- equalities to the tax treatment of business categories that are fiuida- mentally floflcOml)arable. Even explorations of the effects of l)a1~ticil1~tr taxes upon particular mdustnes, in terms of their economic neutrality or unneutrahity, generally contain a large clement of intuition, judg- ment, and prediction.16 information and views from State ban/c supervisors. The removal of Federal statutory restrictions on State taxation of national banks under the "permanent amendment" of section 5219 has implications for time competitive positions of State versus national banks. In view of their special responsibilities relating to State-char- tered institutions, this is an area of particular interest to State bank supervisors. To obtain their views regarding the effects of the changes, the possible need for further Federal legislation, the nature and tax implications of any restrictions on out-of-State banks doing business in their States, and recent or prospective developments of particular significance for State and local taxation, the Federal Reserve Board asked each State bank supervisor to provide a statement dealing with these matter~7 The overwhelming majority of State bank supervisors indicated that they were strongly in favor of the "permanent amendment," which would remove restrictions on State taxation of national banks but re- quire that they be treated the same as State banks. They generally felt that this amendment will improve the competitive position of State- chartered banks relative to national-chartered banks and that such equalization is entirely warranted because of the virtually identical functions of the two classes of institutions. Also, in view of expected continued growth in the amount of banking business conducted across State lines, a few supervisors felt that equality of treatment in the taxation of out-of-State banks is essential for preservation of the dual banking system. Supervisors in seven States, however, held a different view.18 They expressed particular concern about the serious economic effects on the banking industry that might result under the "permanent amend- ment" from interstate taxation of banks, discriminatory taxation of banks as compared with other businesses, and the application to banks of an intangibles tax. With respect to each of these areas, several supervisors felt that there was a need for Federal legislation to con- tinue limitations upon State action. Most supervisors reported that out-of-State banks were not per- mitted to conduct banking business within their borders, such as by having a branch that solicits deposits, etc. 1-lowever, some States indi- cated that out-of-State banks may qualify to conduct certain limited kinds of banking activity in their States, such as lending or fiduciary functions, while others indmcated that their laws enumerate certain of these functions that are not considered doing l)usiness. In either case, supervisors generally were of the opnuon that such activities had no 16 See appendix 7, Carl S. Shoup, "Economic Impacts of Particular State and Local Taxes on Banks, with Special Reference to Neutrality," section headed "Concluding remarks." 17 See appendix 5 for a detailed report on the replies from bank supervisors. `~ The States are Florida, Georgia, Missouri, North Carolina, Oregon, Texas. and West Virginia. PAGENO="0040" 20 tax implications because State assertion of jurisdiction to tax would hinge ordinarily on the existence of a branch or office within the State. Information and views from State tax administrators As a basis for appraising the possible impact of the "permanent amendment" to section 5219, it was essential to have a detailed picture of laws and practices relating to State and local taxation of banks and information concerning the nature of prospective changes in this area. To meet this need, inquiries were addressed to State tax admin- istrators in all States. The survey was made in two parts: (1) A request for a statement indicating the nature of actions that had been taken or were con- templated in response to section 5219 revisions, the probable trend of developments in bank taxation under the "permanent amend'~~ent," and any special problems that the administrators felt should be cov- ered in the Board's study; and (2) a questionnaire requesting detailed information on present and prospective laws and practices affecting banks. in the home State and out-of-State banks and other financial institutions that have activities or property interests within the State. The principal findings and conclusions derived from this survey are summarized below.19 The tax structure applicable to banks, as reported by the admin- istrators, reflects the longstanding restrictions on national bank tax- ation contained in section 5219. Nearly all States reported that they levy on banks an income or a shares tax; a few States levy both, with one of these taxes applicable only to State-chartered institutions. Thirty-four jurisdictions 20 have a tax on net income or, in most cases, one measured by net income. The ]atter form permits inclusion in the tax base of interest income on U.S. Government securities, a sig- nificaiit source of bank operating revenue. Twenty-five jurisdictions 21 levied taxes based on the value of shares or capital structure. Some tax administrators reported that. certain taxes-particularly tangible personal property, sales and use., documentary and license taxes-although not permissible for national banks until enactment of the broader authority on December 24, 1969, had been collected from those banks before that date, and indicated or implied that com- pliance was voluntary. Since then, many States which previously had confined these taxes to State banks have extended them to national banks, and a few States that had exempted aTl commercial banks from such taxes have imposed them on both classes. A few indicated that they intended to take action in 1971 or later. 10 See appendix 4 for a detailed report. 20 The 34 States or areas are Alabama, Alaska, Arizona. California. Colorado, Connecti- cut, Delaware, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine. Maryland, Massachusetts, Michican, Minnesota, Misso:iri, Nebraska, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Ore~zon, Rhode Isian(1, South Carolina, South Da- kota, Tennessee. Utah, Vermont, wisconsin, and Puerto Rico. At present the tax applies only to State banks in Illinois, Maine, and New Hampshire. Effective for 1971, Montana extended a corporation license tax on net income to State and national banks. ~These faxes were reported for Arkansas (on a voluntary basis), Georgia. Illinois (where the tax for Individual shareholders lapsed at the end of 1970), Kentucky, Louisiana, Maine, Mississippi. Montana, Nevada, New Hampshire, New Jersey, New York (as an alter- native minimum tax for State banks only), Ohio, Pennsylvania, Tennessee, Texas, Virginia, West Virginia, Wyoming, and Puerto Rico (State banks only). Bank shares are taxable also, although they were not so reported by tax administrators, in Alaska (State hank shares only: see above, p. 12. footnote 5). Delaware, Florida, Indiana. and South Dakota. In Delaware and South Dakota, where the banks are taxs'd on net income as Indicated in the preceding footnote, State tax officials report that shares of both national and State banks also are ~uhject to ad valorem taxation. In Delaware, the tax on shares is a State tax ; In South Dakota, it is Part of the local 1)roperty tax, PAGENO="0041" 21 In adopting these additional taxes, there appeared to be a trend to- ward treating banks like other corporations. In addition, several States indicated that they were eliminating compensatory higher tax rates applicable to banks and other special arrangements such as tax credits, which had been used to "equalize" tax treatment of State and national banks or of banks and other businesses. However, in other States it appears that prior to the amendment of section 5219 certain taxes had been applied to State banks alone, without any com- pensating adjustment for the exclusion of national banks. * A major issue relevant to an appraisal of the .prospective impact of the "permanent amendment" concerns the extent to which the States after January 1, 1972, are likely to assert jurisdiction to tax banking business conducted in the State by out-of-State banks or to tax in- tangible personal property owned by out-of-State banks. The ques- tionnaire requested not only expressions of opinion by the adminis- trators concerning what they might do with respect to specified types of interstate banking activity but also information on the extent to which various types of out-of-State financial institutions which do business in the State (other than national banks) are already subject to taxation in ti~eir States. The latter information, it was expected, would provide an additional basis for inferences about prospective future action with respect to banks. Most administrators supplied no information with regard to taxa- tion of intangibles, and the few who did reported mainly that they had no tax of this type or that such taxes were not applicable to banks. Four States indicated that after January 1, 1972, their States would apply some form of tax on intangibles of out-of-State banks.22 With respect to taxation of out-of-State banks having State char- ters, administrators in 31 States reported that such banks already were subject to taxation in their States, mainly under the income tax.23 In about half of these States, assertion of jurisdiction depends on the existence in the State of an office, property, or personnel-tests which would exclude most banks engaged in multistate activities, since few would have this exposure. Where business activity was stated as the basis for jurisdiction, it was sometimes only an ad)unct to physical presence in the State, but in a few cases, activity or the earning of income in the State by themselves were reported to provide a sufficient basis. A few States that do not now tax out-of-State banks indicated that they would begin to do so after the expected removal, on January 1, 1972, of national bank immunity to out-of-State taxation generally. After that date, most States would continue to assert jurisdiction if the out-of-State bank maintained an office in the State, but several ad- ministrators expressed the view that jurisdiction might be asserted if lending activity is carried on, even if loans are solicited by travel- ~The four States for which these opinions were reported were Georgia (tax on long- term notes). Michigan (deposits tax), Nebraska (tax covering income from intangibles), and Tennessee (county tax on shares). 38The 31 States or areas, omitting those for which only property or sales taxes were mentioned, are Alabama, Arizona. Arkansas. California. connecticut, Hawaii. ld~ho. TI- linois, Indiana, Maine, Maryland. Massachusetts, Minnesota, Missouri. Montana. No- braska, New Jersey, New Mexico. New York. North Carolina. North Dakota. Ohio, Orocon. South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, West Virginia, and Puerto Rico. This heavy exposure of State-chartered banks to nut-of-State taxation was not con- firmed by the data collected from the banks in the tax-expense survey. State banks re- ported only nominal amounts of income te" payable to out-of-State jurisdictions in 1969 and most of this was attributable to operations of their subsidiaries domiciled in other States. See p. 16 above. PAGENO="0042" 22 ing personnel from outside the State and are subject to out-of-State approval.24 At present, nearly all States tax at least some types of out-of-State financial institutions that do business in the State other than national banks. Of the 29 States that supplied information about the basis on which jurisdiction is claimed, 16 specified that there has to be a physi- cal.: presence in the State, such as an office, property, Or permanent personnel, but in some States only in conjunction with transaction of business. The others use some form of "doing business" test, but five of these use physical presence as an alternative.25 Most States require or permit interstate division of the tax base, at kast in certain cases. The predominant method of apportionment for all types of financial institutions is by formula or a combination of formula and specific allocation. In determining the tax base, consolida- tion or combination of all affiliated corporations is required by only a minority of the States. * As far as local taxes applicable to banks are concerned, the survey indicated that ad valorern taxes on property or shares are predominant. Often the taxes are not wholly local but are administered at the State level, with all or part of the proceeds distributed to the localities. Some local governMents, like States, have quickly taken advantage of the temporary amendment of section 5219 by extending tangible personal property taxes, sales taxes, documentary taxes, and others to banks. Concerns e~vpressed by bankers In the course of the Board's study, staff conferred and corresponded with representatives of many commercial banks, bankers organizations of several States, and other financial institutions and trade associations. Formal statements were received from several banks and associations. In addition, the Washington office of the American Bankers Associa- tion transmitted statements it had received from various banking groups. The principal concerns expressed and proposals made by banking spokesmen in these communications may be summarized in the follow- ing categories: (1) Intangible personal property. (2) Multistate jurisdiction to tax. (3) Local taxation. ** . - (4) Discriminatory or disproportionate burdens. The bankers' comments are summarized below and reflected in the discussion of "Issues and alternatives" in the final section of this report. (1) Intangible personal property.-Exposure to ad valorem taxa- tion of intangible personal property will subject commercial banks to especially heavy taxation which, in their view, would be discrimina- tory because banks, which are closely supervised and have no freedom to transfer their base of operations across State lines, would have fewer opportunities for tax avoidance than other businesses. "This was considered likely In California, Idaho, Massachusetts, Minnesota, Missouri, Montana, and West Virginia, and, for some types of loans, in New Mexico and Puerto Rico. ~Among the 29 States that responded to this question, the following require at least a physical presence: Alabama, Arizona, California, Georgia, Idaho, Indiana, Kentucky, Maryland, Michigan, Minnesota, Missouri, New Mexico, Virginia \Vashingtou, Wisconsin. and West Virginia. Either physical presence or "doing business' were reported as bases in the District of Columbia, Illinois, Maine, New York, and North Carolina. The others, which use some form of "doing business" test, are Hawaii, Iowa, Montana, New Jersey, North Dakota, Oklahoma, Oregon, and South Carolina, PAGENO="0043" 23 Some bankers urge that the prohibition of taxes on intangibles owned by national banks, contained in the interim section 5219, be made permanent and extended to State banks. They add that, if there is a question about congressional authority to prevent the domiciliary State from taxing intangible personalty of its State-chartered banks, Congress should at least exempt national banks and express the hope that States will accord the same treatment to State banks. Another suggested possible solution is Federal legislation that would specify an exclusive situs for taxation of these assets. Special concern was expressed regarding bank-owned currency and coin. A statute enacted in 1894 (31 U.S.C. 425) permits.State taxation of currency and coin as "money on hand or deposit," but section 5219 prevented taxation of national bank holdings of such assets. Some bankers propose that Congress review the policy of the 1894 act in view of the fact that the "permanent amendment" would allow such taxes, whether money is classified as intangible or tangible property for tax purposes. (2) Multistate juvisdiction to tax.-Exposure to taxation in two or more States would confront banks with new problems relating to allocatioi~, apportionment, or other division of the tax base between States and the possibility of overlapping jurisdictional claims. Bank- ers expect their compliance burdens would be greatly increased. They foresee confusion and administrative difficulty, particularly in con- nection with taxes on or measured by net income or the value of capital stock or intangible property. Several statements expressed bankers' concern over the possible impairment of the efficient functioning of the Nation's banking sys- tem and suggested that unrestrained State authority to tax banks could open the way for artificial barriers that will impede the free mobility of capital among the States. The following excerpt from a statement submitted by the First National City Bank of New York is representative of comments on this issue: If the nondomiciliary States are permitted to impose tax on a "doing business" concept based on any slight contact with the State, national banks will undoubtedly face double or multi-taxes on the same income. Confronted with such significant increases in their tax burden, national banks will have to face the decision of whether to seek to pass the cost on to their customers or whether competitive forces will dictate that they curtail significantly their multistate opera- tions. The banking structure provides a highly efficient mecha- nism through which savings accumulated in one part of the country are channeled to borrowers in other parts of the country. By means of overlines and similar arrangements, out-of State banks are able to assist in financing projects in States where, because of legal loan limits or other factors, local resources are insufficient. If out-of-State banks are now to incur additional tax liability when they participate in such transactions, they will naturally be less eager to expand this role. The result will be both higher interest costs for PAGENO="0044" 24 borrowers in certain States and a lower volume of total local financing. This will be true both for privately financed veii- tures and for public financed ones should participation in an underwriting syndicate be deemed to establish tax jurisdiction.26 Different banking groups proposed further Federal statutory en- actments along the following lines (these are alternative rather than complementary proposals): (a) Reinstate the prohibition on taxation of national banks by nondomiciliary States. (b) Prescribe allocation procedures or an apportionment for- mula applicable to financial institutions. (c) Make the interim provisions of section 5219 permanent. Within any State, prohibit discrimination between national and State banks. (d) Continue the interim provisions long enough to permit adequate study of interstate problems in bank taxation. These problems are at least as complicated as those of other businesses- and for manufacturing and mercantile businesses they have not ~been resolved in more than a decade of congressional study. (3) Loca~ taxation.-Lifting the old section 5219 restrictions means that local governmental bodies will have broad authority to tax na- tional banks. Bankers expressed concern that these units of govern- ment, which have no particular responsibility for the stability or productivity of financial institutions or for economic policy, will be without national guidelines that might limit their actions. Some pro- pose that income taxation of banks be confined to the Federal and State governments, with local governments restricted to property and sales and use taxes applicable to all business enterprises. (4) Discriminatory or disproportionate burclens.-Bankers foresee considerable danger that banks will be subject to discriminatory clas- sification for taxation in both domiciliary and other States. This might include requirements that banks pay taxes at higher rates than competing financial institutions and general business corporations, and application of special taxes not imposed on other businesses. One banking group wrote, "The clearly constitutional power to classify for tax purposes will be a virtual license to discriminate . . . [B]anks are highly visible and vulnerable targets for political discrimination." A tax on gross receipts is particularly criticized as destructive of economic efficiency in any business, and especially discriminatory when applied to banks, on the ground that banks cannot recoup the tax through markup adjustments. The "permanent amendment" of sec- tion 5219 removes a provision protecting national banks against dis- criminatory taxation compared to other financial institutions and gen- eral business corporations. Some bankers contend that even under the former section 5219 some Stntes have taxed banks more heavily than other businesses. To avoid this danger, one proposal calls for a Federal statute pro- hibiting the imposition of higher tax rates upon national banks than are imposed upon State banks and general business corporations or of ~ `Report on the National Bank Tax Act as directed by Congress in Public Law 91-156: Recommendations submitted to the Board of Governors of the Federal Reserve System," by the First National City Bank, New York City (1970), pp. 10-11. PAGENO="0045" *25 additional taxes not imposed on such busin~ssc~s. The proposal in- cludes a similar restriction to be imposed on the taxation of national bank. stock and dividends derived therefrom. Ati~'ributee of the financial 8ector and their implications for taxation ~n appraising the economic effects of various types of bank taxes or changes in such taxes, it is necessary to consider not only the impacts ~ the banking system itself but also the broader ramifications for the functioning of financial markets and the role of financial markets- iiational, regional, and local-in the resource allocation process. A ~starting point for such an analysis is to consider possible competitive effects of taxation among the types of institutions cOmpeting for loan and deposit business. Many financial institutions have structural siiui- laritjcs and are closely competitive with banks and would tend to bene-' fit or suffer from any tax-induced diversion of business away from or to banks. But the issues to be dealt with clearly go beyond competitive ~lations among financial institutions. In view of the strategic role of t~h~ financial system in providing funds for the nonfinancial sector, an~ tax that threatened the viability of the financial sector or any thajor part of it would have adverse effects on the economy as a whole. Role of financial institutions.-To provide capital needed for economic ~rowth and improvements in productivity, the economic systeni must have an efficient means for channeling savings into real investment. A significant proportion of grass say- lings is channeled to investment through arrangements internal ~to the individual business firm or household.. For the most part, however, the channeling of savingsto investment is performed through a coiñplex structure of financial markets and institutions.. People save mainly by acquiring financial assets-partly direct acquisitions of securities issued by borrowers, but mostly in the form of deposits and ~other claims on financial intermediaries. These savings, in turn, are channeled by the intermediaries to borrowers who can make potentially productive use of the funds. Over the past 5 years, for example, pri- vate financial institutions supplied well over two-thirds of all the funds raised by nonfinancial borrowers in credit and equity markets. It is important to the national welfare that the mechanism of financial intermediation operate efficiently-partly to help stimulate a high `level of saving, but mainly to ensure that savings are channeled inta investments of greatest productivity. Broadly stated, the role of financial institutions is to gather sav- ings from economic units with surpluses and lend them to those need~ ing additional funds. Most of these savings originate with individ'- nals; while some net financial saving is generated by individual businesses (exclusive of internal investment~, the business sector on balance borrows more than it lends. The spectrum of institutions en- `gaged in gathering and allocating savings is quite broad and gives evidence of the flexibility of financial institutions in responding to~ the highly differentiated needs of both savers and borrowers. Less than a third of the total amount of financial saving in our economy flows into investment channels directly through the market rather than through private financial institutions. Direct financing is. facilitated by institutions which underwrite and distribute new `marketable securities (e.g., investment bankers), originate, sell, and service real estate mortgages (mortgage companies), and act as brokers PAGENO="0046" and dealers to facilitate transfer of ownership of securities from one ~er~on or firm to another (e.g., bond dealers and stock exchanges). While this method of financing has advantages for certain types of transactions, it is a costly and ineffective procedure for channeling the bulk of individual savings into investments. This is particularly true ~or types of investments such as consumer finance, mortgage lending, agricu~ltural credit, and small business finance, where transactions gen- *erahlv are not large and highly specialized knowledge is needed by the lender for efficient operation. Individual savers generally lack the knowledge for judging investment prospects, and the amounts of their individual contributions could not be effectively solicited by most borrowers; transaction costs involved in market transfers are high; markets are relatively inaccessible, for many individuals; and it is virtually impossible to match the peculiar needs of individual bor- rowers and lenders as regards risk, maturity, and liquidity. Financial intermediation provides an opportunity to realize the economies of specialization of function and of scale and the reduction of risk through asset diversification. It is a more efficient means of channeling savings to productive uses than is direct finance for the large majority of savers and borrowers, whose transactions are rela- tively small, and any significant constriction of the competitive capa- bilities 1of intermediaries would have some adverse impact on this group. Financial intermediaries are of two general types. Depositary in- stitutions are by far the most important single category. This group consists of commercial banks, savings and loan associations, mutual savings banks, and credit unions. At the end of 1970, they accounted for over half of all credit market instruments held outside of the Federal and State and local governments. Other intermediaries, whose àperating funds are derived largely through contractual arrangements with savers of a longer-term character and through borrowing in the securities markets, include insurance companies, finance companies, ~nd private and public employee pension funds. The success of the depositary institutions in attracting such a large share of the public's savings reflects the vital economic role they play as intermediaries in meeting the needs of both savers and borrowers. The high degree of safety of deposits in these institutions, which is partly the result of Federal insurance, as well as their convenience, availability in small denominations, fixed value, and liquidity are likely to be as important to the small saver as investment yield. Much of th~ success of the depositary institutions, in fact, is attributable to the fact that they have been able to satisfy borrowers' desires for longer-term credit while at the same time satisfying the desires of savers for highly liquid and safe savings instruments. Deposit instru- ments tailored to the needs of large savers and businesses also are offered by some depositary institutions, but only commercial banks figure importantly in that market. , By virtue of specialization, depositary institutions have developed ~a su~stantia1 amount of expertise in the lending function. In the case of savings and loan associations-and to a lesser extent mutual savings banks-funds are allocated largely to long-term real estate mortgae financing. In the case of commercial banks, financing is provided to all* sectors of the economy-consurners, businesses, and government- PAGENO="0047" 27 and in a wide range of maturities, sizes and types of credit accom- modation. To a major extent, the differences in lending patterns among these institutions reflect the differing statutory limitations placed on their use of funds. Within the depositary institution group, commercial banks have Important distinguishing characteristics aside from their greater di- versification of function and dominance in size (they account for two-thirds of the group's total assets). Commercial banks have a unique role in providing the bulk of the Nation's payments inechan- ism, since they are the only private financial institutions that issue demand deposits, which comprise the major form of money. As such, they are closely regulated by State and Federal banking agencies, and are profoundly influenced by the monetary policy actions of the Federal Reserve. To contribute to the effectiveness of monetary con- trol, banks are required to hold reserves against their deposit liabil- ities. In the case of member banks of the Federal Reserve System, the only permissible forms of reserves are vault cash and balances at Federal Reserve Banks-both of which are nonearning assets. In the case of nonmember banks, reserve requirements generally can be met in whole or in part by earning assets, or balances at other banks that give the holder access to certain "free" correspondent banking services. Banks are prohibited by statute from paying interest on demand deposits, but by offering certain free services to depositors, they indirectly pay interest on these accounts. Another distinguishing feature o~f commercial banks, as compared with most other depositary institutions, is that banks are all incorpor- ated organizations, operated with a view to returning a profit to the stockholders; most competing institutions are mutual organizations in which there are no stockholders apart from the depositors. Each of the other major types of institutions performing an inter- mediary function in our economy-insurance companies, pension funds, and finance companies-plays a distinctive role in the inter- mediation process. As a group, they do not compete closely with the depositary institutions for savers' funds, but the competition in loan markets is considerably closer. There is an area, however, in which their asset portfolios differ: insurance companies and pension funds place appreciable amounts of their assets in common stock-a type of investment generally prohibited for depositary institutions. All types of financial institutions contribute importantly to the provision of geographic mobility to savings, moving them from local- ities or regions where they are relatively plentiful and rates of return are low, to areas where they are scarce and rates of return are higher. Among depositary institutions, large commercial banks have engaged most heavily in interregional lending; among nondepositary insti- tutions, insurance companies, pension funds, and finance companies also allocate funds on a nationwide basis. Traditionally, funds have moved in large volume from the industrialized northeastern section of the country to the rapidly developing southern and western re- gions. But ev~en within States or regions, substantial redistribution of funds is continuously needed to iron out. imbalances between sup- plies of funds and the i~eds of borrowers. These flows have played a strategic role not only in promoting overall growth in our economy but also in contributing to a geographic pattern of development that PAGENO="0048" 28 has tended to reflect the comparative economic advantages of each area. A ttr'Thutes relevant to evaluation of ta~ zmpacts.-Before turning specifically to a. consideration of the effects of taxation of financial institutions on the performance of their intermediary function and on the efficiency of financial markets in channeling savings into in- vestment, it should be noted that several attributes of the financial system are particularly relevant to an evaluation of the potential impacts of taxation in this sector. These may be briefly summarized as follows: 1. Financial institutions, in contrast with other businesses, hold the overwhelming bulk of their assets in intangible form.27 2. Financial intermediation gives rise to derivative layers of. debt or equity instruments resting on a single layer of physical assets or Income-generating capacity. For example, the deposit held by the saver in a depositary institution has as its counterpart a mortgage or bond investment or other financial instrument in which that institu- tion has placed its funds, which in turn rests on real property or in- come producing capacity of an assembly of tangible assets. Another layer of tintangibles may be created where the intermediary institution obtains additional funds by selling a repurchase contract or participa- tion certificate against a package of its existing financial assets. Thus, intermediation results in proliferation of the volume of intangible ~ssets outstanding in the economy. 3. Financial markets are highly integrated and interest rates in various sectors of the market are interrelated. Thus any marked change in one sector tends to have prompt impacts in others. This reflects not only the substantial amount of competition that prevails among suppliers pf funds in many sectors but also the high degree of market knowledge and sensitivity to small differences in interest rates and nonrate terms that exists among many market participants, par- ticularly those engaging in relatively large transactions. Also, credit is fluid and can move quickly, irrespective of distance. As a result, if yields on financial assets change significantly, massive amounts of funds can move into the areas of increasing yields-including flows from one institution to another as well as between institutions and market instruments. On the borrowing side, too, competition is strong and credit terms in various markets and areas tend to be interrelated. Over time, poten- tial borrowers have become more highly sophisticated in seekii~g out alternatives and comparing relative costs of borrowing. They shop from one institution to another and also, in the case of large corpora- tions, move freely between borrowing from an institution or from the market and also between borrowing at short- or at intermediate- or long-term. 4. Despite an appreciable volume of interregional credit flows, sig- nificant geographic differences in interest rates continue. These dif- ferences are confined mainly to types of credit extended to borrowers with limited alternatives who are largely reliant on local or regional sources of financing. Any impediments to free interregional mobility of funds, particularly those affecting large institutional lenders which are the principal providers of such mobility, will tend to place addi- `7 For a more detailed discussion of this point, see pp. 43-44. PAGENO="0049" 29 tional demand pressures on local sources of supply and accentuate dis- parities in interest rates and credit availability. 5. As a result of the highly competitive character of many sectors of the financial market, margins between interest rates paid and earned `by financial institutions in those sectors tend to be relatively small. Thus, there is little cushion for absorption of unusual costs or losses. In other sectors or under certain circumstances, this would be less true, reflecting in part the effects of ceilings on savings rates, insensitivity of savers to interest rate differentials, and lack of effective competition in the market. 6. The base of operations of banks and other depositary institutions generally is confined to a particular State, county, or city, and branch- ing across State lines is prohibited. Thus, unlike most other businesses, they have little flexibility to take advantage of a more favorable tax environment or to escape an unfavorable one. Implications for taTation.-These special attributes of the financial structure. together with other characteristics described earlier, have several implications with respect to taxation. In exploring these, the major focus is on the economic impacts of taxes-on credit flows, resource allocation, and economic efficiency-rather than on the ulti- mate incidencç~ of taxes oii customers, workers, suppliers, sharehold- ers, and the like. Any intensive exploration of incidence would neces- sarily encouiitei' many difficult problems of analysis and would be inconclusive in view of the wide diversity of tax st~-uctures that exists among the States.28 In the following analysis, each tax is considered by itself, without reference to any accompanying repeal or modification of other taxes, or to an existing distortion which is being offset or reinforced. Also, for simplicity, each tax is assumed to apply only to institutions within the State or States levying the tax.29 1. A tax levied against a single sector of the financial system would tend in the short-run to be borne largely by the equity owners of that sector, since any attempt to pass it on through higher charges on loans or lower payments on savings would divert business to other sectors. Depending on the size of the affected sector and the magnitude of the tax, there probably would be some longer run impact on the relative size of the various sectors, on interest rates, and on economic efficiency. A tax on commercial banks would have greater repercussions than a comparable one on other financial institutions, not only because of their dominant position in the financial framework but also in view of their relatively broad lending authority, which affects a wide spectrum of borrowers. * 2. A tax levied on a major part of the financial system-e.g., all depositary institutions or all financial intermediaries-would similarly tend over time to divert business to other sectors as efforts were made to pass on the tax in the form of higher loan charges or lower savings rates. Since the major alternative in this case would be direct market financing, which involves sen oiis admi n i stra five difficulties, high traiis- action costs, and only limited capacity to match saver and lender terms, costs of borrowed funds would generally rise. Even though gen- eral monetary policy wer~ used to offset the higher rates, there would still be an accompanying loss in economic efficiency to the extent that ~ For a detailed discussion of the question of neutrality, see appendix 7. See also ap- pendix 9, section on "intercorporate Comparhois." ~ For a discussion of the economic Impacts of multistate taxation, see pp. 46-9, below. 79-421 0 - 72 - 4 PAGENO="0050" 30 flows through intermediaries declined and direct market financing was substituted. 8. An intangibles tax levied against all holders of financial assets would have a iiumber of differential effects relating particularly to the financial sector. (a) It would have an especially heavy impact on financial in- stitutions, since the bulk of their assets are in the form of in- tangibles while for other businesses much smaller proportions of their assets are 111 this form. (b) It would impinge on the process of intermediation as dis- tinguished from direct market financing, since the duplication of financial assets that is inherent in the intermediation process would expose savings flowing through intermediaries to an addi- tional layer of taxation not encountered when the ultimate saver places Ins funds directly at the disposal of the ultimate borrower. (c) It would fall more heavily on Federal Reserve member banks than on nonmembers, since member banks are required to hold all their legal reserves in nonearning assets-vault cash or balances at the Reserve Banks-while nonmember banks gener- ally may hold their reserves in earning forms or in balances with other banks for which correspondent banking services are received. 4. A tax Jevied on financial institutions in one or a few States would tend to divert credit flows away from potential users in those States. Since some States generate inadequate savings to meet internal needs and are heavily dependent on funds supplied by outside lenders, any interruption in the flow of funds to such States could have an inhibit- ing effect on the volume of capital investment and on the level of eco- nomic activity in those States. 5. In the financial sector, shifts in credit flows or other adjustments to changes in taxes could occur suddenly and in substantial magnitude. Needs for credit among users are continuous, however, so that abrupt shifts in credit flows could give rise to considerable difficulty for some borrowers. 6. Because of the functional similarities among institutions engaged in financial intermediation, the effects of a given general tax would tend to be smilar from group to group within this sector, except for any differences that might be associated with form of organization, i.e., whether corporate or mutual. However, in the highly competitive financial markets, even small differences in tax treatment may be rela- tively important. Accordingly, there is great need for uniformity within the financial sector. Legal setting for analysis of major issues This section, outlining the relevant legal setting for consideration of the major issues presented by the permanent amendment of section 5219, is based in large part on several legal papers prepared for the study.3° It summarizes prevailing legal doctrine as reflected in court 10 These legal studies are reported In the following appendix papers: 10. Charles F. Conlon, Liability of national banks for generally applicable State and local taxes. 11. Jerome R. Hellerstein, Federal constitutional limitations on State taxation of multistate banks. 12. J. Nelson Young, Multiple State taxation of national banks: Division of tax base for Income taxes and "doing business" taxes. 13. WIlliam R. Bellow. Repeal of restri('tions on State taxation of national banks. 14. Sheldon L. Azine, The question of rnsslble discrimination against out-of-State national banks. PAGENO="0051" 3l~ decisions, state regulations, and practice relating to the application of tax law in areas relevant to the Board's study-(1) taxes on intangi- bles, (2) "doing business" taxes, (3) exposure to multistate taxation, ~4) discrimination against out-of-State banks, and (5) interstate divi- sion of the tax base. Intangibles.- A consequence of the termination of restrictions in section 5219 might be the application of substantial taxes upon the previously untaxed intangible assets of national and State banks. Prevailing laws and practices of the several States with respect to taxing intangible personal property generally fall into one of the following categories: (1) Intangibles are not subjected to property taxes. (2) Intangibles are classified separately and taxed at an effec- t~ve rate below that applied to other taxable property. The effec- tive tax rate may vary for different kinds of intangibles. * (3) Intangibles are classified separately and subject to a tax based on a percentage yield in lieu of a tax measured by the value of the property. In these States, intangibles that yield no income are çaxed usually at a low effective rate, such as one-tenth of I percent of value. (4) Intangibles in principle are treated the same as real and tangible personal property, all being taxed at prevailing propeity tax rates in each taxing district, although in fact there may be substantial differences of treatment. In general, where intangibles are taxed at a special rate or on a percentage of yield, the effective tax rate is usually well below three- tenths of 1 percent of full value. Where intangibles are subject to genei~ál property tax rates, the stated tax rates often are high (5 per- Cent or more on assessed value) -and the taxes are relatively high even after adjustment for prevailing fractional assessment levels. In practice, intangibles almost never are subjected to the full force of the general property tax rates; but in these States the owners of intangi- bles are potentially liable for the full tax. The major difference in practice between intangibles and other properties under an ad valorem tax results from the fact that the assessor cannot as readily underassess fixed-value claims, such as bank deposits or bank assets, as he can and generally does undervalue other types of assets. Broad legal doctrines applicable to taxation of intangibles appear to be as follows: (1) Apart from Federal statutory restraints in section 5219, * the State in which a bank maintains its principal office may, under present Supreme Court rulings, impose an ad valorem tax on intangibles held by the bank, such as loans, securities, credits, and other evidences of indebtedness. (2) Ad valorem taxes may be imposed also by the State in which the individual debtor resides or the corporate debtor has its commercial domicile. The State of "business situs" of in- tangibles likewise has constitutional power to tax. Since that would ordinarily be the State of the residence or commercial domicile of the debtor, there would seldom be involved more than two possible property taxes based on the same loan or other ob- ligation. The prevailing practice in property taxation attributes intangibles to the domicile of the owner (the commercial domicile or principal PAGENO="0052" 32 place of business of a corporation). Al~hough a State may validly as- sert jurisdiction to tax intangibles owned by a corporation which it has chartered, apparently no State does so if the principal place of business is outside the State. Ordinarily, the State where a debtor re- sides does not tax a nonresident owner on intangibles representing The debt, except that Florida law provides for taxing intangibles that ~arise out of the sale, lease, or servicing of tangible personal property in the State. Under the business situs concept, intangibles arising out of or principally connected with a business conducted in a State are deemed to have a situs there. However, this rule apparently is used mainly as a. standard for assigning the value of intangibles or the in- come from intangibles in an apportionment factor, and less often as a jurisdictional basis for an ad i-alorem property tax 011 intangibles. Although most States have not reached out to exercise their full taxing power in this area, State court decisions are beginning to re- flect the broader taxing powers which the Supreme Court has accorded to the States in this respect. In short, it appears that the Due Process Clause of the Federal Constitution would not bar State imposition of property taxes on loans or credits held by out-of-State banks that have no connection with the taxing State other than tile fact that the debtor resides there or, in the case of a corporate debtor, has its com- mercial domicile there.3' "Doing business" taxes.-The "permanent am~ndment" would also permit "doing business" taxes to be imposed for the first time on out- of-State national banks operating across State lines. Aside from taxes on or measured by net income, tile major "doing business" taxes of concern to banks are (1) taxes on dr. measured by the value of issued or authorized capital stock or the capital or property used within the State and (2) taxes, other than retail sales taxes, imposed on or meas- ured by gross receipts or gross income from business activities within the State. Tile capital stock taxes-also referred to. as corporation franchise taxes and corporation license taxes-are conceptually a tax on property or wealth. From a legal standpoint, however, they are applied usually in .the form of an excise that is not subject to uni- formity requirements that might apply to a property I x. Generally, this type of tax is imposed in connection with the privilege of doing business as a corporation, exercising the corporate franchise, or con- ducting business activities including the use or ownership of property ivithin the State, or as a license to do business in corporate form. Capital stock-type franchise taxes as actually used in various States are of three main types: (1) A domestic corporation is taxed on the total amount of authorized or issued stock, and a foreign corporation on an amount of its capital stock that is proportionate to capital employed or business done in tile State. (~) Domestic and foreign corporations alike are taxed on the proportion of capital employed or business done in the State. (3) Capital stock of a domestic corporation is subject to a tax graduated by brackets and foreign corporations pay a low flat fee. * . ~ For further discussion of the taxation of Intangibles, see ~ppendixes 10 and 11. PAGENO="0053" * 1 33 .A few States have capital stock taxes that do not fit into any of these categories. Gross receipts or gross income taxes may be imposed on business generally or limited to a particular function or combination of func- tions, e.g., manufacturing, wholesaling, or retailing. These taxes are variously designated as license or occupation taxes, business and occu- pation taxes, or simply gross income or gross receipts taxes. Their legal incidence also differs from State to State: they may be imposed with respect to the privilege of doing business or conducting business activities, as a license tax, or simply as an excise. Only the District of `Columbia, Indiana, and Washington (beginning in 1970) apply this type of tax to banks.32 A few other States use the tax, but in those in- -stances banks are either expressly exempted from a general tax or not -among the types of business subject to a selective tax. Substantially -similar taxes are imposed by local governments in a few States (chiefly in Pennsylvania). Principles regarding the interstate division and taxability of re- * -~eipts derived from business activities in two or more States ar~ fairly well settled in most jurisdictions that use the gross receipts tax. Pre- sumably, these principles would be applied by additional States that extended the~e taxes to banks. ~eneral1y, jurisdictional concepts applicable to intangible property .~and net income taxes (discussed under the next heading) apply also for -capital stock and gross receipts taxes. States usually exempt all' banks from capital stock taxes or franchise taxes measured by capital stock oi~ by assets employed in business in the State. Likewise, States that tax gross receipts usually exempt banks. This may be simply a ie~sult of the longstanding restrictions of section 5219 relative to tax- .ation of national banks. However, for gross receipts taxes in particular the policy may reflect a recognition that such taxes are not well suited to financial institutions. A number of States have statutory provisions specifying that the conduct of designated activities (including the `leflding of money) by a foreign corporation or foreign lending insti- tution is not, to be considered "doing business" within the-State and does not require a foreign corporation to qualify under the corpora- tion laws of the State.33 .Eceposur~ to nwltista.te ta~at~om._WThen the residual immunity of national banks from out-of-State taxation expires at the end of this year under Public Law 91-156,- a national bank may be subjected to tax liability outside the State of its principal office under procedures similar to those that apply to business corporations generally. Current constitutional interpretations that might affect such tax- ation may be summarized as follows.34 (1) The Commerce Clause of the Constitution permits imposition by- a State of a direct net income tax, properly apportioned or allo- catëd to the State, on an out-of-State corporation doing an exclusively interstate business within its borders. However, the Commerce Clause ~ Alaska Imposes a license tax on banks measured by net income plus certain expenses. In the Board's survey of bank tax expenses, some Alaska banks reported net income tax payments while others listed payments under the heading of gross income taxes. The Wash- :Ington State tax was first applicable to banks in 1970. - ~` For a review of State laws on this subject, see appendix 10, supplementary `note ~ For an extensive treatment of this topic, see appendix 11. - - - - PAGENO="0054" .34 prohibits State imposition of excise taxes on the privilege of doing an. exclusively interstate business, whether measured by net income, gross. income, capital stock, gross receipts or otherwise. (2) A franchise tax or other excise tax on doing business may be ap- plied to a foreign corporation conducting within the State an intra- state business along with its interstate business. The subject of such im- posts is the privilege of doing intrastate business, but the tax may nevertheless be measured by income, capital stock, gross income, gross. receipts, or otherwise, from all aspects of the business conducted in the State, interstate as well as intrastate. An impOrtal1t aspect of the dis- tinction between a direct tax such as the net income tax covered in (2) above and a franchise or excise tax covered here is that neither the in- come from Federal securities nor the securities themselves may be taxed directly by the States, but both are includible in the measure of' excise taxes, including taxes on doing business.35 This difference is of' particular significance for banks because Federal securities constitute an appreciable part of their assets. (3) The Due Process Clause requires, as the basis for a State to apply income or "doing business" taxes to an out-of-State corporation that~ there be some link (nexus) in that State with the out-of-State corpora- tion, its personnel, activities, income, receipts, or property. (4) A review of banking activities engaged in by typical multistate banks outsid'.~ their home States leads to the conclu~on that ordi- narily the nexus requirements of the Due Process `Clause would be met for application of a direct State income tax. to such banks on their interstate activities. Moreover, it appears that multistate banks would be held to be doing an intrastate business, and therefore subject to~ doing business taxes in States other than their home States if, as is generally the case, they carry on lending or other activities in those States on a more or less continuous basis are correspondents for local banks and engage in loan participations with them, and carry on th& miscellaneous activities in those States that are a normal part of the business of regional and nationwide banking institutions. These di- verse operations appear sufficient in the aggregate to meet due process requirements for a State to assert jurisdiction even though the bank does not maintain a permanent place of business or inventories of tan- gible personal property, circumstances which provide fairly certain and easily identifiable jurisdictional criteria for nonfinancial business. corporations. (5) Smaller "State border banks" 36 that do not engage in the mag- nitude or variety of out-of-State business of the multistate bank might be subject to income tax by the neighboring State with respect to income from loans, and probably some income from credit card and miscellaneous activities, if the bank regularly makes loans to resi- ~For national banks, the distinction between taxes "on net income" and taxes "accord- ing to or measured by net Income" Is made in section 5219, subsection 1(c), reproduced' in appendix 1-A. A general provision of the public debt statutes, 31 U.S.C. 742, reads as follows: "Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other ob- ligations of the United States, shall he exempt from taxation by or under State or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the Interest thereon2 or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes In lieu thereof imposed on corporations and except estate taxes or Inheritance taxes." (R.S. 3701, as amended Sept. 22, 1959, by P.L. 86-346, Title I, see. 105(n) ; 73 Stat. 662). ~ The term "State border banks" is used here to Identify banks located relatively close to boundaries with adjacent States, which, by virtue of their location, attract appreciable business with out-of-State ~ustoiners. For a farther description, see pp. 47-8, below. PAGENO="0055" 35 dents or businesses domiciled in the neighboring State, receives de- posits and issues credit cards, provides some miscellaneous services, and use advertising to reach into the State to solicit this business. On the other hand, the neighboring State would not have a strong case for imposition of a doing-business tax on such a border bank unless the bank's activities loomed sufficiently large to link it to the neighboring State in a manner that begins to bring the border bank into the cate- gory of a multistate bank. (6) Opinions of legal experts differ as to whether a bank would be subject to a net income tax in any State where it has loan custo- mers.37 One authority holds that both the debtor's and the creditor's State have jurisdiction to tax the interest income. Another contends that, though a jurisdictional claim might be supported, States do not iii practice base jurisdiction on the residence of the borrower by it- self or the location where the borrower expends the loan proceeds. From a jurisdictional standpoint, this situation, it is asserted, is not analogous to the presence of income-producing tangible property within a State because prevailing practice is to attribute intangibles to the business domicile of the owner. Nor is this a case where an in- tangible acquires a business situs as that term is commonly understood. In contrast, a bank that leases out business equipment or other tan- ~ible property within a State probably is subject to the general tax )urisdiction of the State, although jurisdiction might not be asserted universally on that basis. The highest courts of some States have up- held corporate income taxes on rentals derived by an out-of-State corporation from leased equipment used by the lessee within the tax- ing State, but the Supreme Court has not ruled on their validity. Discriminatory ta1ration of out-of-State bank$.-The question arises whether, under the "permanent amendment" of section 5219, States would be prevented by the Constitution from imposing discriminatory license or other doing-business taxes on out-of-State banks, or levies that are more onerous than those applied to their own State-chartered banks and national banks with headquarters in the State. A basic consideration is that States are empowered to impose on foreign corporations, as a condition to the grant of a license or privi- lege of conducting an intrastate business, annual taxes that are not levied on domestic corporations. Or they may employ higher rates or broader bases than those applied to domestic corporations. The theory behind these rulings is that the States have a right to exclude foreign corporations from conducting intrastate business within their borders; consequently, they may exact conditions on the grant of the privilege. The logic of this theory has been questioned. Also, it is by no means clear that these rulings would justify the levy of a discriminatory entry or license tax on a foreign corporation conducting a mixed inter- state-intrastate business (such as banks usually conduct) rather than a purely intrastate business. Given this uncertain state of the law, there is some risk that a State would have power to levy mo~e onerous or discriminatory taxes on out-of-State banks (both national and State-chartered) for the priv- ilege of doing business in the State than it imposes on banks incorpo- rated by or domiciled in the taxing State.38 *7 See appendix 11, section I-B; and appendix 10, section on "Liability for taxes in two or more States." ~ See appendix 11. section 111-A. PAGENO="0056" 36 A related question raised in the course of the Board's study is whether, under the "permanent amendment" of section 5219, States might find it possible to impose taxes that discriminate against out- of-State national banks as a group. The policy of equal treatment for State and national banks is a central theme in the legislative history of Public Law 91-156. An examination of precedents suggests that the "permanent amendment" cannot be interpreted as sanctioning dis- criminatory tax treatment of foreign national banks compared with foreign State banks.39 * hiteretate diviBion of the tax base.-Since the "permanent amend- ment" to section 5219, if it becomes effective without change, will ex- pose individual banks to more than one State tax jurisdiction, a need will arise for division of net income or any other applicable tax base among the taxing States. - The methods commonly employed by States for dividing the income of corporations for income tax purposes are described in a report of a Special Subcommittee of the house Judiciary Committee on State Taxation of Interstate Commerce.~° The Congressional report gives primary attention to taxes generally applicable to corporations engaged in the sale of~ goods across State lines-manufacturers, wholesalers, and retailers-and does not give special attention to taxes that are restricted to selected businesses, such as banks and other financial insti- tutions. However, comparable methods for division of the tax base are used for selected businesses, and the findings of the study may be apnlicable to the extent that common problems are encountered.4' The standard methods are as follows: (1) Separate accounting.-~This approach rests on "the theory that the business of a multistate taxpayer can be divided into sepaiate com- partments so that activities within the taxing State can be segregated from activities elsewhere and accounted for separately. Thus, sep- arate accounting involves identifying all items of income and costs ~vhich are related to a taxpayer's activities in the taxing State, and constructing a Statewide net income from these items.~42 The concept does not assume the existence of a separate corporate unit in each State or for each type of activity. In 1963, only five of the 38 income-tax States indicated a preference for separate accounting, even where it is feasible. The remaining States (with the exception of Colorado, Connecticut, and New York ~or taxes on mercantile and manufacturing corporations) permitted separate accounting but viewed it as a special method for exceptional cases in which the taxpayer was able to demonstrate its peculiar suit- ability. Among State tax administrators who responded to the question on interstate division of the tax base in the Board's bank tax question- naire, 8 reported that their States use separate accounting for State banks.~' Of the 10 major banking States, New York alone reported that it used separate accounting for state-chartered commercial and 89 ~ appendix 14 for a ioemorandum on this question, by Sheldon L. Azine. Assistant to Counsel of the Minneapolis Federal Reserve Bank. See also appendix 11, section 111-B. ~O 88th Conj~ess, 2d sess., Report of the Special Subcommittee of the House Committee on the Judiciary, House Report 1480, vol. 1, June 15, 1904, pp. 113-128 (hereinafter cited as House Report 1480). "Cf. house Report 1480, vol. 1, pp. 14-18. `3Tbid p 115 `3Tbe~ight States reported were Alabama, Arizona, Ha~vaii, Idaho~ Indiana, New York, North Carolina, and South Carolina. PAGENO="0057" 37 mutual savings banks and savings and loan associations under its franchise tax law. (2) Specific allocation.-As an adjunct to formula apportionment, discussed below, most States require specific allocation of particular categories of income in their entirety-that is the attribution of these categories wholly to the taxing State or wholly to other areas. Types of income subject to specific allocation differ among the States; inter- est and dividends are often included. In 1963, among the 38 income tax States, only six did not provide for specific allocation. Of those using this method, nine States "super- imposed a further distinction between apportionable and allocable income by providing for specific allocation of only those items of in- come which were derived from transactions outside the regular course of business; seven more allocated only those not connected with uni- tary business operations of the taxpayer." ~ (The concept of unitary operations is described in the next subsection.) Responses in the survey of tax administrators indicated that, with respect to financial institutions, specific allocation is used in numerous States in combination with formula apportionment. For financial in- stitutions, specific allocation alone is used currently oniy for insurance companies ~tnd in only five States (Connecticut, Kentucky, New York, North Dakota, and Pennsylvania). (3) .Forn-tula apportionment.-TJnder formula apportionment, the percentage of income to be assigned to the taxing State is typically determined by averaging two or more ratios in which economic activi- ties or values within a State are compared with the taxpayer's total activities or values of the same kinds everywhere.45 The most common formula uses an average of three factors-prop- erty, payrolls, and sales. In 1963, 26 States used this formula; four States used a sales ratio alone; and 13 used other formulas. (The total exceeds the number of income tax States because several States em- ployed more than one formula.) There was considerable diversity among States in the substance of the factors employed. For example, there were at least a half dozen different rules for attribution of sales to particular States, with "destination" the most prevalent. Information from State tax administrators reported on the bank tax questionnaire indicates that apportionment formulas alone are used currently by 10 States for out-of-State state chartered commer- cial banks or savings banks and by 10 States for savings and loan associations.46 Five States report this method for credit unions; ~ three, for insurance companies; 48 and from 14 to 19, for each of vari- ous other categories of financial business.~9 Most of these States also require or permit other methods for division of the tax base in particular circumstances. A review of decisions concerned with interstate division of business income indicates that the Supreme Court has interpreted the Corn- `~ House Report 1480, vol. 1, p. 118. `~ Ibid. 46 Arkansas, Connecticut, Idaho, Maine, Maryland, Massachusetts. Minnesota, and Ten- nessee use this method for all 3 classes of out-of-State financial institutions. New Jersey re- ported It for State-chartered coiuumerclal banks; Iowa, for savings banks; and the District of Columbia amid Michigan for savings and loan associations. ~ Connecticut, Maryland, Massachusetts, Minnesota, and Tennessee. 46 Michigan. Minnesota, and Tennossee. `~ States tallied for one or more other classes of business are Alabama, Arkansas, Con- necticut, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Maine, Maryland, Massa- chusetts. Michigan, Mimnesota, New Jersey, New York, Oklahoma, Pennsylvania. Ithode Island, Tennessee, and Texas. Although 20 jurisdictIons are named, the nuniber did not exceed 19 for any one class of financial business. See appendix 4. PAGENO="0058" 38 merce and Due Process clauses of the U.S. Constitution as giving States considerable freedom in their prescription of apportionment formulas. The Court has approved each type of formula presented to it, and only in rare cases has the particular application of a specific formula been found to violate these constitutional provisions. There have been intimations, however, that crude apportionment techniques (such as single-factor formulas) may not meet the requirements.5° Since national banks have not been subject to income taxes outside the State of principal office, and there has been virtually no out-'of- State taxation of State banks, the lack of a standard formula for divi- sion of bank income among States has not heretofore presented an ur- gent problem. State experience in dealing with the interstate division of the income of financial institutions has been limited to State banks, mutual savings banks, and nonbank financial companies. It is this ex- perience that is reflected in the information received from State tax administrators. The unitary concept.-A special aspect of interstate division of the tax base arises with the application by an increasing number of States of a "unitary concept" of the business enterprise. The underlying justification for applying an apportionment forrnulft to the overall tax base of a multistate business is that there exists a unitary enterprise being carried on in more than one State. The formula is a device for attributing to the taxing State its share of the overall tax measure that admit- tedly is attributable only in part to the State. This principle extends, at least in a good many States, both to the branches of a single corporation and to subsidiaries and affiliated corpo- rations that are a part of the enterprise. By applying the typical three-factor formula, the property, receipts, and pay- roll ratios of all branches, subsidiaries, and affiliates are taken into account in determining apportionment ratios, which are then applied to the tax base of the entire business.~' The essential test of unitary business has been characterized as "whether or not the portion of the business within the State is de- pendent upon or contributory to the operation of the business outside the State." 52 Under the unitary business concept, a taxing jurisdiction in effect disregards the separate status of related business and lumps them together as if they were one business. Although a few States per- mit separate accounting for the activities of a unitary business within the taxing State, a greater number require formula apportionment for the entire enterprise. The constitutional validity of the unitary concept appears to be firmly established as a matter of law. Its applicability to niulticor- porate bankiiig organizations, such as holding company systems, is still to be determined, however.53 50For case references, see appendix 12: Jerome R. Hellerstein. Recent Developments In State Tax Apportionment and the Circumscription of Unitary Business, National Tax Journal. vol. XXI (Dec. 1968), P1). 487-503, esp. 495; and E. George Rudolph. State Taxation of Interstate Business: The Unitary Concept and Affiliated Corporate Groups, Tax Law Review. vol. 25, Jan. 1970, l)P. 171-210, at 180-84. 51 Hellerstein, ibid., p. 496. ~George T. Altman and Frank M. Keesling. Allocating of Income in State Taxation (2d ed., 1950), p. 101, quoted in Hellerstein, be. cit. See also 88th Congress, 2d session, House Report 1480, vol. 1, p. 167, quoted in appendix 13. ~`See appendixes 12 and 13. See also Ilelierstein, National Tax Journal, vol. XXI. cited above; and H. George Rudolph, State Taxation of Interstate Business: The Unitary Con- Lept and Affiliated Corporate Groups, Tax Law Review, vol. 25, January 1970, pp. 171-210. PAGENO="0059" .39 Of particular interest, as possible indications of policies that may ~uerge under the "permanent amendment" of section 5219, are deci- Lions by California and Oregon State courts upholding three-factor formulas in the case of a small loan company and a savings and loaii association. In the California case, the court upheld the State in apply- .ing an apportionment formula based on monthly av'rages of loans outstanding, interest collected, and payrolls. In the Oregon case, the taxpayer contended successfully that it was entitled to have part of its unitary income apportioned away from the domiciliary State by use .of a similar three-factor formula, since tI1e income was derived from loans outside the State and the tax regulations provided for apportion- anent of unitary income. These decisions have been termed "markedly relevant" to the question of the unitary character of interstate banking operations.54 * Mu7tico'rporate banking enterpthes.-A bank which is part of a n~ulticorporate banking organization which has business transactions in a State other than the headquarters State of the bank could be taxed in the non-domiciliary State in a manner which takes account of all related business activities, wherever performed. The test of a sufficient nexus to support the jurisdictional claim of the taxing State is the same whether the business is conducted by a single bank or a multi- eorpora~te banking organization. A State that has jurisdiction and ap- plies the unitary concept is likely to require consolidated or combined returns for the related corporations and to seek apportionment of an appropriate fraction of the entire business income of the multi-cor- porate enterprise. . Two types of affiliated groups may be distinguished: (i) affiliated corporations which are engaged in the same line of business in differ- ent geographical locations through separate corporations, and (ii) an affiliated group which comprises several corporations each of which is engaged in a different line of business but operates interstate either in the same jurisdiction as its affiliates or in different jurisdictions. * Several court decisions relati~ig to nonfinancial businesses indicate that the unitary rule may be successfully applied by States for at least the first type of affiliated group. It is reasonably clear that the unitary concept does not apply to the second type.55 - Under new regulatory legislation (the Federal Bank Holding Com- pany Act, as amended in 1970), the future development of bank hold- ing compal1iC~ is chiefly limited to activities which are closely related to banking. As such companies and their subsidiaries seek to achieve operating economies, it may be expected that their interstate activities often will be interdependent and thus susceptible to unitary treatment. The unitary concept has been employed in cases in which States were permitted to tax a share of income from intangibles situated outside the State. Since much of the income of a multi-corporate banking organi- zation is derived from intangibles and it is the business of such enter- prises to own and deal in intangibles, this income received by coin- ponents of the enterprise probably would be considered the income of a unitary business. ~ Household Fiuancc Corp. v. Franchise Tax Board, 230 Cal. App. 2d-, 41 Cal Rptr. 565 (1961) Equitable Sarings and Loan A8sn. v. State Tax Commission, 444 Pac. 2d 916 (Ore., 1968). The cases are discussed In appendix 12. See also the discussion there of Interstate Finance Corp v. Wisconsin Departmcnt or Taxation, 28 WIs. ~d 262, 137 NW 2d 38 (1965). ~ See appendix 12, section discussing "Affiliated corporations and the unitary rule." On multicorPorate banking enterprises generally, see appendix 13. PAGENO="0060" - 40 Statutory limitatione on taxation of interstate nonfinancial business Businesses engaged in multistate activity-especially mercantile and manufacturing companies-have encountered substantial compli- ance burdens and overlapping tax claims as a result of complexity and diversity in State laws and regulations with respect to assertion of jurisdiction to tax out-of-State businesses; inclusions, exclusions, and deductions in computing various types of taxes; and interstate divi- sion of the bas~ for tax purposes. Considerable litigation has ensued. Consequently, pressures have developed for a solution to the problem through Federal or State action. The principal efforts are described. briefly below as an indication of the kinds of problems that would need to be resolved in multistate taxation of banks and other deposi- ~ary institutions and of alternative methods for dealing with them that might have applicability to these institutions. Public Law 86-1472.-The only general Federal statute that sets. limits on State taxation of interstate commerce is Public Law 86-272, enacted in 1959. Stimulated by a Supreme Court decision upholding: the authority of a State to tax in certain circumstances where the nexus tothe State was considered by the Congress to be tenuous,56 this: law was designed to limit such tax jurisdiction of the States while the House Committee on the Judiciary and Senate Committee on Finance-. made a comprehensive study and the Congress considered their recoin-. mendations, which are noted below.57 The resulting proposed legisla- tion has not been enacted, and the limited substantive provisions of Public Law 86-272 remain in effect. Public Law 86-272 relates only to sales of tangible personal prop- erty and therefore does not apply to banking or other financial oper- ations. The act prohibits imposition by a State of a net income tax. on income that is derived within the State by any person or corpora- tion from interstate commerce if the business activities within the State during the tax year were limited to the solicitation of orders. by the seller or his representative in the State, which orders are sent outside the State for approval or rejection and, if approved, are filled by shipment or delivery from a point outside the State. A seller- is not considered to have engaged in business activities witriin a State* merely by reason of sales or solicitation of orders by independent contractors whether or not the contractors maintain offices in thern State, if their activities there on behalf of the seller consist solely of making sales or soliciting orders and they conduct these activities for more than one principal. . . - - In the financial sector, counterparts of these activities would in- clude loans made by a large bank to out-of-State customers that had been negotia.ted by a traveling loan officer, subject to home-office approval and disbursement, or made through participation with a respondent bank that maintains more than one correspondent relation- shi~p. Proposed Interstate Taxation Act.-The study conducted for the- House Committee on the Judiciary resulted in a four-volume report., prepared by a special subcommittee during 1961-65, concerned pri- ~ Northwestern States Porilana Cement Co. V. Miflfle8ota, 358 U.S. 450 79 8. Ct. 357 (1959). ~` The recommendations were Initially embodied in a 1)111 Introduced In the 89th Con-. grass as H.R. 11798. Subsequent bills (such as HR. 16491-89th, HR. 2158-90th. HR.. 3835-91st. H.R. 7906-91st, and related Senate bills) have been of narrower scope. PAGENO="0061" 41 manly with interstate division of the tax base for income, sales and use, capital stock, and gross receipts taxes.58 Bills that developed from this study were twice passed by the House of Representatives (m 1968 and 1969) and similar bills are pending in the 92d Congress, all with provisions that exclude banking corporations and other financial institutions from their coverage. Although they differ in several respects, each of the current bills (H.R. 1538, 2536, and 4770, and S. 317) would prescribe uniform jurisdictional standards limiting the authority of States (a) to impose, with respect to corporations that have a "business location" within the State, taxes on net income, capital stock, and gross receipts from sales of tangible personal property and (b) to require sellers to collect sales or use taxes on interstate sales of such property. The bills also would place a ceiling on the proportion of income or capital attributable to a taxing jurisdiction, this ceiling to be determined in each case by a two-factor apportionment formula (property and pay- rolls). In addition, the bills would limit authority of States to impose sales and use taxes affecting interstate sales of tangible personal prop- erty. As to inqome and capital stock taxes, the House bills are limited to corporations with an average annual income of $1 million or less; the Senate bill would limit application of the two-factor formula for such taxes to these corporations but its other provisions would apply to all companies otherwise within its scope. In addition, the Senate bill would limit the use of consolidated returns and combined reports, thus restricting susbtantially the authority of States to apply the unitary concept. Among related bills in earlier Congresses were some59 that proposed a three-factor apportionment formula (prop- ~rty, payroll, and sales), as in the model State act described below. With respect to banks, it might be noted that an apportionment formula limited to property and payrolls, as a practical matter, would result in virtually no allocation of tax base to States outside the domiciliary State. Since establishment of branches in other States is prohibited, banks conduct their out-of-State lending activities directly from the home office, generally with traveling loan officers domiciled in the home State negotiating the loans, or indirectly through partici- pations with other banks. Model State la~w.-A model law for the uniform division of income for tax purposes (known as UDITPA) was recommended in* 1957 by the National Conference of Commissioners on tTniform State Laws. It ha~ been adopted in 24 States and the District of Columbia. In sev- eral instances, the State enactment does not conform entirely to the proposed uniform law. 1JDITPA prescribes a three-factor formula for apportioning busi- ness income to a State, giving equal weight to property, payrolls, and sales. Although it expressly excludes financial organizations from its scope, a few of the definitions and rules might be adaptable to multi- State taxation of financial institutions. For example, the act specifies that capital gains and losses from sales of intangible personal prop- erty are allocable to a State if the taxpayer's commercial domicile is ~ Entitled "State Taxation of Interstate Commerce," the report was published as 88th Congress. 2d sess., House Report 1480, 2 volumes, and 8~th Congress, 1st sess., House Reports 565 and 952. ~ For example, S. 2804 In the 91st Congress. PAGENO="0062" in that State. The same rule applies to interest and dividends. The model State law does not deal with questions of jurisdiction. MuZtistate corn~pact.-A multistate tax compact, also initiated at the State level, has been adhered to by 21 States as regular members and 14 as associate members but thus far has not won Congressional approval.60 It incorporates s'ubstantially the provision of UDITPA with respect to interstate division of income. It prOVi(les some stand- ards for sales and use taxes, also, and is directed in part toward pro- cedural and administrative problems in the taxation of interstate com- merce. Like IJDITPA, the compact does not deal with jurisdictional issues and excludes banks and other financial organizations from its scope. Ad Hoc Coimmittee plan.-A self-appointed volunteer group of State tax administrators and business representatives, the Ad Hoc Committee on Taxation of Interstate Business, has recently proposed an alternative to UDITPA, the multistate compact, and the pending cqngressional bills. The Multistate Tax Commission (under the com- pact) has a drafting committee at work on revision of the proposal. The Committee plan called for Federal legislation to be admin- istered by the existing agency created by the multistate compact. The proposed Federal statute would provide jurisdictional standards, a uniform apportionment formula for income and capital stock taxes, standards for consolidation or combination of affiliated corporations* for income tax purposes, standards for sales and use taxes, and pro- cedures for settling disputes. Like the other proposals, the plan does not apply to banks and other financial institutions.61 Potentia7 change~i in ban1~ tames and their imq. acts If removal of Federal statutory restraints is followed by generally increased State and local taxation of banks, the rapidity and potential limits of the increases will depend on such factors as the revenue needs of States and their subdivisions; State constitutional restrictions on State legislative authority (including State constitutional require- ments of uniformity) ; the relative effectiveness of banks and other tax- payer interests in each State in persuading legislative bodies to con- sider their special characteristics and problems; and the degree to which the legislature and voters of each State assess, and are con- cerned about, the effects of additional bank taxation on the availability of bankmg services and bank financing in their communities. These factors are largely unmeasurahie. * Tax administrators of 25 States 62 reported in the Board's survey that a review of tax laws affecting banks was then under way in their States. It can be expected that additional States will undertake such reviews and may modify their tax laws in the light of the revised section 5219. 60 New York State withdrew from associate membership In April 1971. 61 For background and comments, see Leonard E. Kust, "A New venture in Federalism: Toward a Solution to Sate Taxation of Multistate Business," in The Tax Executive, vol. 23, January. 1971, pp. 424-34. and in Tax Foundation's Tax Review vol. XXXI December 1970, See also appendix 10, sectIon on "Prospect~ for Standardization." 62Alahama, Arizona, California, Connecticut Florida, ceorgia, Hawaii, Illinois. Indiana, Iowa, Kansas, Michigan, Missouri, Montana. ~e~v Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Rhode Island, Texas, Virginia, West Virginia and Puerto Rico. PAGENO="0063" 43 Intangible personal property owned by banks.-Where it is en- forced, a tax based on intangible property values tends to bear espe- cially heavily on banks and other financial institutions even though the tax law on its face applies equally to every owner of intangibles. Be- cause of regulatory requirements for balance sheet publication, the security holdings and loans of banks and other intermediary institu- tions cannot be concealed and are comparatively easy to evaluate, at least in terms of book value. This may be the case also for some intan- gibles held by nonfinancial businesses, but it is seldom true for the holdings of individuals. Unlike other businesses and individuals, de- positary institutions cannot shift their base of operations or easily re- arrange the geographic distribution of their assets, particularly on selected assessment dates; hence they do not have means for tax avoicj- ance that may be open to some other kinds of multistate business firms. An intangibles tax is especially threatening to commercial banks be- cause the overwhelming bulk of their assets is in the form of intan- gibles-more than 96 percent on June 30, 1970 (including currency and coin as intangibles). Loans and securities investments, the principal outlets for commercial bank funds, accounted for 80 percent of all bank assets qn that date. The other 16 percent were chiefly cash assets, includino~ balances in other commercial banks and the Federal Reserve Banks. &mmercial banks, moreover, are the largest class of institu- tional holders of credit market debt instruments issued by the non- financial sector. At the end of 1970, they held $431 billion or 44 percent of the total of all such debt held by financial institutions.03 Property taxes cannot be applied to Federal Government securities held by banks, nor can a yield tax that is imposed in lieu of a property tax apply to income from such securities. The provision of Federal law (31 U.S.C. 742; Public Law 86-346) requiring exemption of Fed- eral obligations makes an exception only for nondiscriminatory fran- chise taxes or other nonproperty taxes in lieu thereof.64 The several States generally exempt their own obligations and those of their sub- divisions, but they often tax those issued by other States. Consequently, in considering the role of commercial banks as owners of potentially taxable intangibleassets, it is necessary to exclude obliga- tions of the U.S. Government and a good part of those of State and local governments. But even excluding all Federal, State and local securities, at the end of 1970 bank holdings of debt instruments issued by the nonfinancial sector were 38 percent of the total held by financial ]nstltutions and 29 percent of the total held by everybody. Bank hold- ings exceeded those of any other class of financial institutions and also exceeded the aggregate debt instrument holdings of all nonfinancial businesses.65 These data omit corporate stock. Commercial banks generally are not permitted to invest in these securities. The market value of corpo- rate stock outstanding December 31, 1970, was estimated at $864 bil- lion, of which $700 billion, or 81 percent, was held by households, personal trusts, and nonprofit organizations.66 Relatively little of this ~Adjusted to exclude debt of financial Institutions. Federal Reserve Bulletin, `March 1971. pp. A7i.1S-19. ~ For text of the law ~eo footnote 35. ~ Federal Reserve BuBetin March i971 pp. A71.15-19 ~Ib1d. PAGENO="0064" 44 is assessed for property taxation. States which impose general prop- erty taxes or selective intangibles taxes often exempt corporate shares either entirely (that is, as a class) or where the underlying tangible property or the capital stock is taxed to the corporation. Despite consistently unsatisfactory experience with intangibles taxes generally and their declining use, the opening of a hitherto un- tapped and high ly concentrated source for such taxes could result in renewed interest in this type of levy. With section 5219 preventing taxation of intangibles of national banks, the taxation of similar assets of other depositary institutions and financial businesses probably has been inhibited because taxes on them would be discriminatory in favor of national banks. If the prohibition lapses under the "permanent amendment," the entire group of institutions holding large amounts of intangible assets could become an attractive subject for taxation in some States. Where intangibles are legally subjected to a general property tax, administration of the law has been tempered in practice by tacit rec- o~nition that a combination of (i) Federal income tax on interest or dividends and (ii) the stated property tax rate on the asset value may result in a. tax greater than the yield of the intangible. Another reason for forebearance has been the difficulty and cost of enforcing the tax on intangibles owned in modest amounts by numerous individual owners . Present State laws and constitutional provisions bar taxation of in- tangibles in several States with large concentrations of banking capi- tal and in numerous other States as well.67 In other States, special statutory arrangements or the assessors' "custom and usage" have al- lowed most intangibles to escape the tax or be taxed at low effective rates. Enforcement against banks and other financial institutions, with their concentrated holdings, would be comparatively simple and therefore likely to result in heavier taxation of any given portfolio of intangibles. But enforcement against financial institutions and not against individuals would violate uniformity requirements~ Share z~axes.-The "permanent amendment" to section 5219 will per- mit States to tax ~esident shareholders on the value of shares they hold in out-of-State national banks. This type of assessment is difficult to enforce, except as to the few large shareholders whose holdings might be revealed by State examination of their Federal income tax returns. In States that tax the shares of banks domiciled or chartered in the State, by applying either a general property tax or a classified or selective property tax,68 the tax is legally on the shareholders but the assessment is based on a return filed by the bank and the tax is collected from the bank. Under the present section 5219, national bank shares of nonresidents may be taxed only at the office of the bank, and shares of resident stockholders ordinarily are taxed there. In these States, shares in State banks also are usually taxed in the same way. States that con- tinue to use the share tax will have no particular incentive to change these arrangements even if they add other taxes on banks under the "permanent amendment." . ~ States that tax Intangible personal property are named at p. 12. footnot~s 5 and 6. ~ Ibid., for States that tax bank shares. PAGENO="0065" 45 However, the number of share-tax States has declined over the years, as individual States have given up the taxation of intangibles generally or have adopted other methods for taxing banks. The latest to drop the share tax were New Mexico in 1969, Iowa in 1970. and Illinois by a constitutional amendment effective in 1971 for personal property owned by individuals. As indicated earlier, under the "per- manent amendment" any revival of the intangibles tax likely would apply to bank-owned assets. To tax the enterprise on its assets and the stockholders on their respective shares would involve a form of mul- tiple taxation which, as to national banks, has been prevented by section 5219 for more than a century. Taxes measured by `net income.-Taxes on, according to, or measured by net income constitute the principal form of State taxes on com- mercial banks. In the survey of tax expenses, banks in 42 States reported paying some taxes of this kind, but in 13 States such taxes accounted for less than 10 percent of total bank tax expenses and were associated generally with the operations of subsidiaries. In 21 States the net income tax was more than half of all State tax expenses of banks.69 About half of the States have special net income tax laws applicable to banks or to financial businesses. Some of these employ so-called "built-up" rates, higher than those applied to corporations generally, or measui~e the tax base differently, to allow for. the fact that "ordi- nary" corporations may be subject to other taxes under laws that are inapplicable to national banks (and usually inapplicable to State banks also). Several States make other adjustments in bank taxes with the objective of seeking a net tax burden nominally equal to that accorded other business. The interim amendment of section 5219 reduced the reason for these 4'built-up" rates, and the "permanent amendment" appears to remove it entirely since it imposes no restrictions on applying to banks any taxes that apply to other businesses. In fact, some such adjustments 1have begun. For example, New York State in 1970 extended its sales and use tax and mortgage tax to national banks; made a compensating reduction in the rate of the State franchise tax (measured by net income) applicable to banks; and rescinded a credit for sales tax pay- ments that formerly applied against the franchise tax.7° Another characteristic of net income taxes as applied to banks and other financial businesses, less frequent in the taxation of nonfinancial `business, is that they generally are in the form of an excise tax, which permits inclusion of tax-exempt interest income in the tax base. The `distinction carried in section 5219 since 1926 will lapse at the end of 1971 if the "permanent amendment" takes effect as scheduled. How- ever, section 5219 has not been the only source of State authority to include interest income from tax-exempt Federal government obliga- `Lions in the franchise or excise tax base. In addition to a long line of court decisions establishing this distinction, it has also been recognized in the Federal 1)UbliC debt statutes, as previously mentioned.71 As to ~ The 21 States are Alabama, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Kansas, Maryland, Massachusetts, Minnesota, Missouri, New Mexico, New York, north Carolina, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Wisconsin. See appendix ~ for details. ~ The New York franchise tax rate on banks and other financial Institutions was in- creased from 6 to S percent, and the rate of alternative tax on savings banks also was Increased, Aplil 2, 1971. as part of a general increase In business taxes, ".31 U.S.C. 742 (Public Law 86-346) ; see footnote 3~i. 79-421 0 - 72 - 5 PAGENO="0066" 46 State and local obligations, there is `no restriction in the national Constitution or Fedeial statutes that prevents a State from taxing its own O1)ligatiOflS or those of other States. Unless the removal of comparative rate limitations from section 5219 opens up new questions about the scope of excise and franchise taxes, the principal impacts of the "permanent amendment" in the field of net income taxation appear to be the removal of restraints upon (i) taxation outside the State of the bank's principal office and (ii) making banks subject to the same taxes as other businesses. Another recent Federal enactment that could have an important effect on State taxation of banks' net income is the provision of the rederal Tax Reform Act of 1969 establishing new, rules for bad debt reservcs. Many States start with the provisions of Federal law ill determining the amount of income taxable under their laws. In these States, lower deductions for bad debt reserves under the FederaJ law *ould mean lower deductions and higher State tax payments than ~with the earlier law. , :` Reduction of Federal tax rates on corporate net income also has had a reflex effect in the 11 States that permit a deduction of Federal in- ~ón~e tax payments in determining the amount of income taxable under State law.72 These side-effects of Federal legislation, combined with changes in the tax base reflecting such influences as inflation and shifts in mone- tary policy, will obscure the tax-expense effects of the amendment of section 5219 in the home-office States of the banks. But any future faxation of the net income of out-of-State national banks will be attributable to the change in section 5219. AIulti$tate taxation.-In opening the door for the first time for States to tax income earned within their borders by out-of-State na- tional banks, the "permanent aniendment" also would createS in effect a comparable exposure for all commercial banks. State banks, while never declared immune by Federal law, have been largely free of such. taxes probably under the umbrella effect of the national bank im- munity, so removal of that immunity would affect them as well. States that normally seek revenues aggressively from out-of-State firms on business done within their b( de.rs might be. expected to take advantage of their new authority to tax out-of-State national banks. Several State tax administrators indicated in response to the Board's survey that, if the question arose, in all likelihood their States would cl~timn to have jurisdiction t.o tax out-of-State. banks on types of lending typically done by banks across State lines. ~ (1) A(7t~ire of interstate bcini~in.g activity.-For purposes of evalu- ating the potential for out-of-State taxation, two types of interstate banking business are here distinguished: that by large multistate banks and that by banks located near State borders. The Nation's large financial center banks and many large regional banks conduct a. substantial share of their business with out.-of-State cUstomers, including many outside the. country. These interstate activi- ties arise mainly in meeting the, banking service needs of their huge corporate customers (e.g., deposits, loans, investment mnana~eme~t, fiduciary, etc.). National corporations normally maintain clo~e rela- tionships with large banks in various parts of the country where they Alabama, Arizona, Hawaii, Kansas, Minnesota, Missouri, North Dakota Oklahoma South Dakota, Utah, and Wise :n, In table 1 of appendix 7, these States are identified as "double deduction" States. PAGENO="0067" 47 do business, and many, if not most.~ of their' major banks normally participate in ~xtending any substantial credits to such ~ corporittion. Thus, a substantial percentage of the loans made and banking services performed by large banks is for large corporations or their subsidiaries with home offices or major business situs outside the hoiiie State of the bank. Banks also engage in appreciable out-of-State business as a result of their widespread correspondent banking activity. An important element in correspondent banking involves participation in making loans to local business customers of their respondent. banks-loans that would be small for the city bank but that exceed the amount that the local banks desire or are legally able to make. Small banks also par- ticipate in loans made by their large correspondents; at times, flows upstream exceed those downstream. ` City banks render a variety of other services for their respondents, such as check clearing, investment analysis, management advice, safe- keeping of securities, and foreign transactions. These services usually are paid for by the maintenance of demand deposit balances. Corre- spondent banking relationships can be mainly regional in character or countrywide, depending on the bank. One major New York City bank, for example, has correspondent relationships with more than 3,500 banks located in all 50 States and the District of Columbia. Recent data on the overall magnitude of commercial bank lending to out-of-State customers are not available. A Federal Reserve survey conducted in October 1955 showed that 29 percent of all member bank business loans outstanding at that time were to borrowers in other States. In the case of long-term loans, the ratio was 36 percent com- pared with 25 percent for short-term loans, and, of course, the ratio was higher at large than at small banks-44 percent at banks with total deposits of $1 billion or more. . , * In view of the rise in importance of term lending since 1955, par- ticularly at large banks, and the great importance of the Federal funds market, the proportion of out-of-State lending undoubtedly is substantially higher today. Such a rise also might be expected in view of the increased competitiveness that has developed among banks in recent years and the enhanced ability to serve nonlocal cus- tomers that developed after 1960, when large banks in particular began to tap the national money market for lendable funds through issuance of negotiable certificates of deposit. At a few financial center banks, it appears that half or more of their lending is to out-of-State customers located in virtually every State. While the proportion of such lending is particularly high in the case of loans to business, these banks also make or purchase significant amounts of real estate ~nd other loans out-of-State. * A considerably different type of out-of-State banking' activity is conducted by many banks located close to State borders. The out-of- State clientele of these banks probably tend to be a cioss section of banking customers in the local area-individuals as well as businesses. There may be some reluctance among customers to conduct their bank- ing business across State lines, but this probably is not an appreciable deterrent. Accordingly, in view of the advantages frequently associ- ated with doing business with a particular bank-in terms of location, size, quality and yariety of service, etc.-the volume of out-of-State PAGENO="0068" 48 business done by border banks in many cases is likely to be relatively large. The wide geographic coverage of radio, television, and printed media advertising may attract customers from a considerable distance. On June 30, 1968, nearly 5,600 or two-fifths of all insured commercial banks had offices in counties bordering on other States and these offices accounted for 47 percent of all commercial bank deposits. (2) Potential effects of nondomicilary State taxatioi~.-Exposure of out-of-State banking activity to taxation by the nondomicilary States would have substantial impacts on banks, on interstate credit flows, and on the economy. but those effects would diffe.r some- what in the two kinds of situations described above. Large multi- State banks would need to devote considerable accounting and legal resourct~s to maintaining records and compiling data relating to their operations in each State and to mastering the intricacies of the States' differing tax laws. Differences in applicable tax rates and forms of taxes would also be evaluated. Banks would tend to weio~h the profitability of business done in each State against the tax~iiability associated with that business and the additional cost of compliance. In States where the costs associated with the tax exceed the pros- pective return to a bank on the credits extended (a not unlikely situ- ation in some States) or reduce the profitability of its operations below the level of return available elsewhere, the bank would tend to run off its credits and redirect them into more profitable areas. Even credits which met the after-tax profitability test might still be cut off because the lending bank did not wish to be bothered with compliance requirements in the taxing State. While the amounts withdrawn from a given State by any individual bank might be small, withdrawals by many large banks could add up in some cases to a substantial exodus of financing. The funds withdrawn from high-tax States probably would be reallocated mainly to loans in the home State or in other States with a more favorable tax climate, and to investments in securities. Within a high-tax State, all groups in the economic community probably would be affected by any such curtailment of credit avail- ability, but not uniformly so. Large customers with facilities in more than one State pi'obably could arrange to have their bank financing flow through an organizational unit in another State where the tax on the out-of-State lenders might be lower or otherwise more accept- able to the lender. Other alternatives for such firms would include financing in the capital or commercial paper markets-where the in- vestors would be dispersed and not readily subject to taxation by the State of the debtor. The principal impact probably would be on medium-sized businesses, particularly those that depend to a consid- erable degree on out-of -State sources to meet their credit needs. Their alternative sources of financing would be narrowed and their borrow- ing costs would rise in response to the tax cost associated with lend- ing in their State. Small businesses, which normally are dependent on local sources of financing, probably would be affected less than medium-sized firms, although they too might experience some curtail- ment in credit availability and higher borrowing costs. To some extent, the banks within the taxino~ State might be able to offset the funds withdrawn by out-of-State ~anks by competing for funds in the national money market, particularly through issuance of PAGENO="0069" 49 certificates of deposit, and using these funds to relend to local busi- nesses. However, there would be limits to this operation, particularly those imposed by statutory maximums on the size of loans made by individual banks and the need of each bank to maintain liquidity, adequate capital? and appropriate balance in the composition of its assets and liabilities. Borrowers, too, might finds ways to avoid the tax impact. But these adjustments would take time. Meanwhile, the borrowers would suffer and the economy's supply of capital would be allocated in an uneconomic way-with some areas being relatively deprived and others having a comparative excess of credits available. It should be noted, however, that not every tax on out-of-State lenders would necessarily contribute to economic inefficiency. In some circumstances, taxation of out-of-State banks might tend to equalize the competitive situation between home-State lenders and those from other States. In the absence of out-of-State taxation, lenders from a low-tax State would have a competitive advantage in extending credit in high-tax States. However, most money market banks that engage in extensive out-of-State lending are located in industrial States where taxes are likely to be relatively high. With respect to the vast array of banks located close to the borders of a neighboring State that do appreciable amounts of business with customers domiciled in that State, there may be some question whether the foreign taxing State would seek to enforce the tax against such banks, particularly the smaller ones. But even if it did, the adverse consequences might be slight unless the taxes applied to more than 100 percent of the tax base. In most cases taxes would be payable by the bank in only two States, and after allowance for deductibility on the Federal level (and possibly on both Federal and State levels) the net amount of tax might be small. While this reduces potential inter- ference with credit flows, it does not eliminate it. Some border banks might still tend to turn down out-of-State business rather than incur the cost and inconvenience of compliance with tax laws in another State, thus forcing the affected customers to turn to more distant, more costly, or otherwise less satisfactory suppliers of loans and other banking services. Considering the adverse effects that a tax on out-of-State banks might have on credit flows into the taxing State and on its economy, a question might be raised as to whether such taxes are likely to be imposed even if the authority were provided. The pressing needs of the States for revenue, however, may prevent adequate consideration of the economic consequences of each new tax proposal. Once a few States had begun to levy such taxes, this would tend to stimulate en- actment of similar taxes in other States as well. Criteria for evaluating proposals In Public Law 91-156 and its legislative history, the Congress was explicit about the purposes of its actin. As far as section 5219 is con- cerned, the objective was to achieve equal treatment of national and State-chartered banks under State tax laws. This was the overriding objective. An incidental purpose of the legislation was to "sweep away an out- moded, confusing, and inequitable formula for State taxation of na- tional banks, and replace it with a simple, fair, and easily understood PAGENO="0070" 50 rule of law." (House Report 91-290. p. 1). Among other results, a clear and simple rule would obviate frequent and costly controversy and litigation concerned with the extent of State authority to subject national banks to particular forms and rates of tax. In calling upon the Board to make a study, the Jaw directs that the report include the Board's recommendations as to what additional Federal legislation, if any, may be needed to reconcile- (1) The promotion of the economic efficiency of the banking systems of the Nation; and (2) Achievement of effectiveness and local autonomy in meet- ing the fiscal needs of the States and their political subdivisions. In making this request., the Congress indicated awareness that the stated objectives might be contradictory. The House conferees noted that some apprehension had been expressed as to whether the expanded taxing powers might be used in a way which could impair the mobility of capital or the economic. efficiency of the banking system.73 In effect, the ~Board is asked to indicate whether State autonomy needs to be limited, and if so how far and in what ways, to preserve a free flow of capital into banking and across State lines; or, conversely, whether the efficiency of the banking systems will be limited, and if so, how far and in what ways, if the States are given substantial freedom to act independently. Several collateral considerations emerge as these alternatives are ex- amined. For example. in seeking to preserve State autdnomy in accord- ance with the statute. consideration needs to be given to the degree to which diversity in the details of tax measures may create excessive compliance burdens for banks and other taxpayers. Problems in the division of income or any other tax base affect not oniy the relations of taxpayers with States; they extend also to methods of avoiding con- flicts or competition between States. Efforts to attain economic neutral- ity in State tax systems pose questions about the practical meaning of this concel)t and methods of comparing tax burdens of banks with those of other industries. In responding to the congressional call for "the Board's recom- mendations as to what additional Federal legislation, if any, may be needed," the Board is faced with a considerable variety of choices. It could be argued that a need for further legislation cannot be demon- strated until there has been actual exuerience with the new provision. The problem here, however, is that the test of actual experience may involve au extended period in which there would be a crystallization of countervailing interests-a competition among various taxpayer in- terests and between States-that could have significant impacts on the economics of banking and, through banking~ on the national economy as a whole. Unlike taxes on other types of business, those on national banks have had to conform to a Federal statute-and this statute has had an umbrella-like effect upon State taxation of State-chartered banks and to a lesser extent upon the taxatinn of other financial inter- mediary institutions. The test of time would involve slow and difficult processes of adaptation-of State tax systems and adjustment of bank- ing and other financial business practices in the light of revised taxes. This would certainly involve a considerable burde.n on the banking and finance industries in the form of operational adjustments and litiga- "House Report 91-728, p. 5. PAGENO="0071" 51 tion and it also could result in some disruption in credit markets, in- convenience to customers, and impairment of efficiency. Some of the changes might prove difficult or impossible to remedy even if the out- come of future review suggested that Federal restrictions on State action are warranted. Heretofore, the restraints in section 5219 have all applied to the States. The States had the burden of accepting limitations or persuad- ing the Congress that it should relax these restraints-and they suc- ceeded in such persuasion only in 1868, 1923, 1926, and 1969. Under the "permanent amendment" of section 5219, the burden of acceptance or persuasion shifts to the banking industry. Even in the major banking States, the amount of tax revenue de- rived from taxation of commercial banks is but a small fraction- gen- erally 1 percent or less-of all States and local tax revenues. This may be partly a reflection of section 5219. But even a comparatively large increase in the levies on banks would not add significantly to aggre- gate State and local revenues. This fact, of course, is hardly a basis for forebearance by the States. But to some degree it strengthens the case for deliberation in the removal of restraints on State authority. It is often argued that the patterns of taxation applied to banks should conform to the patterns which the several States have devel- oped for business generally, and that special provisions should be lim- ited to characteristics of banking that cannot be dealt with by apply- ing procedures and principles developed for manufacturing, mercan- tile, transportation, and other lines of economic activity. However, an important practical distinction from other business must be taken into account at this special juncture in the history of bank taxation. The fact. is that commercial banks as a group have not been exposed to all forms and measures of State taxation that applied to other businesses and still are not subject to them despite removal of some restrictions by the temporary amendment enacted in Decemn- ber 1969. The question for bank tax policy, then, and the one which the Con- gress posed for this study, is whether all remaining inhibitions on State action should be removed on January 1, 1972, or some restrictions should be maintained. An earlier section of this report describes the economic role of banks and other financial intermediaries as it relates to State taxation.7~ The examination shows that, in view of the special relationships of these institutions to the local economies of their States and regions as well as the national economy, it is important that spe- cial consideration be given to the ways in which the imposition of par- ticular taxes may affect business decisions. The impacts cannot be con- fined to lending institutions; repercussions will unavoidably spread extensively, though unevenly, throughout the economy because credit services provided by depositary institutions are basic to modern eco- nomic activity-even to small-scale local activity. ~1a~or changes in State or ]ocal taxes affecting other kinds of enter- priSes also may have important economic repercussions, locally, region- ally, and even nationally. For example, chamiges in taxes based on tangible assets or their earnmgs could infhience materially the business decisions of in anufacturers and distributors whose efficient operations require large inventories of materials and products or large stocks of 7' See pp. 25-SO, above. PAGENO="0072" 52 machinery. As far as property taxation is involved, the important dif- ference is' that the levies that are important for other businesses-those on real estate and tangible personal property-though marred by ad~ ministrat.ive disparities and extensive maladministration, (10 not ex- hibit such gross discriminatory impacts as characterize the taxation of intangible property. As to other types of taxes on the enterprises- taxes measured by net or gross income, capital structure, and various license or privilege taxes-the financial sector is distmguished by the high degree of competition betweei~ profit-seeking corporatrnns and mutual associations, a type of organizational diversity that is much less pronounced in other sectors of the economy. The import of these differences between financial institutions and other businesses is that a case for continued differential treatment `under State and local tax laws may be supported not only by the historic policy of special treatment of national banks (with its carry- over to other financial businesses), but also by a recognition that de- parture from this policy would open the way for tax measures that might significantly impair the service of depositary institutions to the economy of the Nation and of individual States or markets. Issues and alternatives Areas importantly affected by the prospective complete removal of Federal statutory restrictions are (1) taxation of bank-owned intan- gible assets through general or selective taxes on personal property, and (2) taxation by States other than the State of the bank's principal office. These issues are examined in this section. Also considered here are issues involved in the possible discriminatory taxation of banks and other financial institutions, the tax exemption of interest on Fed- eral Government obligations, the classification of coins and currency for tax purposes, and local taxation. Intangible iwoperty owned by banks.-The Senate committee report on Public Law p1-156 noted specifically that a major effect of the amendment effective January 1, 1972, is to remove the prohibition against the levy of intangible personal property taxes on national banks with their principa.l offices located in the taxing States. The law directs that the Board study shall include an examination of the im- pacts and effects of this statutory change. In considering policy with reference to taxation of intangibles, sev- eral alternative courses of action appear to be open to the Congress: (1) Permit the section 5219 "permanent amendment" to take effect without change on the question of taxation of intangible personal property. This would open the way to application of the tax against bank-owned intangible assets by the home State of a national bank and by other States where such intan~ibles have a "business situs." (2) Permit taxation of bank-owned intangibles of national banks subject to Federal statutory (and possibly administrative) constraints. These constraint.s might comprise (a) rules govern- ing the location of intangibles for tax 1urPo~es or (b) require- ments that, in exercising authority to tax such property, either the home State or the State of the debtor must allow a credit for property taxes paid in another State based on the same bank- owned assets. PAGENO="0073" 53 (3) Permit taxation of bank-owned intangibles of national banks by the State of the principal oflice of the bank, and deny authority to tax such 1)roperty owned by national banks which have their principal offices in other States. (4) Prohibit ally State taxation of bank-owned intangible property of national banks. Each of the last three alternatives is subject to various modifica- tions, as noted in the discussion that follows. A~rgunients for iettb~g the "permanent amendment" take effect with- out cha~i.qe-that is, for allowing States the option of taxing intangible personal property of banks-may be summarized as follows: (1) The Federal Government should refrain from imposing limits upon the authority of States to devise their individual tax systems as long as they conform to Federal constitutional requirements. Freedom *to be different and to experiment is a valuable attribute of our system of dual sovereignty; this freedom should be safeguarded. The perma- iient amendment of section 5219 is of special importance symbolically in unshackling the States. Restoration of any part of the earlier limi- tations would be a step backward. * (2) Under the system of ad valorem taxation of property that is the major source of local government revenue in the United States, the value of the assets owned by individual enterprises generally is used as a base for measuring their obligations to contribute to the financing of local government. These assets are predominantly real and tangible personal property but in more than half of the States in- tangibles also are covered, either comprehensively or in selected classes. A. characteristic of financial businesses, and especially of banking, is that the largest part of the assets of each firm consists of intangibles. Continued prohibition of the taxation of hank-owned intangibles would exclude these assets from the base that is used to measure the banks' obligations to pay t.axes. (3) Where an intangibles tax is used, it helps to insure that all owners of assets contribute to the cost of government. The taxable situs of intangibles may be in a different jurisdiction from the tangible property that underlies some of the intangibles. To what extent the underlying wealth is taxed is usually uncertain. Moreover, not all in- tangibles are representative of tangible personal or real property. In any event, ownership of the intangibles and ownership of the under- lying physical assets (if any) are in different taxpayers. If a State elects to subject intangibles to taxation, the tax obligation of the creditor to his State should not be set aside because the debtor may also be paying taxes on the related tangible property. The creditor's State has a right to ask that the creditor help support the government from which it receives services; and if that State uses property values, mcluding intangibles, as a measure of taxpayers' obligations, bank- owned assets may properly be part of the measure. (4) From the point of view of the taxing authority, advantages of the intangibles tax as applied to banks are that the bulk of the assets ~re easily valued; there is little room for assessors to exercise cursory or uninformed judgment; and concealment is less likely than with other owners of this class of property. (5) The property tax provides a comparatively stable base for taxation; in jurisdictions where intangible property is an element in PAGENO="0074" 54 this base, bank-owned intangibles would constitute a desirable com- ponent in view of their persistent growth. Argu'ments against allowing the States to ta~v rntangzbles of banks may likewise be summarized: (1) The territorial immobility of banks and the fact that they are closely regulated probably would lead to considerably heavier taxation of their intangibles than of similar assets of nonfinancial corporations. Intangibles in nature and in form are mobile, and opportunities to choose the business situs of such assets on the basis of tax considera- tions ordinarily are available to most firms conducting dispersed op- erations. However equal they might be under the law, in practice banks and some other classes of financial institutions would be at a relative disadvantage compared to firms in nonfinancial business, espe- cially large firms, if barriers to State taxation of intangibles were eliminated. (2) A general tax on intangibles would have a discriminatory im- pact against the process of intermediation as distinguished from direct market financing, since the layering of financial assets that is inherent in intermediation would expose savings that flow through intermediaries to double or multiple taxation, whereas those placed directly with borrowers would be taxed only once. Moreover, a tax on intangible assets would be easily enforceable against institutions but the holdings of individuals would largely escape assessment and. taxation. (3) Unless most intangibles are taxed practically everywhere and to all businesses, and with substantially equal effectiveness in all juris- dictions, the intangible personal property tax has distinctly unneutral effects upon geographic and inter-industry movements of capital. If the intangibles tax were imposed in only a few States, or if admini- stration was more vigorous and effective in some States than in others, the taxed banks' market power to recoup the tax by obtaining higher interest rates on loans and securities would be severely limited. Bank- ing capital would tend to migrate toward non-taxing States or low- rate States. (4) An intangibles tax would fall more heavily on Federal Reserve member banks than non-member banks and would constitute an addi- tional cost of membership. This is because member banks are required to hold all their legal reserves in a form that earns no interest (vault cash or balances at the Reserve banks), whereas non-member banks generally may hold their reserves in earning forms or in balances with other banks for which correspondent bank services are received. The nearly universal practice of determining assessments on a single pre- determined date each year might enable member banks to mitigate this difference by actmg to reduce reserves on the assessment date. How- ever, such adjustments would not remain possible if pressures to mini- * mize market disruptions and tax avoidance impelled States to assess on the basis of averages. (5) Exclusion of tax-exempt obligations from the tax base means that an intangibles tax would apply unevenly to individual banks, rather than in a umform relationship to the volume of their intangible assets. Moreover, a tax-induced preference for tax-exempt holdings m]ght have incidental effects, such as a tendency to divert banks from PAGENO="0075" 55 helping to finance the private sector since this would involve acquisi- tion of taxable assets. If a State taxed public debt instruments issued by other States and their subdivisions, this might narrow the market for out-of-State obligations while strengthening the market for home- State securities, since they are usually exempt. (6) The possibility that intangibles might be subjected to taxation in States other than the home State of the bank-that is, by the State of the debtor-might create apprehensions and protective reactions on the part of banks. For example, concern about compliance burdens and uncertainty about potential increases in the rate or coverage of such taxes might lead to limitation of credit operations in the foreign taxing States; any such impediments to the interstate flow of credit and commerce would hamper the efficient utilization of resources. (7) Denial of authority to tax bank intangibles would not be a major limitation on the States, or a major loss to them, for several reasons: (a) They never have had this authority with respect to national banks and therefore have applied it only in rare instances to State banks. In calling for amendment of section 5219, States did not make a special point of this prohibition, as they did with respect to sales, documentary, and some other types of taxes. (b) Many States exempt all personal property or all intangibles and the trend toward exemption is continuing. Some States exempt designated classes of intangibles and tax selected categories at special low rates in recognition of problems of double taxation, the confiscatory potentials of property tax rates when related to yields on intangibles, difficulties of enforcement and administra- tion, and the geographic shifts of investment that might be in- duced by full-rate taxation. It is doubtful that taxes on intangibles other than bank deposits and shares currently contribute as much as one-third of 1 percent of all State-local tax revenues. (c) In any event, a significant portion of bank-held intan- gibles is not available for State taxation because of the exclusion of Federal government obligations from the property tax base. On balance, it appears that the prospective removal of the prohibi- tion on taxing intangibles owned by national banks could have substan- tial effects, concentrated in that sector of the economy which is engaged in the basic economic function of financial intermediation. The inter- state flow of credit and commerce might be hindered. In practice such a tax would be discriminatory against banks and other financial institu- tions, however equitabl~ and even-handed the formulation of the State tax laws. For these reasons, the Congress may wish to limit State authority *to levy taxes on intangible personal property of financial institutions. Alternatives (2), (3) and (4) at the beginning of this section (pp. 52-3) provide for such limitations. The simplest measures in terms of form and legislative procedure, *~ould be to amend the "permanent" section 5219 before .Januarv 1, 1972, reviving without time limit the denial of authority for States to tax national banks on their intangible personal property. Over the years, this restriction has discouraged use of this tax for State as well as national banks. . PAGENO="0076" 56 Arguments advanced against taxation of intangibles of banks are in considerable part applicable to other financial institutions and, in some respects, to business generally or to all holders of intangibles. Although this study is directed to State taxing policies that affect banks, the similarities of function of banks and other financial inter- mediaries and the competition among these groups of institutions are of such importance that it would be advisable to extend any Federal statutory proscription beyond national banks. A broader group might be defined as (a) all commercial banks, State as well as national; (b) all commercial banks and all mutual savings banks; (c) all depositary institutions, whether stockholder-owned or mutual; or .(d) all financial intermediaries, including insurance companies. Or the test might be whether a corporation or association derives more than 50 percent of its ordinary gross income from banking or the extension of credit, or in the form of interest or dividends. Quantitative criteria of this type are proposed in pending bills for an Interstate Taxation Act. (See pp. 40-41.) There appear to be no constitutional inhibitions with respect to congressional authority to intervene with respect to State taxation of financial institutions. Instead of continuing to withhold authority from the States to tax intangible personal property of banks or a broader category of finan- cial institutions, the Congress may wish to consider permitting such taxation within boundaries set by Federal statutory guidelines. The principal purpose of any guidelines would be to avoid double or mul- tiple taxation of the same intangible assets. A secondary purpose would be to establish a degree of certainty and uniformity, reducing controversy and litigation. A Federal statute of this kind might (1) prescribe rules for deter- mining where intangibles may be taxed or (2) require, as a condition of a tax on such assets, that either the domiciliary State of the taxpayer or the nondomiciliary State give credit for intangible personal prop- ertv taxes paid in another State based on the same assets. In all probability, a statutory prescription of locational rules would be the sii;tpler approach from the point of view of taxpaying banks as well as tax administrators in State and local governments. Although the property tax is primarily a local government tax, a Federal statute need not resolve uncertainties about which local taxing district may impose the tax in a particular situation; intrastate locational rules might be left for determination by those States that employ taxes on intangibles. Assuming this rule-prescribing approach, different locational pre- scriptions might he needed for specified categories of assets, such as investment securities, loans secured principally by real property or tangible peronal property, unsecured business loans, and other loans. Formulation of a reasonably clear set of rules that would be generally acceptable to both taxpayers and tax administrators would require extensive negotiation concerned with choices among taxing jurisdic- tions that might have competing claims to tax the same property. A tax crediting arrangement would require similar choices~ whereby the home State of the bank would grant credits for intangibles taxes paid in other States or the other States would be required to credit such taxes paid to the home State on account of the same assets. PAGENO="0077" 57 The case for permitting States to tax bank-owned intangibles within the limits of Federiflly prescribed locational rules, interstate credit requirements, or exclusive home-State jurisdiction to tax (alternatives 2 and 3 aboye), rests primarily on the need to accommodate the con- tradictory criteria specified in Public Law 91-156; Fiscal autonomy for State and local governments on one side, and efficient operation of the Nation's banking system 011 the other. Federal statutory loca- tional rules or tax credit requirements (alternative 2) would restrain States to a moderate extent while providing taxpayer institutions with some assurance of uniform treatment in different States that apply the tax and some protection against a multiplicity of taxes on the same base. Limiting authority to tax intangibles to the home State of the creditor institution (alternative 3) would impose in principle a greater restraint upon State authority. In practice, how- ever, this might ~ to be no greater restriction, because more than one-third of the States do not now attempt to tax intangibles and those that do continue for the most pai~t to rest their jurisdictional claims on the doctrine that intangibles are subject to tax in the State of the creditor's domicile and only exceptionally in other States. * A prohibition of State taxes on bank-owned intangibles (alterna- ~tive 4 above) also may appear more drastic in principle than in prac- tice, for reasons given in several of the arguments listed earlier against State taxation of these bank-owned assets. Such considerations in- clude the fact that States gradually are moving away from ad valorem taxes on intangibles, and that a continued denial of authority to tax bank-owned assets would not inflict a significant revenue loss. Argu- ments against a Federal statutory prohibition in this field are essen- tially those given for allowing the "permanent amendment" to take effect without change. A question may be raised as to the scope of a Federal statutory pro- vision establishing restrictions or a prohibition on State taxation of intangible assets. Should it apply to all types of intangible property or be limited to selected types of assets? Should a restrictive provision prescribe standards in terms of the comparative treatment of specified intangibles of other taxpayers (as in the longstanding provisions of section 5219 referring to "other moiieyed capital")? In view of diffi- culties inherent in this type of tax and in the earlier provisions, selec- tive specifications along these lines have not been examined in this study. If the Congress considers legislation relating to taxation of intangible roperty~ definition of tile types of intangibles and types of business to be covered are matters to which Congressional committees would wish to give pamtictilar attention. Taxation by States otl~er titan the State of the principal office.- Exposure to taxation outside the home State is a matter of concern to banks chiefly in connection with taxes on the value of intangible per- sonal property and taxes on or measured by net income. Aside from net income taxes, the principal "doing business" taxes that banks may encounter in foreign States are those measured by the value of issued or authorized capital stock or the proportion of capital or property used in the State. Taxes measured by gross receipts may also be in this category, although at present they are not used extensively. Multi- state aspects of the property tax on intangib1~s are covered in the preceding discussion of that tax. PAGENO="0078" 58 From the point of view of the banks, issues in this field concern the possibility that two or more States may assert jurisdiction to tax the same net income, using differing rules for interstate division of the tax base and requiring different kinds of records and reports. If inter- state division of the taxable net income of banks and other financial institutions were to conform closely to procedures currently applied to other businesses by most States, there would be comparatively little allocation or apportionment of the tax base to States other than the home States of the banks. However, States could be expected to modify these procedures so as to apply their levies to an increasing proportion of the tax base of out-of-State banks. * The sum of taxes paid by any affected bank would not necessarily be increased by multiple State taxation, as compared with taxation confined to the headquarters State; in fact, applicable tax rates (es- pecially for financial center banks) may be higher in the home State than in other States, and a tax base that is divided among two or more States often is not taxed in one or more of these States because some States may not exercise their authority to tax the out-of-State institution. : There is also the problem of foreign operations. International finan- cial activity, which is of growing importance in large banks, presents especially complex questions associated with the division of the tax base. These merit careful congressional examination. In a few in- stances States now exclude the foreign income of State-chartered banks from the State tax base; in others, they may tax an apportioned part of the income. In the international sphere, as in interstate divi- sion of the tax base, diversity of policy and practice is still the rule, and there is limited experience from which to draw policy judgments.75 With respect to out-of-State taxation generally, the added costs of maintaining records that will meet requirements of all affected States or other jurisdictions may be substantial, and uncertainties about po- tential tax liabilities may become an important factor in decisions to make particular loans or investments. Problems that might be encountered with excise or franchise taxes based on capital structure and gross receipts taxes are analogous to those arising for net income taxation. For this reason, multistate tax issues are presented ordinarily in terms of the treatment of net in- come. However, any conclusions for policy in this area would apply to the several types of "doing business" taxes. The interim provisions of section 5219 (effective for 1970 and 1971) specifically authorize States to apply nondiscriminatory sales and use taxes, tangible personal property taxes, recordation or documentary taxes, and certain other levies to out-of-State banks. These levies are, however, excluded from the Board's study by the language of Public Law 91-156. In developing the 1969 legislation, Congressional committees recog- rnzed that problems of multistate taxation were unresolved. This, in fact, was a reason for requesting a special study. The House commit- tee report said flatly that its bill "does not attempt to solve the prob- lems created by multi-State taxation of interstate business." The com- mittee added: * The multiple State taxation problem has been before the Congress for some time. It is less severe in the banking indus- ~ See appendix 10, section on `Foreign operations." ~ PAGENO="0079" 59 try than it is in manufacturing and trade, because banks are not allowed to establish branches outside .their home office State, but with the growing mobility o~ capital and complex- ity of the economy, there is no doubt that it is becoming a problem for some banks. If a bill proposing a limiting for- mula for State taxation of banks engaged in multistate operations should be referred to this committee, it would then have before it an appropriate vehicle tor considering whether and how this problem should be resolved by Federal legislation. . . .. - ~But that was not, the question posed to your committee by. the reference to it of this bill. The question was, rather, whether national banks should continue to enjoy a special and .privileged position of immunity from this problem, or* whether they should face it on the same terms as their State- ~chartered competitors. So to state the question is to answer it. It should not be the policy of the United States Government to treat national banks as its favored wards (House Report 91-290, p. 3). . . .; . ..-. The Senate committee quoted statements of the General Counsel of the Treasury and of former Chairman Martin on the complexity of the multistate taxation issue, both recommending separate later treatment of the issue. This committee made the following comments: Under the circumstances, the committee believes it wise to specify the types of taxes which can be levied on national banks located outside the taxing State while continuing to prohibit all other forms of such taxation, at least until the Federal Reserve Board completes a study of the problem and Congress has had time to review it along with all the facts. The committee did, however, specify certain taxes [those authorized by the interim provisions] that could be levied on national banks located outside the taxing State. The named taxes are those taxes which virtually everyone concerned agreed could `be properly imposed on these banks. The im- pact on the banking systems of the imposition of these taxes will not be great. Their imposition will not confront the banking systems with a quantitative and qualitative un- known, which may or may not be the case with respect to other forms of interstate taxation (Senate Report 91-530, p. 4). , ` ` The statement of the Hous~ conferees on the final enactment pointed out that under the permanent amendment, on January 1, 1972: States will become free to impose intangible property taxes on national banks just as they have always been free to im- pose such taxes on State-chartered banks. Likewise, any State will be free to impose taxes on income derived within its borders by the operations of a bank having its principal office in a different State, regardless of whether the foreign bank is State or National. This has always been the law with re- spect to State banks. Some apprehension, however, has been expressed as to whether the expanded taxing powers might PAGENO="0080" 60 be used in a way which could impair the mobility of capital or the economic efficiency of the banking system. For this rea- son, the conference substitute includes a section requiring a study by the Federal Reserve Board Thus, if the [Board's] report should disclose a serious danger or deficiency in the amendment to section 5219 to take effect in 1972, the Congress would have a full session in which to take remedial legislative aCt.i011 (House Report 91-428, pp. 5-6). An earlier section of this report deals with probable economic im- pacts of multisbite taxation upon the banking system and the na- tional economy. Here the avenues open for congressional consideration are discussed. These choices, in the order of the degree of restraint they would impose on State authority, may be characterized as follows: (1) Permit the section 5219 "permanent amendment" to take effect without change on the issue of taxation outside the home State of affected banks. (2) Permit bank taxation by States other than the home State subject to Federal statutory (and possibly administrative) con- straints. These constraints would consist of (a) standards for claims of tax jurisdiction asserted by nondomiciliary States and (b) principles to govern interstate division of the base for each type of applicable tax. Coverage of such a statutory provision might be extended beyond national banks to include other cate- gories of banks and financial businesses, such as are indicated in the discussion of intangible personal property. Also subject to a range of choIces is the extent to which standards and rules are to be detailed in a statute or assigned to an administrative agency for development in regulations and interpretations. (3) Continue the interim provisions of section 5219 as perma- nAM provisions insofar as they permit taxation of out-of-State national banks~ but deny authority to apply to such banks any tax that is not specified in these provisions. A statute along these lines should retain the language of the present "permanent amend- ment" so as to prohibit discrimination between State and na- tional banks. The following pages review the foregoing proposals, giving ex- planatory detail and noting arguments for and against each approach. (1) "Permanent amendment" without clumge.-The prospect that national banks may he subject to various additional taxes outside their home States opens up for commercial banks broad and complex ad- ministrative areas which many banks have not. previously explored. Apart from the tax payments themselves, new burdens would be imposed. . (a) Compliance burdens: There is no clear standard or prescribed procedure for determining which States (other than the home State of the bank) have jurisdiction to tax any given enterprise or activity, nor are there uniform methods for dividing army given tax base among States with jurisdiction to tax. Banks, like other enterprises, will find it necessary to maintain extensive records as a basis (i) for applying jurisdictional tests to determine whether their activities are of a kind or magnitude that would support a claim of jurisdiction to tax in a PAGENO="0081" 61 particular State and, where they aie taxable in any State besides the home State, (ii) for dividing the tax base. In many cases, the compli- ance costs may exceed the taxes. In the mercantile and manufacturing business, taxpayer dissatisfac- tion over the competing jurisdictional claims of States, the diversity in methods the States emp]oyed for determining their respective shares of any given tax base, and compliance burdens imposed by all these requirements brought a Congressional response in 1959. This took the form of supposedly temporary legislation (Public Law 86-272) imposing limited restraints upon State action.76 In the same statute, Congress launched an intensive Congressional study that was com- pleted in 1965. As reported in an earlier section, the resulting recom- mendations have not been enacted. Problems to which they are ad- dressed remain a matter of spirited controversy between taxpayer groups and the States. Many States have joined in limited measures intended to alleviate the difficulties. None of these measures is oriented to problems of banks, and, in fact, financial businesses are expressly excluded from State enactments and proposed Federal legislation on the subject. (b) Uncertainty, controversy, and litigation: Bankers, not surpris- ingly, fear that their exposure to multi-State taxation will open an era of controversy, uncertainty, and litigation comparable to that experienced by other interstate businesses. Although exposure of banks to these problems constitutes no discrimination against them, the costs imposed on the national economy in the form of inhibitions upon the interstate mobility of banking capital and activity could prove to be disproportionate in the light of tax yields that may be anticipated. As a minimum, vigorous efforts would be in order to spur action by the States that would promote uniformity in the application of simi- ~ai taxes, avoid overlapping taxation and discrimination, and mini- mize compliance burdens. The foregoing considerations raise doubts about letting the "perma- nent amendment" go into effect without change. Counter-arguments- arguments for permitting it to stand without change-may be sum- marized as follows: (a) State autonomy: As suggested in the case of intangible prop- erty taxation, the Federal Government should refrain from imposing limits upon State authority to formulate and control their individual tax systems as long as they conform to Federal constitutional `require- ments. (b) Comprehensive approach: To the extent that there is a signifi- cant national need for uniformity and certainty in taxation, it should be handled by comprehensive legislation applicable to all types of business that cross State lines rather than by special provisions lim- ited to selected categories of business or types of activity. (This pre- supposes, however, that a comprehensive set of standards can be de- vised and enacted, ~whereas congressional experience over the past decade demonstrates that great difficulties are involved in such legis- lative efforts, even when the unique problems of financial institutions are left out of the proposals.) `~ Described at p. 40, above. 79 421 0 - 72 - 6 PAGENO="0082" 62 (c) State initiatives: States have recognized a need for greater uni- formity and certainty in the field of business taxation generally and are taking steps to reduce the problems. With removal of restrictions on their taxation of national banks, they may be counted on to work out suitable solutions to the. special interstate tax problems of the banking business. * (2) Modified "permanent amendrnent."-The second alternative would require a modification of the "permanent amendment." It pro- *ceeds from assumptions that (i) the States should be free to devise their own tax systems but at the same time (ii) interstate mobility of credit should not be jeopardized nor should the banking system of the Nation be subjected to diversities and uncertainties ofthe kinds that characterize State taxation of interstate manufacturing and mercan- tile business. States are making efforts to ameliorate interstate differ- *-ences but the solution does not appear to be near. Many States-includ- ing several major banking States-have not adopted either the Uni- form Division of Income for Tax Purposes Act or the Multistate Tax Compact. It appears prudent to suggest, therefore, that if commercial banks are to be exposed to mu]tist~ite taxation they should be given, from the very outset, a degree of protection in the form of a statutory prescription of standards for determining jurisdiction to tax and prin- ciples for dividing the tax base among States in cases where division is required. This approach would not limit States in their choice of tax measures and it would allow States to assert jurisdiction to tax out-of-State banks-but it should permit such taxation only in circumstances in which the bank has a substantial tie to the taxing State through physi- cal presence or a pattern of sustained and substantial operations. The purpose~ of such provisions would be to avoid impediments to interstate movements of credit, while safeguarding the authority of States to impose taxes in circumstances where an outside bank estab- lishes a clear relationship to the taxing State. An enterprise that es- tablishes facilities or maintains staff in a State may be using govern- mental services there to ~he same extent as a domestic competitor. In these circumstances, imposition of State and local taxes appears to be warranted by considerations of equity and economic neutrality. If in- terstate branch banking were ever permitted, it would be inequitable to withhold authority for States to tax the branches; in fact, such taxa- *tion might be required to protect domestic banks from the competition of banks headquartered in States with lighter taxes. Formulation of standards concerned with jurisdiction and the di- vision of the tax base is not, however, a simple undertaking. Moreover, such standards-particularly those for interstate division of the tax base-are not likely to be whoily self-executing, so that a Federal ad- ministrative agency might be needed to provide interpretations and regulations.7~ `~ A Federal administrative agency could interpret jurisdictional and divlslon.of.baFe provisions and advise the Congress from time to time whether further legislation is ad- visable. Similarly, where States apply a unitary rule to related corporations (see PP. 35-fl), a Federal administrative body could establish consistent guidelines an(i Interpretations based on the special characteristics of financial businesses. To avoid creating a specialized agency for this circumscribed function, the Congress might assign responsibility to the Internal Revenue Service, which has substantial relationships with all taxpayers and all States; has a store of information about problems of the types to he dealt with; has ex- perience In applying and interpreting jurisdictional and other complex rules: and would have access, within the Treasury Department, to both the supervisory authority for na- tional banks (the Comptroller of the currency) and the tax policy advisers in the Office of the Secretary. PAGENO="0083" *63 * .A Federal statutory provision on jurisdictional standards might be- gin by stating the general objective of policy-e.g., to limit taxation of any given bank and its attributes (net income, capital stock, or other measures of tax) or its activities to those States with which the out-of- State bank has a definite and readily identifiable link through the pres- ence of personnel, property, or substantial continuing operations. Like Public Law 86-272, the statute might provide that. certain common occurrences or practices do not, by themselves, provide sufficient nexus to establish jurisdiction to tax (e.g., solicitation of prospective bor- rowers by the bank or its representatives, the loans being approved or rejected outside the State; the holding of security interests in property located in a State; or enforcement of obligations in the courts of a State). Several States provide in their corporation laws that certain ac- tivities, such as making designated types of loans or acquiring inter- ~sts therein, or maintaining bank accounts, or securing or collecting debts, are not to be considered "transactions" or "doing business" in those States. A similar list of activities might be identified in a Federal law as transactions or operations that do not constitute a basis for a State to assert jurisdiction to tax an out-of-State bank. Similarly, Federal law might outline the objectives of a division-of- base provision and provide rules for its administration. Also, it could establish uniform standards for State applications of the unitary busi- ness concept and State requirements of consolidated returns from re- lated corporations. (3) Retain the interim provisions for multistate taxation.-Sev- ~ral bank representatives have urged temporary retention of the "interim provisions" of Public Law 91-156 that relate to taxation of out-of-State banks. This would permit only designated types of State taxation of nondomiciliary banks while Congress considered more ex- tensively the multistate tax problems of financial institutions. Others have proposed. that these provisions be made permanent, with the addition of identical limitations on out-of-State taxation of State-chartered as well as national banks. A nondoiniciliary State would henceforth be permitted to impose on a national or State bank having transactions in the State only those taxes (excluded from the Board's study) which are enumerated in present law as permissible for national banks during 170 and 1971. (See above, pp. 12-13.) The objective of these proposals is to permit State taxation of out- of-State banks in circumstances where it is clearly warranted, but to control its variety and intensity. Those who support this alternative contend that it will allow nondomiciliary State taxation by methods which, though limited, are clearly defined; that it will not risk the detrimental effects to interstate credit flows that would likely ensue if States were free to levy income or other "doing business" taxes on out-of-State banks without statutory restriction; and that it will not impose burdens of compliance and uncertainty that are anticipated if the "permanent amendment" takes effect without change. Some proponents of this approach suggest further restrictions on State authority, in the form of changes that would reduce banks' com- pliance burdens in the case of sales and use and tangible personal property taxes, particularly for equipment owned by the bank as lessor. Failing this, they favor limitation of these taxes also to the domiciliary State of the bank. . PAGENO="0084" Underlying this "interim amendment" approach is the view that, considering the ramifications of interstate banking practice, a claim to tax jurisdiction advanced by the State of the bank's headquarters ordinarily has greater weight than claims made by States where its debtors reside. if the activities of accumulating and marshalling lend- able resources and releasing them to borrowers may be said to have a physical situs, this is at the bank. Contrary considerations are the contentions mentioned on pages 61-2 in behalf of the "permanent amendment": that. the Federal Gov- ernment should not limit State taxing authority as long as States con- form to Federal constitutional requirements; that if there is a need for restrictive Federal rules, it is one that should be met by measures applicable to all types of business; and that States are making prog- ress in their efforts to solve multi-State tax problems. If it appeared that banks were being treated as a special class of business, free of ob- ligations for income and "doing business taxes" outside their home States, other businesses might contend for like treatment. The counter-argument here, however, as in the case of intangible personal property taxation, is that the States have not had authority heretof ore to tax out-of-State national banks and have had little occa- sion to tax State-chartered banks from other States. Consequently, a proposal for distinctive treatment does not contemplate an actual cur- tailment of a previously available basis for taxation. If major taxes may be imposed oniy by the State of a bank's home office, banks headquartered in a State may have tax obligations differ- ent from those of out-of-State banks that transact business in the State. Individual out-of-State banks, free from major tax liabilities in their customers' State, might enjoy tax advantages over local banks. But in any particular situation the tax differential, if any, could run in favor of local banks, since the comparison depends on the way each bank is taxed in its home State. Related issues.-A part from the issues of intangible property taxa- tion and multistate taxation, and in some measure involved in tliem~ are questions of di~crimination, local taxation, interest income from Federal Government obligations, and the classification of coins and paper currency for tax purposes. These topics are examined below. (1) Discriminatiün.-The possibility that banks as a class might be subjected to systematic discrimination was advanced as an issue for the Board's study. \\T1iate~~er the possibilties of distinctive treatment under the "per- manent amendment," similar opportunities existed, though in a imar- rower mange, under the old section 5219. That provision specified that the tax on national l)ank shares "shall not be at a. greater rate than is assessed upon other moneyed capital in the hands of individual citi- zens . . . . coming into competition with the business of national banks," and excluded certain personal investments from that. concept. Similarly, a condition attached to time use of taxes on. according to. or measured by net income of national banks under the old section is that. the applicable rate "shall not be higher than time rate assessed upon other financial corporations nor higher thami the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations." Time course of litigation interpreting these PAGENO="0085" (;5 provisions suggests that a statutory piesciiption of this kind may not dispel uncertainty and controversy, but it may reduce its scope. Basic protection against "excessive" discrimination or "unduly burdensome" taxation is established for commercial banks~ as for other taxpayers, in Federal constitutional provisions-clauses relating to commerce, due pmc~, and equal protection of the laws-and similar State constitutional provisions, including requirements of uniformity in taxation. The history of business taxation in the. United . States demonstrates that. within these constraints there remain broad areas for diversity in tax treatment of different groups of taxpayers. To the constitutional protection available to banks~ Congress has added in the permanent amendment of section 5219 a single additional standard, the requirement that, for taxation in either the domiciliary State or any other State, national banks shall be subject to the same treatment as banks chartered by the State or other jurisclic'tion within which the principal office is located. But this requirement. would not bar discriminatory taxation of banks generally, as a class apart from Other businesses, and does not. reinforce the constitutional safeguards available to other depositary institutions. It is difficult to frame a statutory prescription for equal treatment that adds substance to the constitutional standards of protection against discrimination. A proposal was made by some bank representa- tives that the Federal statute he amended further to prohibit taxes on national banks at higher tax rates than are imposed on State banks and general business corporations, and also to prohibit other or addi- tional taxes than those applied to general business corporations. But enactment of such a proposal would almost. certainly be interpreted as sanctioning national bank taxes at rates no lower than and nominally no different from those applied to business generally. The problem of equal treatment is one to which former Chairman Wm. McC. Martin. Ji~.. referred in a statement to the Senate Finance Committee in 1969~ concerning bills that led to Public Law 91-156: *A tax Ofl intangible personal property hits hardest those financial institutions whose assets consist almost wholly of in- tangibles; so a tax that appeared to be nondiscriminatory could operate unfairly in practice if applied to banks.78 In practice, it may be necessary in the interests of equity and eco- nomic neutrality to classify banks and other financial institutions, particularly depositary institutions, separately from other businesses in order that tax provisions may be adjusted to their special charac- teri~tmcs. The possibilities of adverse classification of out-of-State de- positary institutions for tax purposes might. be forestalled by provid- ing in Federal law that taxes on these institutions may not exceed the amounts they would pay under the same circumstances if they were domiciled or chartered in the taxing State. Such a pro~sion, coupled with the nondiscrimination provision of the "permanent amendment," should prevent differences in the treatment of out-of-State national and State-chartered banks. . . (2) Local taxation.-Fear of largely uninhibited local taxation presents a somewhat special problem. In our Federal system the taXing `~ 91it (`ongress, 1st sess., Senate Committee on Banking and Currency, Senate Heport 91-530, September 24. 1909, p. 55. PAGENO="0086" 66 powers of local governments are derived from their States and are limited by State constitutions and legislation. In no event are local governments accorded taxing authority not available constitutionally ~o the State government.79 The States differ in the extent to which they delegate taxing author- ity to local governments. The State and local division of functions and responsibilities differs among the States; and State and local roles in raising revenues to finance local government likewise differ. If Fed- eral statutory guidelines are needed, their uniform application would require that they limit State as well as local authority. Individual States may adopt restraints upon local government exercise of power to tax banks and other depositary institutions, but ordinarily this would be done in a setting that coordinates the application of t~txes on these institutions with the administration of taxes on other busi- nesses, as part of the broad structure of taxing authority and respon- sibilities within the State. In defining the role of local governments in the taxation of financial enterprises, State legislatures need to recog- nize the special economic importance of avoiding tax impediments to a smooth flow of credit between communities as well as between States. The problem of local taxation is complicated by a long record of administrative inadequacies in all parts of the country, especially in the application of property taxes. Some types of taxes are not eco- nomically or administratively feasible at the local government level- e.g., corporate net income taxes. With a State tax, the likelihood is greater than with a local tax that the objectives of geographic and inter-industry neutrality will be served and competent administration will be provided. In t.he light of these economic and administrative considerations, restraints upon the proliferation of local taxes might appear desirable. Restrictive guidelines might be applied to local taxation of banks or depositary institutions if taxation of income or capital in nondorni- ciliary States is to be permitted (as it will be if the "permanent amend- ment." of section 5219 becomes effective without change). With respect to taxation in the home State, it may be feasible to formulate standards which promote uniformity and minimize com- pliance burdens without significantly impinging on "local autonomy." This would not protect financial institutions or other taxpayers against excessive local taxation: but it might ameliorate, their burdens without significantly altering Federal-State relationships. * (3) hiterest on Federal obiigations.-Tnterest on Federal securities is exempt from a direct tax on net income but may be included in the measure of an excise or franchise t.ax according to or measured by net income. This distinction was established for corporation taxation gen- erally in Supreme Court decisions over an extended period, and for national banks specifically by the 1926 amendment of section 5219. Under present law, the i)iovision in section 5219 will lapse at the end of 1971. However, the Federal public debt statute has specified since 1959 that exemption of Federal Government obligations- 7~ Of course, individual States often authorize their subdivisIons to levy local taxes which are denied to the State government by the State constitution or statutes-par- ticularly In States which adopt programs for the separation of Sate and local revenue sources. PAGENO="0087" 67 from taxation by or under State or local authority.. . extends to every form of taxation that would require that either the obligations or the interest thereon, or both~ be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes.8° The distinction is not based on economic differences between direct and excise or franchise taxes on income, since they are identical in all other essential characteristics except for the circumstances in which they may be imposed by States. Most States that tax banks with respect to their net income use ex- cise taxes, and the number has gradually increased. But constitutional doctrines forbid a State to levy a "doing business" tax on an out-of- State bank that conducts only interstate business within the taxing State. If States other than the home State are to be permitted to par- ticipate in taxing banks' net income, as they.may do under the "perma- nent amendment" of section 5219, a related statutory amendment may be desirable, to authorize States to include, in the measure of otherwise valid direct net income taxes, the income realized by banks and other financial institutions from Federal securities. Elimination of the distinction between direct and indirect taxes on net income would give the States considerably greater freedom in formulating their tax systems. The point is `particularly important in the taxation of banks and other depositary institutions because of their large holdings of Government obligations. However, the princi- ple is equally applicable to other taxpayers, and the change could be made general in application by amendment of the Federal public debt statute (31 U.S.C. 742) and any related provisions. This proposal does not relate to property taxation based on the value of the securities; it assumes that the present exemption from property taxation would continue. (4) Classification of coins and currency.-Under the "permanent amendment" of section 5219, paper currency and coins held by na- tional banks will be subject to State ad valorem taxation either as tangible or as intangible personal property. The House conferees on Public Law 91-156 declared, with refer- ence to the prohibition on intangible personal property taxes in the interim amendment of section 5219: "For purposes of this provision, of course. the term `intangible personal property' includes cash and currency." (House Report 91-728, p. 4.) However, this is not ex- plicitly provided in the law. The interim amendment exempts "cash and currency" by express language excluding these assets from tangi- bk personal property, which became taxable in 1970. This statutory reference might be interpreted as a recognition that, in the absence of the provision, "cash and currency" are appropriately classified as tangibles for State tax purposes. Without further amendment, the restrictive provisions affecting both tangibles and intangibles will expire at the end of 1971. Paper currency circulating in the United States is a nonrepresenta- tive intangible (since there is no underlying tangible, such as gold 31 U.S.C. 742, quoted and cited more fully above, in footnote 35. Emphasis added. PAGENO="0088" 68 or silver) and coins are tangibles. but some States classify all such assets as tangibles and others classify them all as intangibles under laws imposing taxes on personal propei'ty. In view of prevailing State practices of exemption or nonassessment. of currency and coins of taxpayers generally, the Congress could clarify the situation by estab- lishing a statutory rule that both coins and currency are to be con- sidered intangible personal property for tax purposes if States are permitted to tax intangibles of depositary institutions. This could be done either by explicit amendment of section 5219 with respect to na- tional banks or, more generally, through amendment of the present law which permits taxation of currency as money on hand or deposit (31 U.S.C. 425). Most U.S. paper currency is backed by obligations of the National Government, and the remainder is an unsecured liability of the Treas- ury. Possibly all paper currency should be treated like Federal Gov- ernment obligations for purposes of property taxation-that is, de- clared tax-exempt by Federal statute. A related issue is raised in hifis introduced in the 92d Congress that would amend section 5219 to exclude from personal property taxes on national banks "any . . . item referred to as `Cash and Due from Banks.' "81 If the present, temporary exemption of bank-owned intangibles were made permanent, legislation enacting that provision could include a requirement that coins and currency be treated as intangibles for pur- poses of State taxation. If taxation of bank-owned intangibles is to be permitted. however, as in the "permanent amendment" the Congress might consider a narrower question-the possible extemption from such taxes of all"cash" and "due from banks" of depositary institu- tions or all reserves of these institutions which are required to be held as demand deposits or as coins and paper currency. Such an exemption would tacitly acknowledge that these reserves are established in re- sponse. to statutory and regulatory requirements and earn no interest for the institutions that own them. Although this kind of exemption would be open to the. objection that ad valorem taxation applies in 1)1111 ciple to the value of property, whether or not. it is currently pioduc1ii~ mcome, the fact is that in the case of other intangible, property it is the usual practice of assessors to determine valuations primarily from cur- rent yields-and some State laws validate these practices. The effect of such a Federal statute would be to prevent any possible discrimi- nation in assessment of these assets to depositary institutions. ~ H.R. 4365, February 17, 1971, Mr. Harsha, and H.R. 6142, March 16, 1971, Mr. Hays, both of Ohio. PAGENO="0089" Acknowledgments In preparing this study of State and local taxation of banks, the authors received generous assistance and support from many persons and organizations. To all of them we express sincere thanks. The greatest burden, of course, was carried by staff of the Board of Governors, particularly the Division of Research and Statistics, which had responsibility for the study. J. Charles Partee, Adviser to the Board ai~cl Director of the Division of Research and Statistics sup- plied us with essential professional and technical assistance through- out the project. Members of this Division who handled special assign- mcuts are Miss Sally NI. Hey, Economist in the Government Finance Section; Mrs. Caroline H. Cagle, Economist in the Banking Section; and Paul Schneiderman, Economist in the Capital Markets Section. Development of the bank sample and data handling procedures for the survey of bank tax expenses was carried out by Robert Steinberg. Chief of the Statistical Methodology and Procedures Section, and Irving Gedanken, Statistician, and Erling T. Thoresen, Economist, * Division of Research and Statistics; and data processing in that survey, by Robert F. Taylor, Applications Analyst in the Division of Data Processing. Tabulations for the survey of tax administrators were planned and directed by Peter J. Feddor, Applications Analyst, Division of Data Processing. Mrs. Arlene Lustig, Economist in the Banking Section, Division of Research and Statistics, and Mrs. Jean Hentzel, Associate Economist in the Chicago Federal Reserve Bank, prepared special tabulations. David B. Hexter, Assistant to the Board, served as senior legal adviser, and Grasty Crews II, Adviser in the Legal Division of the Board, also provided legal counsel and policy guidance. Lynn A. Stiles, Vice President and Economist, Federal Reserve Bank of Chicago, served as project consultant and a member of the Advisory Panel for the study. Others who served as members of the Advisory Panel are Harvey E. Brazer, Professor of Economics, Uni- versity of Michigan; Ernest J. Brown, Tax Division, Department of Justice (formerly Professor of Law, Harvard Law School); Murray Drabkin, Attorney (formerly Chief Counsel of the. Special Sub- committee on State Taxation of Interstate Commerce, House Corn- mit tee on the Judiciary) ; Jdhn~ IQ I~ue, Professor of Economics, University of Illinois; L. Laszlo Ecker-Racz, Consultant, former Assistant Director of the Advisory Commission on Intergovernmental Relations; Jerome R. Hellerstein, Professor of L ~v, New York Uni- versity; Allen D. Manvel, Consultant, former A~sistant Director of the Advisory Commission on Intergovernmental Relations; and Carl S. Shoup, Professor of Economics, Columbia University. Federal agency representatives who provided liaison with their offices and also served as members of the Advisory Panel are John Copeland, Chief, (69) PAGENO="0090" 70 Excise Taxation Staff, Office of Tax Analysis, Office of the Secretary of the Treasury; Richard Gabler, Senior Analyst, Advisory Commis- sion on Intergovernmental Relations; Maurizio de Martino, Attorney, Law Department, Office of the Comptroller of the Currency, Treasury Department; and David A. Walker, Financial Economist, Federal Deposit Insurance Corporation. In the course of the study, assistance and information were given by hundreds of bank officers and tax counsel and by national and State banking organization representatives and other trade groups. Tax ad- ministrators and State bank supervisors in every State also were called upon for extensive help. Special acknowledgment must be ac- corded to Charles F. Conlon, Executive Director, Federation of Tax Administrators; Ronald B. Welch, Assistant Executive Secretary, Cal- ifornia State Board of Equalization; Oliver Oldman, Professor of * Law and Director, International Tax Program, Harvard Law School; Harry P. Guenther, Executive Vice President-Economist, and Alex- ander W. Neale, Jr., Legislative Representative, of the Conference of State Bank Supervisors; Matthew Hale, General Counsel, American Bankers Association; Roland IV. Blaha, Illinois State Commissioner of Banks and Trust Companies; William G. Jlerzel, Kentucky State Department of Revenue; Rufus T. Logan, Minnesota State Commis- sioner of Revenue; Lloyd Slater, Director of Research (now retired), New York State Department of Taxation and Finance. `As a member of the Board of Governors, an expert in public finance, * and a former State tax administrator, Governor George W. Mitchell devoted particular attention to this `study. I-I is advice on the project generally and his careful comments on draft materials have proved invaluable. Finally, we are grateful to Lester S. Jayson, Director, Congres- sional Research Service, Library of Congress, who made arrangements for the detail of I. M. Labovitz from the C.R.S. Senior Specialist staff `to the Board of Governors for the period of this study. I. M. LABOVITZ, `Director, Bank Tace Study.' `JA~tEs B. ECKERT, `A88i8tant 4dviser, Division of Research and Statistics. PAGENO="0091" * PART III APPENDIX 1 Federal Statutes Relevant to Study of State and Local Taxation of Banks A. SECTION 5219, REVISED STATUTES (12 U.S. CODE 548), BEFORE AMENDMENT BY PUBLIC LAW 91-156, DECEMBER 24, 1969 U.S. CODE, TITLE 12 § 548. State taxation. The legislature of each State may determine and direct, subject to the provi- sions of this section, the manner and place of taxing all the shares of national bank- ing assoóiations located within its limits. The several States may (1) tax said shares, or (2) include dividends derived therefrom in the taxable income of an owner or holder thereof, or (3) tax such associations on their net income, or (4) according to or measured by their net income, provided the following conditions are complied with: 1. (a) The imposition by any State of any one of the above four forms of taxation shall be in lieu of the others, except as hereinafter provided in sub- division (c) of this clause. (b) In the case of a tax on said shares the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks: Provided, That bonds, notes, or other evidences of indebted- ness in the hands of individual citizens not employed or engaged in the banking or investment business and representing merely personal invest- ments not made in competition with such business, shall not be deemed moneyed capital within the meaning of this section. (c) In case of a tax on or according to or measured by the net income of an association, the taxing State may, except in case of a tax on net income, include the entire net income received from all sources, but the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercan- tile, manufacturing, and business corporations doing business within its limits: Provided, however, That a State which imposes a tax on or according to or measured by the net income of, or a franchise or excise tax on, financial, mercantile, manufacturing, and business corporations organized under its own laws or laws of other States and also imposes a tax upon the income of individuals, may include in such individual income dividends from national banking associations located within the State on condition that it also includes dividends from domestic corporations and may likewise include dividends from national banking associations located without the State on condition that it also includes dividends from foreign corporations, but at no higher rate than is imposed on dividends from such other corporations. (d) In case the dividends derived from the said shares are taxed, the tax shall not be at a greater rate than is assessed upon the net income from other moneyed capital. 2. The shares of any national banking association owned by nonresidents of any State shall be taxed by the taxing district or by the State where the association is located and not elsewhere; and such association shall make return of such shares and pay the tax thereon as agent of such nonresident shareholders. (71) PAGENO="0092" 72' 3. Nothing herein shall be construed to exempt the real property of associa- tions from taxation in any State or in any subdivision thereof, to the same extent, according to its value, as other real property is taxed. 4. The provisions of section 5219 of the Revised Statutes of the United States as in force prior to March 25, 1926, shall not prevent the legalizing, ratifyng, or confirming by the States of any tax heretofore paid, levied, or assessed upon the shares of national banks, or the collecting thereof, to the extent that such tax would he valid under said section. (R. S. § 5219; Mar. 4, 1923, ch. 267, 42 Stat. 1499; Mar. 25, 1926, oh. 88, 44 Stat. 223.) DERIVATION; NATIONAL BANK Aer Section derIved from act June 3, 1864, ch. 106, 41, 13 Stat. 111, whIch was the National Bank Act, and act Feb. 10, 1868, ch. 7, 15 Stat. 34. See section 38 of this title. REFERENCES IN TEXT Section 5219 of the Revised Statutes, referred to In clause 4, is Incorporated in this section. AMENDMENTS 1926-Act Mar. 25, 1926, among other changes Inserted "on their net Income" In ci. (3) of opening par., and added ci. (4) thereto, and inserted proviso in subsec. 1(c). B. PUBLIC LAW 91-156, APPROVED DECEMBER 24, 1969 (91sT CONGRESS, H. R. 7491; 83 STAT. 434-5), AN ACT TO CLARIFY THE LIABILITY OF NATIONAL BANKS FOR CERTAIN TAXES Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, § 1. Temporary amendment of section 5219, Revised Statutes (a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended by adding at the end thereof the following: "5. (a) In addition to the other methods of taxation authorized by the foregoing provisions of this section and subject to the limitations and restrictions specifically set forth in such provisions, a State or political subdivision thereof may impose any tax which is imposed generally on a nondiscriminatory basis throughout the jurisdiction of such State or political subdivision (other than a tax on intan- gible personal property) on a national bank having its principal office within such State in the same manner and to the same extent as such tax is imposed on a bank organized and existing under the laws of such State. "(b) Except as otherwise herein provided, the legislature of each State may impose, and may authorize any political subdivision thereof to impose, the fol- lowing taxes on *a national bank not having its principal office located within the jurisdiction of such State, if such taxes are imposed generally throughout such jurisdiction on a nondiscriminatory basis: "(1) Sales taxes and use taxes complementary thereto upon purchases, sales, and use within such jurisdiction. "(2) Taxes on real property or on the occupancy of real property located within such jurisdiction. "(3) Taxes (including documentary stamp taxes) on the execution, delivery, or recordation of documents within such jurisdiction. "(4) Taxes on tangible personal property (not including cash or currency) located within such jurisdiction. "(5) License, registration, transfer, excise, or other fees or taxes imposed on the ownership, use, or transfer of tangible personal property located within such jurisdiction. "(c) No sales tax or use tax complementary thereto shall be imposed pursuant to this paragraph 5 upon purchases, sales, and use within the taxing jurisdiction of tangible personal property which is the subject matter of a written contract of purchase entered into by a national bank prior to September 1, 1969. "(d) As used in this paragraph 5, the term `State' means any of the several States of the United States the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, and Guam." (b) The amendment made by subsection (a) of this section shall be effective from the date of enactment of this Act until the effective date of the amendment made by section 2(a) of this Act. § 2. Permanent amendment of section 5219, Revised Statutes (a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read: PAGENO="0093" 73 "SEC. 5219. For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." (b) The amendment made by subsection (a) becomes effective on January 1, 1972. § 3. Saving provision (a) Except as provided in subsection (b) of this section, prior to January 1, 1972, no tax may be imposed on any class of banks by or under authority of any State legislation in effect prior to the enactment of this Act unless (1) the tax was imposed on that class of banks prior to the enactment of this Act, or (2) the imposition of the tax is authorized by affirmative action of the State legislature after the enactment of this Act. (b) The prohibition of subsection (a) of this section does not apply to (1) any sales tax or use tax complementary thereto, (2) any tax (including a documentary stamp tax) on the execution, delivery, or recordation of documents, or (3) any tax on tangible personal property (not including cash or currency), or for any license, registration, transfer, excise or other fee or tax imposed on the ownership, use or transfer of tangible personal property, imposed by a State which does not impose a tax, or an increased rate tax, in lieu thereof. § 4. Study by Board of Governors of the Federal Reserve System (a) The Board of Governors of the Federal Reserve System (hereinafter re- ferred to as the "Board") shall make a study to determine the probable impact on the banking systems and other economic effects of the changes in existing law to be made by section 2 of this Act governing income taxes, intangible property taxes, so-called doing business taxes, and any other similar taxes which are or may be imposed on banks. In conducting the study the Board shall consult with the Secretary of I Treasury and appropriate State banking and taxing authorities. (b) The Board shall make a report of the results of its study to the Congress not later than December 31, 1970. The report shall include the Board's recommenda- tions as to what additional Federal legislation, if any, may be needed to reconcile the promotion of the economic efficiency of the banking systems of the Nation with the achievement of effectiveness and local autonomy in meeting the fisca needs of the States and their political subdivisions. Approved December 24, 1969. LEGISLATiVE HISTORY House Reports: No. 91-290 (Committee on Banking and Currency) and No. 91-723 (Committee of Conference). Senate Report No. 91-530 (Committee on Banking and Currency). Congressional Record, vol. 115 (1969): July 17: Considered and passed House. Nov. 21: Considered and passed Senate, amended. Dec. 10: House agreed to conference report. Dec. 12: Senate agreed to conference report. * 0. EARLIER FORMS OF SECTION 5219, REVISED STATUTES 1864 Provided, That nothing in this act shall be construed to prevent all the shares in any of the said associations, held by any person or body corporate, from being indluded in the valuation of the personal property of such person or corporation in the assessment of taxes imposed by or under state authority at the place where such bank is located, and not elsewhere, but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such state: Provided, further, That the tax so imposed under the laws of any state upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any of the banks organized under authority of the state where such association is located: Provided, also, That nothing in this act shall exempt the real estate of associations from either state, county, or municipal taxes to the same extent, according to its value, as other real estate is taxed. (Act June 3, 1864. C. 106, Sec. 41; 13 Stat. L. 112.) PAGENO="0094" 74 1868 Be it enacted by the Senate and house of Representatives of the United States of America in congress assembled, That the words "place where the bank is located, and not elsewhere," in section forty-one of the "act to provide a national cur- rency," approved June third, eighteen hundred and sixty-four, shall be construed and held to mean the State within which the hank is located; and the legislature of each State may determine and direct the manner and place of taxing all the shares of national banks located within said State, subject to the restriction that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State: And provided always, That the shares of any national bank owned by non-residents of any State shall be taxed in the city or town where said bank is located, and not elsewhere. (Act Feb 10, 1868. C. 7; 15 Stat. L. 34.) 1923 SEC. 5219. The legislature of each State may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits. The several States n'iay tax said shares, or include dividends derived therefrom in the taxable income of an owner or holder thereof, or tax the income of such associations, provided the following conditions are complied with: 1. (a) The imposition by said State of any one of the above three forms of taxation shall be in lieu of the others. (b) In the case of a tax on said shares the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks: Provided, That bonds, notes, or other evidences of indebtedness in the 1~ands of individual citizens not employed or engaged in the banking or investment business and representing merely personal investments not made in competition with such business, shall not be deemed moneyed capital within the meanim: of this section. (c) In case of a tax on the net income of an association, the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon the net income of mercantile, manufacturing, and business corporations doing business within its limits. (d) In case the dividends derived from the said shares are taxed, the tax shall not be at a greater rate than is assessed upon the net income from other moneyed eapital. 2. The shares or net income as above provided of any national banking associa- tion owned by nonresidents of any State, or the dividends on such shares owned by such nonresidents, shall be taxed in the taxing district where the association is `ocated and not elsewhere; and such associations shall make return of such income, and pay the tax thereon as agent of such nonresident shareholders. 3. Nothing herein, shall be construed to exempt the real property of associa- tions from taxation in any State or in any subdivision thereof, to the same extent, according to its value, as other real property is taxed. 4. The provisions of section 5219 of the Revised Statutes of the United States as heretofore in force shall not prevent the legalizing, ratifying, or confirming by the States of any tax heretofore paid, levied, or assessed upon the shares of na- tional banks, or the collecting thereof, to the extent that such tax would be valid under said section. (Act Mar. 4, 1923. C. 267; 42 Stat. L. 1499.) 1926 (For the text of section 5219 as amended in 1926, see 12 U.S. Code 548, as repro. duced above, p. 1, under the heading, "A. Section 5219, Revised Statutes (12 U.S. Code 548), before amendment by Public Law 9 1-156, December 24, 1969.") D. FEDERAL STATUTORY PROVISIONS RELATING TO STATE AND LOCAL TAXATION OF FINANCIAL INSTITUTIONS OTHER THAN NATIONAL BANKS EXCERPTS FROM U.S. CODE, TITLE 12 (1) Federal reserve banks, 12 U.S.C. 531: PAGENO="0095" 75 Exemption from taxation. Federal reserve banks, including the capital stock and surplus therein and the income derived therefrom, shall be exempt from Federal, State, and local taxation, ~except taxes upon real estate. (J)ec. 23, 1913, cli. 6, § 7, 38 Stat. 258; Mar. 3, 1919, ~ch. 101, § 1, 40 Stat. 1314.) CODIFICATION Section is comprised of third pai. of SectiOn 7 of act. 1)ec. 23, 11113. First and second pars. of section 7 are classified to sections 289 and 290 of tills title, respectively. (2) Banking corporations authorized to (10 foreign banking business, 12 U.s.c. 627 (Edge Act corporations): State taxation. Any corporation organized under the provisions of sections 611-631 of this title shall be subject to tax by the State within which its home Office is located in the same manner and to the same extent as other corporations organized under the laws of that State which are transacting a similar character of business. The shares ~of stock in such corporation shall also be subject to tax as the personal property *of the owners or holders thereof in the same manner and to the same extent as the shares of stock in simnilar State corporations. (Dec. 23, 1913, ch. 6, § 25 (a), as added Dec. 24, 1919, ch. 18, 41 Stat. 378.) CODIFICATION Section is a part of section 25 (a), which was added to act Dec. 23, 1913, ch. 6 by act Dec. 24, 1919. (3) Federal land banks and associations, 12 U.S.a. 931: Mortgages and bonds as instrumentalities of Government: Every Federal land bank and every Federal land bank association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank or association under the provisions of sections 761 and 781 of this title. First mortgages executed to Federal land banks, or to joint stock land banks, and farm loan bonds issued under the provisions of this chapter, shall be de~mmed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation. (July 17, 1916, oh. 245, title I, § 26, 39 Stat. 380; Aug. 18, 1959, Pub. L. 86-168, title I, § 104(h), 73 Stat. 387.) (4) Joint-stock land banks, 12 u.s.c. 932: Limitations on State taxation of shareholders: Nothing in sections 93 1-933 of this title shall prevent the shares in any joint- ~stock land bank from being included in the valuation of the personal property of the owner or holder of such shares, in assessing taxes imposed by authority of the State within which the bank is located; but such assessment and taxation shall be in manner and subject to tile conditions and limitations contained in section 548 of *this title with reference to the shares of national banking associations. (July 17, 1916, ch. 245, title I, § 26, 39 Stat. 380.) (5) Federal and joint-stock land banks, 12 u.s.c. 933: Real property *not exempt: Nothing in sections 93 1-933 of this title shall be construed to exempt the real property of Federal and joint-stock land banks and Federal land bank associa- tions from either State, county, or municipal taxes, to the same extent, according It' ~s value, as other real property is taxed. (July 17, 1916, ch. 245, title I, § 26, 39 Stat. 380; Aug. 18, 1959, Pub. L. 86-168, title I, § 104(h), 73 Stat. 387.) (6) Federal intermediate credit banks, 12 u.s.c. 1111: Tax exemption: The privileges of tax exemption accorded under section 931 of this title shall apply also to each Federal intermediate credit bank, including its capital, reserve, or surplus, and the income derived therefrom, am1d the debentures issued under this subchapter shall be deemed and held to be instrumentalities of the Govern- ment and shall enjoy the same tax exemptions as are accorded farm-loan bonds PAGENO="0096" 76 in said section. (July 17, 1916, ch. 245, title II, § 210, as added Mar. 4, 1923, ch. 252, title I, § 2, 42 Stat. 1459.) - (7) Central Bank for Cooperatives, Production Credit Associations, and Banks for Cooperatives, 12 U.S.C. 1 138c: Tax exemption: The Central Bank for Cooperatives, and Production Credit Association, and Banks for Cooperatives, organized under this chapter, and their obligations, shall be deemed to be instrumentalities of the United States, and as such, any and all notes, debentures, bonds, and other such obligations issued by such banks, or associations shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority. Such banks, and associations, their property, their franchises, capital, reserves, surplus, and other funds, and their income shall be exempt from all taxation now or here- after imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such banks, association, and, corporations shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed. The exemption provided herein shall not apply with respect to any produc- tion credit association or its property or income after the class A stock held in it by the Governor has been retired, or with respect to any bank for cooperatives or its property or income after the stock held in it by the United States has been retired. (June 16, 1933, ch. 98, title VI, § 63, 48 Stat. 267; Aug. 11, 1955, ch. 785, title II, § 205, 69 Stat. 663; July 26, 1956, ch. 741, title I, § 105 (o), 70 Stat. 666.) (8) Federal home loan banks, 12 U.S.C. 1433: Exemption from taxation, except as to real property: Any and all notes, debentures, bonds, and other such obligations issued by any bank, and consolidated Federal Home Loan Bank bonds and debentures, shall be exempt both as to principal and interest from all taxation (except sur- taxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority. The bank, including its fran- chise, its capital, reserves, and surplus, its advances, and its income, shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority; except that in 1 any real property of the bank shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed. The notes, debentures, and bonds issued by any bank, with unearned coupons attached, shall be accepted at par by such bank in payment of or as a credit against the obligation of any home-owner debtor of such bank. (July 22, 1932, ch. 522, § 13, 47 Stat. 735; May 28, 1935, ch. 150, § 8, 49 Stat. 295.) (9) Federal savings and loan associations, 12 U.S.C. 1464 (h): No State, county, municipal, or local taxing authority shall impose any tax on such associations or their franchise, capital, reserves, surplus, loans, or income greater than that imposed by such authority on other similar local mutual or cooperative thrift and home financing institutions. (June 13, 1933, ch. 64, sec. 5, 48 Stat. 132; as amended Oct. 16, 1962 by P.L. 87-834, sec. 6(e) (1), 76 Stat. 984.) (10) Federal National Mortgage Association, 12 U.S.C. 1723a(c): Exemption from taxation: (1) The Association, including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income shall be exempt from all taxation now or hereafter imposed by the United States, by any territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority, except that any real property of the Association shall be subject to State, territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed. `So in original. . PAGENO="0097" 77 (2) The corporation, including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income, shall be exempt from all taxation now or hereafter imposed by any State, territory, possession, Commonwealth, or depend- ency of the United States, or by the District of Columbia, or by any county, municipality, or local taxing authority, except that any real property of the corpor- ation shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed. (June 27, 1934, ch. 847, title III, sec. 309(c) as added Aug. 2, 1954, ch. 649, title II, sec. 201, 68 Stat. 620, and amended June 30, 1961, P. L. 87-70, title VI, sec. 603(e), 75 Stat. 177, and Aug. 1, 1968, P.L. 90-448, title VIII, sec. 802(aa) (1) - (4).) * (11) Federal credit unions, 12 U.s.c. 1768: The Federal credit unions organized hereunder, their property,their franchises, capital, reserves, surpluses, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed. Nothing herein contained shall prevent holdings in any Federal credit union organized hereunder from being included in the valuation of the personal property of the owners or holders thereof in assessing taxes imposed by authority of the State or political subdivision thereof in which the Federal credit union is located; but the duty or burden of collecting or enforcing the payment of such a tax shall not be imposed upon any such Federal credit union and the tax shall not exceed the rate of taxes imposed upon holdings in domestic credit unions. (June 26, 1934, ch. 750, § 23, formerly § 18, 48 Stat. 1222; Dec. 6, 1937, ch. 3, § 4, 51 Stat. 4, renumbered and amended Sept. 22, 1959, Pub. L. 86-354, § 1, 73 Stat. 637). (12) Federal Deposit Insurance Corporation, 12 U.S.C. 1825: Tax exemption of notes, debentures, bonds, and other obligations: All notes, debentures, bonds, or other such obligations issued by the Corpora- tion shall be exempt, both as to principal and interest, from all taxation (except estate and inheritance taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority: Provided, That interest upon or any income from any such obligations and gain from the sale or other disposition of such obligations shall not have any exemption, as such, and loss from the sale or other disposition of such obligations shall not have any special treatment, as such, under the Internal Revenue Code, or laws amendatory or supplementary thereto. The Corporation, including its franchise, its capital, reserves, and surplus, and its income, shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory; dependency, or possession thereof, or by any State, county, municipality, or local taxing authority, except that any real property of the Corporation shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed. (Sept. 21, 1950, ch. 967, §2 [15], 64 Stat. 890.) E. EXEMPTION OF FEDERAL GOVERNMENT OBLIGATIONS FROM STATE AND LOCAL TAXATION, 31 U.S. CODE 742 Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes. (R.S. § 3701; Sept. 22, 1959, Pub. L. 86-346, title I, § 105 (a), 73 Stat. 622.) * DERIVATION Acts Feb. 25, 1862, cli. 33, 2, 12 Stat. 346; Mar. 3, 1863, ch. 73. § 1, 12 Stat. 710; Mar. 3, 1864, cli. 17, § 1, 13 Stat. 13; June 30, 1864, cli. 172, 1, 13 Stat. 218; Jan. ~, 1865, ch. 22, § 1, 13 Stat. 425; Mar. 3, 1865, ch. 77, ~ 2, 13 Stat. 469; July 14, 1870, ch. 256, § 1, 10 Stat. 272. * AMENDMENTS 1959-Pub. L. 86-346 added second sentence. 79-421 0 - 72 - 7 PAGENO="0098" 78 F. STATE AND LOCAL TAXATION OF CURRENCY, 31 ILS. CODE 425 AND 426 § 425. State taxation. Circulating notes of national banking associations and United States legal tender notes and other notes and certificates of the United States payable on demand and circulating or intended to circulate as ôurrency and gold, silver, or other coin shall be subject to taxation as money on hand or on deposit under the laws of any State or Territory: Provided, That any such taxation shall be exercised in the same manner and at the same rate that any such State or Territory shall tax money or currency circulating as money within its jurisdictiOn. (Aug. 13, 1894, ch. 281, § 1, 28 Stat. 278.) § 426. Same: national banks not affected. The provisions of section 425 of this title shall not be deemed or held to change existing laws in respect of the taxation of national banking associations. (Aug. 13~ 1894, ch. 281, § 2, 28 Stat. 278.) G. STATE NET INCOME TAXES ON INCOME DERIVED FROM INTERSTATE COMMERCE, PUBLIC LAW 86-272, 15 U.S. CODE 381-384 Chapter 1OB.-STATE TAXATION OF INCOME FROM INTERSTATE COMMERCE Sec. 381. Imposition of net income tax. (a) Minimun~ standards. ~b) Domestic corporations; persons domiciled in or residents of a State. ~c) Sales or solicitation of orders for sales by independent contractors. (d) Definitions. 882. Assessment of net income taxes; limitation; collection. 383. 1)efinition. 384. Separability provision. ~ 381. Imposition of net income tax. (a) Minimum standards. No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following: (1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and (2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a ProsPective customer of such person, if orders by such customer to such person to enable such customer to flu orders resulting from such solicitation are orders described in paragraph (1). (b) Domestic corporations; persons domiciled in or residents of a State. The provisions of subsection (a) of this section shall not apply to the imposition of a net income tax by any State, or political subdivision thereof, with respect to- (1) any corporation which is incorporated under the laws of such State; or (2) any individual who, under the laws of such SVate, is domiciled iii, or a resident of, such State.~ (c) Sales of solicitation of orders for sales by independent contractors. For purposes of subsection (a) of this section, a person shall not be considered to have engaged in business activities within a State during any taxable year merely by reason of sales in such State, or the solicitation of orders for sales in such State, of tangible personal property on behalf of such person by one or more inde- pendent contractors, or by reason of the maintenance, of an office in such State by one or more independent contractors whose activities on behalf of such person in such State consist solely of making sales, or soliciting orders for sales, or 1 tangible personal property. I [So In U.S. Code. Should read "of", as, enacted in original P.L. 86-272.] PAGENO="0099" -79 (d) Definitions. For purposes of this section- (1) the term "independent contractor" means a commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities; and (2) the term "representative" does not include an independent contractor. (Pub. L. 86-272, title I, § 101, Sept. 14, 1959, 73 Stat. 555.) STUDY AND REPORT BY CONGRESSIONAL COMMITTEES OF STATE TAXATION FROM `INTEP~TATE COMMERCS~ Title II of Pub. L. 86-272, as amended by Pub. L. 87-17, Apr. 7, 1961, 75 Stat. 41; Pub. L. 87-435, Apr. 21, 1962, 76 Stat. 55; Pub. L. 88-42, June 21, 1963, 77 Stat. 67; Pub. L. 88-286, Mar. 18, 1964, 78 Stat. 166, provided that: "SEC. 201. The Committee on the Judiciary of the house of Representatives and the Committee on Fi- nance of the United States Senate, acting separately or jointly, or both, or any duly authorized subcommittee thereof, shall make full and complete studies of all matters pertaining to the taxation of interstate commerce by the States, territories, and possessions of the United States, the District of Columbia, and the Common- wealth of Puerto Rico. or any political or taxing subdivision of tile foregoing. "SEC. 202. The Committees shall report to their respective houses the results of such studies, together with their proposals for legislation on or before June 30, 196,5." § 382. Assessment of net income taxes; limitations; collection. (a) No State, or political subdivision thereof, shall have power to assess, after September 14, 1959, any net income tax which was imposed by such State or political subdivision, as the case may be, for any taxable year ending on or- before such date, on the income derived within such State by any person from interstate commerce, if the imposition of such tax for a taxable year ending after such date is prohibited by section 381 of this title. (b) The provisions of subsection (a) of this section shall not be construed- * (1) to invalidate the collection, on or before September 14, 1959, of any net income tax imposed for a taxable year ending on or before such date, or (2) to prohibit the collection, after September 14, 1959, of any net income tax which was assessed on or before such date for a taxable year ending on or before such date. (Pub. L. 86-272, title I, § 102, Sept. 14, 1959, 73 Stat. 556.) § 383. Definition. For purposes oi~his chapter, the term "net income tax" means any tax imposed on, or measured by, net income. (Pub. L. 86-272, title I, § 103, Sept. 14, 1959, 73 Stat. 556.) § 384. Separability provision. If any provision of this chapter or the application of such provision to any person oi~ circumstance is held invalid, the remainder of this chapter or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. (Pub. L. 86-272, title I,. § 104, Sept. 14, 1959, 73 Stat. 556.) [So in U.S. Code. Should read "of".] PAGENO="0100" PAGENO="0101" APPENDIX 2 General Statistical Data With Respect to Commercial Banks and Other Financial Institutions TABLE 1.-COMMERCIAL BANKS-NUMBER, BANKING OFFICES, ASSETS, AND DEPOSITS, BY CLASS OF BANK, 1968 AND 1969 fMoney figures in billions of dollars. As of December 31J Banking Banks offices Assets Demand deposits Time deposits Class of bank 1968 1969 1968 1969 1968 1969 1968 1969 1968 1969 All banks 13,679 13,662 32,692 33,870 501.9 531.8 229.7 241.1 205.6 195.6 National 4, 716 4,668 15, 701 16, 396 296. 6 313.9 134.6 141. 1 123. 3 115. 2 State member 1,262 1,201 4, 828 4,679 116.9 119.2 57.1 58. 6 41.3 35.8 Insured nonmember 7, 504 7, 595 11,920 12, 552 84.6 94. 5 36.2 39. 5 40. 2 43. 9 Noninsured 197 197 243 243 3.8 4.2 1.7 1.9 .8 .7 Source: Board of Governors of the Federal Reserve System; Federal Reserve Bulletin. Reproduced from U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, 1970, p. 442, table 652, (81) PAGENO="0102" .2 9 ~cn o~ ~ ~ ~C) ~ - ?~ ~. j~3~ ~ ~ B B C) B B ;~ -.~ -1 ~o)C~ > ~ W F-. oa._= ~ -` -~ 0 (~OC~O ~ - C) Q'O~o~ r- C,, *~ C', Eo C/) C,) C0-E -I ~o. ~ -<~ CI) c,,,oa- ~ CD~*~ C) - -4 cI,n,o C) ~`2. -z -4 i,~' 0 %JC,~ 0)0) 0~-J00 C') C) ~C~3 00 ~ ~ ~ ~ - ~u r~ (000CC o~ ~jc~ r) ~ ~ ~~J0oC1i ~0) .~J -.j ~-J ~ 0~4 0C~ ~ Co C7iC' Co Co~Oo C) ~ 0 0~C~3 (\) 0C~) Cfl 0)- 0 C/i CJ~ C0~J Ooor' 00) (00 (flC) 00 ~J f~3 ~ 0 - ~-`C0~COC') ~C)C#~(fl CoCC/ C) -JC') ~FC/W 0) ~ N~(O Ui~J 00 C'3~ 0 N~C') ~`C)i ~ ~ - `r (~ OOC~ C/iC') F.,) ~.0 C') (0 F-3CJiC) CO 0C~) `.J F.) F.)C))C~ F.) (0 ~ ~ CoO) CoUl `WC') 0) r~-' ~ `.j ~C~) ~ 0 N3'-J CoC') Co r.)C)(0 (0 CJ1(fl 0F.)C) C') 0 CoO) ~ -0) 00PC) B CD C.) ~0 ~J 0 F.30 Co ~O) Co ~Ui 0 (DC) ~ 00 C.) - 0~C.) (JiC0O) 0) C/i ~ Co'.) 00)'.) (J1CoC.) Co 0~CJ1(flN) F..)~ ~0C0Co(D .J ~C/iC)(.) ~C'J ~C)C') 0'.'I-U) 0) 0~J ~CD (0 a)~.) F.) ~ 0O~ 00 0C~ r.)C.) COO Co~0~ - C) Co ~ 0 t~"J'.J0) C.'i - .JC.) `.J 0O-J'JCJCOO C'.) - Co C.)).) (J1 "-a ~ PAGENO="0103" -~ ~ 2.o!±o~c~5.~ ~ - a: ~: ~` r~';~ ~ - ~ ~ CD.(~~ ~ o.0c~ ,~ ~ ~ ; ~, ~ C) ~ B ~ B ~ C) ~ ~ ~ ~- :2~;~~; ~ ~, C) F S C) P ~` 3 ~=: 00 ~3~J -~w~o -Ja'-~a~ iN~' ~ ~ c~J~Z~ ~r.~coco~ ON)C ~J~J ~ -r~-~cj~ ~ ~-~ou, - ~ N)~op~or.~ ~ 0(~)C~3~-' ~ U1-J ~ - ~ "~-`~ ~ ~ r!'~r~ ~ ~s ~ -, ~ N) N) - N) 0)~ N) N)~~~C~lco ~N) 0' ~flc~C~)C~CO ~OC ~ ~tj,-~ ~r~oo C~ ~Cli N) N)C&3 ~4Nl~00 - - - N) C~) ~jN)~-~ ~ C~co.~ O~0O~ - CO - - O~-~CO ~ r~ ~ C~oo~-~ N)~ ~ ~N)COW ~ 0000N) ~ ~~aCc N) ~ -~~Cl- N) ~CC~C~ 00(~-J~r~,~' %J ~(flCO~ 00-J0o(Qa)-4CO ~N)0~ ~ JC.JC-C0 p~,) CO ~5~(O~ ~C~lO-JCJCC) ~ ()~ CO ~ ~~C~CCCOC.))'4OO - N) c~ C~ ~ N)-~N)CO ~ C~ Ø~ ~ - 0, ~ -J0~ ~ N) C~) N) N) C) U~ ~ 0) Cl)C) ~ N) N) - ~ P ~C))~ CJ)Q~ 0, C~N)00~~4 ?~`P ~ 00C~)N)N)N)~-J !~ ~ ~ U~00O)~N)COO) P ~ -JCl)N)00C~)C) P ~N)P~ ~ ~ P ~ wN)~u~a)O !~PPP ~ ~ ~ Cl) ~OCD -`C,) ~ 0.~ ~ k I -4 w 5,, 41) C C) 0 ~C) ~ o~ > C ~ ~ Cl) rn o -4 C,, 2~ CO C. 0 > C- * -4 ~`> -4 C,, > 0 0 -4 C,, C/, C,, PAGENO="0104" Totat:S0States and District of Columbia Total:States and other areas I Alabama - Alaska Arizona Arkansas California Colorado - Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota_ Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Other areas I 14 3 261 5 363 10 18 - 667 3 285 3 558 10 430 1 260 5 181 1 20 3 74 1 302 2 207 1 38 2 168 9 6 2 84 1 130 224 4 628 9 41 17 1 130 64 1 114 479 4 30 (2) 11 .84 TABLE 4.-NUMBER OF COMMERCiAL BANKS AND TRUST COMPANIES, BY TYPE OF BANK, BY STATES AND OTHER AREAS. AS OF DEC. 31, 1969 Insured commercial . State Total National banks Noninsured banks and trust companies State - 4,674 8,790 197 4,683 8,790 208 88 180 5 4 - - 1 4 8 . 68 178 3 68 80 7 120 103 44 27 32 3 13661 13,681 268 10 12 249 155 267 62 19 14 475 433 11 26 1,088 410 668 603 345 231 44 122 161 332 724 181 668 136 442 7~ 228 64 320 109 169 521 426 51 492 13 105 163 305 1,166 51 44 233 92 195 604 70 20 5 11 209 60 7 8 418 122 * 100 172 80 49 21 47 86 98' 197 38 97 48 126 50 137 33 173 23 42 217 218 11 31~ 20 33 77 529 10 26 103 27 81 121 40 9 70 5 232 2 524 3 143 564 7 87 1 311 5 4 23 3 89 2 31 122 25 85 1 124 3 I States and other areas include 50 States, District of Columbia, and `Other areas": Guam, Puerto Rico, Virgin Islands. 2 In Hawaii and in "other areas" there is no breakdown between State and national banks; this makes the totals in these columns vary slightly from those in table 2. Source: Federal Deposit Insurance Corporation, Federal Reserve Board, and Comptroller of the Currency, `1969 Report of Income; Assets and Liabilities, Commercial and Mutual Savings Banks," pp. 36-101. PAGENO="0105" 85 TABLE 5.-NUMBER OF COMMERCIAL BANKS AND TRUST COMPANIES BY DEPOSIT SIZE, IN STATES AND OTHER AREAS, AS OF DEC. 31, 1969 Insured Deposit size Total Total commercial banks Noninsured banks and trust National State companies Less than $1,000,000 348 231 21 210 117 $1,000,000 to $2,000,000 1, 066 1, 051 120 931 15 $2,000,000 to $5,000,000 3, 516 3,494 758 2,736 22 $5,000,000 to $10,000,000 3,448 3,434 1,184 2,250 14 $10,000,000 to $25,000,000 3, 194 3, 180 1, 403 1, 777 14 $25,000,000 to $50,000,000 1, 104 1, 096 584 512 8 $50,000,dOO to $100,000,000 484 476 272 204 8 $100,000,000to $500,000,000 413 403 253 150 10 $500,000,000 to $1,000,000,000 59 59 43 16 $1,000,000,000 or more 49 49 31 18 Total 13,681 13,473 4,669 8,804 208 Source: Federal Deposit Insurance Corporation, Annual Report 1969, table 104. TABLE 6.-SELECTED INCOME ITEMS AND EQUITY CAPITAL, INSURED COMMERICAL BANKS BY STATES AND OTHER AREAS, 1969 LThousands of dollarsj Total Net Equity operating operating Net income capital 3 State income income' after taxes 2 Dec. 31, 1969 Total: 50 States and District of Columbia 30,691,979 6, 714, 511 4,318, 952 37, 940, 503 States and other areas 4 30,806,805 6, 730,014 4,334, 567 38, 116, 222 Alabama 299, 262 73,374 50,201 414,776 Alaska 33, 86X1 5,761 4, 314 32,306 Arizona 231,199 38,748 26,395 183,909 Arkansas 169,812 36,904 26,405 245, 701 Califprnia 3,426,053 594,964 386,896 3, 172,701 Colorado 295,387 61,555 37, 953 340,352 Connecticut 352,369 84,633 49,643 402,679 Delaware 85,282 29,123 16,260 124, 204 District of Columbia 182,236 52,608 29,503 232, 752 Florida 813,590 188,093 130,850 963,140 Georgia 546,053 118,274 71,197 605,292 Hawaii 110,704 21,961 14,818 125,792 Idaho 85,579 20, 348 11,549 90,049 Illinois 2,214,506 488,410 321,460 2,984,560 Indiana 639,838 140,153 93,854 775,930 Iowa 376,198 82,346 60,568 548,127 Kansas 296,414 76,473 53,457 459,561 Kentucky 295,933 78,794 53,632 428,495 Louisiana 379,854 86, 137 61,838 525,951 Maine 83, 779 17, 116 12,694 108, 220 Maryland 322,662 90,472 51,259 458,251 Massachusetts 796,075 183,872 108,113 997,173 Michigan 1,328,034 244,468 168, 585 1,320,373 Minnesota 566,807 115, 721 73, 749 655,297 Mississippi 191,087 48,222 33,187 235,163 Missouri 705,048 185,738 120,080 1,014,514 Montana 98,390 18,526 13,546 113,928 Nebraska 214,083 50,526 34,998 299,988 Nevada 73,965 15,899 9,193 76,115 New Hampshire 60,386 15, 129 9,532 90,696 New Jersey 870,567 208,267 149, 773 1,138,014 New Mexico 89, 617 19,641 13, 598 105 036 New York 5,940,833 1,289,303 738,074 7,472 539 North Carolina 476,600 96, 747 62,028 515,010 North Dakota 85, 331 17, 232 12,135 126,084 Ohio 1,333,065 321,418 206,839 1,878,741 Oklahoma 325,008 77,732 54,772 470, 039 Oregoi~ 279,174 47,549 30,970 276,294 Pennsylvania 1,819,301 443, 866 296, 2~0 2, 533 335 Rhode Island 117,274 27,847 16,812 159,216 South Carolina 151,043 41,085 26,638 199 830 South Dakota 93,475 20,328 13, 095 117,624 See footnotes at end of table, p.86. PAGENO="0106" 86 TABLE6.-SELECTED INCOME ITEMS AND EQUITY CAPITAL, INSURED COMMERICAL BANKS BY STATES AND OTHER AREAS, 1969-Continued - fi'housands of dollarsi Total Net Equity operating operating Net income capital 3 * State income income 1 after taxes 2 Dec. 31, 1969 Tennessee 433, 282 94, 124 65, 427 591 980 Texas -- 1, 549, 721 356, 422 237, 209 2, 049, 295 Utah 123,324 29,691 14,784 137,014 * Vermont 52, 142 9, 928 6,799 63, 759 Virginia 518,333 108,703 74,533 621,049 Washington 398, 178 79, 021 52, 546 - 437, 631 West Virginia 154, 430 38, 838 26, 584 - 266, 242 Wisconsin 558, 657 112, 547 76, 854 688,933 Wyoming 48,179 9,874 6,786 67,243 Other areas4 114,826 15,503 15,615 175,719 1 This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating expenses include interest on capital notes and debentures and provision for loan losses. 3 Net income is income after securities gains or lcsses, extraordinary charges or credits, taxes, and other adjustments. 3 This item is for all commercial banks and trust companies, including noninsured. 4 in this table, States and other areas include 50 States, District of Columbia, Puerto Rico, and Virgin Islands. Source: Federal Deposit Insurance Corporation, Federal Reserve Board, and Comptroller of the Currency, 1969 Report of income; Assets and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969. pp. 114-121 and 36-101. TABLE 7.-SELECTED INCOME ITEMS AND EQUITY CAPITAL OF INSURED COMMERCIAL BANKS, BY DEPOSIT SIZE, TOTALS FOR STATES AND OTHER AREAS, 1969 . tin thousands of dollarsj Total operat- Deposit size ing income Net operating income 1 Net income after taxes 2 Equity capital Dec. 31, 1969 3 Lessthan$1,000,060 10,203 2,216 1,738 118,327 $1,000,000 to $2,000,000 101,380 23,546 18, 194 225,906 $2,000,000 to $5,000,000 759,260 167, 971 124, 877 1, 292, 125 $5,000,000 to $10,000,000 1, 595,039 350, 133 251, 303 2, 250, 111 $10,000,000 to $25,000,000 3, 199, 271 697, 397 492, 366 4, 134, 141 $25,000,000 to $50,000,000 2, 522, 591 555, 134 375, 434 3, 234, 873 $50,000,000 to $100,000,000 2, 223, 385 469, 069 319, 968 2, 723, 245 $100,000,000 to $500,000,000 5, 851, 279 1, 343, 029 867, 610 7, 196, 046 $500,000,000 to $1,000,000,000 2, 966, 656 689, 751 435, 655 3, 543, 878 $1,000,600,000 or more 11, 565, 453 2, 433, 043 1, 449, 023 13, 397, 557 TotaI~ 30, 794, 517 6, 731, 289 4, 336,16838,116,209 O This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating expenses include interest on capital notes and debentures and provision for loan losses. 2 Net income is income after securities gains or losses, extraordinary charges or credits, taxes, and otheradjustments. S This item is for all commercial banks and trust companies, including noninsured. income items are for banks operating throughout the year; consequently totals in this table differ slightly from those In table 6. Sources: Federal Deposit Insurance Corporation, Annual Report 1069, table 116; Federal Deposit Insurance Corporation, Federal Reserve Bnard and Comptroller of the Currency, 1969 Report of Inccrne; Assets and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969. pp. 108-109. PAGENO="0107" 87 TABLE 8.-SELECTED INCOME ITEMS AND EQUITY CAPITAL; BY TYPE OF BANK, INSUREi7 COMMERCIAL BANKS, TOTALS FOR STATES AND OTHER AREAS, 1969 tIn thousands of dollarsj Total Net Net income Equity operating operating after capital & Type of bank income income I taxes 2 Dec. 31, 1969 National 18,221,202 3,915,203 2,534,279 22,134,459 State member Federal Reserve System 6,777, 750 1, 552, 624 916, 455 8, 146, 053 Nonmember Federal Reserve System 5, 808, 033 1, 262, 187 883, 833 7, 835, 710 Total 30, 806, 805 6,730, 014 4, 334, 567 38, 116, 222 Operating throughout year 30,794, 517 6,731, 289 4,336, 168 (4) I This item is operating income, less operating expenses, before income taxes and securities gains or losses. Operating expenses include interest on capital notes and debentures and provision for loan losses. Net income is income after securities gains or losses, extraordinary charges or credits, taxes, and other adjustments. 3 This item is for all commercial banks and trust companies, including noninsured; total differs by 12 from total in table 7 from earlier publication. 4 Not available. Source: Federal Deposit Insurance Corporation, Annual Report, 1969, tables 106, 115. TABLE 9.-MONEY SUPPLY AND TIME DEPOSITS: 1950 TO 1969 fin billions of dollars. As of December, seasonally adjusted. Averages of daily figuresj Item 1950 1955 1960 1965 1966 `1967 1968 1969 Total - 152.9 185. 2 214. 0 313. 4 328. 9 365. 4 399.7 393. 7 Moneysupply 116.2 135.2 141.1 `166.7 170.4 181.7 194.8 199.6 Currency I 25. 0 27. 8 28. 9 36. 3 38. 3 40. 4 43. 4 45. 9 Demand deposits 2 91. 2 107.4 112. 1 130. 4 132. 1 141. 3 151. 4 153.7 Time deposits, adjusted 3 36.7 50.0 72.9 146.7 158.5 183.7 204.9 194. 1 I Currency outside Treasury, Federal Reserve System, and vaults of all commercial banks. Demand deposits at all commercial banks other than those due to domestic commercial banks and U.S. Government, less cash items in process of collection and Federal Reserve float, plus foreign demand balances of Federal Reserve banks. a Time deposits at all commercial banks other than those due to domestic comrercial banks and U.S. Government. Source: Board of Governors of the Federal Reserve System: Federal Reserve Bulletin. Reproduced from U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the U.S., 1970, p. 450, table 668. TABLE 10.-INTEREST BEARING DEPOSITS, BY TYPE: 1950 TO 1969 tIn millions of dollars. As of December, not seasonally adjustedj Type , 1950 1955 1960 1965 1967 1968 1969 Total 71,304 112, 373 175, 518 317, 296 377, 753 411, 503 408, 628 - Commercial bank time deposits I 36, 403 49, 602 72, 052 145, 247 182, 036 203, 086 192, 373 Mutual savings banks deposits 20, 025 28, 182 36, 343 52, 443 60, 121 64, 507 67, 086 Savings and loan shares 13,992 32, 142 62, 142 110,385 124, 493 131, 618 135, 489 Creditunion shares 884 2,447 4,981 9,221 11,103 12,292 13,680 I Time deposits at all commercial banks other than those due to domestic commercial banks and U.S. Government. Averages of daily figures. Effective June 9, 1966. balances accumulated for payment of personal loans were reclassified for reserve purposes and are excluded from time deposits reported by member banks. Source: Board of Governors Of the Federal Reserve System, unpublished data: National Association of Mutual Savings Banks, New York. N.Y., National Fact Book: Mutual Savings Banking; Federal Home Loan Bank Coard, Savings and Home Financing Source Book; and Dept. of Health, Education, and Welfare, Social Security Administreztion, Federal Credit Union Program. Reproduced from U.S. Department of Commerce, Bureau of the Census, Statisticat Abstract of the U.S., 1970, p. 450 table 670. PAGENO="0108" Total: States and other areas Connecticut Indiana Maine Maryland Massachusetts New Hampshire - New Jersey New York - Pennsylvania Rhode Island Vermont Washington Wisconsin Other States or areas 88 I Insured mutual savings banks only; the total including noninsured mutual savings banks Is 497 banks. This is net current operating income after income and franchise taxes. It does not include nonrecurring items, realized profit or loss, or transfers from valuation adjustment provisions. This category comprises Alaska, Delaware, Minnesota, Ohio, Oregon, and Puerto Rico. Source: Federal Deposit Insurance Corporation, Federal Reserve Board, Comptroller of the Currency, 1969 Report of Income; Assets and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969, pp. 122-123, 104-105. TABLE 12.-INCOME AND FRANCHISE TAXES, INSURED MUTUAL SAVINGS BANKS, BY STATES AND OTHER AREAS, 1969 (In thousands of dollarsj All States and areas Connecticut Indiana - Maine Maryland Massachusetts New Hampshire New Jersey New York - Pennsylvania Rhode Island Vermont Washington Wisconsin Other States and areas I 61,874 14,302 47,572 9,492 915 8,577 174 174 0 334 321 12 1,044 745 299 1,590 86 1,504 843 360 483 1,837 1,837 0 42,239 7,447 34,792 1,077 271 806 1,222 329 894 183 166 18 1,552 1,551 1 18 14 4 269 87 182 TABLE 11.-NUMBER OF BANKS, SELECTED INCOME ITEMS, AND SURPLUS ACCOUNTS, INSURED MUTUAL SAVINGS BANKS, BY STATES AND OTHER AREAS, 1969 (Thousands of dollarsj . . States . Number of banks~ Dec. 31, 1969 Total current operating income Net current operating income Net current operating income after taxes2 Surplus accounts total Dec. 31, 1969 331 3, 581, 559 3, 139,408 3, 077, 535 4, 697, 716 69 309,840 264,802 255,310 454,734 4 6,655 4,993 4,820 8,391 31 50,975 43, 713 43,379 83,433 5 50,300 41,334 40,290 72,343 8 112,949 99,898 98,308 159,115 31 71,584 61,644 60,801 110,748 21 155,997 132,525 130,688 197,967 122 2,389,429 2,121,494 2,079,255 3,027,354 7 205,769 177,283 176,206 298,375 7 66,103 54,711 53,488 87,985 6 16,498 14,351 14,168 19,366 9 80,868 68,274 66,722 92,671 3 2,083 `1,616 1,598 3,244 8 62,510 52,771 52,502 81,990 . ~ . States . . . ~ Franchise and income taxes . ~ . Total . rederal Income taxes State franchise and income taxes .1 Included are Alaska, Delaware, Minnesota, Ohio, Oregon, and Puerto Rico. Source: Federal Deposit Insurance Corporation, Federal Reserve Board, Comptroller of the Currency, 1969 Report of Income; Asseta and Liabilities, Commercial and Mutual Savings Banks, Dec. 31, 1969, pp. 122-123. PAGENO="0109" APPENDIX 3 Survey of State and Local Tax Expenses of Insured Commercial Banks, 1969 JAMES B. ECKERT* Associate Adviser, Division of Research and Statistics As part of its study of State and local taxation of banks pursuant to Public Law 91-156, the Board of Governors of the Federal Reserve System in cooperation with the Federal Reserve Banks conducted a survey of State and local tax expenses of insured commercial banks for the year 1969. The major purpose of the survey was to obtain inf or- mation on the amounts of maj or types of State and local taxes paid by national and State chartered banks in the various States in 1969-the year preceding the amendment of section 5219, Revised Statutes, which substantially broadened the powers of the States to tax national banks.1 Respondents were requested to report their tax expenses showing separately the amounts of State and local government taxes paid (1) within the home State of the bank and (2) in all other States. Where tax laws or regulations within the home State of the bank had been revised to a significant degree subsequent to the amendment of section 5219, respondents were also asked to estimate what each affected tax would have totaled in 1969 if the revision had been applicable during that year. Sammary of Survey Results Insured commercial banks are estimated to have paid $623 million in taxes (other than payroll taxes) to State and local governments on their 1969 operations.2 This accounted for three-fourths of one per- cent of total State-local tax revenue for that year. The 1969 structure of State-local taxes~ on banks, as might be ex- pecte(l, reflected the limitations imposed on the States by section 5219 before the liberalizing changes introduced by Public Law 91-156. This is indicated not only by the choice of major types of taxes that States apply to banks, but also by the relative treatment accorded national versus State-chartered banks and the limited extent to which banks pay taxes in non-domiciliary States. Relevant data are summarized below. (1.) Types of taxes. Eighty-six per cent of all State-local taxes paid by banks for 1969 were in three categories-taxes on net income, real property, and shares or capital structure. These also were the only types of taxes that States were authorized to levy against national *The author is indebted to Caroline H. Cagle, Economist In the Banking Section of the Board's Divi- sion of Research and Statistics, and to Allen D. Manvel, Consultant and former Assistant Director of the Advisory Commission on Intergovernmental Relations, for valuable assistance in carrying out the analysis presented in this appendix. Public taw 91-156 was approved Dec. 24, 1969. 2 The Survey covered State-local tax expenses incurred by banks on their own operations and those of cates a more limited meaning. (89) PAGENO="0110" banks during that year under the provisions of section 5219 .(prior to the December amendment), and each State was limited to a choice of either an income or a shares tax in addition to a tax on real property. The largest revenue-producer among taxes levied upon banks by State and local governments was the tax on net income. In most States this took the form of an excise tax measured by net income, a form that permitted inclusion in the tax base of interest on TJ.S. Government securities-which is exempt from taxation under a direct income tax. This type of tax accounted for $235 million or roughly 38 1)eI'cent of all 1969 State-local taxes on banks. In 21 States, it comprised more than half of all bank taxes, and in 8 additional States; between 10 and 50 percent of the total. Even in the over-all revenue picture of the States, the tax on net income of banks loomed important, since it accoimted for nearly 7 percent of all 1969 State-local revenue from corporation income taxes ($3.5 billion). Second in importance for banks is the real property tax, which totaled $179 million in 1969 and accounted for 29 percent of all State- local bank taxes in that year. This is a relatively significant ta* for banks in every State, although its percentage share of total bank taxes varies widely among the States, from a low of 12 percent in Louisiana and Ohio to 75 percent in Florida. In 7 States, half or more of bank taxes were collected in this form. Taxes levied on bank share~ or capital structui e, the least important of the major State-local bank taxes, accounted for close to one-fifth of the total, or $121 million. In 9 States, however, the proportion was half or more and in 8 additional States, between a fifth and a half. This form of tax, which has declined sharply in relative inWortance in recent decades, probably owes its continued significant role in bank taxation to section 5219. The remaining 14 percent of bank taxes for 1969 was distributed among a variety of levies. The major one, accounting for over two- fifths of the residual (6 percent of all State-local taxes on banks) was a tax on bank deposits, which generally is levied on the depositor but collected from and absorbed by the bank. This tax was dominant in Ohio and relatively important in only two additional States- Michigan and Rhode Island. Other taxes making up the residual included the tangible personal property tax (dominant in Arkansas), the gross receipts tax (dominant in the District of Columbia), general sales and use taxes, which were reported by banks in nearly all States but were an important component of bank taxes only in the State of Washington, and a variety of miscellaneous imposts, such as auto license, documentary taxes, fees, etc. (2) National versus State-chartered banks. National banks accounted for 57 percent of total State-local tax expense of all insured commercial banks in 1969-a slightly smaller percentage than the national bank share of the banking universe as measured by total assets or income. Accordingly, national banks as a group show somewhat lower ratios of tax expense to assets, net income before taxes, and other bases, than State-chartered banks as a group. In most States, national and State chart cued banks were taxed about the same. This included a number ;[ States where the State levied types of taxes not authorized for national banks by section 5219- mainly tangible personal propei ty and sales and use taxes-which some, if not all, the national banks paid voluntarily. In several other PAGENO="0111" 91 States, however, taxes not permissible for national banks were ~pplie.d only to State-chartered banks, without any offsetting adjustment to equalize burden. While section 5219 restrictions account in part for the higher tax ratios for State than national banks, structural and other differences between national and State-chartered banks also were contributing factors. (3) Home-State versus o'ut-of-State taxes. Practically all 1969 State- local taxes of banks were paid to governments in their respective home-office States. Total payments to out-of-State jurisdictions amounted to less than $1.4 million, or 2/10 of 1 percent of all State-local bank taxes. Nearly three-fifths of the out-of-State payments were net income taxes, while real l)roPertY taxes accounted for most of the remainder. Moreover, the bulk of these payments were reported by banks in 4 States-California, Illinois, Massachusetts, and New York-and represented in large part taxes paid by separately incor- porated out-of-State subsidiaries of large banks. In 30 States, the sums reported as paid to other States were $1,000 or less, and in most of these States, banks reported no such taxes. Under section 5219, prior to the 1969 amendment, taxes other than real property taxes could be collected from national banks only by the State in which the bank was located, thus accounting for the negligible amounts reported. * While State-chartered banks enjoyed no such immunity in law, their out-of-State taxes totaled oily $218,000 in 1969, less than one-fifth the amount reported for national banks. (4) Uhanges in taxes. The December 1969 amendment of section 5219 opened the door for States to apply additional types of taxes to national banks withjn their borders, other than an intangibles tax. In response to the request for information relating to tax law changes, 585 banks located in 41 States supplied estimates of what their 1969 taxes would have been if the changes had been in effect that year.3 * The net result of changes reported by these banks would be to raise their total tax expense for 1969 by 9 percent and the 1969 total for all banks in the sample by 5~ percent. Three-fifths of the increase was in sales and use taxes, which were already on the statute books in most States and readily could he made applicable to banks or extended to national banks in cases where State banks were already covered. Most of the remainder was in shares, gross receil)ts, and tangible personal property taxes. Because these increases in other taxes would have affected deductions or credits under the net income tax, a considerable number of respondents reported that their income taxes for 1969 would have declined, afl(l these declines more than offset by a small margin the increases in net income taxes reported by other banks. Information supplied in response to this question is suggestive of the kinds of changes that have been occurring under the "interim amendment" to section 5219, but it does not fully measure the expected impact of the interim changes since many States had not yet acted under their enlarged authority and, in some cases, respon~ dent banks were not yet aware of changes in taxes that had occurred or were imminent. No attempt, of course, was made in this survey to deal with the additional changes that might occur in response to the "permanent amendment" to section 5219. $ Respondents with total deposits under ~15 million were given the option of not filling In this part of the questionnaire. PAGENO="0112" 92 Need for the Survey The purpose of the survey was to provide a quantitative foundation for the study of bank taxation which the Congress had requested. Detailed information about the magnitudes involved in State-local taxation of banks was needed in three major areas: (1) Data showing the types and amounts of taxes paid by national and State-chartered banks in the various States were needed as a basis for examining the effects of section 5219 on State tax structures-including any differ- ences in the treatment of national versus State-chartered banks-and for evaluating the prospective impact of the changes in section 5219 enacted in December 1969. (2) Information on the amounts of taxes' paid outside the State of domicile by type of tax and charter-class of bank was required for study of the interstate aspects of the "perma- nent amendment" to section 5219. (3) Information also wasrequired as to the nature and quantitative effect of changes in State and local taxes that had been introduced subsequent to December 24, 1969, under the broader authority to tax national banks authorized at that time. Detailed investigation of potential data sources led to the conclusion that the only feasible way to obtain the necessary information was through a special survey of commercial banks. Statistics of this type had not hitherto been compiled by any Government agency. An effort was made to collect the data directly from the States in a survey of State tax administrators being conducted in connection with the study, but early replies to this survey showed that State govern- ments generally did not have detailed summaries of tax receipts from commercial banks and could not readily prepare them. While much of the needed information on State-local tax expense is regularly reported by banks in the deductions schedule of their Federal income tax returns, tabulation of data from these returns for either 1969 or another recent year proved infeasible, mainly due to variations in the manner of reporting such taxes and the physical impossibility of locating and processing the returns for any sizable pre-selected sample of indi- vidual banks within the time available.4 Thus, it became apparent that a special survey was required if the specific data needs for the study were to be met, and that the results of the survey might also provide valuable benchmark information that could serve a wide range of other potential research needs. Reporting Form and Ban/c Sample The major foc.us of the reporting form (which is reproduced at pp. 112-115) was to obtain information on the dollar amounts of major types of State-local tax expense incurred by banks for the calendar year 1969-the last year preceding amendment of section 5219 and the last full year before the study began. All types of State and local taxes allowable as deductions for Federal income tax purposes were to be reported (except State J)ayrOll taxes for unemployment compensa- tion and disability insurance). The amounts of the various taxes to be reported were those reflected in the bank's 1969 "Consolidated Report of Income" that had been filed with the Federal bank super- 4The only pertinent tax information separately reported `by banks in the "Consolidated Report of In- come" is the amount of "PrOvision for State and local income taxes." TI'fese data are summarized for each State for the calendar year 1969 in the volume, "1969 Report of Income; Assets and Liabilities-Commercial and Mutual Savin s Banks. December 31 1969" ublished b the Federal Deposit Insurance Corporation, a pp. 114-12 . ee comment be ow in footnote 8 at p. 96. PAGENO="0113" 93 visory authority. In addition to nine major types of taxes speCifie(1 on the questionnaire, space was provided for reporting any miscella- neous types of taxes that had been shown as deductions on the Federal tax return but which did not fit the designated categories, and estimates for any taxes not shown as deductible taxes on the Federal return but included in other relevant expense accounts as operating expenses. These latter would include general sales taxes, selective taxes oil utility billings, and other known taxes paid in the price of goods or services purchased by the reporting bank. For each category of taxes, respondents were asked to show sep- arately the amounts paid within the home State of the bank and to all other States, identifying these States if this information was readily available. In addition, where home State taxes had been significantly affected by changes in tax law or regulation since 1969, respondents were asked to estimate for each affected category what their 1969 taxes would have been had the change been effective throughout that year. To provide checks on the basis and comparability of reporting, re- spondents also were asked to indicate whether the income statement for 1969 had been prepared primarily on a cash or accrual basis and whether or not a J);rent holding company had incurred tax liabilities for 1969 in addition to those shown in the report, and to provide selected information relating to their 1969 Federal income tax returns. In the course of its formulation, the reporting form was subjected ~ to extensive review by the technical staffs of the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, Federal Deposit Insurance Corporation, and the Comptroller of the Currency, as well as the Conference of State Bank Supervisors, the American Bankers Association, a group of commercial bank tax officers and comptrollers, several State tax administrators, and a number of independent tax consultants. The survey was directed to a probability sample of 2,250 insured commercial banks out of a universe numbering close to 13,500. The sample was designed to provide reliable estimates of the amounts of the principal types of State and local taxes paid in each State by national and by State-chartered banks separately. Selection of the sample was on the basis of probability I)roportionate to size, with size measured by the bank's gross operating income in 1969. As in the banking universe, a little over one-third of the banks in the sample had national charters and the remainder were State- chartered. Tile sample of national banks accounted for about 75 per- cent of the gross operating income of all national banks in 1969 and that of State banks for nearly 65 percent of the gross operating income of all insured State banks. Since the purpose of the survey was to determine tax expenses for the year 1969, the sample banks were selected from the bank universe as it existed on December 31, 1969. Sample banks that had merged or changed their status after that date were requested to supply data for the particular unit as it existed in 1969. In a few instances where a bank chosen in the initial sample was unable to supply tile requested information, a substitute bank was selected. The survey was conducted by mailed questionnaire distributed through the Federal Reserve Banks during the latter part of December 1970. Usable reports were received from a total of 2,222 banks, or about 99 percent of the total sample. 79-421 0 - 72 - 8 PAGENO="0114" 94 Reporting Difficulties and Limitations of the Data Tax expenses shown in the tables represent in every case the total for all insured commercial banks, estimated on the basis of survey responses, except that amounts derived from column C of the ques- tionnaire (tax changes) represent actual responses, without adjust- ment to magnitudes that would represent the entire commercial banking universe. Statistics derived from a survey on a sample basis are necessarily subject to some margin of error. However, in view of the relatively large sample and the virtually complete response, the resulting esti- mates of the U.S. totals for major categories of taxes are believed to be highly reliable. Within individual States, where greater varia- bility is inevitable, the estimates appear to fall within acceptable tolerances. The data were collected from respondents through the regional Federal Reserve Banks, where they were reviewed and edited before being forwarded to the Board for computer processing. Since the pattern of response within most States was fairly consistent, major errors and abnormalities for the most part were discernible and nec- essary corrections were worked out through telephone communication with the respondent. Although information requested in the survey generally was readily available at the banks, difficulties were encountered by some respond- ents in determining which taxes to report and in selecting the appro- priate category in which to report them. One major problem area was the distinction between a tax on bank shares, which in most States is a local ad valorem tax on shareholders hut is paid and absorbed by the bank, and a tax on capital structure, which generally is a direct tax levied by the State government on the bank itself and is measured by a specified concept of capital. In view of wide- spread failure of respondents to distinguish these categories, the reported payments have been combined for analytical purposes. Problems in reporting also arose where the legality of a tax was in question and the respondent bank had paid the tax under protest and then filed a claim for refund. Except where the refund had been received, the tax was considered as having been paid and the respond- ent was asked to report it. In other cases involving taxes of question- able applicability, respondents encountered no particular difficulty but a mjxed reporting pattern emerged, since some banks had paid the tax while others had not. Another part of the questionnaire wi~ich was troublesome for some respondents was column C, which called for reporting revised 1969 estimates for any taxes which had been subject to change by law or regulation since the December 1969 amendment to section 5219. In recognition of the difficulties that smaller banks, especially, might encounter in preparing these estimates, banks with total deposits of less than $15 million were advised that they need not fill in this part of the questionnaire. Some of them chose to respond to it, and their replies are included in the statistics. Taxes whose legality was being questioned also gave rise to report- ing l)roblems in this part of the survey. One type of situation involved sales and use taxes that had been collected from nationa.l banks with- out statutory authority for all or part of 1969 and for which the bank PAGENO="0115" 95 had filed for refund. Where a refund had been received, respondents were requested to report no 1969 tax in column A but to show iii column C what the tax would have been if legally applicable. Where the tax had been paid in 1969 but no refund had been requested or received, the amount paid was to be reported in column A and no entry shown in column C. A similar problem given parallel treatment arose in one large city, where the authority of the city to collect a vault tax and a business occupancy tax was contested by some banks, which refused to pay the tax while others paid without protest. Patterns of Bank Taxation Total State and local tax expense for all insured commercial banks in 1969 is estimated at $623 million, as shown in table 1.° This total includes all separately identifiable State and local taxes of banks and their domestic subsidiaries for that year except State payroll taxes for financing unemployment compensation and disability insurance. TABLE 1.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS, 1969 [Amounts in thousands of dollars] Percentage Measure of tax Amount of tax distribution Total 623, 052 100.0 Net income 235, 160 37.7 Real property 179,409 28.8 Shares or capital structure 120, 510 19.3 Bank deposits 38,865 6.2 General sales and use 10,938 1.8 Gross income or gross receipts 7, 575 1. 2 Tangible personal property 4, 745 .8 Documentary taxes -- 597 . 1 Miscellaneous deductible - 11,971 1.9 407 2, 190 536 8,838 13, 282 2.1 12,272 920 90 23, 617 3.8 2,877,432 1, 250, 785 1 Of this total, $8,274 thousand was reported by banks in Indiana and consisted almost entirely of a combination of that State's taxes based on deposits and share values (net of gross income tax credit for State banks). Taxes not shown as deductible taxes on Federal income tax returns but included in the relevant category of other expenses, such as selective taxes on utility billings or known taxes included in the cost of purchased goods and services. To some extent, the reported data probably understate the total State and local tax expense associated with domestic commercial banking activity for calendar 1969.6 Two possible sources of such understatement are suggested by the responses. (1) Survey data show that over 800 banks were affiliated with a parent company that incurred tax liabilities on 1969 operations in For the distribution of this total by Staten and charter-classes of banks, see table A at the end of this appendix. A detailed breakdown of each State total by type of tax and class of bank appears in table G below. pp. 126-142. 6 See below, p. 106, footnote 12, for a possible source of slight overstatement of taxes on domestic operations. Sales and use Occupancy License and privilege Other1 Other2 Sales and use Real estate Other Memoranda: General sales and use taxes (including amounts reported under miscellaneous and other) Taxable income for Federal income tax purposes Federal income tax PAGENO="0116" 96 addition to those reported on the survey for the bank itself (see table B). In many cases, these taxes were associated with activities closely interrelated with those of the subsidiary bank or banks, particularly the tax liabilities incurred by most registered bank hold- ing companies and the larger one-bank holding companies that recently had been created. However, the amounts of such bank-related taxes generally were small compared with the total of State and local taxes paid by the subsidiary banks. (2) Survey data also show that the income statements which pro- vided the base for derivation of the tax expenses reported on the survey had been prepared mainly on a cash rather than accrual basis by a substantial proportion of smaller banks-85 percent in the case of banks with total deposits under $15 million and 43 percent for those with deposits of $15-$100 million (table C, p. 118) .~ With cash accounting, tax expenses would reflect a lag between tax accruals and payments, and given the uptrend in earnings, property values and other bases for taxation prevailing at that time, reported tax expense for 1969 would be less than the amount of tax accruing on 1969 opera- tions. This may have been true in part even for net income taxes, which were especially affected in 1969 by large capital losses. Although all banks were asked to report such taxes for 1969 on a current basis, this was a transition year for a major revision in requirements for income reporting to Federal supervisory authorities, and it is possible that some banks were not able to complete the changeover. The distribution of bank tax expense by type of tax is heavily concentrated, with taxes on net income, real property, and bank shares accounting for 86 percent of the total. The most important of these is the tax on net income which totaled $235 million in 1969 and accounted for 38 percent of the total.8 But taxes on real property and on shares or capital structure also were important; they amounted to $179 million and $121 million, respectively, or 29 and 19 percent of the total. Nearly half of the $88 million remainder was in the tax on bank deposits; the rest was distributed mainly among five categories-sales and use, gross receipts, tangible personal property, miscellaneous deductible, and other. Under "miscellaneous," respondents were requested to report identifiable amounts of taxes that were deductible on line 17 of IRS Form 1120 in calculating Federal income tax and that did not fit into any of the other categories on the survey reporting form. About two- thirds of the amounts reported in this category consisted of the com- bination deposits and shares tax levied in Indiana. Small amounts of selective sales and use, occupancy, and license or privilege taxes also were reported in this category. Under "other taxes," respondents were asked to report any signi- ficant amounts of taxes that were not shown as deductible taxes in Most banks in the $15-$100 million deposit group that reported mainly on a cash basis probably fell in the lower part of this size range, since every bank with total resources of $50 million or more at the end of 1968 was required to prepare its 1969 "Consolidated Report of Income" on the basis of accrual accounting. However, certain exceptions were permitted--for reporting trust department income and reporting particu- lar accounts where the results would not be significantly different. 8 The estimates of net income taxes derived from the bank tax expense survey ($125.6 million for national banks and $109.5 million for State-chartered banks or a total of $235.2 million) are somewhat higher than the "provision for State and local income taxes" reported by banks on their "Consolidated Report of In- come" ($116.0 million for national banks and $101.8 million for State-chartered banks, or a total of $217.8 million). See Annual Report of the Federal Deposit Insurance Corporation 1969, p. 280. These differences probably reflect mainly the reporting of final data on the tax survey, which was conducted late in 1970 after tax returns for 1969 had been filed, whereas the amounts of taxes reported on income statements, which had to be submitted early in the year, in many cases were preliminary estimates. PAGENO="0117" 97 calculatin~ Federal income tax liability but were included with other expenses. ~early all the amounts reported were sales and use taxes. If sales and use taxes reported in the "miscellaneous" and "other" categories are combined with those separately reported, the total of such taxes rises to $23.6 million or nearly 4 1)ercellt of total bank tax expense. Excluding sales and use taxes, the combined total of residual categories falls to 2 l)ercemlt of all taxes, illstea(l of 4 percent. The concentration of bank taxes in the net income, real property, and shares or capital structure categories was evident in all size- classes of banks (table 2). However, the relative shares accounted for by each tax category at the largest banks (total del)osits of $500 million and over) differed markedly from the relative shares of these taxes at banks in the smaller size groups. The tax on net income was much more important for the largest banks than for others, while the shares tax was much less important. TABLE 2.-PERCENTAGE DISTRIBUTION OF 1969 STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS, BY MEASURE OF TAX AND SIZE OF BANK Measure of tax All banks Size of bank (t otal deposits in millions of dollars) Under 15 15-100 100-500 500 and over Total Net income rReal property Shares or capital structure Bank deposits General sales and use Gross income or gross receipts Tangible personal property Documentary taxes Miscellaneous deductible Other 100.0 100.0 100.0 100.0 100. 0 37.7 28.8 19.3 6. 2 1. 8 1. 2 .8 . 1 1.9 2.1 31.1 25.2 30.2 5. 0 1. 8 1. 6 1.9 .3 2. 2 .8 22.0 31.8 28.0 8. 5 1.2 1.8 1.4 . 2 3. 5 1.6 28.1 29.6 23.1 9. 5 2.3 1. 2 .9 . 1 2. 1 3.2 50.3 28.0 11.3 4. 2 1.8 .9 .1 (` 1. 2.3 Less than 0.05 percent. . To a considerable extent, these differences reflect the locational distribution of large banks m dative to the varying tax structures of the States. The largest banks tend to be concentrated in States placing heavy reliance on a net income tax, particularly New York and California. These two States alone accounted for nearly three-fifths of the $235 million total of bank income taxes reported for the country as a whole. States placing heavy reliance on shares taxes, on the other hand, tend to be in nonindustrial areas, where relatively small banks predominate. An additional actor contributing to lower shares tax ratios for large banks is a tendency for high-value properties to be assessed at lower ratios of value than those of lesser value. While large banks also operate with thinner capital cushions than smaller banks, the effect of this difference would be slight. Another significant tax structure difference related to bank size is the smaller importance of certain minor taxes at large than at smaller banks. The maui taxes showing this difference were those on tangible personal property, gross receipts, and documents-types of taxes not authorized by section 5219 for application to national banks before December 1969. Since national banks account for the bulk of the resources of all banks in tile largest size grotips, their exemption from these 1)articula1~ tyI)eS of taxes would tend to lower the i~atios. PAGENO="0118" 98 Within-Slate Tax Di.stribvtion As might be expected, the within-State tax pattern in most. cases showed much greater concentration on a few individual types of taxes than is evident in the aggregate data. In 41 States, over half of all bank taxes was accounted for by a single type of tax. This is in(licated by the data in table 3, where States have been grouped according to the percentage of total commercial bank State-local taxes in the State that is accounted for by each ty~)e of tax. (See also table D for specific percentages for the several States.) The income tax accounted for over half of the total in 21 States and it was the largest category in 3 additional States (see table 4). In all, some net income tax was re- ported by banks in 42 States~ although in 13 this tax amounted to less than 10 percent of the total. Small amounts were reported in several States which did not levy an income tax on banks; these were in large part associated with subsidiaries subject to the regular corporation net income tax. TABLE 3.-NUMBER OF STATES DISTRIBUTED BY THE RATIO OF STATE AND LOCAL TAXES OF EACH TYPE TO TOTAL STATE AND LOCAL TAXES ON ALL INSURED COMMERCIAL BANKS IN 1969 , Percent of total State and local taxes on banks Over 0 but 90 70 50 40 30 20 10 less . and to to to to to to than Measure of tax Total' over 90 70 50 40 30 20 10 0 Netincome. 51 6 15 3 3 1 1 13 9 Real property Shares or capital structure. - - Bank deposits 51 2 5 10 11 15 8 51 5 4 5 2 1 2 51 1 2 16 13 16 35 General sales and use 51 1 47 3 Gross income or gross re- ceipts Tangible personal property_ Documentary taxes Miscellaneous deductible . 51 1 1 51 1 1 51 51 2 1 . 11 40 28 49 38 9 23 1 Other 51 1 46 4 Net income plus real property. Shares plus real property 51 21 8 3 7 3 4 5 51 12 5 5 5 8 12 4 `Includes District of Columbia but excludes Virgin Islands. 2 Indiana tax, combining taxes based on deposits and share values (net of gross income tax credit for State banks). TABLE 4.-PRINCIPAL BANK TAX CATEGORIES, BY NUMBER OF STATES, 1969 Measure of tax: Number Net income 24 Real property 9 Shares or capital structure 14 Bank deposits 1 Gross income or gross receipts Tangibte personal property 1 Miscellaneous deductible 1 1 Total' 51 I Indiana tax combining taxes based on deposits and share values (net of gross income tax credit for State banks). `Includes District of Columbia but excludes Virgin Islands. Taxes on shares or capital were the second most important category of taxes as measured by the number of States where this was the dominant tax on banks. These taxes accounted for over half of all bank taxes in 9 States and were the largest single category in 5 ad- ditional ones. While some of these taxes were rej)orted for 35 States, the amounts exceeded $20,000 in only 24. The real property tax is the only tax applied to banks in all juris- dictions and was relatively important in most States. WThile in only 7 PAGENO="0119" 99 States was this tax more important for banks than all other taxes combined, it accounted for 20-50 percent of total tax expense in 36 additional States. Other taxes were the major category of bank tax expense in only four jurisdictions: tangible personal propert (Arkansas), bank deposits (Ohio), gross receipts (District of Columbia), and a combination deposits and shares tax (Indiana). Of these, the most extensively used was that on tangible personal property, with some amounts reported in 42 States, but for only 2 of these (lid the share of total taxes on banks exceed 10 percent. Bank deposit taxes, which generally are levied upon depositors but are collected from and absorbed by banks, were reported in 16 States, but their share exceeded 10 percent of all bank taxes in only 3 States. Gross receipts taxes, which were reported by banks in 12 States and the District of Columbia, accounted for more than 10 percent of the total in only 2 jurisdictions.9 Next to that on real l)roperty, the general sales and use tax was the most widely applied, with payments reported in all but 3 States. However, the share for this tax (excluding amounts reported under "miscellaneous" and "other") exceeded 5 percent of all bank taxes in only 4 jurisdictions, and in 19 States it was less than 1 percent. Docu- mentary taxes, while reported in about half the States, accounted for as much as 1 percent of total bank tax expense in only 3 States. The high degree of within-State concentration on certain types of taxes is particularly evident in data on the percentage of total bank taxes accounted for by the two principal taxes in each State. In all but 5 States, these two categories accounted for more than 80 l)erCeflt of total taxes, and in 34, their share exceeded 90 percent (table 5). The combination of net income and real property ap~)eared in over half the States, and shares and real property was the leading combination in nearly all remaining States. In 21 States, the combination of net income and real property tax provided more than 90 l)ercent of all bank taxes at the State-local level. The tax on real property was one of the two most important taxes on banks in every State except Micli- igan and Indiana. TABLE 5-PERCENTAGE OF TOTAL STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS ACCOUNTED FOR BY THE 2 LARGEST TAX CATEGORIES WITHIN EACH STATE, 1969 Number Percent of total taxes: of States Under 70 2 70to80 3 80to85 4 85to90 8 * 90to95 21 95to100 - 13 Total' 51 I Includes District of Columbia but excludes Virgin Islands. While nearly all bank taxes in most States were in two major cate- gories, banks in every State reported small amounts of tax expense in several additional categories. In most States, some taxes were re- porte(l in 6 or more categories, including "miscellaneous" and "other". However, in all but 2 or 3 categories, the amounts generally were quite small, and probably include taxes on subsidiaries, isolated local 1)lst,-Ictof Columbia (73 per cent) and Indiana (23 per cent). Two a(lditinnal St~ite~ where some banks reported significant amounts of these taxes appear tn represent n,isclassllicalion-Alaska (5 per cent.). where a tax called a gross receipts tax is applied, in the case of banks, to a net iiicome base, and Ilawaii (2~ per cent.), whore a tax called a general excise tax and sometimes referred to as a gross income tax, is in the form of a sales lox. Only negligil)le amounts \\`ere reported iii most of the remaining S Slates and some of these taxes also might have represented misclassiticatio,, of sales taxes or possibly Were taxes on subsidiaries. PAGENO="0120" 100 levies, taxes paid to out-of-State jurisdictions, and possibly some mislabeling in the responses or misclassification. Impact of Section 5219 The concentration of taxes indicated in the preceding review developed mainly as a result of the restrictions on State powers to tax national banks imposed by the Congress in section 5219 of the Revised Statutes. Prior to Deceniber 1969, the States were permitted use of only two basic methods of taxing national banks, apart from taxation of their real property, a.n(l each State could select only one of these-either a tax on the value of the bank's shares or a tax on its net income, including an* excise tax according to or measured by net income.'0 Over the years, States have levied additional kinds of taxes on busi- nesses generally, such as taxes on tangible personal I)roPertY, gross receipts, and sales, and in some cases the taxes have been extended to banks, including national banks, even though ti~ey were not specifi- cally authorized by section 5219. Often through negotiation or com- mon consent, national banks agreed to pay these taxes voluntarily. In several instances, these agreements were l)ubliCiZed and applieti over long periods. In other instances, taxes not authorized by section 5219 were levied on State banks only. Taxes on bank deposits also have been levied in some instances, with the legal incidence on the depositors so that the tax was not subject to the constraints in section 5219. Banks usually absorbed such taxes, rather than try to pass them on to the depositor, owing to fears of losing deposits to banks in neighboring jurisdictions where similar taxes might not apply. Also, as indicated above, subsidiaries of banks sometimes were liable for types of taxes not applicable to the banks. For all these reasons, the pattern of reported bank taxes in most States includes relatively small amounts of various types of taxes not specifically authorized by section 5219. TABLE 6.-TYPES OF BANK TAXES COMPRISING 2 LARGEST CATEGORIES WITHIN EACH STATE, 1969 Number of States Categories: Net income plus real property Shares or capital plus real property Tangible personal property pius real property Bank deposits plus real property Gross receipts plus real property. Sales and use plus real property Net income plus bask deposits Miscellaneous deductible 1 plus gross receipts 27 18 1 I 1 1 I 1 Total° 51 I Indiana tax combining taxes based on deposits and share values (net of gross income tax credit for State banks). 2 Includes District of Columbia but excludes Virgin Islands. States generally tended to apply the same basic tax structure to their State-chartered banks as they did to national banks, owing to the close competitive relationship between the tw-o groups of banking institutions, equity considerations, and provisions of section 5219 designed to prevent (liscrimmnation. Where certain types of taxes were levied against State banks and other businesses that (lid not 10 A dividend tax also could 1)1- used in combinatIon With a tax on net Income hut since this is a tax upon shareholders rather than the banks, it is not considered here an alternative tax on banks. PAGENO="0121" 101 apply to national banks, higher rates or other special provisions were in some instances applied to national banks as a device to equalize burdens. Data relating to the distribution of taxes between national and State banks are examined in the following section. Comparisons of National and State-Chartered Ban/cs State and local taxes of national banks were $355 million in 1969, or 57 percent of the total for all insured banks (table 7). There were significant differences between National and State-chartered banks in the relative importance of certain types of taxes. In particular, real property and shares taxes were much more important for National than State-chartered banks, while net income taxes were less impor- tant. In the aggregate, these three major types of taxes specifically authorized by section 5219 made up more than 88 percent of all State-local tax expense of national banks, compared with 83 percent for State banks. The differences in percentage share for the three undoubtedly reflect in part differences in relative importance of national and State banks in the various States, which have a wide diversity of tax structures and rates. While the deposits tax was about equally important for both groups, the tangible personal property, gross receipts, and sales tax all showed appreciably higher (though still nominal) ratios for State-chartered than national banks. In each of these categories, State banks accounted for about two-thirds of the all-bank total. TABLE 7-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY MEASUREOFTAX AND CHARTER STATUS OF BANK [Amountsin thousands of dollarsi Amount of tax National Percentage distribution as percent Measure of tax All banks National State of total National State Total 623, 052 354, 822 268, 231 56. 9 100. 0 100. 0 Net income 235, 160 125,644 109,515 53.4354 408 Real property 179,409 112,482 66,927 62.7 31.7 25.0 Shares or capital structure___- - 120. 510 74, 877 45, 633 62. 1 21. 1 17.0 Bank deposts 38,865 21,343 17,522 54.9 6.0 6.5 General sales and use 10,938 4,088 6,851 37.4 1.2 2.6 Gross income or gross receipts 7,575 2,211 5,364 29.2 .6 2.0 Tangible personal property 4, 745 1, 719 3, 026 36. 2 . 5 1. 1 Documentary taxes 597 341 256 57.1 .1 .1 Miscellaneous deductible I 11,971 7, 166 4 805 59.9 2.0 1.8 Other2 13. 282 4.949 8,332 37.3 1.4 3.1 I Includes sales and use taxes of 3407 thousand, of which $303 thousand was at national banks and $104 Ihousand at State banks. (See table 1, above.) 2 Includes sales and use taxes of $12,272 thousand, of which $4,689 thousand was at national banks and $7,583 thousand at State banks. (See table 1, above.) The survey data indicate that in a substantial number of States, certain of these taxes were reported only by State-chartered banks or the relative importance of the tax was. much larger for State than for national banks. (See table D, p. 119.) Taxes on tangible personal prop- erty and sales taxes were the most frequent examples of this. In over one-third of the 34 States in which State banks reported paying a par- ticular tax and national banks did not, the amounts were relatively small-aggregating 1 percent or less of total tax payments of State banks in* those States. States in which State-chartered banks paid relatively significant amounts of taxes not reported by national banks included Alabama, Alaska, Arizona, Hawaii, Idaho, Indiana, Maine, PAGENO="0122" 102 Nevada, Pennsylvania, Rhode Island, Utah, West Virginia and Wyoming. In some cases, the selective imposition of taxes on State banks that did not appiy to national banks appears to have resulted in a tax burden on State-cliartei'ed banks commensurately higher than that. on national banks. in other cases, the States have made compensating adjustments, iflClU(liflg differential rates or permitting one type of tax to be used as an offset against another. The over-all data suggest, however, that State-chartered banks were taxed somewhat more heavily than national banks in 1969, as shown by the ratios of total State and local taxes to various balance sheet and income statement measures (table 8). For example, the ratios for State banks exceeded those for national banks by one-half of 1 per- centage pomt on net income before taxes and nearly 1 percentage point on net income after taxes. Differences were ~)roportioflately greater when taxes are measured in relation to total assets and equity capital. State banks ratio divided by national banks ratio Size of bank (total deposits in millions o~ dollars): Less than 15: All banks National State .. - -. State banks ratio divided by national banks ratio - - l5to 100: All banks - - - National State State banks ratio divided by national banks = ratio 100 to 500: All banks National State State banks ratio divided by national banks = ratio SOC and over: All banks National. State 8.64 14.50 8.40 13.99 9.04 15.35 108 110 9.14 15.85 8.73 14.68 9.96 18.48 .13 1.76 .12 1.67 .14 1.92 117 115 .12 1.77 .11 1.64 .13 2.04 TABLE 8.-RATIOS OF TOTAL STATE AND LOCAL TAX EXPENSES IN 1969 TO SELECTED BALANCE SHEEt AND INCOME STATEMENT AGGREGATES FOR ALL INSURED COMMERCIAL BANKS, BY CHARTER STATUS AND SIZE OF BANK . Ratio (in percent) of tax expenses to- Net income , before all State and Class and . size of bank . local taxev, Federal income taxes, and securities gains or losses Net income after taxes and securities gains or losses Totzl assets Equity capital All banks National State 8.81 14.51 .12 8.61 14.16 9.10 15.00 1.67 .11 1.61 .13 1.77 106 106 118 110 7.84 11.46 .11 1.32 7.88 11.77 .10 1.24 7.82 11.32 .11 1.36 99 96 110 110 8.88 13.91 .12 1.64 8.78 13.92 9.03 13.90 103 100 .12 1.60 .12 l.69 100 116 State banks ratio divided by national banks ratio 114 126 118 124 PAGENO="0123" 103 The general level of the several ratios for both National and State banks varied widely from State to State, as did the relationships be- tween ratios for these two groups. (See table E, p. 1123.) In fact, with respect to the ratio of State-local taxes to net income after taxes, the national bank ratio was higher than the State-bank ratio in over half the States, while for all other measures the State-bank ratios were higher in a majority or close to a majority of the States. Table 9 provides a frequency distribution of States that compares the national and State bank ratios of State and local taxes to net income before taxes with ratios for taxes-to-equity capital. This table indicates that the States differ considerably in these relation- ships. It illustrates also the tendency for State bank ratios to be higher than national bank ratios. The ratios for the two charter groups are within 20 percent of equality for both the tax/income and tax/equity measures in nearly half the States (24), but there are 10 States for which both ratios are higher by 20 percent or more for State than for national banks and only 3 States where both ratios for State banks are below those for national banks by 20 percent or more. TABLE 9.-STATE/NATIONAL BANK RATIOS FOR SELECTED MEASURES OF STATE-LOCAL TAX EXPENSE [Number of States[ Ratio of State-local tax ex- pense to net income before taxes-State banks as per- cent of national banks Ratio of State-local tax expense to equity capital-State banks as percent of national banks - All 130 or 120 to 110 to 90 to 80 to 70 to Less than States more 129 119 109 89 79 70 All States 130 or more 51 8 6 5 13 9 4 6 5 . 3 2 120to129 8 5 2 1 110 to 119 5 1 2 1 1 90 to 109 20 2 1 10 3 4 80to89 8 2 4 2 70 to 79 Less than 70 2 1 1 3 1 2 In many cases, there was no readily discernible relationship be- tween the relative percentage for National and State banks within a State and the presence or absence of special taxes on State banks In that State. This J)robably means that the effects of the tax differences were outweighed by differences in characteristics of National and State banks within the various States, including their size distribution, type of business, branching status, and other factors. The higher over-all tax ratios for State than for national banks appear to be attributable mainly to differences at the larger banks. For banks with total deposits under $100 million, for example, the ratios of State and local taxes to the various measures in table 8 show no marked or consistent differences, with the ratios for State banks being somewhat higher than those for national banks in 4 cases and the same or lower in 4. However, a widening spread of State-bank ratios above those for national banks emerges as the size of bank increases. For banks in the largest size class (total deposits of $500 million and over), the differences are marked-for example, the ratios for National and State banks are 14.68 and 18.48 percent, respectively, for net income after taxes and 1.64 and 2.04 percent, respectively, for equity capital. PAGENO="0124" 104 While the survey data alone do not provide an explanation for these charter-status differences tirnong large banks, the data on the relative importance of various types of taxes at large national and State banks suggest one possible influence. With respect to tangible person~~l ProP- erty, sales, and the miscellaiieous-other categories (which are in large part sales taxes)-types of taxes that were not legally enforceable against national banks in 1969-large national banks showed much smaller relative shares than large State banks. At smaller banks, on the other hand, the differences were less marked (table 10). The minimal amounts of these taxes reported by large national banks may reflect in part greater awareness of the law exempting them from cci'- tam taxes (particularly following the~ 1968 Supreme Court decision rejecting the sales tax for n~ttional banks"), greater concern about stockholder suits in case unauthorized taxes were paid voluntarily, or less willingness to P~Y such taxes as a consideration for gaining State deposits where this might be a factor. In a few jurisdictions, large national banks refused to pay sales taxes whereas smaller national banks in many cases paid those taxes as did the State-chartered banks. TABLE 10-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY MEASURE OF TAX. CHARTER STATUS OF BANK, AND SIZE OF BANK Size of b Measureof tax All banks Underl5 ank (total depo sits in millions of dollars) l5tolOO 100to500 500and over NATIONAL BANKS Total 100.0 100.0 100.0 100.0 Net income 35.4 26.5 19. 0 24.5 46.6 Real property 31.7 30.6 33.8 31.8 31.0 Shares or capital structure 21. 1 32. 3 30. 0 27. 2 14. 2 Bank deposits 6.0 4.3 9.2 8. 2 4.3 General sales and use 1. 2 1. 2 .9 1. 6 1. 1 ~1ossjncomeorgrO5S receipts - .6 .1 *5 8 .6 Tangible personal property . 5 1. 2 1. 2 . 6 . Documentary taxes . 1 .6 . 2 . 1 (`) Miscellaneous deductible 2.0 2.4 4.3 3.0 .8 Other 1.4 .7 .9 2.3 1.3 STATE BANKS Total 100.0 100.0 100.0 100.0 100.0 Net income 40. 8 33.3 25. 2 33. 6 57.0 Real property 25. 0 22. 7 29. 6 26. 3 22.7 Shares or capital structure 17. 0 29. 1 25. 9 16. 8 6. 2 Bank deposits 6.5 5.3 7.7 11.5 4.2 General sales and use 2.6 2. 1 1. 6 3.4 3. 0 Gross income or gross receipts 2. 0 2. 4 3. 2 1. 6 1.3 Tangible personal property 1. 1 2. 2 1. 7 1. 5 . 2 Documentary taxes . 1 . 1 . 2 . i Miscellaneous deductible 1.8 2. 1 2.7 .8 1. ~ Other 3.1 .9 2.3 4.5 4.0 I Less than 0.05 percent. At both national and State-chartered banks, the tax ratios in table 8 varied directly with bank size, but the spreads between the ratios for the smallest and the largest size classes were wider for State than for national banks for the reasons indicated above. The ratio of taxes to net income before taxes for State and national banks combined was 9.14 at the largest banks, about one-sixth above the smallest-bank ratio, while the ratio of taxes to equity capital, at 1.77, was about one- II First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339 (lOtS). PAGENO="0125" 105 third higher. Most of the size-of-bank variation in the ratios was between banks in the smallest size class (total deposits under $15 mil- lion) and those in the next larger group (total deposits of $15 to $100 million), although three of the four ratios tended to rise further as bank size increased. This tendency for tax ratios to vary with bank size reflects a number of factors, including (1) the understatement of tax expense on 1969 operations for smaller banks owing to widespread reporting of such expense by the these banks on a cash rather than accrual basis (as discussed in paragraph (~) on page 96 above); (2) the concentration of smaller banks in smaller communities and in less industrialized States, where tax levels tend to be lower than in urban areas and indus- trialized States where most large banks are located; (3) the more favorable treatment accorded smaller institutions in many State and local tax laws or in their administration; and~ (4), with respect to the equity capital ratio, the larger relative capital positions among banks in the smallest size group as compared with those of larger size. Out-of-State Taxes Banks paid only nominal amounts of taxes to State and local govern- ments outside their home States in 1969. Such taxes aniounted to less than $1.4 million for all insured, commercial banks, only about two- tenths of 1 percent of all their State-local taxes, as summarized in table 11. This proportion was less than 1 percent for banks located in every State except Illinois (1.4 pei'cent), and less than one-half of 1 percent in all but three other States (California, Massachusetts, and Missouri). No out-of-State taxes were reported by banks in 11 States and only nominal amounts were reported in 10 other States. TABLE 11.-STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969 PAYABLE IN JURIS- DICTIONS OUTSIDE THE HOME STATE, BY MEASURE OF TAX AND CLASS OF BANK [Amounts in thousands of dollarsj Percentage distribution of Out-of-State taxes as Measure of tax A All banks mount of tax National State amount - All banks National State Percent of total for all banks National State percent of total State and local taxes Total 1,373 1,155 218 100.0 100.0 100.0 84.1 15.9 0.2 Net income Real property Shares or capital structure Bank deposits General sales and use 786 385 8 3 58 657 130 323 61 6 2 3 55 3 57. 3 56.9 59. 5 28. 0 28. 0 28. 2 . 6 . 5 1. 1 .2 .3 4. 2 4. 7 1. 4 83. 5 16. 5 83. 9 15. 9 75. 0 25. 0 100.0 94. 8 5. 2 . 3 . 2 (1) (1) . 5 Gross income or gross receipts Tangible personal property Documentary taxes Miscellaneous deductible~ 1 22 1 27 1 21 1 19 8 . 1 . 1 1. 6 1. 9 . 1 . 1 - 3 2. 0 1. 7 3. 8 100. 0 100. 0 100. 0 70. 4 29. 6 (1) . 5 . 2 . 2 Other 81 69 12 5.9 6. 0 5. 6 85. 2 14. 8 . 6 1 Less than 0.05 percent. Note: Detail may not add to totals because of rounding. This minimal volume of out-of-State taxes for banks is in marked contrast with other industries similarly engaged to an appreciable extent in interstate activities, which pay substantial amounts of out-of-State taxes. The special position of banks again appears attrib- PAGENO="0126" 106 utable at least in part to the restrictions on Stale powers to tax national banks contained in section 5219. Prior to the 1969 amend- ments, this statute confined authority to tax national banks to the State in which the principal office of the bank was located, excej)t for taxes on real property. As in the case of the other restrictions in this law, the immunity to out-of-State taxation appears to have carried over to State-chartered banks, although legally they could be taxed by any States in which they transact business It is also possible, however, that the manner in which State banks operate in foreign States, which generally involves no physical presence, does not often bring them within the taxing jurisdiction of those States. Notwithstanding their statutory immunity, national banks ac- counted for 84 percent of all out-of-State taxes reported by banks for 1969. These payments were heavily concentrated at large banks, and were mainly associated with the operations of subsidiaries, which are not covered by the statutory immunity of the banl~s. Other sources of out-of-State tax liability included taxes on foreclosed property, in a few instances on out-of-State branches and respresenta.tive offices, and on purchases of goods and services in other States. The major form of tax paid to out-of-State jurisdictions was the income tax, nearly three-fifths of the total. Real property taxes ran second at 28 percent, and sales taxes a distant third at 4 Pe1~ceflt. Banks with total deposits of $500 million or more accounted for all the out-of-State income tax, about three-fourths of the real property tax, and about 85 percent of the sales tax. Thus, to the extent smaller banks paid out-of-State taxes, they were mainly real pro~)erty or "other" taxes (mainly sales and use taxes). * Only 227 banks are estimated to have incurred out-of-State tax * liability for 1969, about two-thirds of them with. liabilities in only one foreign State. The average number of States per respondent was just under two. Payments in appreciable numbers of States were reported only by a few large money-market banks. The affected States for most respondents were adjoining, or nearby States. Where a more distant State was involved, the State mentioned most often was New York, and in several of these cases, the tax was associated with a bank's Edge Act subsidiary.'2 Banks paying out-of-State taxes were distributed over 39 States and the District of Columbia. The maximum number of banks in any Stat.e that is estimated to have paid out-of-State taxes is 20-the total from Florida. Changes in Taxes after December ~4, 1969 To provide information on the extent to w'hch bank taxes had been affected by the enactment of Public Law 9 1-156 respondents were asked to report information concerning any significant change (ex- clusive of a change solely in rate) in State and local taxes that lied been 12 As part, of a major revision in the report of income required by Federal bank supervisory authorit,es beginning with the year 1959, all banks Were required to prepare a conoohdated statement on an item by Item ha.cis for the hank and its domestic subsidiaries. For purposes of this statenient. the instructions speci- fied that Edge Act Corporations, which engage primarily in international business, are not domestic cub- sidieries, but ncf income remitted to the bank by these corporations continued to he included under "other operating income." This resulted in some ambiguity concerning the treatment of taxes paid by these cor- porations in the tax expense survey, which requested reporting of the amounts of1911i) State and local tax expense "reflected" in the bank's "Consolidated Report ~ Income" filed with the Federal hank supervisory authority for that year. Some l)anks interpreted their Edge Act Sut)SidiarieS as being "reflected" in their reports of income and therefore reported taxes for those subsidiaries in the tax expense survey hut others apparently did not. PAGENO="0127" 107 made since the effective (late of that legislation.'3 For each tax so af-. fected, banks were asked to furnish an estimate of what their 1969 tax expense W0U1(l have been on the assumption that the change was ef- fective thioughout 1969. Thus any inctease due to expansion in the tax base as a result of rising income and prices was to be excluded from the calculations. Only 585 respondents-about one-fourth of all banks in the sample- submitted information relating to tax changes. In no event would a 100 percent response rate have been expected since in many jurisdic- tions there were no tax changes to report. Since the amendment of section 5219 applied specifically to national banks, they were_more frequently affected by tax changes than State banks, and 44 percent of all national banks in the sample subniitted estimates compared with 16 l)erCeflt of the State banks (table 12). The response rate for both charter groups varied directly with size of bank, ranging from 34 PerCent for banks with total deposits of $15-100 million to 65 percent for the largest size group (total deposits of $500 million or more). Although the smallest banks (those with total de- posits under $15 million) were given the 01)tioll of not responding to this question, information was received from nearly 10 percent of all sample banks in this category. TABLE 12-BANKS REPORTING INFORMATION ON CHANGES IN TAXES BETWEEN DECEMBER 1969 AND THE SURVEY DATE (DECEMBER 1970), BY SIZE OF BANK AND CHARTER STATUS . Size of bank (total deposits, in millions of dollars) Number of banks in sample Banks reporting tax changes as a perc sample banks in each group ent of Total National ~- State All size groups Less than 15 15 to 100 100 to 500 500 and over 2,222 1,040 805 273 104 26. 3 43. 7 9.0 15.6 33.8 45.9 55. 7 72. 8 65.4 75.0 15.6 6.6 24.8 30.6 43.8 The lower response rate at smaller banks may have been attributable in part to the difficulties of re-estimating taxes, but lack of specific information concerning the nature of tax actions tl1at had been taken in their States, ~)artidular1y actions with a. deferred effective date, probably was a more important consideration. Also, as noted earlier, the smaller national banks to a much greater extent than the large ones I1ad been making voluntary p~ ments of types of taxes that were legally applicable only to State banks. The imj)act of statutory changes therefore was relatively less for the smaller national banks than for the large ones. The 585 banks submitting tax-change information were located in 41 States. In 5 of these, however, there were only one or two responses, suggesting that the relevant tax change might have been confined to a single local community. In 10 of the remaining 36 States, half or more of all sample banks reported, and in 13 additional States, where tax action apl)arefltly had been confined to national banks since no State banks reported, close to half or more of all national banks in those States responded. !3 The "temporary amendment" authorized State and local governments to impose on itational banks within the State any generally applicable and non-discriminatory tax (except an intangibles tax) in the same manner and to the same extent as the tax was applied to State banks in that St~tp. As of Jimuarv 1, ~1972 the intangibles tax restriction will be removed under the present language of the "permanent amendment." PAGENO="0128" 108 Most of the reported changes related to tax increases, particularly the imposition of taxes previously not. applied to banks, or at least not to national banks, because of section 5219. In nearly all the 41 States, the sales tax was reported, and in a substantial number, also the tangible. persoiial property tax and various miscellaneous taxes (mainly occupancy, service, and license and privilege taxes). In addition, the gross receil)ts tax was reported by banks in WTashing_ ton, and the documentary ta~x by banks in Alabama and Florida. Although the survey of tax administrators indicated that several other States had adopted a documentary tax or extended it to national banks subsequent to December 24, 1969, no bank in any of these additional States reported the change (possibly because the tax is passed on to the customer and not absorbed by the bank). TABLE 13.-ESTIMATED EFFECTS OF CHANGES BETWEEN DECEMBER 1969 AND DATE OF SURVEY IN STATE AND LOCAL TAXES PAYABLE IN THE HOME STATE BY INSURED COMMERCIAL BANKS, BY MEASURE OF TAX lAmounts in thousands of do liars; respondent banks onlyj Measure of tax Number of banks reporting change Amount of tax f or 1969 Net change Percenfage Amount distribution - Actual Revised Net income Real property . Tangible personal property Shares or capital structure Gross income or receipts Sales and u Documentary Mfsce!Ianeous Total reporting Memoranda: National banks - State banks All banks reporting 122 7 155 88 32 406 8 44 84,677 84, 421 125 136 95 2,789 4,439 7, 631 1 3134 523 14, 412 15 47 45 434 -256 -1. 1 11 (2) 2,694 11.7 3, 192 13. 8 3,133 13.6 13, 8~9 60. 2 33 389 1. 7 . 3 585 4 256, 078 4 279. 164 23, 086 100. 0 372 213 169, 845 190, 420 86,232 88,745 20, 575 12. 1 2,511 2.9 585 256, 078 279, 164 23, 0869.0 I The amounts shown in these columns for each category of taxes cover only those individual taxes that were affected significantly by changes in statute or regufat'on between December 1969 and the survey date (December 1970). lr. the "Revised" column are respondents' estimates of what their 1969 tax expense for the designated tax would have been if the revision had been in effect throughout thet year. Less than 0.G5 percent. a This total ix not the sum of the number of banks that reported changes for individual taxes, since some banks renorted chanc'es in more than one tsx. These totals represent aggregate Stnte and local taxes of the 585 respondents that reported changes in individual taxes, including categories of taxes that had not changed. The "Revised" total indicates what total State and !oca! taxes for those banks would have been in 1969 after allowing for the reported changes. Decreases in selected taxes also were reported in a few States. These OCCUr1'e(I mainly where one tax was substituted for another or where the introduction of new taxes was associated with or re- sulted in some reduction in another tax, such as by raising the total of allowable tax deductions used in calculating taxable income under the income tax. The net effect øf all the changes repol'te(l by the 585 respondents. was an increase in their total State and local taxes of 9 l)erceflt (table 13). As might be CXpecte(I, in view of the Federal statutory change for national banks, these banks showed a much larger rise than State banks-12 percent as compared with 3 percent. PAGENO="0129" 109 Three-fifths of the total increase of $23 million was for sales and use taxes, which reflected the aggregate of small increases in a large number of States. Ti next largest increases were in shares or Cfl1)ital structure and gross receipts taxes, which rose by a little over $3 million each. Both of these were concentrated, with the gross receipts tax accounted for entirely by the State of Washington and the shares tax mainly reflecting the net of a $3.7 million increase in New Jersey (where the share tax rate was doubled and the structure changed)'4 and a $634 thousand decrease in Iowa, which replaced its shares tax mainly with an income tax. Increases in taxes on tangible pei'soiml property were reported in about two-fifths of the 41 States and the increases totaled $2.7 million, or about 12 percent of the total. The net income tax shows a small net decline, as increases in States which had introduced this tax (Iowa and New Hampshire) or extended its coverage to national banks (Tennessee) were more than offset by declines associated with increased deductions for other taxes or, in the case of New York, a reduction in the income tax rate accompanied by elimination of a sales tax credit against th~ income tax.'5 Relation of Bank Taxes to Total State-Local Tax Revenue `The $623 million of State and local tax expenses of commercial banks in 19G0 amounted to about three-fourths of one percent of the $83 billicn total of State-local revenue that year, as shown in table 14. (Bof Ii these amounts are exclusive of State payroll taxes for financing unemployment compensation and disability insurance.) Banks' share of total taxes on business was 1.1 percent, but the proportion varied considerably by type of tax. Owing in part to limitations imposed by section 5219, the States placed considerable reliance on the net income tax in taxing banks; l)ayrne1~ts by com- mercial banks were nearly 7 percent of total State-local revenue from the corporation income tax. Taxes IMtid by banks on their property or on shares and deposits exceeded 13% percent of all business taxes on property. But other taxes derived from banks, such as sales and use and gross income or gross receipts taxes-types of taxes which section 5219 made inapplicable to national ban ks-were of negligible importance as sources of State-local revenues. 14 The tax was changed from a county tax to a tax that is split between the State and the county at the same time that the rate was raised from ~ to 13'~j per cent. 15 The small net increase reported for real property taxes may have included some changes resulting from new assessments or higher levies, even though time survey instructions were intended to exclude this kind of change. 79-421 0 - 72 - 9 PAGENO="0130" 110 TABLE 14.-RELATION OF COMMERCIAL BANK STATE-LOCAL TAX EXPENSES TO TOTAL TAX REVENUE OF STATE AND LOCAL GOVERNMENTS, BY MEASURE OF TAX: CALENDAR YEAR 1969 [Amounts in millions of dollars[ Measure of tax Tax expense of commercial banks State-local tax revenue --- Bank tax expense as a percent of total State-local tax revenue -------------- Total Business Total Business All taxes 623.1 82,826 57,471 .75 1.08 Net income Property value Other 235.2 13435 44.4 13,476 31,956 37,394 3,483 19,402 34,586 1.75 6.75 1.07 1.77 .12 .13 I Comprises taxes on real property, tangible personal property, shares, capital structure, and deposits. Source: Data on bank taxes were compiled from the Federal Reserve survey. The estimate of total State and local tax revenue for calendar 1969 is from Bureau of the Census, Quarterly Summary of State and Local Tax Revenue, October- December 1969. The estimates of total business taxes and the breakdowns of total and business taxes were derived from the Bureau of the Census total of all State-local tax revenue and from data in the Survey of Current Business, July 1970, table 3.3 at p. 30, as follows: Business taxes total equals the census total of State-local revenue less the Commerce total of personal tax receipts (exclusive of $7,546 million nontaxes but inclusive of homeowners property taxes classified under "business" property tax in the Commerce table totaling $11,479 million, according to breakdown supplied by the Office of Business Economics); net income taxes (Commerce); property value taxes (Commerce; adjusted as noted above); other taxes (residual after deducting net income and property value taxes as derived above from total for all taxes). Included in other business taxes are $25,100 million of general and selective sales and use taxes; the entire amount of such taxes is assigned to the business sector in the Commerce breakdown although a substantial proportion of these taxes is levied on and collected from individual consumers. Bank taxes in 1969 ranged from less than 0.4 percent of total State-local tax revenue in seven States to more than 1.3 percent in three State.s and between 1.0 and 1.3 percent in five.10 (See p. 125, table F, column (b).) There were significant regional differences in the general level of the ratios, ranging from a low median level of .53 in the South to .90 in the Northeast (table 15). However, within each region, the range of ratios was quite wide. These marked variations in the bank share of total tax revenue arise not only from diffeiences in the economies of the States and in theii practices concerning the taxation of banks, but also from differ- ences in the intensity of their over-all tax effort and in the makeup of their tax structures. For example, the bank tax proportion is likely to be less in a State that relies very heavily upon consumption taxes (which add to the State-local revenue total but have little impact on banks) than in a State which makes significant use of corporation income taxation. 16 States with bank taxes accounting for less than 0.4 percent of total State-local tax revenue were Alaska, Arizona, Florida, Nebraska, New Hampshire, South Carolina and Washington. Thoce in the 1.0-1.3 pci- cent range were Connecticut, District of Columbia, Minnesota, New York and Ohio; and those with higher percentages were Louisiana, Montana and Texas. In this and subsequent comparisons that deal with individual States, bank tax amounts for calendar 1969 are related to total State-local tax revenue for "fiscal 1958-69-that is, for fiscal years ending in June 1969 or within the preceding 11 months. Because of the strong upward trend in State-local taxes, this results in some overstatement of the bank shares of total taxes. Calendar-year tax totals are not reported for the individual States. PAGENO="0131" 11'l TABLE 15.-DISTRIBUTION OF RATIOS OF BANK TAXES TO TOTAL STATE-LOCAL TAX REVENUE, BY REGION, 19691 [Number of States] Bank taxes as a percent of total State-local tax revenue U.S. total Northeast North central South West All States 130 or more 1.00 to 1.29 0.90 to 0.99 0.70 to 0.89 0.60 to 0.69 0.50 to 0.59 0.40 to 0.49 0.30 to 0.39 Median ratio 51 9 12 17 13 3 2 1 5 2 2 1 5 3 2 5 1 3 1 7 3 1 3 11 2 2 4 3 8 1 1 4 2 7 1 1 2 4 .590 .903 .668 .531 .590 I Bank taxes for calendar 1969 are related to tax revenue of the individual States for "fiscal 1968-69-i.e., for fiscal years ending in June 1969 or within the preceding 11 months. Source: Table F below, p. 125. Further background on these relationships is provided by a recent research study of the Advisory Commission on Intergovernmental Relations, which includes State-by-State estimates of "relative tax effort." 17 These estimates express the percentage relationship of actual State-local tax revenue in each State to the potential tax yield of that State if national average rates for each kind of tax were applied to the various tax bases of the State. The resulting ratios can be compared with various ratios relating to the general level of bank taxes-for example, the percentage of the national average of a State's ratio of bank taxes to net income before taxes, to equity capital, etc. Comparisons of this type show that there is a general tendency for State ratios of the level of bank taxation, so derived, to vary directly with over-all indexes of State-local tax effort developed by the Advisory Commission, whether "effort" is considered from the stand- point of all State-local taxes or only "business" taxes. For example, in the 17 States with the highest indexes of over-all effort on business taxes, the ratios of bank taxes to net income before taxes averaged 110 percent of the national average compared with 74 percent for the 17 States with the lowest effort indexes (table 16). Similar relation- ships exist if the level of bank taxes is measured in rd ation to net income after taxes or to equity capital. However, within each of the various effort groupings of States, a considerable range exists in the 1-evel of bank taxation and in many cases, the bank tax index for indi- vidual States also differs materially from either of the broader tax effort indexes used for this comparison. Such disparities are to be expected, however, not only because of the wide State-to-State differences in the bank tax ratios, discussed earlier, but also because of the many and varied factors affecting tax-effort ratios, including differences in the relative use of grants-in-aid, nontax sources of revenue, borrowing, etc. 17 Advisory Commission on Intergovernmental Relations, Measuring the Fiscal Capacity and Effort of State and Local Areas, Washington, D.C., March 1971, report M-5S. See columns (c) and (d) of table F, below, p. 125. PAGENO="0132" 112 TABLE 16.-STATE INDEXES OF TOTAL TAX REVENUE COMPARED WITH TOTAL STATE-LOCAL TAXES ON INSURED COMMERCIAL BANKS Tax effort group Index of overall Range tax effort Average Index of State-local taxes on banks, 19691 Range Average All State-local taxes, 1968-69: l7high-effortStates 17 medium-effort States . 101-139 88-100 111 94 63-144 101 51-168 88 17 low-effortStates 71-87 81 41-164 78 State-local `business" taxes, 1966-67:2 l7high-effortStates 17 medium-effort States 108-149 86-107 124 94 65-168 110 41-156 83 17 low-effortStates 45-85 71 44-117 74 I As indicated by the ratio of bank State-local tax expense to net income before taxes in each State expressed as a percentage of the national average for that ratio, 2 Comprising corporation taxes, severance taxes, and local property taxes on business property. Source: Table F below, p. 125. Other Relationships A question of considerable interest and importance that arises in connection with a detailed study of the tax status of any industry is how the tax burden of that industry compares with that in competing industries and with business generally. This question is a matter of special interest in the case of banking because of the long-standing limitations placed on State and local taxation of national banks by section 5219 and the efforts of the various States to seek accommoda- tion to those limitations while preserving an equitable balance in the treatment of banks and other businesses with their often dissimilar tax structures. However, no effort has been made in this report to develop inter- industry comparisons of this character. As pointed out in another paper prepared in connection with the over-all study, serious conceptual and analytical difficulties would be encountered in developing an appro- priate framework for making such comparisons.18 Moreover, even though the data needed for making such comparisons were obtained for banks for the year 1969 in the tax expense survey, comparable data are not available for other industries, including those closely competitive with banking for which comparisons would be most relevant. REPORTING FORM AND INSTRUCTIONS Confidential (FR 741). 0MB No. 55S70005 Approval Expires March 31, 1971 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM SURVEY OF STATE AND LOCAL TAX EXPENSES OF INSURED COMMERCIAL BANKS, 1969 INSTRUCTIONS Please supply the information requested below relating to State and local tax expense incurred by your bank for the calendar year 1969. Part I. The amounts of taxes reported should be those reflected in your bank's "Con- solidated Report of Income" filed with the Federal bank supervisory authority for that year. The kinds of taxes to be reported are those State and local taxes that are deductible on line 17 of IRS Form 1120 in calculating Federal income tax. Exclude 4° See appendix 9 below, 1)1). 469-484. PAGENO="0133" 113 State payroll taxes (for unemployment cornl)(~nsation, etc.). Report total State and local tax expense for your home State in Column A and for all other States combined in Colunin 13. Column C is intended to measure the impact of signilicant recent changes in State-local taxation of commercial banks since the Federal statute governing State taxation of national l)anks was amended 1)eceniber 24, 1969. If your hank ex- perienced such changes affecting any type of home-State tax for 1970, please re- compute or estimate what your 1DGD tax expense would hame been on the assumption that the change was effective throughout 1969. Include instances where (by statute, regulation, or administrative ruling) a former tax has been dropped, a tax not previously applicable has been imposed, or a tax has been broadened. 1)o not include estimates based on a change simply in the rate of tax (such as a change in the ad valorein rate on real property or the net income tax rate). If the amount of tax expense for item 1 (tax on net income) would have been affected by changes in other taxes-i.e., through changes in deductions or credits-please estimate the revised amount for this item giving effect to the changes in other taxes as well as any changes in law, regulations, or rulings governing this tax. In Column C, dis- regard changes under $100 or 5 percent of the affected tax expense. Leave Column C blank for any item for which a revised estimate is not reported. Banks with total deposits of less than $15 million need not fill in this column. Part II. Please report in item 1 any State and local tax expense not covered in Part I and in item 2 the names of States other than your home State in which taxes were paid. Items 3 through 5 provide supplementary information needed to identify the basis of reporting. Please return the filled-out form to the Federal Reserve Bank of - by December 30, 1970. PAGENO="0134" 114 part I. -- 1969 State anti Local. Taxes (See instructions on page 1). 1. Net income tax. State-local taxes upon, measured by, or according to. net income, including any "excise" or "franchise" taxes of ~this nature. 2. Real property 3. Tangihle personal property 4. Bank deposits 5. Shares of bank stock 6. Taxes measured by capital structure (capital. surplus, undividtd profits,.etc.). 7. Gross income or gross receipts 8. General sales and use taxes ~. Documentary taxes (real estate transfer, security transfer, mortgage taxes, etc.) 10. Niscellanecus. Identifiable amounts of State- .ocal taxes not included above (e.g., motor vehicle licenses, selective taxes on utility billings, etc.). Omit State payroll taxes. Specify t~'pes: xxx xxx `(xx State and local tax Estimate at Basis or type of tax expense Within home State Col. A 1969 In other States Col. B revised 1969 amounts for home State Col. C ~umit eta.) (omit cts S (Omit cts.) $ 11. Total, items 1-10 12. Other taxes. Totals reported in Part II, item 1 13. Total. State and~local ta,tes (sum of items 11 an 12). . . - ME~1ORANDUN: If column C is not applicable, check here PAGENO="0135" 115 Part II. Supplementary Information (Please complete all, questions): 1. If your bank incurred significant State and local tax expenses in 1969 (for example, more than 5 per cent of amounts in Part I, line 11) that were not specifically theme as deductible taxes but were included in other expenses in your Federal income tax mince and therefore are not included in Part I above (e.g. , general sales taxes or selective taxes on utility billings that were not separated from other expenses), plemse specify these taxes and estimate approxi- mate amounts for 1969. Omit State payroll taxes. (Add pages if more space is needed.) Check here if item I is not applicable Amount of tax, 196') (omit cents) Typo of tax Within l,o~e State 1 In other Stato.~ ~,________ $________ Total of above items 2. Please name the "other States" for which you.report tax amounts in Part I, Column B. If information is readily available, indicate type of tax applicable for each State. (Add pages if more space is needed.) Check here if item 2 if not applicable ~/ 3. The 1969 "Consolidated Report of Income" for your hank (as filed with the Federal bank supervisory authority) was prepared primarily on: cash basis ~ accrual basis c `4. A parent holding company of this bank did did not ~ incur State-local tax liabilities in 1969 in addition to those shown in this report. Check here ji item 4 is not applicable 5. Selected items from your Federal income-tax return for 1969: (a) Taxable income reported for Federal income-tax purposes (IRS Form 1120, line 30). $____________________ Bank only Consolidated basis (b) Total Federal tax for 1969 (IRS Form 1120, line 31): $_________________________ 6. Comrsen~g (add pages if more space is needed) ________________________________________ Name and address of bank: _________________________________________________________________ Name, title, and telephone number of individual to whore queries concerning this survey may be directed: Date of response: - 197_. PAGENO="0136" 116 c~iciC5 c~cr~-~ U- _ ~:~2 ~ ~ o C~4 CD-~r-- ~`)C~)C')C~ "CDC')C'JC) ~cO~CO OO~C)~-~O C)r-~C)~ ~ CC) C') N~ C')C~ c~jc~ CC) CO-'CC) - OO. CD - - U) C C C~ Ui CD ` ` `c'~ - ` `~ `CD C') C')-' `CD ``` `,c4. `CD' CD'-' `c-a ` ` ` , ` ~C C ``: C C C CC C ` C C C C C C C C : Ui Cc a, C) E- LCCCDCDO)-C ~ ~ ~ CC .D r- ~ - ~- ~ C) CD ~ CDCD `cO CD CC ~ C') - C) - C'~ r-~ C-i CCC)Q ~ - - >- E 2 ~- - ` C)~'Jr'-C) ~C)CDCDc) C),-'CD~c') C'J°°CDCD.-~ CDC-'JC)C)OO C'4C)C)C))Ct) 2 ~ CDCC)~~ C)C'~C)~ ~QcC)cC - C') - - - Co - ~ C--i - ,-CC) C')CD C') ~ CC-CO C~ C 00 (`4 cCC') ~ ~ (0) 00 -I I F~ `CD `) ~ ~oCD - :~: CD~ - , ` C C CC o C C CC C C C') - - CDC'4 - ~ ~- C) - - C) CC) CD ~ `-C CD (`4CC) CC) (`4 C'4 (C) (`4 - _, E -J U- 0 - - 00 CC', U) ~C~C')C')~ O)CO CD C~t"O)"CD ~ ~r ~.-)(CDC) `a~ ~c~j fr~tr- -`~c~ ~ ~jCC~(~r C- Ui >( * : I : ::::`, ``:1'1 0 :111 III: Ui I- `I' 00 1:: ~::..._ ::~:~, C' a, -~ a, a, ~ ~gc'~ ~ ~ C'~~° ~ °2~'~ ~ ~ ~ ~ ~cC() C~)00IZ E5 ~ ~2~55 ~5~z:2 PAGENO="0137" C~1 R o6 u,~ ~;C)- ~ t-~(D ,-~: ,~: ~ C)~fl C~) ~ ~ c~ - - ~ ~ - r~ `C~4 ~ - LC) ~L ~J~1 ~ *2~~-g ~ ~ 117 bO PAGENO="0138" 118 TABLE B-TAX STATUS OF PARENT HOLDING COMPANY OF INSURED COMMERCIAL BANKS IN 1969 INumber of banksj Tax status of holding company and size of bank (total deposts in millions National of dollars) All banks banks State banks Holding company incurred additional State-local tax liability, total' 826 311 515 Under 15 390 53 337 l5to 100 293 164 129 100 to 500 93 61 32 500 and over 50 33 17 Holding company incurred no additional Slate-local tax liability, total ~ 1, 014 385 - 629 Under 15 628 182 446 15 to 100 -- 315 154 161 lOOto 500 61 42 19 500 and over 10 7 3 Banks with no parent holding company 11,626 3, 974 7,652 Under 15 8,982 - 2,589 6,393 l5to 100 2,364 1,206 1,158 100 to 500 234 146 88 500 and over 46 33 13 I Because some holding companies control two or more subsidiary banks, the number of banks exrt~ds the number of holding companies. TABLE C.-PERCENTAGE DISTRIBUTION OF THE NUMBER OF INSURED COMMERCIAL BANKS THAT PREPARED THEIR 1969 CONSOLIDATED REPORTS OF INCOME ON A CASH AND ON AN ACCRUAL BASIS, BY SIZE AND CHARTER STATUS OF BANK Percent of total number of banks within each group Size of bank (total Cash basis Accrual basis deposits in millions Number -__________ of dollars) of banks Total National State Total National State All banks 13,465 73.0 61.6 79.0 27.0 38.4 21.0 Under 15 10, 000 - 85. 1 80. 8 86.8 14.9 - 19.2 13.2 15 to 100 2,971 42.9 37. 1 49. 0 57. 1 62.9 51.0 100 to 500 388 9.8 10. 8 7.9 90.2 89.2 92. 1 500 and over 106 3.8 4. 1 3. 0 96. 2 95.9 97.0 PAGENO="0139" TABLE D.-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY STATE, CHARTER STATUS OF BANK, AND MEASURE OF TAX (The sum of entries on each line is 100.0; any discrepancies result from rounding) Total 37.7 National banks 35. 4 State banks 40. 8 Alabama 78. 1 National banks 79. 8 State banks 74. 9 Alaska 20.6 National banks 23. 4 State banks 5. 1 Arizona 33.4 National banks 35. 8 State banks 29. 2 Arkansas . 1 National banks . 1 State banks California 63. 9 National banks 63. 6 State banks 65. 1 Colorado 58. 4 National banks 57. 3 State banks 61. 5 Connecticut 72.0 National banks 66. 9 State banks 76. 5 Delaware 55. 5 National banks 21. 2 State banks 55. 9 District of Columbia National banks State banks Florida National banks State banks Georgia . 2 National banks (1) State banks . 3 See footnotes at end of table, p. 122. 28.8 0.8 6.2 19.3 1.2 1.8 0.1 31.7 .5 6.0 21.1 .6 1.2 .1 25.0 1.1 6.5 17.0 2.0 2.6 .1 13.9 .4 .6 1.9 .2 (1) 14.6 12.8 1.2 1.5 5.2 .7 .1 65.3 3.9 5.3 70.3 1.1 37.3 25.7 29.0 21.3 17.6 .4 33.9 28.1 21.1 17.5 .4 19.9 72.8 7.1 19.3 71.2 9.3 21.1 76.5 2.2 74.5 .6 .8 13.1 78.7 .6 .9 8.7 67.4 .6 .7 20.5 31.0 .1 68.1 40.9 58.9 20.9 .3 77.5 1.9 2.1 2.0 1.4 1.8 3.1 3.5 1.4 4.5 1.1 1.6 2.1 .2 .2 .3 Net State income Real property Tangible personal property Bank deposits Shares and capital structure Gross income or receipts General sales and use Documentary Miscellaneous Other 1.9 2. 1 1.0 2.7 4.3 2.8 .3 4.1 .2 1.4 .5 .4 2.5 .2 3.0 1.8 1 7.2 .5 19.1 56.4 59.6 51. 1 30.5 58.1 5.7 .7 1.9 32.7 49.6 11.1 .6 1.6 28.2 67.0 .8 2.1 31.9 .2 (1) (1) .1 .1 (1) 3.7 c~ 32.6 .1 (1) (1) (1) 3.7 29.7 .4 .1 .5 .2 .1 3.9 40.2 .2 .1 .7 (1) .5 (1) 41.3 .2 .7 .5 (1) 37.0 .1 .2~ .6 (1) .6 (1) 22.6 2.6 1.1 (1) (1) 1.7 30.8 .1 (1) 2.1 15.1 4.9 2.2 (1) 1.3 5.2 16.8 5.0 1.3 1.3 3.0 5.0 2.1 .2 3.9 4.9 1.1 3.2 1.5 5.2 .2 .1 .2 .1 .2 (1) .1 2 .i .4 .3 PAGENO="0140" TABLE D.-PERCENTAGE DISTRI BUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BY STATE, CHARTER STATUS OF BANK, AND MEASURE OF TAX-Con. State Tangible Shares and Gross General Net Real personal Bank capital income or sales income property property deposits structure receipts and use Documentary Miscellaneous Other Hawaii 54.9 National banks 67.4 State banks 54.6 Idaho 69.2 National banks 71.9 State banks 61. 4 Illinois 8.8 National banks 2. 4 State banks 17.2 Indiana National banks Statebanks Iowa .6 National banks 1.7 State banks Kansas 53.9 National banks 49. 5 State banks 58. 8 K~tucky National banks State banks Louisiana .1 National banks . 1 State banks Maine 5.8 National banks .4 State banks 9.9 Maryland 72.0 National banks 71.6 State banks 72.3 Massachusetts 64. 7 National banks 65.4 State banks 63.7 Michigan 39.4 National banks 38. 4 State banks 40. 6 Minnesota 68.8 National banks 64.8 Stata banks 77.0 31.0 .3 2.4 9.4 .1 22.5 9.8 31.2 2.5 9.7 .1 26.8 1.9 .1 1.3 26.1 1.4 28.6 7.1 .3 .9 36.1 .4 49.0 1.6 .2 35.8 (1) 56.3 .7 .3 36.6 .8 39.5 2.7 .1 22.6 .1 23.3 1.4 .1 27.9 (1) .1 1.2 16.0 .1 52.2 1.7 .1 45.1 .7 49.0 3.1 553 (1) 40.8 1.6 39.9 1.1 53.2 3.8 40.1 1.2 . 2.9 (1) 45.3 .1 2.9 34.2 2.5 2.9 .1 18.5 .1 .7 74.5 1.4 (1) 17.8 (1) .7 76.1 1.3 (1) 19.0 .1 .7 73.3 1.5 (1) 12.2 .1 87.2 .3 15.0 .1 84.6 .1 8.8 .1 90.5 .4 46.6 1.1 2.3 36.0 53.1 .3 42.8 41.6 1.7 4.1 30.8 2.8 .1 1.2 .2 4.0 (1) .9 (1) .3 (1) 1.3 (1) 33.9 .1 (1) .5 33.7 .2 .1 .4 34.2 .1 .6 (1) 27.7 .1 29.7 .6 .4 .1 30.1 30.1 .2 .2 25.1 .3 29.3 1.1 .7 .1 28.3 (1) 1.7 (1) 32.3 1.8 (1) 20.2 .1 1.5 1.0 .9 1.1 .9 .7 .2 .4 .2 1.4 .3 .4 3.5 .5 4.1 .3 2.8 52.2 .4 70.7 .1 29.0 .8 .4 1.2 .2 .4 .5 1.6 .2 1.6 ~ .3 1.8 .1 1.4 .2 4.7 .3 3.8 .1 5.3 (1) .2 .1 .2 5.1 .1 1.9 .2 7.5 .3 1.2 .1 1.6 .4 .9 .1 .7 .1 .2 .1 1.5 .1 1.8 .1 1.0 .1 2.8 .3 .9 .2 .9 .3 .9 25.6 26.4 25.0 PAGENO="0141" M~ssiss~pp~ 1.9 40.1 National banks 50.5 State banks 3. 6 30. 7 Missouri - 74.7 18.2 National banks 73. 1 23. 7 Statebanks 75.6 15.0 Montana 21.6 National bank 27. 2 State banks 16. 5 Nebraska 41.0 51.4 National banks 30. 7 63. 8 State banks 53. 9 35. 8 Nevada National banks ~ - State banks New Hampshire 3.4 National banks 1.0 State banks 9.0 New Jersey. .1 National banks .2 State banks New Mexico 65. 6 National banks 68.9 State banks 55. 3 New York 68.6 National banks 68. 7 Stote banks 68. 5 North Carolina 63. 0 National banks 69. 1 State banks 50. 3 North Dakota 50. 8 National banks 45.6 State banks 57.5 Ohio (1) National banks (1) State banks Oklahoma 70.9 National banks 70. 9 State banks 70. 5 Oregon 63.4 National banks 64. 5 State banks 58.4 Pennsylvania 1 Nat.onal banks... -- State banks . 3 See footnotes at end dftàble, p"122. 4.7 2.1 8.0 43.3 .4 1.7 35.5 59.4 1.3 5.3 70.1 6.0 72.4 3.9 65.0 10.7 .4 10.1 .2 18.6 .6 2.5 .2 2.9 .2 1.5 .2 4.8 .5 1.8 .4 1.7 .7 2.4 i-~ 3.0 (1) 1.6 1.9 .7 (1) .3 .1 4.6 (1) 2.6 3.2 1.0 .3 .9 .4 .3 2.1 .4 2.7 .1 42.4 2.7 2.0 26.2 . 2.5 2.6 .3 56.9 2.9 1.? 1.6 .6 .4 (1) (1) .9 .6 5.0 73.1. 2.2 70.2 7.5 75.6 2.4 3.7 .7 2.1 .4 2.6 .9 1.8 .3 .1 .2 .2 .3 (1) .8 1.8 .1 (1) 1.1 2.2 .5 .5 1.3 .2 2:1 .7 52.0 1.4 64. 1 26.9 4.3 20.4 .1 22.6 .1 15.3. 51.5 43.4 2.0 51.6 45.3 1.3 51.3 40.8 2.9 29.0 .3 .9 (1) 1.8 (1) 26.9 (1) 2.1 (1) 35.5 1.4 3.6 .2 .9 24.9 (1) 30.2 21.1 (1) 30.4 4.2 .3 29.0 .8 .4 33.2 11.2 (1) 45.6 1.3 1.1 .1 53.7 (1) 35.1 2.9 2.6 .1 12.0 (1) 76.0 8.8 .9 .1 13.9 78.2 7.6 (1) .1 9.8 (1) 73.5 10.1 1.9 .1 23.9 .2 .1 24.0 .1 .1 22.9 .3 .1 35.4 (1) .2 (1) .3 .7 34.8 (1) .7. 38.5 .1 1.0 (1) 1.7 .3 22.4 70.9 1.4 .9 .1 (1) 4.0 23.4 76.1 .1 .3 .1 (1) 20.9 63.3 3.5 1.8 .2 (1) 10.1 .5 *7. .6 .1 .3 1.5 (1) 2.3 (1) .2 (1) 4.6 1.5 3.0 .4 .2 1.2 3.2 .4 2.6 1.9 .6 1.1 PAGENO="0142" Rhode Island. 47.8 National banks 47.7. State banks 48.9 South. Carolina 65. 5 National banks 61.6 State banks 71. 9 South Dakota 43.1 National banks 43.4 State banks 54.9 Tennessee - 17.2 National banks.. 3. 1 State banks 38.3 Texas National banks State banks Utah 72.4 National banks 83.9 State banks 51.3 Vermont - - 38. 3 National banks 41.3 State banks 34.8 Virginia 3.0 National banks 4.6 State banks . 1 Washington National banks State banks West Virginia f_i National banks .1 State banks . Wisconsin 58.6 National banks 55.2 State banks 61.0 Wyoming National banks State banks I Less than 0.05 percent. 25.9 .2 26.2 .2 16.4 1.4 17.1 2.3 18.8 2.8 14.3 1.4 45.6 .5 52.5 .9 .2 35.7 (1) 1.3 30.5 11.3 .5 31.3 35.4 6.3 45.0 23.0 18.8 1.3 10.8 .5 63.2 34.6 .3 64.7 38.5 1.4 58.3 21.7 2.8 (I) .3 15.3 .1 .5 33.5 7.7 (1) .1 53.2 5.7 1.4 55.5 2.9 50.4 9.0 3.1 24.1 * (1) 69.8 (1) 25.1 .1 66.7 .1 22.5 75.2 48.7 8.0 ...._..._.. .1 (1 48.5 7.1 50.0 14.4 .7 (1) 43.7 5.0 .1 44.8 .8 47.6 4.2 .2 45.0 1.1 39.1 6.1 44.5 .4 38.4 .2 (I 42.2 (1 35.7 .3 17.8 15.4 23.3 6.8 3.8 13.8 .4 .3 5.9 9.1 2.2 8.7 2.6 9.9 1.4 (I) 4.6 (1) 4.8 .1 5.6 .2 3.7 (1) .1 .1 .1 .1 .2 (1) 1.0 (1) (1) 2.7 .1 .1 (1) .3 (1) .3 (1) .3 33.7 .2 36.6 .2 13.3 TABLE D.-PERCENTAGE DISTRIBUTION OF STATE AND LOCAL TAX EXPENSES OF ALL INSURED COMMERCIAL BANKS IN 1969, BYSTATE,CHARTERSTATIJS OF BANK, AND MEASURE OF TAX-Con, State ` Net income Real property TangIble personal property Bank deposits Shares and capital structure Gross Income or receIpts General sales and use Documentary * Miscellaneous . . Other 25.0 (1) 25.6 4.0 1.1 .7 .1 22.4 .3 3.6 .2 5.3 .5 .8 .2 2.0 .2 1.2 .3 3.2 1.3 3.0 .2 4.3 3.0 1.1 .4 .2 .2 .1 1.2 .5 .3 1.5 - .2 .6 4.1 .1 1.1 .1 .2 .2 2.3 .8 2.0 1.0 2.2 .5 ` 1.5 .7 8.6 .2 7.4 4.3 ` 17.4 1.3 1.2 1.6 (I .9 2. .2 2.0 .1 2.1 .2 1.9 .7 1.0 .7 .7 3.3 3.0 (1) 6.5 .6 (1) .4 (I) 72.8 .9 (1) 80.1 56.0 2.9 (1) PAGENO="0143" 123 N- ,-000N),-~NJ ~N)-~00 WN)N)0,a, 00Om~co ~-joO~ N- N- CON) ~C) C,, CO (I, S = C,, -J CO 0 I- S I- C,, 2 0 C.) 0 C-, C,) 0 `I) CO C.) 2 o C.) C,) -J .~1 Lo. 0 0/) (I) Lu I- C) 0 0 I- CI) I- 0 I- 0 C,) 0 CO CO 00 ~00 0000 g N- CON- CC) 0 000 (OW0000N- C4~N- c~Jc~N-~g - c-~ 0-0 CO COO N- 00~ N- N- ~ C') 00 C') ~ ~r E E S C0C/)05 C)~ ~ C.) ::::: ~::..._ ::::~.~ ~ E ~ ~ ~ s~-~= ~ 2-~~ ~ ~C=C~ o.E ~ 2222~ ~ PAGENO="0144" 124 0000 00- C~J 00 ~ C) C~J U)'!) 0~' U) I- I- U) w -J 00 00 I- `U I- U) LU 0 C-, 00 C-) -J U) 0 I- U) 00 -J C.) = 00 CW -(000 -~00Ooo C~4 I- E E C) C') 0000 00 0J~. 0) C!) .t20:v; 00(00000(0 (00000 C') ~ LI! ~L 1~!~U ~ ~ ~ ~ ~ PAGENO="0145" ~:;3 3 ~, C) ci, -9 C) 0 0 0 cc cc p 0 0 -c cc z 0 0 0 C', -4 9:~ ~ ~. C,, : N3~ -`00 ~cCtD U~Q 0) . ~ - CC' 00 C) (C' ~ CO (~) - oOO~ C)0)() ~ . . -. =~ 0) ~.J0O ~J (C ~ (0 00 ~ U) U) ~ (0 (0(0 z~z~ g~g~ J~CO-.J0i C0-.J_.JC0 ~ ~;z;~~J.~J UJ© U)c COU~r~ 07)0000(0 `~ C)P.~U'U70)U) WO,CJ)(0'~J00 O)UC.400 00 (0C0 N(0~.Jen (0U)U,cmcwoo ~W-O) 0500-0000 COc--(0 r~0o©U,~ ~-`C)O0C,-J0)C~C7 OC'~C'~ PS3O5(0~ ~ ~(07C~U5~J'~JU5 -o-0s-N3rc3p~ 0O~JU5U)OOW 0' c7j pc-c -4 C-,' C, -4 -4 0 7- > -4 C, -4 3 0 ~ ~ 3 riO ~ C,, o ~ ~ >~4 o = C,, 0 0 -4 0 -4 C,, -4 > -4 > C, 0 C, I- -4 : ;~i:~i ~ PAGENO="0146" V) .~ 126 C,, - (0 ~ c~cc ~ (0 C~4(0 ~ ~4 CO~ C~1 - (0 C~4(D~~ 00 ~C~J - 03 C C,) I- C,, w m `3 C I1~ 0 C,, w `(7 I- `I) >- 03 z 03 -J `3 * Lu 0 `3 C Lu C') U- * 0 C') * C') C- >( >( I- -J 0 -J C 119 E E I- E I.- `C Lt)000e')(O C CC~4 (`(C ~ - ((~(0C0 (`((000 C~J (`(C CCC 0000CCo C ~CC, Co - (0 ~CCCc(C, Co C~J - 00400 C'((OC C04('~ Co L~ ~ ~ 0~C~c( C ~00 ~C_C~C C 03 0000000 0 ~G( (`4 ~Co ~CC~C~C ~ C CCC© ~c,t'~co ~ 04 ((4 :1::::' o'''''..'.'. ~ ~ ~ : o5~0C~_~, h- (~) PAGENO="0147" 127 oo~ooo~-oo - ~ ~ co0co~ N- c~ w to ~ ~ tD'-~ 00 O0C'J 0~ tO ~ 00O)~. ~ooo~o~ ~ to C-4 N- - 0) ~09~c~~cD ~ M ~r~oo r~ ~`-~p-0tO0 0 C~4~ to 0 * ~:::I::::: -~:~::: I ~::::::: ~ ~ ~ E ~ ~ ~ ~ ~ ~.. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 129 0 00000000 0 0C~C)C')CO~ 0) It) - ID ~ 0000000000 It) It) lb 0C~) 0tfl ~O)000It)It4 1 Lt)~00C!)0Lfl OOcC)10CJ0)lD C~ - Co 00000000-0 00 ~t) 00) O~ lb (!4 C!) - :!~:~::: r~ 00000 OI() 0 0 r- co~ oo o~n 0 0000000000 - NJ !Q 000 It) 00 It)(ONJ 0 lb PAGENO="0150" C,, 0 Cl) to, LU = 0 I- 00~ 0 LU Cl) 5 I- C') = 0 C,~0 0 ._, 0 C.) 0 LU S S 0 C.) 0 LU to~ U- 0 C,, C,) 0~ `C I.- C.) 0 .~1 0 LU I- `1 0 LU -J 1- E E I- E `C S 000000 0 00 t~ 0 ~ 00 0?~.if3 C~J C,) 00 ~ 0~ 00 0r'.ofl o~J 0~o~0oo0~r-. Ll) ~oco0~r-~ C'4 _000000 t-~ 00 130 0 0000000 0 -tflO 00000 r~ 00 O00~g~ - C') C~j 0000000000 ~ 00 ~ ~0r~ 0 00 00') ~ 00~ 000 ~ 0 (0 0000000000 000~r~~ C'~ 00~ 0 Cl) C0 oo~ Cl, 0 ~ 0'''''' N'00 00000000 C-. N-C') 0000 0000 - ~0000 00 000 er-. 00000000000 -- CO NJU)r-.0 07 C)J Cfl-. 000000 Cl) 000'4 0 CC U) ~oo 0000 000) (0 C,J0-O 0 ~ 0 - 00 J~1ii~i 0O.~C)0,_wo, .E ~ C,, 0 -J -J *0,,*$, 2:11:1::, ~ ~0, ~-` ~a ~ :c~ :~: ~ 0 0 0~ o, 0 0- ~- 0 0~ 0) - ~ ~ PAGENO="0151" 131 0 r ~n0C)Jc0 C~) 0010-1)10 Cl) 00 :::::::::,>..::::~::::: <:::::::::: ~::::~:::~: ~:::~::::: :~:::::::: `-:::::::; ~:::~::: :~::::::::: .~ *)))))) l)l))~))lI *0 :1.1:: ~C) O~0). >1 :~ ~ ;~ :~ ~ ~ :~ ~ :~ I :~ ~ ~ E : ::-~:.._t,:~: :.~ C) a ~ o ~ >1 ~) .~ C). ~ >1 >1 .~ 0 ~ >1 E.~o ~ ~ 0)~0)Z~E.~~o ~ 0 ~ ~ ~ a o o~ 0) 0 ~ - * ~.. a ~0) 0) 0 ~ - 0 ~- a a a 0 - Co ~- 0 ~C) ~ 0 a - 0) £~ ~ ~ C~C~5Q ~2~5 0c10000 0 ~0a0~~ e.j CL) 10 W0000~0~~ C~4 11) 10 sn,~ 000 ~ C)JC)J 0 a) 001, )C) 0 0 ~ 0C'~ N. )C) (1)~C) a tfl00~C~4C.J0 C) 00 11)00 C); o 000000000 0 0000000000 0000Ô00000 0 00~ 11.001)0 ~0 ~ 0 - 10 CC 00011)000) Q1~4 0.- ~ 11. C000C..0001011J000 r~ ~C0 (0 001-. 11)001100 OorO ~ - - C)) PAGENO="0152" 132 0 , .E~ 000-~ N- 0 ~ ~-0t)~Oø~ - ~cc~ ~ ~ ~ ~g~oog~ 0 c,00 - ~ ~r, - L 00 ~C~)C~) L~. 0 C,, 0000000000 0 LU I- C.) 0 0 LU .~ ~~0©00~0~ ~ c~00r-~0O~' NJ ~NJ I.- c-Sr I- E° PAGENO="0153" 133 11) ~ ~cc~g~ ~ -~ ~ ~ --~~ ~ ~ cog ~ Q~ v) - a' a ~ co - Q C' - 0~ - (C - C' (C ~ - ~ c~j ~ - - a)C'~ .... `~,, ...`` `.....`` 2 o.':''''''''~.'' : `````: : ``````: 0 C,) - 0 `~::``:`:: :c,~::',''''''~' 2 2 2 ::a:~:~: ::~.:~~:~: ~ ~ ~ * ~ 02_Q.)0_()2 . ~ oo2~)0_,,.~ * - ~ ~ ~ PAGENO="0154" 134 *~ ~00e~QCr~.O ~ ~ ~ ~ ~ ~ ~C?) ~ ~ - ~ = ~ E 0 ~C') 00 Li. 0 - 00 .!2 ~ ~ ~ - U) U) E Li. o Lii ~O~0~3 2 ~3 .E ~ U) C)C\zt0000WOr..N. ~ oooU) ocooc~j~ oo - 00 00 U) U) 2 2 o E .2 0 Lii ~ 0~cC0~000c) C, r-. U)~000cO0~~ * 0 ~ 00 00 ~ ~ U) U) 0 12 C,, Lii isis,', ,,,s,, Iii,,,,., C. .s ~`` , s,',,,,,, ~ ~ c~c~5 PAGENO="0155" c~J 0 I', 0 ~j 000 00 0000© o o 0000 - 0000 ooo 000 0000 ~ 00 w V) ~ !~ a :~ ~ 135 0 ~ ~ C~)0C~)Co Ct) CD -~ - C') CD Co Ct) ~ ~- - C') to 000 ~ 00000 0 ~ ~ C) - C) ~ 000000000~ 0 0000 t')O C')O 0) (Ci c)~ 0000 C')0C')0 C') 0) tCi 0 t~.00 000000 U5 0)00 C00 0t)~ N- _oo ~ - - Lt)CO 00 tOO 0 C'J N- CO ~-4 - - 00000000 C~ (0 Ct) (000 O~ 0 ~ 0 ~t) CO NJ 0) C') ~ 00' CO~ >-::::`::::: L~J :~ ~ ~ ~ ~ ~ ~ V) ~ 0050 PAGENO="0156" 136 ~©c~ tr, to ~ ~C~C).-.wN- o--~~~r-.c~ ~ ~ tc i- c~ to CO ~ ~ C~ - C., o tt).-.O ~ ~ c-~ ~ c-~ ts~ (0 0 c 4NJ0 00000 0 00 C-J~ ~ - N- to - 00 c~ to I- *0~~ I" p.- (0 C,) = (0 _J 0 00) - 0)00 (`~0 - to (0 N- C~) -000 N-toO (00 N- N- NJ - ~ ~-) U) ~-~C) ~c) S ~ c~i ~ c~-~ 5 0, 0~ o E C.) 0 0 - wN-ooc,o~toatr-. tr -ootoor--~-j (~) tOto-~!)N- N- - U) - U~ a 0)0 0) - ~ to to N- N- - p.- ~ ~ ~ L&. 0 - I- -J o *::::::::::.:~:::::::::: :<::::~::::: 0 0 p.- 0 C,) > C~) 0 ::::~ :=:::::::;:: ~:::::::::: 0) >_ 0) - 0) C~ 0 - - a ~-, a o `-`E0, - ~ ~ ~ Ea~~ 5 0E.~0)°0_0) ~- ~ F- OcL-2 ~ ~ ao-E ~E= ~J~L~25 z~5&~~5 PAGENO="0157" 137 o o 0 0 ~Pc~b~~rOO - ~n~ooooco~ r- ~ ::0~HH :i::::::L 2' 2 o'''''''''' 0 - .~ 0 0 UbI - ~ ~ ~ ~ ~ ~ , ~- OO2Q)O~_~p,,~ PAGENO="0158" 138 0 m ~ Co Co(O ~ - CD%t~ ..C~ .-`~(O ~ 00 Co ~ -~ CoCO `Co ~ 00 C~4 ~t) Cl) It) - - ~ cc E .2 O~CoCoCO~ ~ ~COOO~ ~ C'~ CO C~ Cl) `` in - Co cc cc `-IC Ii. - 0 * C') 00000000 ~ I- U 0 ~ -~ 0 0C*J0 C4CO~ CO in 0O)0~~ CO CS~ ~COCo - ~ ~ cc I- CC E Li. = 0 o o q ~ 0)000 C) CO C~J 2 in r. - Co - _0~0 CO CC 00 0 = 0 C)Cfl0~COCoU~CW -`0d00 CO - C~ 2, ~V) oo N: - ,.; cc O0CDCO~0 CO ~ CO ~ 000in-in0) Co `~ ~It~;in_~ ~ - C"J ~ CO - - cc N: .-cc -~ cc U. Co 0 C') LU C') LU >c CCCI C CCC -I C) 0 C CC CC C C C C C CCCI, CC C C CCC$CCCCCC'C LU - I.. -J ~::::~::::: :~:::::::::: :~:::::::::: C') - I CO i,,,,,, ,W,,,,,,,,,,, iLl Lut~~*:~: :=::t;-'::~: :~``t:'e~''''' OS_,Cc,C~ 55-S *~CSC'*~*s .s-,.Q,,a','-~2,,, C') ~ `>5~:t~ =*C) >S : * ~ O.~, * d~E~~o * ~ ~ `~ ~ ~ ~ Ea'~.~-~ C * ~ ~ ~ oo,~o-,_0~,, E; E~~LS ~ ~ ~ ~ PAGENO="0159" 139 ~- ooo~_ ~ 00 ~~O0C~4~ ~ 4,~C~J 10 C!)OO10 C!) WI - C!) C!) IC) 0) ~ C) OOC'O~C)JW C!q ~ - - IC) 10 IC)! ~ø000'-.00 00 c~ o00~c~ 000 C!) 0) r~ c~ 0 0 - C~ C!) ~ ~ ~ C!) ~-!o00 IC) 00000~0 ~ 00~~ ~ - ~` 0 ~Z~c,) ~ It)- - c'J .0 Ui o U) 0 ~ lb ~ lb lb ~ .~ ~ .~ ~j~3E~o 0 ~ ~ E~-~ ~ 00.!~C)0~_c~! ~ O0c_~o i... ~ ~cc~ c~5~5 ~ PAGENO="0160" 140 ~ 0 0000000000 0 000000C.J00C~J ~ 0000000000 C) 0 ~ - E 0 0 .0 ~CO_0C~0 ~ ~ `-""~ ~` ~n - C'~ C') ,-.~ 00 I- ..; I- C') >. `-C, C')' C/) 00 -~1 C.) 0 00 ~n 0 CC) N. .-~ - ~ 0~ o E C.) 0 0 c~ooo-o-oo CO C') CO C', O~ CO U- 0 C') w 0. >( U' C.) 0 0 :::::::::: : U' = U) I I- 0 * ,,,,.,.,.s.00's~.'''''') c~*. ::~.~.::::::: :~::0:0j::::: :~::,~.:~~::::: :0. : :0 00 ~ `~.`----:~ 0 ~~C/ .~ 0 ~-0) 0 C'0 * `~ ~ :~ : I :~ ~ :~ : *~ ~ ~ ~ ~ ~. ~ ~- ~ ~ PAGENO="0161" 141 0-0000000 ~ - 0 0 r~ c~j ~n - O~ 003 c~~oo 000 ~ c'~ c~Ja) 00~~ ~u3 ~0~0~000c~4 U, C~JO) 0 ~~c30~400~t)0 10 00000O0~303 ~ ~ ~- ~ ~- - - !TI! !H ~ ~ :~:::::::::: :~:::::::::: :~:::::::::: :~:::`::::::: :::::~;~::,...:::::::::: :c.'::::::::::: ::.~:~::::: :~::.~:o::::: :~::.~`:~~::::: ~ E~I~ ~ ~ O05~0)Oc_o,0 .._ O0.~Q,0o_oo 1.- O2~00_o~3 P- ~ E E 79-421 0 - 72 - 11 PAGENO="0162" TABLE 0.-STATE AND LOCAL TAX EXPENSES OF INSURED COMMERCIAL BANKS, BY STATE, MEASURE OF TAX, AND CHARTER STATUS OF BANK-Continued WYOMiNG Net income Real property - Tangible personal property Bank deposits - Shares or capital structure - Gross income or receipts General sales and use Documentary Miscellaneous deductible Other Total - Note: Details may not add to totals because of rounding. (In thousands of dollarsj All banks Within Measure of tax Total home State National banks State banks In other Within States Total home State In other States Within Total home State In other States O 0 0 0 0 0 0 0 0. 121 121 0 73 73 0 48 48 0 46 46 0 18 18 0 29 29 0 O 0 0 0 0 0 0 0 0 495 495 0 379 379 0 116 116 0 0 0 0 0 0 0 0 0 0 6 6 0 0 0 0 6 6 0 0 0 0 0 0 0 0 0 0 5 5 0 3 3 0 1 1 0 7 7 0 0 0 0 7 7 0 680 680 0 473 473 0 207 207 0 PAGENO="0163" APPENDIX 4 Information and Opinions on State and Local Taxation of Banks and Other Financial Institutions, Supplied by State Tax Administrators SALLY M. HEY Economist, Government Finance Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System I. INTRODUCTION Public Law 91-156 directed the Board of Governors of the Federal Reserve System to study and make recommendations to the Congress regarding how to "reconcile the promotion of the economic efficiency of the banking systems of the Nation with the achievement of effec- tiveness and local autonomy in meeting the fiscal needs of the States and their political subdivisions." Consequently, the Board was concerned with the present and prospective systems of State and local taxes applicable to commercial banks and also with effects of taxes on the economic efficiency of the banking and financial sector of the economy. Concern with banking efficiency was focused on the following two aspects: (1) limitations upon interstate banking business and their resulting tax consequences, and any distorting effects caused by multistate taxation, and (2) tax discrimination involving Static banks, all commercial banks, or financial institutions generally, especially with regard to intangibles taxes. In accordance with the directive to the Board, in P. L. 91-156, to "consult with * * * appropriate State * * * taxing authorities," the Board on November 13, 1970, sent letters, questionnaires, and copies of section 5219 and of P. L. 91-156 to the appropriate State tax administrator or administrators in each of the fifty States and in the District of Columbia, Puerto Rico and the Virgin Islands. The tax administrators were asked to fill out a questionnaire and to send letters and materials supplementing the questionnaire answers and raising any other matters relating to State and local taxation of banks which the State tax officials might wish to bring to the attention of the Board. The questionnaire covered all forms of State and local taxes but did not ask for detail about real property taxes. The letter and Questionnaire sent by the Board are reproduced in Supplement A, at pp. 166-180. Replies were received from forty-nine States and from the District of Columbia and Puerto Rico, but the completeness of the responses was very uneven. No reply was received from Vermont or the Virgin Islands, while questionnaires were not returned by the major taxing agencies in Colorado, Louisiana, or New Hampshire. Fairly complete information was received on State taxes applicable to banks on November 15, 1970, and there was some information on (143) PAGENO="0164" 144 changes in taxes applicable to banks that had been made since Decem- ber 24, 1969. Some iniormation alsQ was provided on the nature of any compensatory rates or other adjustments designed to equalize tax treatment of State and national banks or of banks and other businesses, and any changes in such treatment. There also was some information, necessarily somewhat tentative and sometimes vague, on anticipated tax changes affecting banks. Regarding present and prospective taxa- tion of out-of-State banks, the information received was even less certain. Although related information was solicited (questionnaire items 3.110 through 3.233), it was not possible to determine clearly those activities by out-of-State banks which are (a) allowed and not a basis for taxation, (b) allowed and a basis for taxation, (c) not allowed, and (d) actually engaged in. Also, it turned out to be difficult in many cases to interpret the significance for bank taxation of replies concerning tax treatment of nonbanking out-of-State financial busi- nesses and of affiliated corporations. Finally, information on intangibles taxation, on local taxation, and on amounts of revenue involved was quite scanty. The detailed tabulations of the questionnaire responses are in supplement B, pp. 181-198. The gist of the replies is found in the text of this appendix and tables which accompany the text. Information supplied in letters or in supplementary materials is also summarized in the text, along with references to charges which have occurred since the tax administrators' responses were received. In States in which replies were received from more than one agency, or in which supplemental tax information was received from the banking supervisor, the re- sponses were combined and coordinated before being tabulated. In a few instances the information received from State tax administrators was not consistent with information received from other sources. Where it seemed apparent or was later verified that the inquiries on the questionnaire had been misinterpreted, corrections have been made and noted; otherwise this report simply presents the data and opinions that were sent by the tax administrators. II. CURRENT STATE TAXATION OF DOMESTIC STATE AND NATIONAL COMMERCIAL BANKS, AND RECENT CHANGES A. THE SITUATION ON NOVEMBER 15, 1970 The structure of State and local taxes applicable to banks domiciled in the State clearly reflects the Federal statutory limitations on State and local taxation of banks with national charters. Until December 24, 1969, section 5219 of the Revised Statutes permitted States to apply to national banks, in addition to real property taxes, only the follow- ing taxes: (1) a tax on bank shares, (2) a tax on bank dividends as part of an individual income tax, if dividends of other domestic cor- porations were also included, (3) a tax on net income, or (4) a tax according to or measured by net income. Furthermore, again only until December 24, 1969, the first, third, and fourth types of tax were mutually exclusive, while national bank dividends could be included in individual taxable income if the third or fourth types of bank tax were imposed but not if bank shares were taxed. (For a summary of the 1969 "temporary" and "permanent" amendments, see part II, pp. 12-13 of this publication.) PAGENO="0165" 145 In table 1, the State treatment of banks under the tax measures listed above as of November 15, 1970, is summarized, except for real property taxes. More detail is available in supplement tables B-2 and B-3, where it can be seen that some of the taxes were in force prior to December 24, 1969, while others came into effect oniy after that date. Taxes which have been repealed since December .24, .1969, were not reported on the quebtionnaire and in tabulations from the questionnaire, nor were rate changes or other modifications of existing taxes, although such supplementary information was supplied in some cases. In many States, income or shares taxes on banks are in lieu of other kinds of taxes which could not legally be imposed on national banks before December 24, 1969; the in-lieu taxes typically are on banks only (as in the case of taxes on shares of banks but not of other busi- nesses) or at a higher rate or on a more comprehensive base for banks than for other businesses. In some States, all commercial banks domi- ciled in the State have been taxed in the same way, often with the sort of compensatory tax treatment just mentioned, intended to, equalize tax burdens on banks ~ ith those on other businesses In other States, State banks have been taxed differently from national banks but subject (in some but not all instances) to special offsetting arrange- ments such as tax credits. The predominance among States of bank taxes on or according to or measured by net income can he seen in Table 1 and in greater detail in table 13-2 in supplement B, p. 182. The significance. of a tax according to or measured by net income (an excise or franchise tax) is that income from government securities may be included in the measure of the tax base although it would be exempt from taxation under a direct tax on net income.' In some States banks have been subjected to higher rates than other corporations to compensate for bank exemption from other taxes which nonbanks have to pay or to compensate for exclu- sion of interest on government securities under a direct tax on net income. Where the questionnaire responses explicitly confirmed that one or the other special kind of treatment of banks is in effect, the fact is footnoted in supplement table B-2. Nine States or areas tax banks on or according to net income and also tax bank shares, but in most of these jurisdictions only State banks are subject to both kinds of taxes. Maine and New Hampshire subject only State banks to taxes based on income, and only State banks are subject to the shares tax in Puerto Rico and to an alternative tax based on capital value in New York. Bank shares are taxable to the shareholders under property taxes in Alaska (presumably for State bank shares only) and South Dakota. Illinois is in the process of shifting from a shares to an income tax, Tennessee extended the income tax to national banks only after the enactment of P.L. 91-156, and Delaware apparently applies both kinds of taxes to all banks, levying a very low rate on income. Kansas reported a "tax measured by income from intangibles" (item 1.540 in the questionnaire), which appears to be a tax measured by net income and is included as such in the'tabulations. Domestic bamic ~lividends are taxable under individual income taxes in at least 32 jurisdictions, according to the questionnaire replies (see 1 For further discussion `of this point, see below, appendix 6, at pp. 401-409, and appen- dix 11, at P. 532. PAGENO="0166" 146 listings in table 1). In 4 of these States (Georgia, Illinois, Maine, and West Virginia) oniy dividends of domestic State banks are taxable. Only 4 States (Delaware, Indiana, Mississippi, and Montana) report taxing both shares and dividends of national banks; the Mississippi response noted explicitly that dividends became taxable only in 1970. PAGENO="0167" TABLE 1.-TREATMENT OF BANK DIVIDENDS UNDER INDIVIDUAL INCOME TAXES, RELATED TO MAjOR SlAtE tAXES ON bANKS, NOVEMBER 15, 19701 The major State taxes on domestic (State and national) banks States States which have individual income tax Including dividends of Including dividends of domestic domestic State banks national and State banks only Other States which have no individual income tax or did not reply to the questions Tax on or measured by or accord- ALAB, ALASKA,2 ARIZ, CALIF, ALAB, ALASKA, ARIZ, CALIF, DEL, ILL and ME(2) ND uOKL,INH,?and COLO, CT, SD, and VT (4). ing to net income. COLO, CT, DEL, HAW, ID, ILL,3 HAW, ID, IA, KANS,a MD, MASS, 1'ENN.'s(4). IA, KANS, ME,~ MD, MASS, MICH, MICH, MINN, MO, NEBR, NM, NY, MINN, MO, NEBR, NH,~ NM, NY, NC, ORE, RI, SC, UT, WISC, and NC, ND, OKL, ORE, RI, SC, SD, PR.(24) TENN, UT, VT, WISC, and PR.(34). Tax on bank shares and/or tax ALASKA,8 ARK,' DEL, FLA, GA, ILL,3 ALASKA, DEL, ND, MISS, MONT, GA, ILL, ME and WV(4).... NH,~ TENN, 2 and VA 7(3) ARK FLA, KY, LA, NEV, NJ, measured by capital structure. IND,10 KY, LA, ME, MISS15, MONT'8, NY and PR.(7) oti, PA, SD, TEX and WYO. NEV, NH, NJ, NY,~ OH'1, PA, SD,8 (11). TENN, TEX, VA, WV, WYO, and PR.4(25). Other DC,'~ IND,iO and WASH'4(3) DC and IND1O(2) WASH.(1). 1 Notice that States which occur more than once under the 1st column heading are also repeated I Banks are paying this tax under a voluntary agreement at present. in the columns to the right (these States or areas are Alaska, Delaware, Maine, New Hampshire, 10 Indiana imposes a gross income tax on State banks only; dividends became taxable after Dec. New York, South Dakota, Tennessee, and Puerto Rico). 31, 1969; shares are taxable to individuals under tangible property tax. 2 Alaska banks pay both a bank excise tax, based on net income, and the gross receipts or business ii Ohio also reports municipal income taxes applicable to banks in many municipalities. license tax, which is based on net income in the case of banks. ~ Dividends of all out-of-State banks seem to be taxable (the response was hard to interpret). 3 Income tax is effectively on State banks only, until Jan. 1, 1972; bank shares tax lapsed at end of 13 District of Columbia imposes a gross earnings tax, is not bound by section 5219. 1970 except for shares held by corporations. . 14 Washington imposed a gross income tax on banks after Dec. 24, 1969. 4 Tax is only on State banks; New York tax is on capital structure and is an alternative to the net 12 This is apparently a local tax; bank dividends became taxable starting Jan. 1, 1970. income tax, if larger. i~ Montana has also extended its business license (net income) tax to banks, starting in 1971. I Bank dividends became taxable in Kansas starting July 1 1970. . 6 Bank dividends are not taxable in these States. NOTE: For key to 2-letter abbreviations of State names, see below, p. 181. 7 Only dividends of out-of-State State banks are taxable. 8 Not reported in questionnaire, but shares in State banks are presumably taxable in Alaska, and all bank shares are legally taxable in South Dakota. PAGENO="0168" 148 Twenty-five States or areas are tabulated as having a tax on bank shares or a tax measured by capital structure or both. It appears, from supplementary materials sent by the tax administrators or from other sources of information, tha.t bank shares are taxable under a selective or classified property tax in 17 of these States;2 in some of these States, there is a separate statute on bank shares taxation. Bank shares are taxable at general property tax rates under general property taxes in another 7 States or areas.3 Arkansas is included in this group because the tax is being paid under a voluntary arrangement despite an adverse State Supreme Court ruling in 1961. In Illinois, which also is counted among the 7 States, a 1970 constitutional change abolished ad valQrem taxation of personal property to individuals, effective January 1, 1971, and a further constitutional revision pro- vides for termination of all personal property taxation before 1979; in the meantime, hank shares hel.d by corporations presumably remain taxable. The 25th area is New York State, where there is no intangible property taxation, but State banks are subject to an alternative tax on capital value previously mentioned. From table B-2 it can be seen that some respondents reported the shares tax under questionnaire item 1.5121 (Intangible property: Shares of bank stock), whereas others reported item 1.620 (Tax measured by capital structure [capital, surplus, undivided profits]),. even when the name of the tax was given as bank shares tax or tax. on shares of bank stock. Ohio, Tennessee and Wyoming reported. both bank shares taxes and taxes based on capital value.4 The legal distinction between a shares tax and a tax on capital structure is. spelled out by Charles F. Conlon in appendix 10 (p. 416). The tax administrators' responses may not all reflect this distinction. One characteristic of taxes on bank shares is that the tax is legally on the shareholder rather than on the ba.nk but the assessment is usually based on a return filed by the bank with the tax then collected from the bank on behalf of the shareholders. Another characteristic is that share taxes ordinarily are part of the local property tax~ whereas taxes measured by capital structure are State levies at flat- and usually low-rates on nominal values. Of the remaining 27 States or areas, which were not taxing bank shares or capital values in November 1970, 18 do not tax any intangible property or, in some cases, do not tax either tangible or intangible 1)ersoflal property.5 There is some taxation of intangibles in the other 9 States.6 A tax measured by income from intangibles in lieu of property tax (questionnaire item 1.540) was also cited on the returns from Kansas (where the tax was called a privilege tax), Minnesota (bank excise tax) ,~ and Puerto Rico (personal property tax). 2 Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maine, Mississippi, Montana, Nevada, New Hampshire, New Jersey, Ohio. Pennsylvania, South Dakota, Virginia, and West Virginia. The rates are different from those levied on other taxable property except in Louisiana, Mississippi, and Nevada. Alaska, Arkansas, Illinois. Tennessee, Texas, Wyoming and (for State bank shares only) Puerto Rico. Ohio and Wyoming reported that the shares were taxable to the shareholders rather than to the banks; Tennessee reported that the tax on shares is completely local. 6 California, Colorado, Connecticut, District of Columbia, Hawaii, Maryland, Massachusetts, Minnesota, - Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Vermont, Washington, and Wisconsin. The reference at p. 12, In. 6 of pt TI, staff report on "State and Local Taxation of Banks" to 18 States and the District of Columbia includes New York, which has already been covered in this text. `Alabama, Arizona, Idaho, Iowa, Kansas, Michigan~iissouri, North Carolina, and Rhode Islan~I. 7 The Minnesota bank excise tax was entered under both item 1.530 (net income) and item 1.540, because it is explicitly in lieu of property taxes except those on real property; the base is broader than income from intangibles alone. PAGENO="0169" 149 * Although the net worth of banks, or part of it, is the basis for taxes on banks or bank shareholders in some States, as explained above, intangibles taxes ~n bank assets have been effectively inhibited by the section 5219 prohil)ition on taxation of intangible assets of national banks, ~vhicli is still iii force under the temporary amendment (section 1 of P.L. 91-156). ~fhe 9 States 8 which had entries for item 1.5123, tax on baiilc assets or any category thereof, explained them as real property taxes; Puerto Rico also reported an unspecified bank assets tax app~icable to State banks only. As for intangibles taxes relating to bank liabilities, a tax on "bank deposits taxable to depositor an(i collected from bank" was reported by the tax administrators in only 6 States.9 Such a tax would be an intangible l)rol)ert.Y tax bitt not on the banks themselves, and could therefore be considered outside the scope of section 5219. In Rhode Island, national banks were paying on a voluntary basis. From other sources on bank tax law it appears that bank del)osits are taxable but with the tax payable by the depositor in 7 States,'° and they also do not appear to be exempt from property taxation in another 11 States,11 although little or no revenue may be actually collected from this base in some of these States. Banks in several other States not mentioned here reported small amounts paid as deposits taxes, as noted in appendix 3. Other types of State and local taxes also are levied against banks, ftlthough they tend to be of lesser revenue importance thaim the net income and shares taxes. In some cases, these other taxes were eXten(led to banks or to national banks only after the easing of Federal restrictions: since December 24, 1969, under the temporary amend- ment (section 1 of P. Ti. 9 1-156), States have been permitted to levy on national banks (lorniciled in the State not only taxes on real property, net income, dividends, capital value, and deposits, bitt also any other taxes except a. tax on intangible bank assets, so long as the tax is general throughout the taxing j uris(l ict ion, nondiscriminatory, and * equally applicable to domestic State-chartered banks. In addition, section 1 of P. L. 91-156 gave a list of taxes which a State could impose on out-of-State national banks after December 24, 1969. In many instances, however, respondents rel)Ort.ed that both State and * national banks had been ~)a.ying sales taxes, documentary taxes, tangible 1)ersollal property taxes and other such taxes prior to Dec.em- bem' 24, 1969. Where it was explained that. such taxes were being paid voluntarily or tha.t they were being disputed, the fact has been noted in the supplementary tabulations. The question of State sales and nse taxes was a major factor leading to the change in the banking-tax statute. Such taxes are widespread: 43 States or areas (tabulated in table 2 and in more detail in supple- ment table B-2) report sales or use taxes presently applicable to banks. The questionnaire inquiry was made in terms of vendor, vendee, or "other forms" of sales tax. This (listiliction has been (Iropped from the tabulation, however, because some States have hybrid vendor-vendee sales taxes while in other States the intended impact *~ Calif~ruia, Connecticut, Florida, Georgia, Louisiana, Maine, North Dakota, Texas, and Wyoming. Indiana, Kentucky, Michigai, North Carolina, Ohio, and Rhode Island, IC Arkansas, Florida, Illinois (deposits of corporations only), Missouri, Pennsylvania, South Dakota (deposits drawing Interest), and Tennessee. "Alaska, ~7ona, Georgia, Iowa, Kansas, Montana, New Jersey, Texas, virginia, West Virginia, and Wyoming. PAGENO="0170" 150 of the law is ambiguous.12 Items 1.551 and 1.553 on the questionnaire (vendor and vendee taxes respectively on sales to banks) were com- bined as sales tax on sales to banks, while item 1.552 (vendor tax on sales by banks) and one entry under item 1.554 (other forms of sales tax) were classified as sales tax on sales by banks. Several States'3 also reported sales or use taxes on motor vehicles separately. TABLE 2.-STATE SALES AND USE TAXES REPORTED TO BE APPLICABLE TO DOMESTIC COMMERCIAL BANKS, NOV. 15, 1970 Type of tax State Sales tax on sales to banks (43) ~ Sales tax on sales by banks (32) ` Use tax (an out-of-State purchases by banks) (40). ALAB, ARIZ, ARK, CALIF, COL,' CT, DC, FLA, GA, HAW,2 ID, ILL, ND, IA, KAN, KY, LA, ME, MD, MASS, MICH, MINN, MISS, MO NEBR, NEV NJ, NY, NC, OH, OKL, PA, RI, SC, SD,TENN, TEX, UT, VT, 1 VA, WASH WISC, and WYO. ALAB, ARIZ, ARK, COL,' CT, DC, FLA GA, ID, ILL, IND, IA, KAN, KY, ME, MD, MASS, MICH, MINN, MO, NEBII, NEV, NY, NC, OKL, RI SD, TENN, TEX, UT, VA, and WISC. ALAB, ARIZ, ARK, COL,' CT, DC, FLA, HAW,2 ID, ILL, IND, IA, KAN, KY, LA ME, MD, MASS, MICH, MINN, MISS, MO, NEBR, NEV NJ NY, NC, OH, OKL, PA, RI, SC, SD, TENN, TEX, UT, VA, WASH, WISC, and WYO. I Information is from banking supervisor, not from questionnaire. 2 Tax is still on State-chartered banks only. Gross income taxes applicable to banks are rare, being used only in. the District of Columbia (which was never bound by section 5219), in Indiana (applied as a credit against property taxes on shares, and applicable to State banks only), and in Washington (since the passage of P.L. 91-156). A proposal to subject West Virginia State and national banks to a gross income tax was turned down in 1970 (but the business and occupation tax was extended to banks and financial businesses in 1971). The only other gross receipts entries (item 1.520) appeared tct be sales taxes and were tabulated as such.'4 Documentary taxes applicable to banks are common, being reported by 32 States, the District of Columbia and Puerto Rico (table 3). Real estate transfer taxes are the most common type reported, and accord- ing to the questionnaire responses (see table B-2) such taxes were quite common even before passage of P.L. 91-156; they seem typically to be considered taxes on the borrower rather than on the banks. 12 For example, California is currently involved in litigation over whether the sales tax is a vendor or a vendee tax. 13 This was reported under item 1.554 by Oklahoma, under Item 1.630 by Iowa and Texas, and under iteni 1.640 by Virginia. 14 These entries were for Arkansas and Hawaii; the tax in Hawaii is called the general excise tax. The Alaska business license tax is also on gross receipts, but for banks the tax base is measured by net income plus certain expenses. On the West Virginia tax, see below, appendix 7, p. 446, footnote 21. PAGENO="0171" 151 TABLE 3.-STATES REPORTING DOCUMENTARY TAXES, TANGIBLE PERSONAL PROPERTY TAXES, AND MOTOR VEHICLES TAXES APPLICABLE TO DOMESTIC COMMERCIAL BANKS, NOV. 15. 1970 Type of tax State . Documentary taxes (34)1 Tangible personal property taxes(24)~. Motor vehicle taxes or fees(32)6 ALAB, ARK,2 CT, DC, FLA, GA, HAW,' ILL, IA, KAN, KY,4 ME,' MD, MASS, MICH, MINN, MO, NEB, NEV, NJ, NY, NC,'4 OH, OKL,PA,RI,SC,'SD, TENN, VA, WASH, WV, WISC, and PR. ALAB, ARIZ, ARK, COL, CT, FLA, ID, lLL,~ IA, KAN, KY, LA, MASS, MISS, MONT, NEB, NEV, OH, RI, TEN N, UT, WASH, WYO, and PR.' ALAB, ARIZ, ARK, CT, DEL, DC, FLA, HAW, ID, IA, KAN, KY, LA, ME, MD, MASS, MICH, MINN, NEB, NEV, NJ, NM, NC, OKL ORE PA, RI, SD TENN, TEX, UT, VA, WASH, and WYO. I This category includes entries from items 1.570, 1,580, 1,590, and 1.610 on the questionnaire. S Presently being contested. $ Applicable to State banks only. 4 Local tax. Reported for national banks only. This category includes not only entries from item 1.630 on the questionnaire but also entries from item 1.640 which were identifiable as motor vehicle fees, and it does not include entries identified as a motor vehicle sales or use tax Tangible personal property taxes applicable to State and national banks were reported by 23 States and (for State banks only) Puerto Rico, as shown in table 3. Although it was not permissible for States or localities to levy such a tax on national banks prior to December 24, 1969, 9 States 15 reported that this was done (table B-2). The banks may have been paying the rehttively minor amounts of personal property tax without complaint; other possibilities are that the re- spondents may have listed the answers in the wrong columns or that the answers might have referred to real instead of to personal property taxes. Responses for 3 States were in fact referring to real property taxes, and these States were not listed in the tabulation.1° klotor vehicle taxes or fees were similarly widespread (see table 3) and probably small in amount. Only small fees were reported in some States (Florida, Idaho, Louisiana, Maryland, North Carolina, Oregon). In others, both fees and ad valorem taxes were involved (District of Columbia, Kansas, Maine, Massachusetts, Washington), and in the rest of the States tabulated, the precise type of fee or tax was not ascertained. Other taxes reported applicable to both State and national banks in November 1970, besides real prO~)erty taxes, were license or franchise taxes (Delaware, Iowa, Virginia, Wyoming), tax on "dividends" paid on deposits (New Hampshire), various excises (Oklahoma), and local utility taxes (Virginia). License or franchise taxes or fees applicable to, State banks only were reported by Idaho, Kentucky, Minnesota, Oregon, and Tennessee. B. BANK TAX CHANGES REPORTED BETWEEN DECEMBER 24, 1969, AND NOVEMBER 15, 1970 Table 4 summarizes the reported instances of taxes which have been newly imposed on or extended, to domestic State or national banks since December 24, 1969. The levying of sales and use taxes on banks 17 was clearly the most common such change, and in many cases this did not require legislative action but was accomplished through administrative fiction. As a result, States which impose sales or use taxes on banks now impose them equally on State and national banks except in Hawaii, 11 Alabama, Arkansas, Massachusetts, Mississippi, Montana, Nevada, Tennessee, Washington, and Wyo~nlng. . 1nIt,dlana,.New Hampshire, and Oregon. . 17111 California, aiid possibly iii some other States. applicability of sales taxes to banks is still disputed. PAGENO="0172" 152 where the one national bank (lomiclle(l in that State is still exempt from this tax. Docunienta.ry taxes, tangible l)ersoltal propert taxes, and motor vehicle fees or taxes were also a~)plied to banks in a number of States after December 24, 1909, often without the iieed for legis- lative action. TABLE 4.-STATES IN WHICH TAXES HAVE INITIALLY BECOME APPLICABLE TO STATE OR NATIONAL BANKS OR BOTH SINCE DEC. 24, 1969, BY MEASURE OF TAX .- Measure of tax To n Initially applicable since Dec. 24, 1969 ational banks To both State and national banks Net income taxes TENN (1) IA, MONT,1 NH.' (3) Taxation of dividends ND (1) KAN, MISS. (2) Tax measured by capital TENN (1) (0) structure. SaIestaxonsaIestobanks.~. ARIZ, CT, ID, IND,IA, ME, MASS, MISS, MO, NEB, ALAB,COLO,~FLA,GA,LA, NEV, NY, NC, OH, OKL, PA, RI, SD, UT, VT,3 and MD, TEX. (7) WYO. (21) Sales tax on sales by banks.... ARIZ, ILL, KY, ME, MICH, MO, WISC (7) ALAB, COLO,' FLA, MD. (4) Use tax (on out-of-State ARIL, CT, ID, ILL, IND, IA, KY, ME, MASS, MICil, ALAB,COLO,3 FLA, LA, MD, purchases). MISS, tviO, N[B, p4EV, NY, NC, OH, OKL, PA, RI, SD, TEX. (6) UT,WISC,WYO. (24) Gross income taxes (0) WASH, WV.4 (2) Documentarytaxes ARK, ILL,IA, NEB, NY,OH,OKL (7) ALAB,FLA,GA,KY.' (4) Tangible personal property CT, ID, ILL,' KAN, NEff, RI, UT (7) ARIZ, COLO, FLA, IA, KY, LA, taxes. 011. (7) Motor vehicle fees or taxes 6 KY, tIEB (2) (0) 1 Business license tax was applied to banks effective January 1, 1971 (from later information than the questionnaire). 2Thjs is on State banks only. `Information is from banking supervisor, not questionnaire. 4 Passed in 1971 (from later information than tHe questionnaire). ulhjs is a local tax. °Does not include sales or use taxes on motor vehicles. Changes involving income or shares taxes were less common and usually involved legislation. The "saving provision" of P. L. 91-150 stated that affirmative legislative action would be i'equired for the imposition of taxes on banks which were not 1)reviously irnJ)osed on any banks, except for sales and use taxes, documentary-type taxes, or taxes relating to tangible property. Taxes on or according to net income were levied on banks (State, national, or both) in iowa, Montana (1971), New Hampshire and Tennessee. Tile gross income tax was extended to banks in Washington (1970) and WTest Virginia (1971). in Arizona and in Colorado, special bank taxes measured by net income were replaced by the regular corporate income tax. in Iowa, the newly imfl1)OSCd taxes on net income and on tangible I)ersonal ~)ropeity of banks replaced taxes on bank shares and on monies and credits. Much of the income-tax activity since the end of 1969 seems to be part of a longer-run trend toward extension of income taxation. Income taxes were enacted in illinois and Maine in 1969, and income taxation of banks replaced taxes on bank shares or capital stock jU: Maryland in 1968 and in New Mexico in 1969. In Tennessee however, tile franchise tax based oil capital stock value was extended to national banks in addition to the income tax, in 1970. - Time respoiises of the tax administrators, supplemented by informa- tion supplied by tile banking sttpervisors, showed that there were also rate changes or other modifications of major batik taxes in some States in recent years. Time corporate iiiconie tax rate was raised and some exemption of interest was deleted in Delaw'are. In Kansas, tile batik income tax mate was cliang&, effective after December 31, 1970, to a PAGENO="0173" 153 normal and surtax schedule. New York repealed the sales tax credit and lowered the rate for bank income tax when national banks became subject to sales taxes. The North Carolina excise (net incoi~e) tax rate was raised in 1969, and in Puerto Rico the rate was increased and other changes were made in the corporate income tax in mid-1970. As for shares or capital structure taxes, the Louisiana rate is in the process of being gradually reduced, the New Jersey rate was doubled and the proceeds divided evenly between the State and the counties, and in 1971 the Pennsylvania rate was increased. Other changes noted are the exemption of all personal property from taxation in North Dakota in 1969 and the exemption of personal property of individuals under a constitutional amendment adopted in Illinois in 1970. There were also reports of some attempted changes in bank tax treatment which did not become effective. In Georgia, a bill to subject banks to net income taxes (in addition to the shares tax) was not en- acted. A Wisconsin bill to repeal the exemption of commercial banks from tangible property taxation was not passed. In North Dakota an additional net income (privilege) tax on banks had been enacted to be effective in 1970, but was then not imposed because section 5219 had been amended in the meantime. In Washington, voters rejected a 1970 constitutional amendment which would have allowed net income taxes, and the Wyoming legislature in 1971 failed to replace taxation of bank shares based on par value with a proposed tax based on "total resources." in supplement table B-i, p. iSi, there is a listing of 36 States which reported recent or anticipated changes in the tax treatment of com- mercial banks, including out-of-State banks. In about half the States, legislative action was cited. Twenty-nine States (named in one or both of the first two columns of table B-4, p. i84) reported formal or in- ~forma1 review of tax laws affecting banks or official tax proposals, and only 2 respondents (Connecticut and North C1arolina) specified that the review was not prompted by P.L. 91-156. in 6 instances the review or proposals concerned national banks only. Five respondents (from Illinois, New York, Ohio, Tennessee and Puerto Rico) reported recent tax changes which affect out-of-State banks. A tendency to try to equalize tax treatment of national relative to State banks and of banks relative to other businesses has been quite clear in the reported restructuring of bank taxes in 1970, in the extension of taxes to national banks, and in the cases in which taxes were extended to both State and national banks from which both had previously been exempted. III. FORTHCOMING CHANGES IN STATE TAXES ON COMMERCIAIJ BANKS DOMICILED IN THE STATE Given the complexity of the current bank-tax systems in many States, with various compensatory provisions and the like embodied in statutes, it is understandable that there might be delays in revising the laws in the light of the amendments to section 5219 even if this seemed clearly desirable. Furthermore, State legislatures may be wait- ing to see if further changes will be made in that section. Eighteen States, as seen in supplement table B-4 at p. i84, reported that. further review of the tax laws affecting banks is likely. PAGENO="0174" 154 A. EXTENSION OF TAXES TO NATIONAL BANKS Most of the remaining discrepancies between State tax treatment of State and of national banks are scheduled to be eliminated in 1971 or 1972. These changes in many instances are already provided for in laws or would require only administrative action. Illinois, Maine, and New Hampshire expect to extend income-measure taxes to national banks in 1972. In Indiana the legislature has been asked to extend the gross income tax to national banks. Hawaii expects to extend sales and use taxes to national banks in 1972 or possibly in 1971. Ohio reports that the corporate franchise tax, a tax measured by capital structure, is expected to be extended to national banks on or after January 1, 1972. Puerto Rico reported that taxes on tangible personal property, on bank shares, and on intangible bank assets (under the property tax) would be extended to national banks in 1972. Legislation will be proposed in Rhode Island to extend the bank deposits tax to national banks, which are paying it on a voluntary basis. Arkansas also anticipated legislation applying a corporate franchise or privilege tax (questionnaire item 1.650) to State banks in 1971 and to national banks in 1972. B. TAX CHANGES AFFECTING BOTH NATIONAL AND STATE BANKS Likely tax changes affecting all commercial banks are less certain than those affecting only national banks. Only one change (Alabama) was reported in the questionnaire sections tabulated in table B-2, while the others were mentioned in letters. Alabama reported that a corporate franchise tax (item 1.650) will be levied on commercial ba~ks in 1972. Louisiana and Maine, both share- tax States, reported that bank dividends will become taxable to in- dividuals in 1972. In Florida, it was expected that the 1971 legislature might extend the capital stock tax to banks; a corporate income tax might be proposed, but this would require a constitutional amend- ment. Bank assets would become subject to Florida intangibles taxa- tion in 1972. In Missouri, banks will become subject to the regular corporate income tax rather than the special bank tax, starting in 1972. Except for some of the tax changes mentioned in the preceding para- graph, future tax changes affecting banks are quite uncertain. A pend- ing bill in California would relieve banks of the special bank tax and would subject them to city license taxes, local tangible personal prop- erty taxes (not on cash or currency), State and local sales and use taxes, documentary taxes, and motor vehicle license fees. In West Virginia, a successful attempt has been made in 1971 to subject banks to the gross income tax; legislation may also be proposed to subject banks to sales and use taxes. Extension of sales and use taxes to banks will also be proposed in North Dakota. Extension of tangible personal property taxes is being considered in several States. Among the States which tax banks according to net income, Michigan and North Carolina, as well as California, may de- cide to levy tangible property taxes on banks. Maine, which is starting to impose income taxation on banks, may also apply tangible property taxes to banks if the bank shares tax is repealed as planned. Louisiana, a shares tax state, is considering tangible personal property taxes on banks as well. PAGENO="0175" 155 New Jersey may switch from bank-stock taxation to a net income tax on banks or to a choice of net income or net worth taxation. New York already subjects State banks to the larger of either an income-measure or a capital stock tax and might extend this to national banks. It might be that, with the expansion of international and interstate operations, more tax base would be allocable to the home State under a net worth than under a net income tax. Illinois is the only State which reported that consideration might be given to a new intangible property tax which would apply to bank assets. The local bank shares tax, imposed legally on the shareholders, lapsed for individually-held shares on January 1, 1971, because with a change in the State constitution ad valorem personal property taxation of individuals is now forbidden. However, the new State constitution, approved December 15, 1970, may preclude adoption of a tax based on the value of bank-owned intangibles. In Kansas, banks have been exempted from the shares tax because the State imposes on banks a tax measured by income and because an intangibles rate on bank stock was considered an infringement of section 5219. The Kansas respondent reported that after January 1, 1972, Kansas might reinstate the shares tax on banks. Later information than the questionnaires 18 indicates that in addi- tion to proposals for rate increases and other changes in existing taxes, there is pending legislation for a bank tax measured by income in Wyoming, for sales and use taxes in New Hampshire, and for docu- mentary taxes in Arkansas, Missouri, North Dakota, and Texas. Repeal of personal property taxes is under consideration in Iowa and Wisconsin, repeal of local income taxes in New York, and repeal of the intangible property tax in Indiana. IV. How STATES CURRENTLY TAX OUT-OF-STATE FINANCIAL BUSINESSES A. THE KINDS OF TAXES LEVIED AND THE BASES FOR ASSERTING JURIS- DICTION TO TAX OUT-OF-STATE FINANCIAL BUSINESSES Taxation by a State of national banks not domiciled in the State is severely restricted, even under the currently-applicable provisions of P. L. 91-156. Only five itemized tax categories (sales and use taxes, real property taxes, doci~imentary taxes, tangible personal property taxes, and license fees and certain other charges related to the owner- ship, use, or transfer of tangible personal property) may be levied prior to 1972 against nondomiciliary national banks. Under the "permanent amendment" of section 5219, however, States would be free to tax out-of-State national banks in the same way that they tax out-of-State State banks. The kinds of taxes that the States have now, and the ways in which these taxes ar~ levied against out-of-State financial businesses, can shed some light on the probable post-amend- ment tax treatment of out-of-State banks which carry on business in some way in a State. Forty-five States and areas 19 responded to the questions on taxa- tion of out-of-State financial businesses. A few mentioned sales and `~ Commerce Clearing House reports. 1~ That Is, all except Alaska, Colorado, Delaware, Louisiana, Nevada, New Hampshire, and Vermont. PAGENO="0176" 156 use taxes,2° real or tangible personal property taxes, 21 and annual license or privilege fees, 22 but for the most part the answers concerned the kinds of taxes which cannot now be levied on nondomiciliary national banks. The discussion below is restricted to such taxes. The tax administrators were asked, in questionnaire section 3.41, Whether various listed categories of "out-of-State financial institutions (other than national banks) that do business in your State [arej now subject (November 15, 1970) to taxation in your State," and under what types of taxes. The answers respecting out-of-State State- chartered commercial banks (item 3.411) were somewhat inconclu- sive. For some States, respondents affirmed that such banks "that do business" would be subject to taxation although it appears that in fact out-of-State banks are prohibited by State law from engaging in the sorts of activity which would constitute doing business in that State or being taxable in that State. In other States, there are no out- of-State State banks which presently engage in activity that would involve taxable status there, although such activity would be per- missible. In 31 States or areas, out-of-State banks "that do business" in the State were reported to be subject to taxation under income, stock, assets or intangibles taxes, although the extent of actual taxation in- volved is uncertain. Net income taxation was by far the predominant method under which such banks are taxable and was reported by 24 States plus Puerto Rico, as can be seen in supplement tabie B-6 at p. 192. Indiana and Washington subject noiidomiciliary State bmiks to a gross income tax. Taxes on capital stock were reported by 6 States (Massachusetts, Montana, New Jersey, Ohio, Tennessee, and West Virginia). Idaho and Montana reported using a tax measured by value of assets used in the State, while Missouri and North Carolina reported intangibles taxes and Indiana reported a bank deposits tax applicable to out-of-State State banks. Very similar situations were reported for out-of-State mutual savings banks and savings and loan associations, as can be seen in table B-6. Fewer States (22) report taxing out-of-State credit unions, but again the frequency distribution of the various types of taxes is similar. Between 41 and 45 of the 45 respondents reported taxing each of the other types of out-of-State financial institutions named in the ques- tionnaire. Net income is by far the most common tax measure em- ployed except in the case of out-of-State insurance companies (items 3.421 and 3.422 on the questionnaire), which are generally taxed under gross income or premiums taxes. Some States levy more than one type of tax on out-of-State financial businesses, from among the types of taxes under consideration, and a system of alternative taxes is em- ployed in at least 2 States. Criteria for asserting tax jurisdiction over out-of-State financial busi- nesses were reported for some of the States,23 as tabulated in table 5 and in supplement table B-7, p. 194, but the information received was not complete. The first two columns in table B-7 compare the number of "Hawaii, Idaho, Maryland, Minnesota, Nebraska, Texas, and Washington. 21 District of Columbia, Florida, Kansas, Mississippi, Montana, Ohio, and Wyoming. 22 District of Columbia, Kansas, Mississippi, North Carolina, and Virginia. 23 No information on jurisdictional criteria, or nothing specific, was received from the following 18 States or areas: Alaska, Arkansas, Colorado, Delaware, Louisiana, Massachusetts, Mississippi, Nebraska, Nevada, New Hampshire, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Wyoming, and Puerto Rico. PAGENO="0177" 157 States in which out-of-State financial companies are reportedly subject to tax and the number of States for which the jurisdictional basis or bases were specified. In a few States tax jurisdiction may be claimed on more than one basis, such as either a localized office or localized trans- actions. TABLE 5.-NUMBER OF STATES REPORTING CRITERIA FOR CLAIMING TAX JURISDICTION OVER OUT-OF-STATE FINANCIAL INSTITUTIONS 1 . Kind of business and measure of tax Bas is of jurisdiction In-State office, property or personnel Business Location of activity risk, or or "doing income from business' in-State in State sources Not or gross income taxes: State banks 13 7 3 Savings banks Saving and loan associations Credit unions 11 12 10 7 2 9 2 6 2 Finance and loan companies Factors 19 17 13 4 13 4 Leasing companies Insurance companies Mortage companies, securities brokers, investment companies Taxes on capital stock, assets, intangibles, or sales: State banks Savings banks Savings and loan associations Credit unions Finance and loan companies Factors Leasing companies Insurance companies Mortgage companies, etc 16 7 18 5 . 4 9 7 12 9 11 - -2 11 12 4 12 7 14 4 4 4 4 4 6 2 6 2 6 2 2 1 8 2 I A State may use more than 1 basis of jurisdiction in a given situation and may therefore be tallied more than once on a single line. Where the criterion cited was simply doing business or engaging in localized transactions, the meaning of the response was uncertain, since the definition of "doing business" (as a legal concept) varies greatly from State to State. For example, it may refer to any activity carried on wholly within the State, to certain types of activity only, or to situations such as the Ownership of capital or property in the State. In most cases, the tax administrators reported that jurisdiction would be claimed only if the out-of-State company maintained a physical presence in the State, such as an office, property, or personnel. [his was less true of the major banking States than of others. The basis for claiming tax jurisdiction also varies somewhat with the type of tax involved. To date, activity by banks across State lines has been somewhat inhibited by prohibitions against branching and other special restric- tion on banks, as well as by the complications and uncertainties in- volved in multistate taxation. Banks are likely to become increasingly involved with interstate business activity and with affiliates which are in interstate business, as a result of trends such as the growth in large banks, the spread of bank holding companies, and the diversification of activities engaged in by banks and their affiliates. Current State practice regarding interstate division of the tax base of out-of-State businesses and the tax treatment of affiliated corporations is covered in sections B and C, which follow. - 79-421 0 - 72 - 12 PAGENO="0178" 158 B. INTERSTATE DIVISION OF THE TAX BASE Twenty-three States or other jurisdictions which tax out-of-State financial institutions reported that they require or permit interstate division of the tax base generally. Another 15 States reported that they do permit or require such tax base division, but not for all types of businesses and circumstances or for all tax measures applicable to the out-of-State financial businesses. Six States replied that interstate division of the tax base is not permitted or required. The replies are tabulated in supplemental table B-8, p. 196. Where interstate division of the tax base is allowed, the method of division used is tabulated in supplemental table B -9 and summarized in table 6. Apportionment by formula, or a combination of formula apportionment and specific allocation, is the predominant method used for all types of financial businesses and measures of tax, with the excep- tion of premiums taxes on insurance companies. Specific allocation by itself is not used by any of the major banking States except when taxing insurance companies. Separate accounting is likewise reported by none of the major banking States, except that in New York the Tax Com- mission typically prescribes separate accounting for State-chartered commercial and mutual savings banks and for savings and loan associa- tions. TABLE 6.-METHOD OF INTERSTATE DIVISION OF THE TAX BASE, BY KIND OF BUSINESS AND MEASURE OF TAX Measure of tax and kind of business Separate accounting Apportionment by formula Specific alloca- tion More than 1 method Net income, singly or with other measures: Commercial banks, ALAB, ARIZ, ARK, CT, DC, ID, IOWA, (0). CALIF, ILL, MONT,NEB, savings banks, savings HAW, NY, OKL, ME, MD, MASS, NM, ND, ORE, SD, and loans, credit SC. (6) MINN, TENN. (10) UT, WIS, PR. (11) unions. Insurance companies (0) MINN, TENN (2) (0) ILL, NEB, SD, PR (4) Other financial busi- ALAB, ARIZ, ALAB, ARK, CT, DC, (0). CALIF, ILL, KY, MONT, nesses'. HAW, OKL.(4) HAW, ID, IND, IOWA, NEB, NM, NC, ND, ME, MD, MASS, ORE, SC, SD, UT, VA, MICH, MINN, NJ, NY, WIS, PR.(15) 0 KL, PA, RI TEN N. (19) Premiums or gross in- come: Commercial banks, IND (1) (0) (0). WASH. (1) savings banks, savings and loans, credit unions. Insurance companies~ HAW, IND, UT, MICH (1) CT, KY, NY, ND, WASH. (1) WIS. (4) PA. (5) Other financial busi. IND (1) (0) (0) WASH. (1) esses. Nonincome measures: Commercial banks, ID, NC (2) NJ, MICH (2) ID (1) 01-I. (1) savings banks, savings and loans, credit unions.1 Insurance companies' ID, NC (2) (0) ID (1) (0). Other financial busi- ID, HAW, NC (3). NJ, TEX (2) 10(1) OH. (1) nesses.1 1 Some States may be tallied more than once in a row; for detail, see table 6-9 at p. 197, below. C. CONSOLIDATION OR COMBINATION OF AFFILIATED CORPORATIONS FOR TAX PURPOSES The practice of. consolidating or combining data for affiliated ocr- porations (the "unitary concept") for tax purposes applies with PAGENO="0179" 159 greatest frequency in net income taxation, although it may be em- ployed in the assessment of other types of taxes. Tax administrators' responses indicate that a requirement of consolidation or combination in the taxation of financial businesses often applies only in certain cases or at the discretion of the appropriate official. The responses received are tabulated in supplemental table B-b, p. 197. Of 26 States or areas for which responses were given on the ques- tion of consolidation (section 3.5 of the questionnaire), 5 States re- ported with no qualification that such consolidation is required, and another 16 areas indicated in explanatory comments that consolidation may be required in certain cases. It appeared from the responses that required tax consolidation would depend not on the type of business involved but on whether a group of affiliated corporations constitutes a "unitary business operation" under the State's criteria; respondents from several States explained that it would depend on whether the tax commissioner decides that consolidation is necessary to avoid excessive attribution of income to other jurisdictions for tax purposes.24 Four States replied that consolidation or combination of affiliates, although not necessarily required, may be permitted in some cases. Two of these States were responding with regard to taxes other than income taxes, and whether consolidation is permitted depends on the type of tax.25 In retrospect, it appears that the question was ambiguous, making it difficult to interpret these negative replies. It is possible that in some of these States consolidation is permitted or even required in particular circumstances but is not universally required. Other responses may mean that consolidation is not permitted at all. Only 5 areas (Connecticut, District of Columbia, Maryland, Mississippi, and New Jersey) reported explicitly that tax consolidation is not permitted or that there are no provisions for such consolidation. There is no clear pattern in the responses from the major banking States. Of the 10 major banking States in terms of total operating income, only California and Massachusetts reported that consolidation for tax purposes is required in some or all cases. In New York, Florida and Ohio, consolidation is permitted in some instances. New Jersey reported that consolidation is neither required nor permitted, and the other major banking States 26 simply reported that it is not required. V. OPINIONS AS TO PROBABLE TAX TREATMENT OF OUT-OF-STATE NATIONAL AND STATE BANKS UNDER THE PERMANENT AMENDMENT A. EXTENT AND CERTAINTY OF RESPONSE The State tax administrators were asked to give their opinions as to situations in which, in the absence of Federal statutory restrictions after January 1, 1972, their States would be likely to assert jurisdiction to tax commercial banks domiciled in other States. A~ variety of business activity situations were postulated, and the respondents were asked to specify the tax measures to which their answers referred. The questionnaire stressed that the responses would be considered not as formal, binding interpretations or commitments, but rather as 24 For discussion of the unitary concept and the tax treatment of multicorporate banking enterprises, see appendices 12 and 13, at pp. 551-592, be'ow. 25 In Florida, affiliated corporations may choose consolidation for purposes of the intangible property tax: in Ohio, they may choose it for purposes of the franchise (capital stock) tax but not the personal prop- erty or dealers-in-intangibles taxes. 26 Illinois, Pennsylvania, Texas, and Michigan. PAGENO="0180" F- F- C, tC ~ ~;-: ~ ~ 2 F- F- r ~2~J ~ ~ib ~ ~!~: CD ~ ~2 2~ -l 0 0 2 -4 2 F DC ~- u rio -~ -4~5 - ~~;2- 2 ~i< -~ -4 a -u 2 0 2 C,, 0 -n C,, -1 -4 -4 0 to 2 -1 Cl, C, -40 -<2 0 0 74 0 C~, -4 -4 9 2 C,, -1 2 C,, o c-p- ~ CD ~ CD ~~4O ~ ~+)(D CD c+ ~ -. ~CD Ci) CD 4~ Co -. CDO Co 0 CD p.' Ci) ~ C-'- - ~D Cl) -. C,, 2 2 c0~ -, 2> ~ -C~ !"c~ 042> PAGENO="0181" 161 TABLE 8.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE BANKS AFTER JAN. 1, 1972, BASED ON ACTIVITIES OTHER THAN LENDING Numberof Numberof States which Number of States which would assert States wouldnotassert Type of activity jurisdiction uncertain jurisdiction Soliciting deposits: By advertising 5 39 Through visiting officials 4 6 34 Through local representatives 12 8 24 Issuing credit cards: From outside the State, for residents to use in State 4 10 30 From outside State, for residents to use in or out of State 2 10 32 From outside State, for nonresidents to use in State 6 7 31 From within the State 19 12 15 Underwriting municipal securities 3 8 33 Dealing in securities: Through an in-State office 1 31 3 8 Through visiting officials 11 7 26 Through an out-of-State office 4 4 36 Conducting trust business: For in-State beneficiaries 5 9 30 Involving in-State real or tangible personal property 11 7 27 Leasing equipment for use in State 2 31 5 10 Selling accounting or data processing services: Through out-of-State office 2 4 8 33 Through in-State office 432 2 9 Through subsidiary or affiliate in State 3 12 8 22 1 Includes Maryland personal property tax. 2 Answer is for sales or use tax only, in 4 States. Answer is for sales or use tax only, in 1 State. 4 Answer is for sales or use tax only, in 3 States. Responses to section 3.1, concerning taxes based on income, capital stock or assets, were received from 45 States or areas.27 Twenty_two answered specifically with reference to income taxes or income taxes along with other taxes.28 Another 14 apparently were answering also with reference to income taxation, although this was not specifically stated. Some responses referred to taxes based on capital stock, assets, or intangibles. In a few instances, answers referred to sales and use taxes or to tangible personal property taxes. There was practically no response to the separate section (section 3.3) dealing with taxation of intangibles. Thirty-seven States or areas did not respond in any manner to this part of the questionnaire. In- tangibles taxation is discussed below, in section D, after two sections dealing with jurisdiction to impose other taxes. B. PATTERNS OF RESPONSES NATIONWIDE The responses of the tax administrators regarding probable assertion of jurisdiction to levy income, capital stock or assets taxes are listed in supplemental table B-5, p. 185. and tallied in briefer form in tables 7 and 8. In general, the responses indicate that jurisdiction to tax an out-of-State bank would very likely be asserted if the bank maintains an office in the State. In a minority of States, however, officials thought they might assert jurisdiction as long as financial activity was carried on in the State without the need for approval from an out-of-State source, even if the activity were carried on by a bank official who was only temporarily in the State. The most commonly citGd instances in which the respondents expect that the State would assert jurisdiction for income, stock, or assets 2, Those not responding were Colorado, Delaware, Louisiana, New Hampshire, Vermont and the Virgin Islands; Alaska and Kansas stated simply that no foreign banks are allowed to do business. ~ Reference was to gross Income taxes, in the cases of Indiana, Washington, and West Virginia. PAGENO="0182" 162 taxes were the following: (1) dealing in securities through an in-State office, (2) making loans through the bank's own office in the State, subject to out-of-State approval, (3) selling accounting or data process- ing services through an office in the State, and (4) leasing equipment for use in the State. The States were divided on whether they might assert jurisdiction in cases of (1) binding loan commitments made by visiting bank officials, (2) loans made by an in-State affiliate or subsidiary subject to out-of-State approval, (3) issuance of credit cards within the State, and (4) selling accounting or data processing services through an in- State affiliate or subsidiary. C. PATTERNS OF RESPONSES OF INDIVIDUAL STATES Where there was no distinct consensus among the States (i.e., in the four instances listed in the preceding paragraph), individual States tended to fall consistently on one or the other side of the split. Of the 45 States and areas responding, 20 held the same opinion for all of the 4 situations above to which they responded, and another 13 held the same opinion in 3 out of the 4 situations. It does not appear, from the questionnaire responses, that the permanent amendment of section 5219 will have much effect on whether a State taxes out-of-State commercial banks, although pre- sumably taxation will be extended to national as well as State- chartered banks. Thirty-one States responded (in item 3.411 in the questionnaire. shown in table B-6, p. 192) that out-of-State banks that do business in the State are presently taxable.29 Thirty-five respondents reported (in questionnaire items 3.110 through 3,233, table B-5) that they might tax foreign banks under the permanent amendment.3° Three of these States reported probable changes in the laws under which they would tax foreign banks: Montana and New Jersey expect net income taxes to be passed, and West Virginia reported that it expected to apply the gross receipts tax, which has since been extended to banks. Nine States. (Florida, Pennsylvania, and 7 other States) reported that they do not tax out-of-State banks now (except perhaps under property taxes) and do not expect to in the future, while another 2 do not tax them now and are uncertain about the future. The responses to the questions concerning probable future taxation of out-of-State banks were consistent with the reported current treat- ment not only of foreign State banks but also of other out-of-State financial institutions. For example, 39 States or areas reported that out-of-State leasing companies are now subject to State net or gross income taxation (item 3.4 19 of the questionnaire). Twenty-eight of~ these States reported that out-of-State banks which lease equipment for use in the State (questionnaire item 3.220) probably would or might be subject to income taxation. As for dealing in securities, 40 States or areas reported that they now tax out-of-State security brokers or dealers (questionnaire item 3.424) under net or gross income taxes. 29 Plus Texas (which reported only sales and use taxes on foreign State banks), Wyoming (which reported ad valorem [apparently real property] taxes only), and Florida and Mississippi (property taxes). 35 This covers the 1 listed in table B-S with the addition of the District of Columbia (for activities other than lending, taking deposits, and doing trust business), Georgia, Michigan, Mississippi, and Texas, and minus New York. New York would tax out-of-State banks only if they accepted deposits within the State, hut does not permit this activity. PAGENO="0183" 163 Thirty-one of these States probably would or might subject out-of- State banks to income taxation if they deal in securities in the State through an in-State office (item 3.181), though only 16 reported that they would or might assert jurisdiction for income taxes if the trans- actions were made by visiting officials with no permanent in-State office (item 3.182). D. INTANGIBLES TAXATION Very little information was received in response to the specific question (section 3.3 of the questionnaire) regarding the likelihood that the States would subject intangible personal property of out-of-State banks to taxation in the absence of Federal statutory restrictions. Responses to section 3.3 of the questionnaire are summarized in table 9. Only Georgia replied that any intangible assets of out-of-State banks (the banks' long-term notes) would probably be subject to taxation. Of the five States that mentioned intangibles taxes currently applicable to out-of-State financial institutions,3' only Michigan re- ported that they would probably be applicable to out-of-State banks after January 1, 1972, and this response referred to deposits taxes paid on behalf of the depositors. In Florida and Missouri taxation would depend on whether the out-of-State bank was engaged in activity which would constitute doing business, but out-of-State banks are forbidden to "do business" in Florida. In North Carolina, the out-of- State bank would not be subject to the intangibles tax as long as it was subject to an excise tax. There was no answer to the question from Indiana, which also has an intangibles tax. TABLE 9.-PROBABLE STATE TAXATION OF INTANGIBLE PERSONAL PROPERTY OF OUT-OF-STATE BANKS AFTER JAN. 1, 1972 Yes, in at least some situations (4) Uncertain in any situations (4) No (8) No answer (37) GA, MICH,' NEB,2 and TN 3. ARK, ILL, IOWA,and MO. ARIZ, FLA, MINN, NJ, NC, ND, OKL,and WASH ALAB, ALASKA, CALIF, COLO, CT, DEL, DC, HAW, ID, IND, KANS, KY, LA, ME, MD, MASS, MISS, MONT, NEV, N.H, N.M, N.Y, OHIO, ORE, PA, RI, SC, SD, TEX UTAH, VT, VA, WV, WIS, WYO, PUERTO RIáO, AND VIRGIN ISL 1 Refers to deposits tax, paid on behalf of depositor. 2 Refers to tax covering income from intangibles. Refers to county shares tax. Some respondents did mention recent or likely changes in the taxa- tion of intangibles. Illinois, it was indicated, might conceivably enact a tax on bank-owned intangibles after January 1, 1972, to replace the now-unconstitutional shares tax on shares held by individuals, and Iowa repealed its intangibles tax on monies and credits in 1970. Ne- braska repealed its intangible property tax in 1967, although there has been some discussion of reenacting it. Many States do not now have any ad valorem taxation of intan- gibles,32 or they have only a share-value tax on banks, and even States which do not explicitly exempt intangibles sometimes fail to enforce the intangibles part of the property tax. Four States specified that other bank taxes are in lieu of intangibles taxes (Kansas, Minnesota, North Carolina and Ohio), and Alabama stated that banks are exempt 31 Florida, Indiana, Michigan, Missouri, and North Carolina; see tables B-6 and B-7, pp. 192-195, below. ~° See section lI-A, pp. 144-449 above, concerning taxes on bank shares and bank deposits. PAGENO="0184" 164 from property taxes on cash and evidences of debt. Tax administrators in some of the other States and areas may have ignored intangibles taxation because their States do not now have such taxes or because banks are now exempt. Unfortunately, the responses throw little light on whether the States would be likely to impose intangibles taxes upon bank-owned assets after national bank immunity terminates under the "permanent amendment" of section 5219. VI. LOCAL TAXATION AND OTHER MATTERS A. LOCAL TAXATION OF BANKS Information from the State tax administrators on types of local taxes applicable to banks was incomplete. Some respondents mentioned local real property taxes, while others apparently limited their answers to local taxes on banks other than real property taxes. Also, the situa- tion was complicated by the fact that there ar~ different opinions as to what properly can be called a local tax. There are many instances of taxes the proceeds of which go wholly or in part to counties, municipal- ities, or other local units, but which are administered by the State government. Some respondents mentioned such taxes, while others may have left out similar taxes. Finally, some respondents failed to answer part 4 of the questionnaire at all. The answers received are tabulated in table 10. It should be remembered that even if a local tax applies to banks in a State, this may be true only in some counties or municipalities and not in others. The District of Columbia is not included in table 10. TABLE 10.-STATES REPORTING LOCAL TAXES APPLICABLE TO COMMERCIAL BANKS, NOV. 15, 1970 1 Property taxes - Shares taxes or taxes based on capital structure(11) Income taxes(5) Sales taxes(10) Other taxes (7) - Real prop- erty only (15) Real and personal(6) Not sped- fied(4) CALIF, IND, ME, MICH, MINN MISS, MO, MONT, NJ, NY, * NC, ND, OKL, SC,andVA. ARIZ, ARK, ILL, KY, MONT, and NEV. CT, ID, IOWA, and WYO. ~ GA, ILL, KY, LA, ME, MISS, MONT, NH, NJ, TENN, and VA. MO, NY, ND, OHIO, and WASH.' ALAB, ARIZ, ARK, NEB, NC, OKL, SD, TEX, UT, and WASH. KY,' MD,' MO,' NEB,~ NH,' ORE,' and VA." lDistrict of Columbia is not included in the tabulation. Transfer or recordation taxes. $ Intangibles tax. Motor vehicle tax. I Gross income tax. `lax on dividends paid. `Payroll and license taxes. I Utility taxes. The kinds of local taxes applicable to banks reflect the limitatiotis on local taxing authority and the practical constraints on local taxing. Consequently, the major local taxes applicable to commercial banks are ad valorem taxes on real property. Often personal prop- erty is not taxed locally, either because there are no tangible personal property taxes on banks or because such taxation is at the State level. Of 25 States for which the respondents mentioned municipal or county property taxation of banks, 15 specified real property taxes only, while only 6 mentioned specifically that both real and personal property of banks were taxable, as tallied in table 10. PAGENO="0185" 165 The most important type of local tax on banks aside from property taxes is the ban/c shares tax or a tax based on capital structure, which was reported for 11 States. In 7 of these States,33 these taxes are com- pletely local or else are State-administered with all the proceeds dis- tributed to localities. Kentucky, Louisiana, Ne~v Jersey, and Virginia report both State and local bank shares taxes or else shared taxes on bank shares.34 In Illinois, since November 3, 1970, the tax is effective on shares held by corporations only. Local income taxes applicable to banks are not common. In New York, the tax is imposed only in New York City, and the tax tabulated for North Dakota is a State-administered privilege tax that is distrib- uted to the localities. Some Ohio municipalities levy an income tax although the response did not specifically state that the tax is appli- cable to banks. Local income taxes may become more common; re- spondents from Kansas, North Dakota, and Oregon mentioned that such taxes are now authorized. However, responde~its from Alabama and Nevada mentioned specifically that localities are not authorized to levy income taxes. Michigan has a local income tax from which banks are excluded. The trend in State taxation away from ad valorem taxes to income-based taxes is likely to mean a shift away from local taxes to State taxes,35 perhaps with tax sharing features. Local sales taxes which are now applicable to banks were reported in 10 States: in Utah and Washington (and possibly in other States as well) such taxes are administered by the State on behalf of the localities. Seven States reported a variety of other local taxes applicable to banks, as recorded in table 10. In at least one case (Maryland) the recordation tax is collected at the State level and paid over to the local units.. All the taxes applicable to banks in the District of Columbia could be considered local taxes, too. Respondents from Kansas, Nevada, North Dakota, and Oregon mentioned that local governments are now authorized to levy taxes other than those which are now imposed. In California, several pro- posals to remove the in-lieu provision of the State bank tax law were defeated in 1970 but may be offered again; such a change would enable localities to impose on banks such taxes as license taxes, tangible personal property taxes, sales taxes, documentary taxes, and motor vehicle taxes. B. CONCLUDING COMMENTS It is clear from the responses submitted by the State tax adminis- trators that the States and localities have generally been extending and modifying the taxes applicable to banks since the easing of restric- tions on taxation of national banks. The tendency has been for banks to be taxed more like other business corporations, although little was said in the responses concerning the economic consequences for bank- ing. The revision of State taxes has been more difficult in some States and for some kinds of taxes than for others, depending on the State laws involved and the degree of specification in State constitutions. At the very least, however, the amendment of section 5219 has reduced the likelihood of disputes over whether a tax applies to the bank as a `3 Georgia, Illinois, Maine, Mississippi, Montana, New Hampshire, and Tennessee. `~ In Virginia, a local tax on bank shares is an offset tax, creditable against the State tax on bank shares. *3This was mentioned in connection with the possible repeal of bank stock taxes in Georgia and Maine. PAGENO="0186" 166 corporate entity or to some other party such as shareholder, depositor, or supplier. All the bank-tax changes which have occurred or are likely to occur are not attributable to P.L. 91-156, of course. For example, changes in State constitutions in Illinois and Nebraska have necessitated changes in bank taxes, and respondentsfrom Connecticut and North Carolina stated that the tax law review efforts in those States were not prompted by P.L. 91-156. S Concerning the permanent amendment of P.L. 91-156, the major areas affected would be intangibles taxation and multistate taxation. The lack of response on the matter of intangibles taxation may be partly because of the way the questionnaire was set up and partly because taxation of intangible property is considered very unlikely in most States. S Responses concerning the multistate taxa~ion of banks cannot help but be highly conjectural. In the past such taxation was limited not merely by statutory r trictions but also by restraints which many banks imposed on their activities across State lines. Such activity is becoming increasingly important, however, despite State restrictions on "doing business" and prohibitions upon interstate branching. Re- flecting the State-level concern with multistate taxation, the respon- dent from Iowa suggested that the Board's study might include guide- lines for allocating net income of nondomiciliary banks which do business in the State and of nonbanking subsidiaries of domestic banks which do business both in and out of the State. Existing State practice regarding jurisdiction to tax out-of-State firms may not provide a very firm guide to future practice where banks are involved. Not only are changes in practices likely, reflecting the unique restrictions on bank branching, but the whole matter of uniformity and coordination of multistate taxation is a matter of cur- rent concern in Congress, the States, and business. Despite such un- certainties, the information and opinions supplied by the State tax administrators have been of great value in the Board's examination of the likely impacts of the "permanent amendment" of section 5219 of the Revised Statutes. SUPPLEMENT A BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, D.C., November 13, 1970. Letter sent to State tax administrators. By direction of the Congress, the Board of Governors of the Federal Reserve System is making a study of State and local taxes on banks. This study is required by Section 4 of Public Law 9 1-156, and the Board, in conducting the study, is di- rected to consult with "appropriate State banking and taxing authorities." A copy of P.L. 9 1-156 is enclosed. This legislation amends a provision popularly known as Section 5219 of the Re- vised Statutes (12 USC 548-also enclosed) which prescribes methods by which the several States may tax national banks. The act makes a temporary amendment, effective through December 31, 1971, an,d a permanent amendment which will become effective January 1, 1972, unless the Congress enacts further changes. As part of the study, we need information and advice from you about present and prospective taxes applicable to banks in your State. This should be provided in two steps: (1) A letter from you at the earliest possible date advising us whether action has been taken or is contemplated for the near future that would affect State and local taxes paid by commercial banks-particularly taxes on in- tangible personal property, net income, gross receipts, and capital stock. PAGENO="0187" 167 Other matters that we would like to have covered in your letter are indicated below. (2) A response by December 10, 1970 (or as much sooner as is feasible), to the enclosed questionnaire calling for more detailed information. The deadline for submission of our report to the Congress has been set at March 31, 1971; and unless we have your reply to the questionnaire by December 10, it may not be possible to reflect this information adequately in the report. The information you supply in these two communications will be an important element in the formulation of our findings and recommendations. In your initial letter, we would appreciate, in addition to the above information on specific tax action, an expression of your views on the following: What you foresee as the probable trend of developments in bank taxation in your State if the "permanent amendment" of Section 5219 becomes effec- tive January 1, 1972, without further change. Whether there are relevant special problems in your State that ought to be examined in the course of our investigation. Any other major issues you consider pertinent to our study. The questionnaire is designed to supplement your initial reply, giving us more detailed information on a number of points. It inquires about present and prospec- `tive laws and practices affecting taxes on commercial banks and other financial institutions-those for which yours is the home-State and also those out-of-State banks that may have activities or property interests in your State. We are supplying three copies of the questionnaire-one to be returned to us, one for your files, and one for use in drafting replies or, if necessary in referring questions to another office. The questionnaire was prepared with advice from several State tax officials, outside tax experts, representatives of the Federation of Tax Administrators and the National Association of Supervisors of State Banks, and representatives of several Federal Government agencies. It covers the following major subjects: 1. Existing statutes governing State and local taxation of banks, 2. Future action, 3. Interstate aspects of bank taxation, 4. Local taxation of banks, 5. Revenue from taxes on banks, 6. Comments on other issues. The questionnaire includes a request that you give us your comments on issues that you consider pertinent or on special problems in your State. In replying to that part of the inquiry, you may wish to amplify the observations in your initial letter. In any case, we urge that you reply fully to all parts of the detailed questionnaire. Very truly yours, ROBERT C. HOLLAND, Secretary. PAGENO="0188" 168 O.M.B. 11°. 55S70004 Approval Expires March 31, 1971 STATE AND LOCAL TAXATION OF CO~9ORCIAL BANKS Questionnaire for State Tax Administrators Study by the Board of Governors of the Federal Reserve System under Public Law 91-156, December 24, 1969. The Board of Governors of the Federal Reserve System is engaged in a study of State and local taxation of banks, as required by law. THIS QUESTIONNAIRE IS ADDRESSED TO YOU IN ORDER THAT WE MAY HAVE AUTHORITATIVE INFORMATION FROM YOUR STATE FOR USE IN THIS STUDY. PLEASE REPLY BEFORE DECENDER 10, 1970. Longstanding Federal statutory limitations on the authority of States to tax national banks are generally removed by P.L. 91-156 (enclosed). Section 2 of that law amends section 5219 of the Revised Statutes (12 USC 548, also enclosed) to read as follows: For the ~,urposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located. This new provision will become effective January 1, 1972, unless Congress takes further action. Until 1972, earlierprovistons of section 5219 will continue in effect, with enlarged taxing authority available to States under a new clause 5 added to section 5219 by P.L. 91-156, section 1, and saving provisions in section 3. the Board of Governors of the Federal Reserve System is directed by the Act (section 4 of P.L. 91-156) xake a study to determine the probable impact on the banking systems and other economic effects of the changes in existing law to be made by section 2 of this Act governing income taxes, intangible property taxes, so-called doing business taxes, and other similar taxes which are or may be imposed on banks. In conducting the study the Board shall consult with the Secretary of the Treasury and appropriate State banking and taxing authorities. The Board is to report.the results of its~study to the Congress and to include in the report -- The Board's recommendations as to what additional Federal legislation, if any, may be needed to reconcile the promotion of the economic efficiency of the banking systems of the Nation with the achievement of effectiveness and local autonomy in meeting the fiscal needs of the Staten and their political subdivisions. Your full and prompt response to our questions will be greatly appreciated. Please attach copies of statutes, reports, legislative bills, tables, and othur documents that will amplify or clarify your answers to the questions. (See NOTE, page 10.) If you find it necessary to refer parts of this questionnaire to another office, please request that a prompt response be sent directly to us -- and please indicate in your own response to us the name of the individual and office from shon further information I'an been requested. * Questions of interpretation and procehre may be discussed with us by telephone or letter. ~ telephone, please call Mr. I. N. Labovltz, ares tode 202 - 737-1100, extension 3363. A postage-prepaid envelope is enclosed for your return of the completed questionnaire with attach- ments and supplements. Extra copies of the questionnaire are enclosed for your files or for use, if necessary, in referring questions to another office. * We thank you for your cooperation. PAGENO="0189" 169 piesosyjilin the fol low~ggg~ces: State ________________________________________________ Date of response ______________________- Respondent: Name and title of respondent: _____________________________________________________________________________ Name of agency or office: _________________________________________________________________________________ Addrass: Name and title of individual to whom queries may be directed: __________________________________________ Telephone number (include area code): ________________________________________________________________ 1. EXISTING STATUTES This section relates to taxation of commercial banks under present laws of your State. Please che: spplicsble spaces or fill in blank lines. If an answer is in doubt, please explain in an attachment. Plea~. mark each attachment witis the identifying number of the question (or questions) to which it relates and chc~;. the appropriate box in the column at farthest right to show that you are providing supplementary materials f~. that question. Supplem. material Yea No encloe(. 1.1 Temporary amendment of sec. 5219, R.S.: Assuming no further legislative action by your State, are thero any tax laws of your State rhat became applicable to national banks on or after December 24, 1969 (the date of FL. 91-156) or that will become applicable to national banks under the interim provisions of P.L. 91-156, sees. 1 and 3? (Examples: A general sales tax; a document recordation tax; taxes on tangible personal property.) 1.2 Permanent amendment of sec. 5219, R,S.: Assuming no further legislative action, will any tax law of your State become applicable to national banks on or after January 1, 1972, that has not heretofore been applicable to them because of restrictions imposed by soc. 5219 or generally attributable to sec. 5219? (Examples: A state law that exempts national banks by specific reference to sec. 5219 and provides for lapse of the exemption when sec. 5219 is modified; a State law that carries a general exemption or disclaimer which has been interpreted to exclude national banks from the particular tax.) 1.3 Legislation since Dec. 24, 1969: If you answered Yes to either or both 1.1 and 1.2, and if your answer is based on an existing law (or laws) which was enacted or amended in relevant respects since December 24, 1969, please identify this law (or laws) here or in an attachment: 1.4 Changes affecting State banks and out-of-State banks: Does any State law referred to in 1.3 above (or any other law enacted or amended since December 24, 1969) make a change in the taxation of -- 1.41 State banks as well as national banks? ("State banks" are commercial banks chartered by your State.) ~ ~ 1.42 State banks only? . . . . . PAGENO="0190" 170 1.43 ~.t-of-State banks? (I.e., national bank with principal office in another State; State bank chartered by another State.) c: i:~ 1.44 If you answered Yes to 1.41. 1.42, or 1.43, please identify this law or lava: 1.5 Taxes currently applicable to commercial banks: Please check boxes to indicate taxes that apply currently (November 15, 1970) or will later become applicable under present law to national and State coonnercial banks. Where applicable, please indicate on "Name of tax" line the designation that is uaad in your State to identify this tax and enter a brief citation to the statute. In supplying supplementary materials, please include the applicable rate or rate schedule for each tax checked. - "National bank" here means a national bank with its principal office in your State. "State bank" here means a cononercial bank chartered by your State. For the periods before January 1, 1972, include (and designate) voluntary payments by national banks of taxes not authorized under section 5219. (Several of the boxes provided below relate to such taxes.) Initially applied Initially applicable on nitially applicable Pleasure or kind of tax before or after Dcc. 24, 1969, on or after Supplet-~ and its name in your State, Dec. 24, 1969 but before Jan.l, 1972, Jan. 1, 1972, matcria~s with statutory citation sndeipresent law under present ~ enclosed National State National ~ State National State banks banks banks I banks banks banks 1.51 Property values: 1.5110 Tangible pornonal property: 1.5111 Under general property tax ~ E~J c:J c:~ E~1 1.5112 Under classified property tax (Name of tax): E~J c~J E:J E~J 1.5120 Intangible property: 1.3121' Shares of bank stock (Name of tax): _________ 1.5122 Bank'ascetc or any cate- gory thereof (Name of tax): ___________________ 1.5123 Bask depooits taxable to depositor and collected from bank (Name of tax): 1.520 Cross income or' receipts: (Name of tax): * * E~J 1.530 Net~in~omn: Tax on, or mea- sured by. or according to net income (Name of tax): 1.540 Tax measured by income from intanflibles in lieu of - property tax (Name of tax): PAGENO="0191" 171 3. 1. EXISTING STATUTES -- 1.5 Taxes currently applicable to commercial banks -- continued .. Neasure or kind of tax and its name in your State, vith statutory citation nitially applied Initially applicable onjlnitially applicablel before or after Dec. 24, 1969. on or after ISupplee. Dec. 24, 1969 but before Jan.1. 1972, iso. 1, 1972 materials under preoent law ~ under present law enclosed National State National State National State banks ~J banks banks banks L banks J banks 1.550 Sales tax: 1.551 Vendor tax on sales to banks 1.552 Vendor tax on sales ~ banks 1.553 Vendee tax on sales to banks 1.554 Other forms of sales tax (Name of tax): _________ 1.560 ~x (on out-of-State pur __ ___- 1.570 Real est:te transfer tax 1,580 )brtRaRe tax (Name of tax): - CJ i~ 1.590 Security transfer tax (Name of 1.610 Other documentary taxes (Name 1.620 Tax measured by capital strue turejcspital, surplus, un divided profits) (Name of _____ _____ _____ 1.630 )ttor vehicle tax or fee (Name 1,640 Other license * registration, c~j ~ transfer, excise, fee, or tax on ownership, use, or transfer of tangible per- sonal property (Name of tax): 1.650 7~anchise, license, or priv- (~ [~J CJ C flege tax not included above (Name and nature of tax): 1.660 ~y~pplicsble tax not in- _____ eluded above (Name and nature of tax): __________ PAGENO="0192" 172 4, 1. EXISTING STATUTES -- continued 1.7 Dividends on ,~fonal and State bank shar: If your State imposes an income tax on individuals, please check boxes tc~ show the treatment of dividends received from commercial banks: National Stats Supplem. bank bank materials dividends dividends enclosed 1,71 Bank dividends are included in taxable income of individuals 1.72 Bank dividends are not included in taxable income of individuals 1.73 Other provisions (please specify) ___________________________________ 2. P%fl1JRE ACTION This section relates to possible or prospective action in your State in view of the permanent emend- sent of sec. 5219, R.S. * enacted in P.L. 91-156. sec. 2. Please reply by checking applicable boxes and adding explanatory comments to the extent required. If an answer is in doubt, please explain in an attachment. Where answer is Yes, see NOTE on page 10. Supplem.. ~ateria1s Yes No enclosed 2.1 Review of tax laws. -. Has the amendment of sec. 5219 prompted a review of tax laws of your State with a view to changes that might affect taxation of -- 2.11 National banks? 2,12 State banks? (The question refers to any such review by administrative officials or bodies; legislative committees, councils, or commissions; and any unofficial studies.) 2.13 Nature of review, if any _______________________________________ 2.2 Official proposals. -- In your State, have there been any official proposals (sincd enactment of P.L, 91-156) for further legislation to change State or local tax laws or rates that would affect -- - 2.21 National banks? 2.22 State banks? - ("Official proposals" here means proposals by the Governor, tax board or commission or administrator, revenue or budget officer, legislative councils or committees, revenue or budgetary cam- missions, individual legislators, and other public bodies, offices, or officers.) 2.3 Possible further review. -- Do present tax laws of your State provide exemptions or limitations, particularly applicable to national banks, which exemptions or limitations nay be subject to re-examination in light of the amendment of sec. 5219' 3.. INTERSTATE ASPECTS OF BANK TAXATION This section relates to the possibility that States may impose taxes on out-of-State commercial banks that were not permitted as to national banks under section 5219, KS., before amendment by P.L. 91-156. Questions 3.1 and 3.3 relate to circumstances in which States might assert jurisdiction to tax. Questions 3.4 and 3.5 relate in part to measurement of the tax base subject to the tax imposed by your State or its subdivisions. "Out-of-State bank" means a national bank with its principal office in another State or a State bank chartered in another State. Assume the bank has no office in your State unless the contrary is specified. PAGENO="0193" - Uncer- Supplem. Yes tam No Name of tax; citation; conesenta materials enclosed 3.110 The bank makes loans to customers in your State (residents or businesses) secured by real or tangible personal property located inyour State. These loans are negotiated -- 3.111 by bank officers uho make binding comnitments during visits to your State 3.112 by bank officers who visit your State for this purpose, but each loan is subject to approval outside your State 3.113 by a loan correspondent in your State but subject to approval outside your State 3.114 through the bank's own office in your State (e.g., a loan production office) but subject to approval outside your State 3.115 through an affiliate or subsidiary corporation office in your State but subject to approval outside your State 3.116 outside your State 3.120 The bank makes loans to customers in your State (residents or businesses) secured by real or tangible personal property located outside your State. These loans are negotiated -- 3.121 by bank officers who make binding commitments duriog visits to your State El El EJ 3422 by bank officers who visit your State for this purpose, but each loan is subject to approval outside your State El El 173 Your answers to these questions will not be construed as formal, binding interpretations. or connnitments. Rather, they will be considered informal expressions of opinion, based on your knowledge of practices, procedures, and rules applied by taxing authorities of your State in the taxation of businesses other than commercial banks in circumstances in which two or moth States might be able to assert jurisdiction. 3.1 Jurisdiction to impose a tax based on gross or net income or receipts, capital stock, or assets used. -- Judging from present practice in the taxation of interstate busineases and other relevant facts, isit youc opinion that after January 1, 1972 -- in the absence of Federal statutory restrictions -- your State would assert jurisdiction to tax an out-of-State bank that conducts within your State any of the operations spehified below? Please consider this question with reference to any or all of the follow- ing taxes that may be used in your State: Taxes on gross or net income or receipts (or measured by or according to gross or net income or receipts); Taxes measured by capital stock or by assets used in the State. Please reply by cheCking applicable boxes below. If you answer Yes or Uncertain, please specify the tax (or taxes) to whi..h your answer refers and enter brief statutory citations. Add necessary comments here or in an attachment. Situation 79-421 0 - 72 - 13 PAGENO="0194" * 3, INTERSTATE ASPECTS OF BANK TAXATION -- 3.1 Jurisdiction to impose a tax based on ~~s4t~1 sink no en~etn used -- continued 3.123 by a loan torrespondent in your State but subject to approval outside your State EJ El El 3.124 through the banks own office in your State but subject to approval out- aide your State EJ EJ 1~I 3.125 through an affiliate or subsidiary corporation office in your State but subject to approval outside your State 3.126 outside your State 3.130 The bank makes loans to customers in your State (residents or businesses) secured by collateral in the form of intangible personal property held at the bank's principal office. These loans are negotiated -- 3.131 by bank officers who make binding cousnitments during visits to your State El El El 3.132 by bank officers who visit your State for this purpose, but each loan is subject to approval outside your State El El El 3.133 by a loan cnrrespondcnt in your State but subject to approval outside your Store EJ El El 3.134 through the bank's own office in your State but subject to approval out- side your State El El El 3.135 through an affiliate or subsidiary corporation office in your State but sUbject to approval outside your State . . El 3.136 outside your State U L_.J 3.143 The bank makes unsecured loans to customers in your State (residents or businesses). These loans are negotiated -- 3.141 by bank officers who make binding cotnrntttrents during visits to your i~tate El U El 3.142 by bank officers who visit your State for this purpose, but each loan is subject to approval outside your State - El El El 3.143 by a loan correspondent in your State but subject to approval outside your State El El El - 3.144 through the bank's own office in your State but subject to approval out- aide your State El E~l El - 3.145 through an affiliate or subsidiary corporation office in your State but subject to approval outside your State - El El 3.146 outside your State El U] 174 - Uncer- Supplens. Situation Yea tam No Name of tax; citation; cotmnenta ~ R El El El H. U] U] El El El El PAGENO="0195" 3.150 The bank participates in a syndicate to underwrite aecurities of a municipal borrower in your State :~ c:j cj 3.160 The bank issues credit cards from an office outside your State that may be used -- 3.161 only in your State by residents of your State 3.162 in your State and other States by resident! of your State 3.163 in your State by nouresidents 3.170 The bank issues credit cards through an office or an agent bank or an asso- ciate bank in your State to residents of your State which they nay use -- 3.171 only in your State 3.172 in your State and other States .. The bank deals in securities in your State -- through its own office in your State .~ EJ EJ cj through officials who visit your State for such transactions . . . . E:J t:~ EJ through its office outside your State .. U [:1 U 3.190 The bank conducts trust business -- 3.191 for beneficiaries rcsident in your State c:i c:i ci - 3.192 involving administration of real or tangible personal property in your State U U U: The bask solicits depof its -- by advertising is media puhltshed and distributed in your State through bank officials who visit your.Stste for this purpose . through a representative stationed in your State 3.220 The bank owns equipment which it leases to others for use in your State . . . UJ i:j c:~ 3.230 The bank sells accounting or data processing services to a business in your State 3.231 from its office outside your State 3.232 through its own office in your State 3.233 through an affiliate or subsidiary corporation office in your State 175 3. INTERSTATE ASPECTS OF BAtE TAXATION -- 3.1 Jurisdiction to inpose a tax based on or reeeisrs ramital utmek ousots ,on1 -- continued . Situation hinter- tam No * Suppleru. Name of tax; citation; conssentsj matertals 6. U H 3.180 3.181 ~.182 3.183 - 3.210 3.211 3.212 3.213 EJUJ~ UL~JUJ __ U - cJ U ___ U ___ U __ U PAGENO="0196" 3. INTERSTATE ASPECTS OF BANK TAXATION -. continued 3.3 Jurisdiction to tax intangible personal property. Is it your opinion that after January 1, 1972 -- in the absence of Federal statutory restrictions -. your State would assert jurisdiction to tax intanRible personal prope~ry of an out-of-State coennercial bank conducting within your State one or more of the operations specified in question 3.1 above? Ex~ple: The bank holds a note secured by real property in your State. Make no entries if the answer is No for all situations numbered 3.110 through 3.233 that involve intangible personal property. For any case where the answer is Yes or UncertaiU. please identify the situation by using situation numbers (3.110 through 3.233) from question 3.1 and specify the tax (or taxes) to which your answer refers. If possible, please specify any additional circumstances that might determine whether your State would claim jurisdiction to tax in a particular situation. 7~t / uation (ref erenee number) yes OD c~ DD DD DEJ ~D cJc Name of tax; citation ; coosnenta ~materials D D c: ~ ~-D . . . . ; 3.4 Financial businesses other than national banks. -. 3.41 Are out~of-State financial institutions (other than national banks) that do business in your State new subject (November 15, 1970) to taxation in your State on one or more of the bases ("measures") named below? Please reply by checking applicable Yes or No boxes below. Use line 3.410 below if the same answer covers every kind of business named and all types of tames listed. Where you answer ~gg, please specify the measure of the tax (by entering in the "Measure" column one or more applicable references from the list below). Also give the name used in your State for this tax and a brief statutory citation, For some types of business, you may need to designate two or more taxes. Add necessary connnests here or in an attachment. the these reference letters in_"measure"_column ______________ A to mean S to mean Ctomean 0 to mean B to mean Ftomean. 176 $easure of tax Net income or receipts Cross income or receipts Capital stock Value of assets used in State Value of intangible personal property Other measure or tax base Supplein. Bind of business Yes No Measure Name of tax; citation; cotmoents materials enclosed 3,410 All kinds of business named below ~ - 3.411 State banks (commercial) DD - __________________________________ D PAGENO="0197" 177 Sled of business Yes No Measure Name of tax; citation; . comments Supplem. materials enclosed 3.412 Motual savings banks 3.413 Savings and loan associations 3.414 Credit unions 3.415'Sales finance companies 3.416 Small loan companies 3.417 Commercial finance companies . 3.418 Factors 3.419 Leasing companies 3.421 Life insurance companies 3.422 Fire;ndc:sualty insurance .3.423 Mortgage companies 3.424 Security brokers and dealers . 3.425 Investment companies 3.426 Small businesu Inveatment . . EJEJ . . . . EJEJ . . CJCJ - - -.. - - - . t:J EJ cj c~ fJ J ~ t:i ~j 0 c:i 0 EJ ~ - . 3. INTERSTATE ASPECTS -. 3.4 Financial buoineones other than notional banks -. continued 3.43 For instances in which your reply to question 3.41 is Yes, please specify the tests or criteria that are used to determine whether the particular organization or company is taxable in your State. For these out-of-State financial institutions, a claim of jurisdiction to tax night be based on localized operations (ouch as a small loan company office) or various situati ens analogous to those numbered 3.110 to 3.233 above. Answers night be along the followinglines: 3.411.. ,Measure A, excise (income) tax, Code sec. 64-463: Loans secured by real propçrty in State. 3.423.. .Measure E, intangible property tax, Comp.Stat.l20-72(a): Loan office and commercial situs of intangibles in State. Supplementary materials enclosed. . 3.44 In inotaices in which your reply to question 3.41 is Yes, does your itate permit or require inter- state division of the tax base? Oseck applicable box: Yes . No . ~ Yes, for some, No for others. . PAGENO="0198" 178 3.45 If you answered question 3.44 with Yes or Yes for some, No for others, please indicot. interstate division of the tax base by filling in the form below: Measure of tax Kind of business Neth d f di (enter capital (enter numerical symbols 0 V S 0 letter references question 3.41. E.g., for free ques. 3.41) banks (commercial)" onto 3.451 Separate accounting _______________ ________________________ 3.452 Apportionment by formula 3.453 Specific allocation 3.454 Combination of specific allocation and formula apportionment _______________ _______________________ 3.5 Treatment of affiliated 3.51 In taxing affiliated corporations, does your State require that operations of such of. tions be consolidated or combined ir, determining the tax base? Yes , . . No . . . £ 3.52 Does this rulmor requirement apply when one or more of the affiliated corporations a' of the kinds of business named in question 3.41? Yes . . . No . . . 3.53 If you answered Yes to question 3.52, please specify the kinds of business by usinc; from question 3.41 and the kind (measure) of tax by using reference letters from qut Kind of business Measure of tax - (numerical symbols from question 3.41) (letter references from quo.. 3.54 What criteria are used in your State to determine whether to require combination or operations of affiliated corporations? ______________________________________________ 3.55 Please check this box if you are enclosing supplementary materials about the treousor corporations 3. INTERSTATF. ASPECTS -- continued 35 Other aspects or problems. -- Please use this space or enclosures to comment on any other interstate aspects of baoo on special problems in your State that are not covered in preceding replies. Please check this box if you are enclosing supplementary materials about these r~ aspects or problems PAGENO="0199" 4. LOCAL TAXATION OF BANKS 4.10 We need information about present and potential local government taxes applicable to cossnercial banks in your State. This includes not only taxes especially applicable to banks, but also general taxes (for example, a local income tax) that may have been extended to banks under interim provisions of see. 5219, R.S., or may be extended to banks following removal of restrictions in that section. 4.11 Please report briefly any such local taxes in your State, either on this page or in an enclosure. 4.12 If your office cannot supply information along these lines, is there another State office which should be able to supply it? If so, please provide a specific referral (including telephone number). 4.13 If there is no central source for this information in your State, will you please name the finance or tax officials in three or four major financial cities or counties in your State, so that we may inquire directly? Please check this box if you enclose supple- mentary materials for Enter replies to questions 4.11, 4.12, or 4.13 below: question 4.10 . . . . 5. REVENUE FROM BANK TAXES 3.1 State revenue. -- Please complete the table below (to the extent feasible) to show the amount of State tax revenues collected from coomercial banks in the latest fiscal year for which you have data. If you can subdivide amounts between State and national banks, please do so. tksit real property and payroll taxes. Please check this box if you enclose supplementary materials for question 5.1 [J Type of bank affected Total State government taxes Measure or kind of tax (check box) from banks (in thousands): and its none in your State State Natl. Both Fiscal year ended 19 5.11 Tax on net income (tax measured by, according to, or on net income): Name of tax: - 5.12 Tax on gross income or receipts: Name of tax: 179 D~EJ D PAGENO="0200" Measure or kind of tax ~nd jts name in your State 180 5.13 Tax on value of capital stock: Name of tax: _____________________________ 5.14 Tax on value of shares: Nameof tax: ______________________ 5.15 Other taxes applicable to banks (specify tax): Typ. of bank affected (check box) State Natl, Both EEJEJ EJ~ D JJ E Total State government taxes from banks (in.thousands): Fiscal year ended 19 S. 19 Total of reported taxes . 10. 6. ~O*~NTS ON OTHER ISSUES We invite your conments on other issues that you consider pertinent to our study under P.1. 91-156. or on relevant special problems in your State that are not covered in this questionnaire. - If you are supplying an enclosure with such coesuents, please mark it "Question 6" and check this box 7. NOTE cJ With your response, pleGse supply explanatory memoranda, statutes, bills, regulations, reports, tabula- tions, manuals, or other documents that will rmplify your replies. We request especially with reference to questions 1, 2, and 3 that you give information such as the following, to the extent applicable: .whether taxes referred to, either enacted or proposed, are for State or local government purposes; the basis (or measure) for each tax; .estimates of the magnitude of the taxable base -- or recent actual data; .applicable or proposed tax rates; .actual or expected revenue yields or effects; ,,interrelations between taxes (for example, that a particular tax is credited against another tax - or in lieu of it); .jurisdictional or other rules for deciding when the tax applies; . - .rules or procedures for determining the interstate or interlocal division of the taxable base or payment of each taxpayer. PAGENO="0201" 181 SUPPLEMENT B State names and abbreviations. Table B-i: States Reporting Changes in Tax Treatment of Commercial Banks after December 24, 1969 [1.1, 1.2, 1.3, 1.41 through 1.44]. Table B-2: State Taxes Reported Applicable to Commercial Banks on November 15, 1970, by Measure of Tax and Extent and Timing of Applicability [1.5110 through 1.660]. Table B-3: Treatment of Dividends Received from Commercial Banks Under State Individual Income Taxes, Since December 24, 1969. [1.71, 1.72, 1.73; also 1.5121 through 1.620]. Table B-4: States Reporting Review of Tax Laws or Official Tax Law Proposals Affecting Commercial Banks. [2.11, 2.12, 2.13, 2.21, 2.22, 2.3]. Table B-5: Opinions of State Tax Administrators Regarding Taxation of Out of St,ate Commercial Banks after January 1, 1972, by Type of Bank Operation and Measure of Tax [3.110 thrOugh 3.233]. Table B-6: Status of State Taxation of Out-of-State Banks and Other Financial Institutions as of November 15, 1970 [3.410 through 3.426]. Table B-7: Basis of Jurisdiction for Taxation of Out-of-State Banks and Other Financial Institutions, November 15, 1970 [3.43; also 3.410 through 3.426]. Table B-8: State Practice Regarding Inti~~~tate Division of the Tax Base in Taxing Out-of-State Banks and Other Financial Institutions [3.44 and to some extent 3.45]. Table B-9: Method of Interstate Division of the Tax Base, by Kind of Business and Measure of Tax [3.451 through 3.454]. Table B-i0: State Positions on Consolidation or Combination of Affiliated Corpo- rations in Deteiinining the Tax Base [3.51, 3.52, 3.53, 3.54]. STATE NAMES AND ABBREVIATIONS I Alabama AL Alaska AK Arizona AZ Arkansas AR California CA Colorado CO Connecticut CT Delaware DE District of Columbia DC Florida FL Georgia GA Hawaii HI Idaho ID Illinois IL Indiana IN Iowa IA Kansas KS Kentucky KY Louisiana LA Maine ME Maryland MD Massachusetts MA Michigan Ml Minnesota MN Mississippi MS, Missouri MO Montana MT Nebraska NE Nevada NV New ljampshire NH New Jersey NJ New Mexico NM New York NY North Carolina NC North Dakota ND Ohio OH Oklahoma OK Oregon OR Pennsylvania PA Rhode Island RI South Carolina SC South Dakota SD Tennessee TN Texas TX Utah UT Vermont VT Virginia VA Washington WA West Virginia WV Wisconsin WI Wyoming WY Puerto Rico PR Virgin Islands VI I Federal Information Processing Standards (FIPS). TABLE B-1.--STATES REPORTING CHANGES IN TAX TREATMENT OF COMMERCIAL BANKS AFTER DEC. 24, 1969 Changes affecting domestic national and/or State banks after Dec. 24, 1969 . Changes affecting national banks, expected after Jan. 1, 1972 (9)1 Changes affecting out-of- State banks (5) Enactment or amendment of No legislative change legislation cited (19) needed, or non cited (17) , AZ, AR, IL, IA, KS, ME, MD, AL, CO, CT, FL, GA, ID, MI, NE, NH, NJ, NY, OH, OK, IN, KY, MA, MS, MO, PA, TN, TX, WA, and PR(19). NC, RI, UT, VA, WI, and WY(17). AL,' FL,' IL, KS 2 ME, MO,2 NH, OH, and RI. (9). 11, NY, OH, TN, and PR. (5). . `This listing, from item 1.2 on the questionnaire, does not include all the possible changes mentioned in the text. `Changes will affect both State and National banks. Note: For key to 2-letter abbreviations of State names, see preceding table. `For each table, the items tabulated from the Questionnaire for State Tax Administrators (reproduced in Supplement A) are listed in square brackets. PAGENO="0202" TABLE 8-2.-STATE TAXES REPORTED APPLICABLE TO COMMERCIAL BANKS, BY MEASURE OF TAX AND EXTENT AND TIMING OF APPLICABIUTY Applicable prior to Dec. 24,1969, and still in force Applicable starting after Dec. 24,1969, but before Forthcoming after Nov. 15,1970 Jan. 1, 1972 Jan.1, 1972 Measure of tax (with corresponding State and national Extended to national State and national National State and questionnaire number) banks State banks only banks banks banks national Income: 1.53OTaxon,ormeasuredby,oraccordingto, A1,12AK,1 AZ'CA, 2 IL,7ME,TN,and PR~ TN IA,' MT,4and NHS IL,~ME,and net income. CO." CT, D~, HI,' ID, NH. KS'MD'MA Ml MNI MO12NEINM1NY1 NC1ND,100K1OR1RI SC,i SD,' UT, VT,'4 WI,' and PR. 1.520 Gross income or receipts DC IN WA - Items of net worth, assets or deposits: 1.5121 Shares of bank stock ` ARE,' DE,~ FL 11,0 a in IN,4 PR PR KY, ME, M1, NV, NH, OH,iO TN,o TX, and WY." 1.620 Tax measured by capital structure GA," IA," MS.' NJ," NY,12 OH, and TN TN OH (capital, surplus, undivided profits). PA, `I VA," WV, and 1.5122 Banks assets or category thereof 12 PR - PR 1.5123 Bank deposits taxable to depositor and IN, KY Ml, NC, OH, collected from bank 4, and ltI `3. S., Tangible property: 1.5111. 1.5112 Tangible personal property..... AL, AR MA, MS, MI, CT ID; IL,° KS, NE, CT, ID, 11,0 KS, NE, AZ, CO, FL, IA, KY, PR NV, 1'N, WA, and WY. lII, UT, and PR. RI, and UT . LA and OH. 1.630 Motor vehicle tax or fee ii -- AL, AZ, AR, CT, DE, DC, KY and NE KY and NE FL, HI, ID, KS, LA, ME, MD, MA, MI, MN, NV, NJ, NM, NC, OK, OR, PA, RI. SD, TN, UT, VA, W;~, and WY. Sales and use: 1.551, 1.553 Sales tax on sales to banks AR,'~ CA,'~ DC, IL, KS,'~ AZ, CT HI, ID, IN, IA, AZ, CT, ID, IN, IA, ME, AL, CO 4 FL, GA, LA, MD, KY, MI, MN, MS." NJ,1~ ME, h~A, MS, MO, NE, MA, MS, MO, NE, NV and ix. SC,'? TN, VA,'7 WA,~? and NV, NY, NC, OH, OK, NY, NC, OH, OK, PA. WI. PA, RI, SD UT, VT,~ and RI, SD, UT, VT,4 and WY. WY. 1.552 Sales tax on sales by banks AR,'~ CT, DC, GA, ID, IN, AZ, IL, KY, ME, MI, MO, AZ, IL KY, ME, MI, MO, AL, CO,~ FL, and MD...~ IA, KS,'~ MA, MN, NE, and WI. and WI. S NV, NY, NC, OK, RI, S SD, TN, TX, UT, and VA.*7 S PAGENO="0203" 1.560 Use tax (on out-of-State purchases)-.. AR,'° DC, KS,17 MN, NJ,17 AZ, CT, HI, ID, IL, IN, AZ, CT, ID, IL, IN, IA, AL CO,~ FL, LA, MD, and SC,i7 TN, VA,'7 and WA.i7 IA, KY, ME, MA, MI. KY, ME, MA, MI, MS, 1'X. MS, MO, NE, NV, NY, MO, NE, NV, NY, NC, NC, OH, OK, PA, RI, OH, OK, PA, RI, SD, SD, UT, WI, and WY. UT, WI, and WY. Transfers: 1.570 Real estate transfer tax CT, DC, KY,° MD, MA, Ml, AR,'~ HI, IL, IA, ME, NY, AR,'~ IL, IA, NY, OH, and AL, FL, and GA MN, NV, NJ, PA, RI, SD, NC,~ OH, and OK. OK. TN, WA. WV, WI,and PR. 1.580 Mortgage tax KS, MN, OK, and TN NY NY AL, and FL 1.590 Security transfer tax.. NY FL 1.610 Other documentary taxes MD,° MN, MO, 5C18 VA, NE, and TN NE and WA. Other: 1.650 Franchise, license or privilege tax not DE, IA, VA, and WY ID, MN, and OR AR " AR 19 AL. included above. 1.640, 1.660 Any applicable tax not included NH, OK, and VA° KY, and TN above (excluding real property)'°. 1 Tax was reported to be a special bank or financial institutions excise tax, or at a special rate. 14 From other sources it appears that bank deposits are also taxable but payable by the depositor 2 Change in rate or replacement by ordinary income tax is likely, in Arkansas, Florida, Illinois (deposits of corporations only), Missouri, Pennsylvania, South Dakota 3 Tax was changed from special to regular income tax since Dec. 24, 1969. (deposits drawing interest), and Tennessee, and they do not appear to be exempt in Alaska, Arizona, 4 Information is from sources other than questionnaire. Georgia, Iowa, Kansas, Montana, New Jersey, Texas, Virginia, West Virginia, or Wyoming. 3 Tax was reported as item 1.540 "Tax measured by income from intangibles in lieu of property 13 National banks are paying this tax voluntarily. tax." 16 This category does not include some reported sales or use taxes on motor vehicles (Iowa, Texas); 0 Tax is completely local; timing of Kentucky real estate transfer tax not given, some respondents specified that the tax was a license tax or fee rather than an ad valorem tax (An. 7 National banks are included in the class of taxpayers, but with a tax base of zero until Jan. 1, 1972. zona, Florida, Idaho, Louisiana, Maryland, North Carolina, Oregon, Utah) or a license tax or fee in 8 Applicable to State banks only. addition to an ad valorem tax (District of Columbia, Kansas, Maine, Massachusetts, Washington). This tax was recently repealed in Iowa and New Mexico; under a constitutional amendment, the 17 Tax was disputed (California, New Jersey, Virginia), paid voluntarily (Arkansas, South Carolina, Illinois tax will be dropped in 1971 except for shares held by corporations; banks are paying the tax Washington), or enforced by nondeposit of State moneys (Kansas). in Arkansas on a voluntary basis; shares are also apparently taxible under property taxes in Alaska 18 Reported for national banks only. (State bank shares only) and South Dakota. 10 This assumes an expected change in the law in 1971, and would be only on State banks until 1972. 10 Tax is legally on stockholder, not on the bank. 20 Miscellaneous taxes reported: tax on dividends paid on deposits (New Hampshire), taxes on 11 Tax is called a bank share or bank stock tax. cigarettes, fuel,alcohol, and motor boats (Oklahoma), local utility taxes (Virginia), corporate organi- 12 Tax is alternative to net income tax if larger, and only State banks are subject to the alternative. zation tax (Kentucky), and State banking fee for supervision (Tennessee). 13 Tax was reported by California Connecticut Florida, Georgia, Maine, North Dakota, Texas and - - 181 Wyoming,butwasapparentlyon real property and was therefore not tabulated. Note: For key to 2-letter abbreviations of State names, see a ovo, p. - PAGENO="0204" TABLE B-3.-TREATMENT OF DIVIDENDS RECEIVED FROM COMMERCIAL BANKS UNDER STATE INDIVIDUAL INCOME TAXES, SINCE DEC. 24, 1969, BY MAJOR STATE TAXES ON BANKS Tax on, measured by, or according to net income of banks Tax on bank shares or capital structure 1 Tax on gross income or receipts Treatment of bank dividends on Nov. 15, 1970, Total State and and changes in dividend treatment or number of State banks State banks national State banks bank taxes since Dec. 24, 1969 States State and national banks only State and national banks only banks ohly Situation on Nov 15, 1970: Individual income tax which includes all domestic 28 AL, AK, AZ, CA, DE, HI, ID, IA, None DE, IN, MS, and MT (4) AK, NY, and DC (1) IN. (1) bank dividends KS, MD, MA, MI, MN, MO, PR (3). NE, NM, NY, NC, OR, RI, SC, UT, WI, PR. (24) Includes domestic State bank dividends only 4 None IL and ME(2) GA, IL, ME, and WV (4) None None None. Includes out.of.State bank dividends only 3 TN (1) NH (1) NH, TN and VA (3) None None None. Does not include any bank dividends 2 ND and OK (2) None None None None None No individual income tax, or no answer to the 15 CD, CT, SD, and VT (4) None AR, FL KY, LA, NV NJ, OH, None WA (1) None. question PA, SD, TX, and ~Y (11). Changes reported between Dcc. 24, 1969, and Jan. 1, 1972: Bank dividends taxable: Jan. 1, 1970 2 None None MS (1) None None IN 2(1) July 1, 1970 1 KS (1) None None None None None. 1 New York tax is an alternative to the income tax; in Arkansas, tax is being paid voluntarily. 2 National bank dividends were included in taxable income of individuals starting Jan. 1, 1970, Note: For key to 2-letter abbreviations of State names, see above, p. 111 State bank dividends had already been taxable. TABLE B-4.-STATES REPORTING REVIEW OF TAX LAWS OR OFFICIAL TAX LAW PROPOSALS AFFECTING COMMERCIAL BANKS Review of tax laws Official proposals Further review likely AL. AZ, CA, CT,1 FL. GA, HI,2 IL,3 lN,~ IA, KS, Ml, MO, MT. NJ, NM, NY, NC,1 ND, OH, Rl,2 CA, GA, Hl,2 IN, IA, KS, ME, MA, MI, NJ, AR, CA, GA, HI, KS, MA, MI, MO, NJ, NM, NC, OH, OK, OR, TX,2 VA, WV, WY,~ and PR2(26). NC,4 ND, OH,2 WV, and Wl(15). RI, TN, VA, and WV (18), 1 Tax law review is underway but was not prompted by Public Law 91-156. 2 Review took place in 1969. 2 Concerns national banks only. 4 Proposals expected by end of 1970. Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0205" TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFFER JAN. 1, 1972, BY TYPE OF BANK OPERATION AND MEASURE OF TAX Type of bank operation (with corresponding questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdicl.ien2 Uncertain 3.110 The bank makes loans to customers in your State (residents or businesses) secured by real or tangible personal property located in your State. These loans are negotiated- 3111 By bank officers who make binding commitments during visits to your State: Net income AL, CA, ID, IL, ME, MA, MN, MD, Mf, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, MI, ND, OR, RI (4). NJ, NN, NC, SC, PR (15). OK, PA, SD, TN, U F, VA, WI (17). Gross income WV (1) WA (1) IN (1). Other measures3 GA, ID, MA (3) DC, FL, MS, TN, TX, WA, WY (7) MI, NE (2). 3.112 By bank officers who visit your State for this purpose, but each loan is subject to approval outside your State: Net income CA, ID, MA, MN, MO, MT, NM, PR (8) AL,AZ, AR, Cr, DC, GA, HI, IA, IL, KY, ME, NJ, OR, RI (3). MD, Ml, NE, NY, NC, ND, OK, PA, SC, SD, TN, UT, VA, WI (25). (0). Gross income WV (1) IN, WA (2) (0). Other measures3 GA, ID, MA (3) DC, FL, MI, MS, TN, TX, WY (7) NV (1). 3.113 By a loan correspondent in yourState butsubject to approval outside your State: Net income MO MT, NM PR (4) AL, AZ, CA, CT, DC, GA, HI, IA, KY, ME, AR, ID, IL, MI, MN, NJ, ND, RI, SD. MD, MA, NE, NY, NC, OK, OR, PA, SC, (9). TN, UT, VA, WI (23). Gross income WV (1) IN (1) WA (1). Other measures 3 GA (1) DC, FL, MA, MS, TN, TX, WY (7) ID, MI, NV (3). 3.114 Through the bank's own office in your State (e.g., a loan pro- duction office) but subject to approval outside your State: Net income AL, AZ, CA, CT, GA, ID, IL, ME, MD, MA, AR, DC, HI, IA, KY, NY, PA, VA (8) WI, RI (2). MI, MN, MO, MT, NE, NJ, NM, NC, ND, OR SC SD TN UT PR(25). Gross income IN, WV (2) (0) (0). Other measures 3 GA, ID, MA, MI, MS TN, TX (7) DC, FL, WY (3) NV (1). 3.115 Through an affiliate or subsidiary corporation office in your State but subject to approval outside your State: Net income AZ, AR, ME, MD, MA, MN, MO, OR, SD, AL, CA, CT, DC, GA, Hi, ID, IA, KY, NJ, IL, MI, MT, NE, NM, ND, RI (7). PR (10). NY, NC, PA, SC, TN, UT, VA, WI (18). Gross income IN, WV (2) WA(1) (0). Other measures GA, MA, MS, TX (4) DC, FL, ID, TN, WY (5) MI, NV (2). 3.116 Outside your State: Net income MO, PR (2) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IA, IL, NM, RI (2). KY, ME, MD, MA, MI, MN, MT, NE, NJ, NY, NC, ND, OK, OR, PA, SC, SD, TN, UT, VA, WI (32). Gross income (0) WA (1) IN, WV (2). Other measures3 - GA (1) DC, FL, ID, MA, MI, MS, TN, TX, WY (9).... NV (1). See footnotes at end of table, p. 191. PAGENO="0206" TABLE B-5.-OP1NIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFTER JAN. 1, 1972, BY TYPE OF BANK OPERATION AND MEASURE OF TAX `-Continued Type of bank operation (with corresponding questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdiction2 Uncertain 3.120 The bank makes loans to customers in your State (residents or businesses) secured by real or tangible personal property located outside your State. These loans are negotiated- 3.121 By bank officers who make binding commitments during visits to your State: Net income AL, CA ID, IL, ME, MA, MN, MT, NE, NJ, AZ, AR, CT DC, GA, HI, IA, KY, MD, MO, MI, NM, ND OR RI, PR (6) NC, ~C (12). NY, OK, ~A, SD, TN, UT, VA, WI (18). Gross income WV (1) WA (1) IN (1) Other measures a ID, MA (2) DC, FL, MS, TN, TX, WY (6) MI, NV (2). 3.122 By bank officers who visit your State for this purpose, but each loan is subject to approval outside your State: Net income CA, ID, MA, MN, MT(5) AL, AZ, AR, CT, GA, HI, IL, IA, KY, ME, NJ, NM, OR, RI(4). MD, Ml, MO, NE, NY, NC, ND, OK, PA, SC, SD, TN, UT, VA, WI, PR (26). Gross Income. WV (1) IN, WA (2) (0). Other measures' ID, MA (2) DC, FL, Ml, MS, TN, TX, WY (7) NV (1), 3.123 By a loan correspondent in your State but subject to approval outside your State: Net income MT (1) AL, AZ, AR, CA, CT, DC, GA, HI, IA, KY, ID, IL, MI, MN, NJ, NM, RI, SD, PR (9), ME, MD, MA, MO, NE, NY, NC, ND, OK, OR, PA, SC, TN, UT, VA, WI (26). Gross income WV (1) IN (I) -- WA (1). Other measures0 (0) DC, FL, MA, MS, TN, TX, WY (7) ID, Ml, NV (3). 3.124 Through the bank's own office In your State but subject to approval outside your State: Net income AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, MO, NY, PA, VA (8) NM, RI, WI (3), MA, MI, MN, MI, NE, NJ, NC, ND, OR, SC, SD, TN, UT, PR (24). Gross income IN, WA (2) (0) (0). Other measures3 ID, MA, MI, MS, TN, TX (6) DC, FL, WY (3) NV (1). 3. 125 Through an affiliate or subsidiary corporation office In your State but subject to approval outsIde your State: Net income AZ, AR, ME, MD, MA, MN, OR, SD (8) AL, CA, CT, DC, GA, HI, ID, IA, KY, MO, IL, MI, MI, NE, NM, ND, RI, PR (8). NJ, NY, NC, PA, SC, TN, UT, VA, WI (19). Gross income IN, WV (2) WA (I) - (0). Other measures3 MA, MS, TX (3) DC, FL, ID, TN, WY (5)~ MI, NV (2). 3 126 Outside your State: Net income (0) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, RI (2). KY, ME, MD, MA, MI, MN, MO, MI, NE, NJ, NY, NC, ND, OK, OR, PA, SC, SD, TN, UT, VA, WI, PR (34). Gross Income (0) IN, WA, WV (3) (0). Other measures° (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9)~_ NV (1). PAGENO="0207" 3. 130 The bank makes loans to customers in your State (residents or businesses) secured by collateral in the form of intangible personal property held at the bank's principal office. These loans are negotiated- 3. 131 By bank officerswho make bindingcommitments during visits to your State: Net income AL, CA, ID, IL, ME, MA, MN, MO, MT, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, Ml, NM, ND, OR, RI, PR (6). NJ, NC, SC (13). OK, PA, SD, TN, UT, VA, WI (17). Gross income WV (1) WA (1) IN (1). Other measures3 ID, MA (2) DC, FL, MS, TN, TX, WY (6) MI, NV (2). 3.132 By bank officers who visit your State for this purpose, but each loan is subject to approval outside your State: Net income CA, ID, MA, MO, MT (5) AL, AZ, AR, CT, DC, GA, HI, IL, IA, KY, MN, NJ, NM, OR, RI (5). ME, MD, MI, NE, NY, NC, ND, OK, PA, SC, SD, TN, UT, VA, WI, PR (26). Gross income WV (1) IN, WA (2) (0). Other measures3 ID, MA (2) DC, FL, MI, MS, TN, TX, WY (7) NV (1). 3.133 By a loan correspondent in your State but subject to approval outside your State: Netincome MO,MT(2) AL,AZ, CA, CT, DC, GA, HI, IA, KY, ME, AR,ID,IL,MI,MN,NJ,NM,RI,SD,PR(10). MD, MA, NE, NY, NC, ND, OK, OR, PA, SC, TN, UT, VA, WI (24). Gross income WV (1) IN (1) WA (1). Other measures 3 (0) DC, FL, MA, MS, TN, TX, WY (7) ID, MI, NV (3). 3. 134 Through the bank's own office in your State but subject to approval outside your State: - Netincome AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, NY, PA, VA (7) NM, RI, WI (3% MA, Ml, MN, MO, MT, NE, NJ, NC, ND, OR, SC, SD, TN, UT, PR (25). Gross income IN, WA (2) (0) (0). Other measures3 ID, MA, Ml, MS, TN, TX (6)_ DC, FL, WY (3) NV (1). 3. 135 Through an affiliate or subsidiary corporation office in your State but subject to approval outside your State: Net income AZ, AR, ME, MD, MA, MN, MO, OR, SD(9)~ AL,CA, CT, DC, GA, HI, ID, IA, KY, NJ, NY, IL, MI, MT, NE, NM, ND, RI, PR (8). NC, PA, SC, TN, UT, VA, WI (18). Gross income IN, WV (2) WA (1) (0). Other measures3 MA, MS TX (3) DC, FL, ID, TN, WY (5) MI, NV (2). 3. 136 Outside your State Net income MO (1) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, RI (2). KY, ME, MD, MA, MI, MN, MT, NE, NJ, NY, NC, ND, OK OR, PA, SC, SD, TN, UT VA, WI, RPd3). Gross income (0) IN, V/A, WV (3) (0). Other measures° (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9) NV (1). See footnotes at end of table, p. 191. PAGENO="0208" TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL~BANKS AFTER JAN. 1,~1972, BY TYPE OF BANK OPERATION AND MEASURE OF TAX I_~Continued Type of bank operation (with corresponding questionnaire number) and measure of tax2 Would assert . jurisdiction Would not assert Jurisdic . tion 2 Uncertain 3.140 The bank makes unsecured loans to customers In your State (residents or businesses). These loans are negotiated- 3.141 By bank officers who make binding commitments during visits to your State: Net income AL. CA, ID, IL, ME, MA, MN, MO, MI, NE, AZ, AR, CT, DC, GA, HI, IA, KY, MD, NY, MI, MN, ND. OR, RI, PR(6), NJ, NC, SC(13). OK, PA, SD, TN, UT, VA, Wl(17). Gross income WV(1) WA(1) IN(1), Other measures3 ID, Ma(2) DC, FL, MS, TN, TX, WY(6) MI, NV(2). 3.142 By bank officers who visit your State for this purpose, but - each loan is subject to approval outside your State: Net income CA, ID, MA, MN, MO, MT(6) AL, AZ, AR, CT, DC, GA, HI, IL, A, KY. ME, NJ, NM, OR, RI(4) MD, Ml, NE, NY, NC, ND, OK, PA, SC, SD, TN, UT, VA, WI, PR(26). Gross income WV(1) IN, WA(2) (0). Other measures3 ID, MA(2) DC, FL, Ml, MS, TN, TX, WY(7) NV(1), 3.143 By a loan correspondent in your State but subject to approval outside your State: Net income MO, 7T(2) AL,AZ, AR, CA, CT, DC, GA, HI, IA, KY, ME, ID, IL, MN, NJ, NM RI, SD, PR(8) MD, MA, NE, NY, NC, ND, OK, OR, PA, SC, TN, UT VA, Wl(25). Gross income WV(1) IN(1) WA(1), Other measureo~ (0) DC, FL, MA, MS, TN, TX, WY(7) ID, MI, NV(3) 3.144 Through the bank's own office in your State but subject to approval outside your State: Net income AL, AZ, AR, CA, CT, GA, ID, IL, ME, MD, DC, HI, IA, KY, NY, PA, VA(7) NM, RI, Wt(3).. MA, MI, MN, MO, MT, NE, NJ, NC, ND, OR, SC, SD, TN, UT, PR(25). Gross income IN, WA(2) (0) (0). Other measures a ID, MI, MA, MS, TN, TX(6) DC, FL, WY(3) NV(1). 3.145 Through an affiliate or subsidiary corporation office in your State but subject to approval outisde your State: Net income AZ, ME, MD, MA, MN, OR, SD(7) AL, CA, CT, DC, GA, HI, ID, IA, KY, MO, AR, IL, MI, MT, NE, NM f~D RI PR(9) NJ, NY, NC, PA, SC, TN, UT VA WI(19). Gross income IN, WV(2) WA(1) (0). Other measures3 MA, MS, TX(3) DC, FL, ID, TN, WY(S) Ml, NV(2). 3.146 Outside your State: Net income NE(1) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, NM, Rl(2). KY, ME, MD, MA, MI, MN, MO, MT, NJ, NY, NC, ND, OK, OR, PA, SC, SD, TN, UT, VA, WI, PR(33), Gross income (0) IN, WA, WV(3) (0). Other measures 3 (0) DC, FL, ID, MI, MA, MS, TN, TX, WY(9) - NV(1), PAGENO="0209" 3. 150 The bank participates in a syndicate to underwrite securities of a municipal borrower in your State: Net income MA, NE, SD(3) AL, AZ, AR, CA, CT, DC, GA, HI, ID, IA, KY, IL, MN, NM, ND, Rl(5). ME, MD, MI, MO, MT, NJ, NY, NC, OK, OR, PA, SC, TN, UT, VA, WI, PR(28). Gross income (0) WA(1) IN, WV(2). Other measures3 MA(1) DC, FL, ID, MI, MS, TN, TX, WY(S) NV(1). 0 3. 160 The bank issues credit cards from an office outside your State that may be used- 3. 161 Only in your State by residents of your State: Net income ID, MO, PR(3) AL,AZ,AR,CA,CT,DC,GA,HI,lA,KY,MA, IL, ME, MD, NE, NJ, NM, RI, TN.(8) MI, MN, MT, NY, NC, ND, OK, OR, PA, SC, SD, UT, VA, Wl(25). Gross income WV(1) IN(1) WA(1). Other measures3 ID(1) DC, FL, MI, MA, MS, TX, WY(7) NV, TN(2). 3. 162 In your State and other States by residents of your State: Net income MO, PR(2) AL,AZ,AR,CA,CT,DC,GA,HI,IA,KY,ME, ID, IL, MD, NE, NJ, NM, Rl(7) MA, MI, MN, MT, NY, NC, ND, OK, OR, PA, SC, SD, TN, UT, VA, Wl(27). Gross income (0) IN(1) WA,WV(2). Other measures3 (0) DC, FL, MI, MA, MS, TN, TX, WY(8) ID. NV(2). 3. 163 In your State by nonresidents: Net income - AL, AZ, AR, CA, DC, ID, MO, PR(8) CT, ME, GA, HI, IA, KY, MA, MI, MN, MT, IL, MD, NE, NM, RI(5). NJ, NY, NC, ND, OK, ME, OR, PA, SC, SD, TN, UT, VA, WI(23). Gross income (0) IN, WA(2) WV(1). Other measures (0) DC, FL, ID, MA, MI, MS, TN, TX, WY(6) - (0). 3. 170 The bank issues credit cards through an office or an agent bank or an associated bank in your State to residents of your State which they may use:4 3.171 Only inyourState: Net income AL,AZ,CA,CT,DC,GA,ME,MA,MN,MO, HI,IA,KY,NY,NC OK PA UT,VA WI(10) AR ID IL MD MI MT NM ND RI SD(lO). NE, NJ, OR, SC, TN, PR(16). Gross income (0) IN,WV(2) WA(1). Other measures3 DC,MA,TN,TX(4) FL,MS,WY(3) ID,MI,NV(3). 3.172 In your State and other States: Net income AL, AZ, CA, CT, DC, GA, ME, MA, MN, MO HI, IA, KY, NY, NC,OK, PA, UT, VA, WI(10) AR, ID, IL, MD, MI, MT, NM ND, RI RI,SD NE, NJ, OR,SC, TN, PR(16). (10). Gross income (0) IN,WV(0) WA(1). Other measures3 DC, MA,TN(3) FL, MS WY(3) ID, MI, NV(3). ___________ See footnotes at end of table, p. 191. PAGENO="0210" TABLE B-5.-OPINIONS OF STATE TAX ADMINISTRATORS REGARDING TAXATION OF OUT-OF-STATE COMMERCIAL BANKS AFTER JAN. 1, 1912, BY TYPE OF BANK OPERATION AND MEASURE OF TAX 1_Continued Type of bank operation (with corresponding questionnaire number) and measure of tax2 Would assert jurisdiction Would not assert jurisdiction 2 Uncertain 3.180 3.181 3.182 3.183 The bank deals in securities in your State:3 Through its own office in your State: Net income AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, ME, IA, KY, NY, PA, VA(5) NM, RI(2). MA, Ml, MN, MO, MI, NE NJ, NC, ND, OR, SC,SD, TN, UT,W1 P11(27), Gross income IN, WA(2) (0) (0). Other measures3 DC, ID, MD, MA, MI, MS,TN(7) FL,TX,WY(3) NV(1), Through officials who visit your State for such transactions: Net income CA, CT, DC, MA, MN, MO, MT, NE, NC, PR AL,AZ,GA,HI, IL,IA, KY,ME MD, NY, OK, AR, MI, NJ, NM, ND Rl(6). (10). OR PA, SC, SD, TN, UT, vA, Wl(19). Gross income WV(1) -- -- IN, VIA(2) (0). Other measures3 DC, MA(2) FL, ID, MS, TN, TX, WY(6) MI, NV(2). Through its office outside your State: Net income DC, MN, MO, PR(4) AL, AZ, AR, CA, CT, GA, HI, ID, IL, IA, KY, NM, Rl(2), ME, MD, MA, Ml, MI, NE, NJ NY, NC ND, OK,OR, PA,SC, SD, TN, UI, VA,WI (30) Gross income (0) IN,WA(2) WV(1), Other measures2 DC(1) FL, ID, MA, MI, MS,TN,TX,WY(8) NV(1). . . 3.190 The bank conducts trust business- 3.191 . 3.192 For beneficiaries resident in your State: Net income AL, MO, MI, SC (4) AZ, AR, CA, CT, DC, GA, HI, IA, KY, ME, ID, NE, NJ, NM, ND, RI, PR (7). MD, MA, MI, MN, NY NC, OK OR PA, SD TN, UT, VA, WI (~5). Gross income IN(1) WAd) WV(1). Othermeasures3 (0) DC, FL,MA, Ml, MS,TN,TX,WY(8) ID, NV(2). Involving admiiistration of rea I or tangible personal property in your State: Net income AL, CT, ID, IL, MN, MO, MI, NE, ND, AZ, AR, CA, DC, GA, HI, IA, KY, MD MA, ME, MI, NJ, NM, RI. (5). PR (10). NY, NC, OK, OR, PA, SC, SD, TN, U'F, VA WI, PR(22). Gross income. IN(1) WA(1) WV(1). Other measures 3 10(1) DC, FL, MA, MS, TN, TX, WY (7) Ml, NV. (2). * 3.210 The bank solicits deposits- 3.211 By advertking in media published and distributed In your State: Net income (0) AL, AZ AR, CA, CT, DC, GA, HI, ID, IL, IA, NE, NM, RI (3) KY, f~1E, MD, MA, MI, MN, MO, MT, NJ NY, NC, ND, OK, OR, PA, SC, SD, TN, UT, VA, WI, PR(33). PAGENO="0211" Gross income (0) IN, WA (2) WV(1). Other measures3 (0) DC, FL, ID, MA, MI, MS, TN, TX, WY (9).. NV (1). 3. 212 Through bank officials who visit your State for this purpose: ~ - AL, AZ, AR, CT, DC, GA, HI, ID, IL, IS, MI,NM,ND,RI(4). KY, ME, MD, MO, MT, NJ, NY, NC, OK, OR, PA, SC, SD, TN, UT, VA, WI, PR.(28) Gross income ~(O) IN, WA(2) WV(1). Other measures 3 MA (1) DC, FL, ID, MS, TN, TX, WY (7) MI, NV (2). 3. 213 Through a representative stationed in your State: Net income AZ, AR, CA, CT, MA, Ml, MN, MO, NE, NJ, AL, DC, GA, HI, ID, IA, KY, ME, MD, MT, IL, NM, ND, RI, TN (5). OR, SC (12). NY, NC,OK, PA,SD, UT, VA, WI, PR(19). Gross income (0) WA(1) IN,WV(2). Other measures 3 MA, MI(2) DC, FL, ID, MS, TX, WY (6) NV, TN (2). 3.220 The bank owns equipment which it leases to others for use in your State: Net income AL `AZ, AR, CA, CT, GA, HI, IL, ME, MD, MA, DC, IA, KY, MI, NY, PA, SC, VA (8) NM, ND, RI (3). MI, MN MO, NE, NJ, NC, OR, SD, TN, UT,WI PR(23). Gross income WA, WV~2) IN (1) (0). Othermeasures° DC,ID MD,MA,MI,MS,NV,OK,TN,WA, FL,TX(2) CO,MD(2). WY ~11). 3. 230 The bank sells accounting or data processing services to a business in your State: 3. 231' From its office outside your State: Net income DC, MO, SD(3) AL, AZ, AR~CA, CT,GA, HI,IL,IA, KY, ME, MI, NE, NM, RI, PR(S). MA, MN, MI, NJ, NY, NC, ND, OK, OR PA, SC, TN, UT, VA, WI (26). Gross income (0) IN,WA(2) WV(1). Other measures6 DC, MD, SD (3) FL, ID, MA, MS, TN, TX~ WY (7) MI, NV(2). 3. 232 Through its own office in your State: Net income AL, AZ, AR, CA, CT, HIlL, ME, MA, Ml, MN, GA, IA, KY, NY, PA, VA (6) RI (1). MO, MI, NE, NJ, NM, NC, ND, OR, SC, SD,TN UT,Wl, PR(25). Gross income IN,WA,*V(3) (0) (0). Other measures6 DC, ID, MD, MA, MI, SD, TN, TX (8) FL, MS, WY (3) NV (1). 3. 233 Through an affiliate or subsidiary corporation office in your State: Netincome AZ,ME,MA,MN,MO,NE,OR,SD(8) AL,AR,CA,CT GAHI, IA, KY, NJ, NY, IL,MI,MT,NM,ND,RI,PR(7). NC, PA, SC, Tk, UT, VA, WI (17). Gross income IN,WV(2) WA(1) (0) Other measures6 DC, MA, SD, TX (4) FL, ID, MS, TN, WY(S) MI, NV (2). 1 Forty-four States or areas are included in table B-5, and some are tabulated for more than Ohio has capital stock taxes (dealers-in-intangibles tax and franchise tax); did not respond on grounds one measure of tax for a given type of operation. that the types of problems listed have not arisen. 2 Measure of tax in some cases was not clear from the questionnaire responses, especially when 4 Answers for Georgia are only if there is an office in the State; for DC, only if not subject to gross the response was that the State would not assert jurisdiction; New Jersey response assumes passage earnings tax. of an income tax. Answers for DC are only if not subject to gross earnings tax. 3 Other measures of tax are capital stock value (FL, MA, MS, TN), value of assets (ID, TX), intan- 0 Answers are for sales and use taxes in DC, ID, MD, SD, and, for 3.220, in NV, OK, WA, and WY. gibles (FL GA MI TN) fees or tangible personal property (DC MD), and unspecified (NV WY) - Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0212" TABLE 8-6.-STATUS OF STATE TAXATION OF OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS AS OF NOV. 15, 1970 3.418 Factors 3.419 Leasing companies 3.421, 3.422 Life, fire and casualty insurance compa- nies.2 IN and WA (2) MA, MT, NJ OH TN,and ~V(65. IN and WA (2) MA, MT, OH, TN, and WV (5). IN,TN,andWA(3). MA,MT NC OH, and ~V(5~. IN, WA, and WV (3). IN, NM, WA, and WV (4). IN, MS, NM, WA, and WV (5). MA, OH, and TN (3). FL, MI, MS. NJ, OH, PA, SC, and TN(8). ID and MT(2)... IN, MO, and NC (3). ID,IA,and MT IN and MO(2).~. (3). ID, IA, MO and MT ~4). ID, IA, KY, and MT (4). ID, IA, KY, MA, MT, OK, and TX (7). ID, IA, KY, MA, MT. OK, and TX (7). ID, IA, KY, MA, MT, and OK(6). ID, IA, KY, MA, MT, OK, and TX(7). ID, KY, MA, MI, OK, and TX (6). ID and MT (2).. FL, MO, and NC(3). FL, ID, MD MN, MS, NE. TX, and WY~8). FL, ID, MD, MN, MS, NE, TX, and WY (8). DC FL, ID, ND, MN, MS, NE, 1'X, VA, and WY(10). FL, ID, MD, MN, NE, TX, VA, and WY (8). DC, FL, ID, KS, MD, MN, MS, NE, NC, TX, and WY (11). DC, FL, ID, KS, MD, MN, MS~ NE, NC, TX, and WY(11). DC, FL, HI, ID, KS, MD, MN, MS. NE, NC, TX, VA; and WY (13). DC, FL, HI, ID, MD, MN, NE, NC, TX, and WY (10). DC, FL, HI, ID, KS, MD, MN, NE, NC, OH,TX, WA, and WY (13). FL, KS, MS. NE, TX, and WY(6). Kind of business (with corresponding questionnaire number) Net Income or receipts 1 Measure of tax Gross income or premiums3 Capital stock3 - Value of assets used in State Intangibles4 Others 3.411 State banks (commerclal) AL, AZ, AR, CA, CT, HI, ID, IL, ME, MD, MA MN, MO, NE, NM, NY, NC, ND, OR, SC, SD, TN, ut, WI, and PR (25). 3.412 Mutual savings banks._ - AL, A~, AR, CA, CT, HI, ID, IL, IA, ME, MD MA, MN MO, NE, NM, NY, NC, OR, SC, SD, TN, ui, WI, anc~ PR (25). 3.413 Savings and loan associa- AL, AZ, AR, CA, CT, HI, ID, IL, ME, MD, MA, MN, MO, tions. MT, NE, MN, NY, NC, ND, OK, OR, SC, SD, UT, and WI (25). 3.414 Credit unions AL, AZ, CA, IL, KY, MD, MA, MN, MO, MT, NM, OK, OR,SD,TN and WI (16). 3.415 Sales finance companies AL, AZ, AR, óA, CT, DC, GA, HI, ID, IL, IN, IA, KS, KY, ME, MD, MA, MI, MN, MS, MO, MT, NE NM, NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, UI2, VA, WI,and PR(38). 3.416 Smallloan companies. AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KS, KY, ME, MD, MA, MI, MN, MS, MO, MT, NE NM, NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, uY, VA, WI,and PR(38). 3.417 Commercial finance AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KS, companies. KY, ME, MD, MA, MI, MN, MS. MO, MT NE, NM, NY, NC, ND, OK, OR, PA, RI, SC, SD, T1~I, UT, VA, WI,and PR(38). AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IN, IA, KY, ME, MD, MA, MI, MN, MS, MO, MI, NE, NY, NC, ND. OK, OR, PA, RI,SC, SD, TN, UT, and PR (34). AL, AZ, AR, CA, CT, DC, GA, HI, IL, IN, IA, KS, KY, ME, MA, MI, MN, MS, MO, MT. NE, NJ, NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, UT, WI, and PR (36). IL, MN, MS. NE, SD, and PR (6) IN and WV (2) IN, WA, and WV (3). IN, MI, MO, and NC (4). IN, MO, and NC(3). FL, MI, MO, and NC(4). FL, MI, MO, and NC (4). FL, MI, MO, and NC (4). FL, MI, and NC(3). FL, Ml, and NC(3). FL MI, MS. NJ, oH, PA, SC, and TN(8). IN WA,andWV FL,MI,MS,NJ, OH, PA, SC, and TN (8). FL, MI, MS, NJ, OH, PA, SC, and TN (8). FL, MI, MS, NJ, OH, PA, SC, and TN (8). AL, CA, CT, FL, GA, MS (1) HI, ID, IN, IA, KS, KY, ME, MA, MI, MO, MT, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, WA, WV, and WI (34). 3.423 Mortgage companies~ AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, IN, WA, and WV FL, MA, MI, MS, ID, IA, KY, MT, FL, MI, MO, ME, MD, MA, MI, MN, MS. MO, MT, NE, NJ, NM, (3). NJ, OH, PA, SC, OK, and TX and NC (4). NY, NC, ND, OK, OR, PA, RI, SC, SD, TN, UT, VA, and TN (9). (6). WI and PR (38), DC FL, ID, MD, MN, NE, NC, I2X, and WY (9). PAGENO="0213" 3.424 Security brokers and AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, ME, IN, MA, NM, WA, FL, MA, MI, MS ID, KY, MY, FL, MI, and DC, FL, HI, ID, MD, MN, NE, dealers. MA, MI, MN, MD, MT, NE, NJ, NY, NC, ND, OK, and WV (5). NJ, DH, PA, SC, and OK (4). NC (3). NC, TX, VA, and WY (11). DR, PA, RISC, SD, TN, UT, WA, WI, and PR (36). and TN (9). 3.425 Investment companies.. AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KS, KY, ME, IN, MA, WA, sod FL, MA, MI, MS, ID, KY, MT, FL, MI, MD, DC, FL, HI, MD, MN, NE, MI, MN, MS, MD, MI, NE, NJ, NM, NY, NC, ND, OK, WV (4). NJ, DH, PA, SC, OK, and TX and NC (4). NC, TX, and WY (10). OR, PA, RI, SC, SD, TN, UT, VA, sod WI (35). and TN (9). (5). 3.426 Small business invest- AL, AZ, AR, CA, CT, DC, GA, HI, ID, IL, IA, KY, MA, IN, MA, WA, and FL, MA, MI, MS ID, MY, MT, FL, MI, and DC, FL, HI, ID, MD, MN, NE, ment companies. MI, MN, MS, MD, MT, NE, NJ, NM, NY, NC, ND, DK, WV(4). NJ, DH, PA, SC, DK, and TX NC (3). NC, TX, VA, and WY (11). OR, PA, RI, SC, SD, TN, Ui, VA, WI, and PR (35). and TN (9). (5). 1 The New York tax in the largest of a tax on net income, a tax on capital stock, or a minimum tax. In the case of insurance companies, premiums taxes are listed under gross income taxes escept that premiums taxes in Minnesota and Nebraska were reported as net income taxes; for North Carolina fire and casualty companies (3.422), the tax is the larger of gross premiums or net income taxes. The Tennessee tax is a franchise tax based either on capital stock or on tangible personal property. 4 Indiana has a bank deposits tax; the other States listed have intangibles taxes. a Sales and use taxes were reported by Hawaii, Idaho, Maryland, Minnesota, Nebraska, Texas, and, for leasing companies, Washington. Property or ad valorem taxes were reported by District of Colum- bia, Florida, Kansas (except fur finance and loan companies), Mississippi (for banks and savings and loans), Ohio and Wynming;.Muntana taxes, reported as assets taxes, are also en tangible property. The ether taxes are all privilege, license, or franchise taxes. Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0214" TABLE 3-7.-BASIS OF JUR1SDICTIO~1 FOR TAXATION OF OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS NOVEMBER 15; 1970 No. of Measure of tax and kind of business I Levying taxa States' Basis of jurisdiction Citing basis tn-State offl * ce prope Business activity, or doing business" in rty or personnel State Intangibles located in. or income from sources in State Net or gross income taxes: 3.411 state banks 27 19 AL, AZ, CA, ID, IN, IL, ME, MD, MN, NM, IL, ME, NJ, NY ND OR and SC (7) AZ MO and NC (3). NC, WA, and WI (13). 3.412 mutual savings banks 27 17 AL, AZ, ID, IN, IL ME MD MN NM WA CA IL ME NY ND OR and SC (7) AZ and MO (2). and WI (11). - 3.413 savings and loan associations 28 20 AL, AZ, ID IN, IL, ME MD MN NM NC CA IL ME MT NY ND OK OR and SC(9) AZ and MO (2). WA, and WI (12). 3.414 credit unions 18 16 AL, AZ, IL KY IN MD MN NM WV and CA IL MT ND OK and OR(6) AZ and MO (2) WI (10). `````` ````` 3.415, 3.416, 3.417 loan and finance companies...._ 40 28 AL, AZ, DC, GA ID IL IN KY, ME, MD, CA, GA, IL IA, ME, MT NJ NY NC ND AZ DC MO and NC (4). MI, MN, NM, NY, NC, VA, WA, WV, and OK, OR, and SC (13). WI (19). 3.418 factors 37 26 AL, AZ, DC, GA, ID, IL, IN, KY, ME, MD, CA, GA, HI, IL, ME, MI, NJ, NY NC ND AZ DC MO and NC(4). Ml, MN, NM, NY, NC, WA, and WI (17). OK, OR, and SC (13). 3.419 leasing companies 39 25 AL, AZ, DC, GA, ID, IL, IN, KY, ME, Ml, CA, GA, HI, IL, ME, MI, NJ, NC, ND, OK, AZ, DC MO, and NC (4) MN, NM, NC, WA, WV, and WI (16). OR, and SC (12). 3.421, 3.422 insurance companies 41 23 IL, GA, MI, MN, NM, WA, and WV (7) CA, FL, GA, HI, IL, IN, NC, ND, OH, OK, CT, FL, MO, NJ, NY, VA, SC, and TX (12). and WI (7). 3.423to3.426mortgageandlnvestmentcompanies, 41 28,,,,,,.,,...,_ AL, AZ, DC, GA, ID, IL, KY, ME, MD,~ MI, CA, GA, HI, IL, IN, ME,' MI, NJ, NY, NC, AZ, DC, MO, and NC (4). securities dealers. MN, NM, NY, NC, VA, WA, WV, and ND, OK, OR, and SC (14). Capital stock taxes: WI (18). 3.411 to 3.413 banks and savings and loans 7 3 NC, WV, and OH (3) (0) (0). 3.414 credit unions 3 1 OH (1) (0) - (0). All other except Insurance companies 8 3 FL,' OH, and Mi (3) SC (1) FL' (1). Tax on value of assets used in State: 3.411 to 3.413 banks and savings and loans 3 2 ID and MI 6(2) (0) (0). 3.414 credit unions 3 2 ID and KY (2) (0) (0). All other except insurance companies 6 4 lD,~ TX, and KY (3) TX `and OK' (2) (0). Intangibles taxes: 3.411 to 3.413 banks and savings and loans 4 4 Ml `and NC 10(2) IN and MO (2) (0). 3.414 credit unions 3 3 NC (1) IN and MO (2) (0). All other except insurance companies 4 3 Ml and NC (2) MO" (1) (0). 3.421, 3.422 insurance companies 3 3 NC (1) FL and MO (2). FL and NC (2). License and franchise taxes: 3.411 to 3.414 banks, savings and loans, credIt 3 1 VA (1) (0) (0). 3415 to 3417 loan and finance companies 4 3 KS, NC, and VA (3) NC (1) NC (1). 3.418 factors 3 2 MC (1) NC and TX (2) MC (1), 3.419 leasing companies 3 2 KS and NC (2) NC (1) NC (1), 3.421, 3.422 insurance companies 2 (0) (0) (0). 3,423 to 3.426 mortgage and investment companies, 3 3 . NC and VA~2(2) NC and TX"(2) NC (1). securities brokers, PAGENO="0215" 1 Numbers refer to questionnaire items. 2 Some States are tabulated in more than I column; 34 States are included in the table. States levying taxes on out-of-State financial institutions are listed in table B-6. 4 Refers to mortgage companies only. a Excludes securities brokers and small businesses investment companies. Refers to savings and loans companies only. 7 Refers to insurance companies as well. 8 Excludes leasing companies. Sales and use taxes: 3.411 to 3.414 banks, savings and loans, credit 5 2 ID and TX (2) ID and TX (2) (0), unions. 3.415 to 3.417 loan and finance companies 6 3 DC, ID, and TX (3) ID and TX (2) (0). 3.418 factors 7 3 DC and ID (2) HI and ID (2) (0). All other except insurance companies 7 4 DC, ID, and TX (3) Hl,'4 ID, and TX (3) (0). Excludes securities brokers. 10 Excludes mutual savings banks. U Excludes factors and leasing companies. 12 Excludes mortgage companies and small business investment companies. 13 Refers to securities brokers only. 14 Excludes mortgage companies. Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0216" TABLE B-8.---STATE PRACTICE REGARDING INTERSTATE DIVISION OF THE TAX BASE IN TAXING OUT-OF-STATE BANKS AND OTHER FINANCIAL INSTITUTIONS Interstate division of tax base permitted or required, for taxed businesses Measure of tax In all cases 1 In some cases but not in others 1 In no cases No answer Net income, or that plus other tax meas- AZ, CT, DC, HI, ID, IL, MD, MN, MT, AL, CA, GA, IA, KY, ME, MA, NY,2 NC, MS and MO (2) ures. NE, NM, ND, OK, OR, RI, SC, SD, PA, TN, UT and VA (13). WI and PR (19). Other tax measures IN, NJ, OH and WA (4) MI and TX (2) FL, KS, WV and WY (4) Total (23). (15). (6). AK, AR, CO, DE, LA, NV, NH, VT and, VI(9). 1 Some respondents specified that their answers were only for incorporated enterprises. 2Allocation permitted where a corporation has a regular place of business outside the State. Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0217" TABLE B-9.-METHOD OF INTERSTATE DIVISION OF THE TAX BASE, BY KIND OF BUSINESS AND MEASURE OF TAX' Method of interstate tax Kind of business (with corresponding questionnaire number) Separate accounting Apportionment by formula Sped base division fic allocations Formula plus specific allocation 3,411-State banks (commercial). AL, AZ, HI, ID,2 IN,3 NY,~ NC,2SC (8)_~. AR, CT, ID, ME, MD, MA,4 MN, NJ,2 ID' (1) CA,7 IL, NE,' NM, OH,~ OR, SD,' UT, TN 4 (9). WA,~ WI, PR (11). 3.412-Mutual savings banks. AL, AZ, HI, ID,2 IN,' NY4(6) AR, CT, ID, IA, ME, MD, MA,~ MN, ID `(1) CA,' IL, NE,8 NM, OH,2 OR, SD,8 UT. TN 4 (9). WA,3 WI, PR (11). 3.413-Savings and loan associations_~_ AL, AZ, HI, 1D2, IN°, NY,~ NC,~ AR, CT,D C, ID, ME, MD, MA,e MI,2 ID `(1) CA,' IL, MT, NE,8 NM, ND, OH,2 OR, OK (8). MN, TN~ (10). SD,8 UT, WA,3 WI (12). 3.414-Credit unions AL, AZ, ID,2 IN,3 NC,e OK 8(6) CT, MD, MA,~ MN, TD4(5) ID `(1) CA,' IL, KY,~ MT, NM, OH,2 OR, SD,8 ID'(l) CA7IL~KY4MT NE'NM NC4ND, - - OH,2 OR, SC,~ SD,' UT, VA, WA,3 WI, PR (17). ID'(l) CA'IL KY4MT NE'NM NC4ND OH,2 OR, SC,4SD,"UT, VA, WA,a WI, PR(17). ID'(l) CA'IL KY4MT NE8NM NC~ND -- - OH,2 OR, SC,4SD,~ UT, VA, WA,~ WI, PR (17). ID'(l) CA'IL KY4MT NE$NC4ND OH° OR,SD,' UT, WA 3(12). IDs(1) CA' IL KY~ MT NE8 NC~ ND OH,2 OR, SC,4SD,8 UT, WA,~ WI, PR (15). CT, ID,' KY,' NY, ND, PA (6) -- IL, NE,' SD,' WA,~ PR (5). ID `(1) CA,' IL, KY,~ MT, NE,' NM, NC,~ ND, OH,~ OR, SC,~ SD,8 UT, VA, WA,3 WI, PR (17). ID `(1) CA,' IL, KY,~ MT, NE,8 NC,~ ND, OH,~ OR, SC, 4 SD,' UT, VA, WA,~ WI, PR (16). ID `(1) CA,' IL, KY,4 MT, NE,' NM, NC,~ ND, OH,2 OR, SC,4SD,' UT, VA, WA,3 WI (16). ID 5(1) CA,' IL, KY,4 MT, NE,' NM, NC,~ ND, OH,2 OR, SC,~ SD,' UT, VA, WA,2 WI (17). 3.415-Sales finance companies AL,AZ, HI, lD,~ IN,~ NC,2 OKO(7) AR, CT, DC,ID, IN, IA, ME, MD, MA,~ MI,4 MN, NJ,~ NY,4 OK,4 PA,~ RI, TN,4TX2(18). 3.416-Small loan companies AL, AZ, HI, ID,~ IN,~ NC,2 OK 0(7) AR, CT, DC, ID, IN, IA, ME, MD, MA4MI4MN NJ'NY4OK~PA~ RI, `TN,4 TX 2(18). 3.417-Commercial finance companies~. AL, AZ, HI, ID,~ IN,' NC,~ OK 0(7) AR, CT, DC, ID, IN, IA, ME, MD, MA,4 MI,~ MN, NJ,~ NY,~ OK,4 PA,~ RI, TN,~ TX 3(18). 3.418-Factors AL,AZ, HI,' lD,'IN,~ NC,2OK,°(7) AR, CT, DC,HI, ID, IN, IA, ME, MD, MA,4M1,4MN, NJ,2NY,4OK,~PA,~ RI, TN 4(18). 3.419-Leasing companies AZ, HI,' ID,2 IN,3 NC,~ OK 6(6) AL, AR, CT, DC, HI, ID, IN, IA, ME, MA4MI4MN NJ4NY4OK4 PA,~ RI, TN, 4 TX,2 (19). 3.421, 3.422-Life, fire and causalty in- HI,3 ID,2 IN,3 NC,~ UT,3 Wl3 (6) Ml,~ MN, TN~ (3) surance companies. 3.423-Mortgage companies AZ, HI, ID,2 IN,3 NC,~ OK6 (6). AL, AR, DC, ID, IA, ME, MD, MA ~, M14 MN NY~ OK~ PA~ RI,TN~ TX2 (16). 3.424-Security brokers and dealers AZ, HI,' ID,2 lN,3 NC,2 OK6 (6). AL, AR, DC, HI, ID, IA, MA,~ Ml,~ MN, NY,~ OK, PA,~ RI, TN (14). 3.425-Investment companies AZ, HI,' lD,2 lN,3 NC,2OKe(6) AL, AR, DC, HI, ID, IA, ME, MI,~ MN, NY,4 OK,~ PA,~ RI, TN,d TX' (15). 3.426-Small business investment com- AZ, HI,' ID,~ IN,2 NC,2 OKO (6) AL, AR, DC, HI, ID, IA, MA,4 MI,~ MN, panies NY,4 OK,4 PA,~ RI, TN,4 TX2 (15). Measure of tax for which interstate tax base division reported is solely net income unless other- wise footnoted. Nonincome measure of tax is used: Capital stock (NJ, OH), value of assets used in state (ID, MI, TX) or value of intangible personal property (NC, MI). 2 Measure of tax is gross income or receipts (IN, WA), or premiums in cases of insurance companies. 4 State employs both (or alternatively) net income measure and the following: Capitalstock (NY, MA, MI, NJ. PA, SC), value of assets (KY, OK), value of intangible property (MI), or franchise or other (NY, TN, NC). o Refers to sales and use taxes. Separate accounting is used when income is not considered part of unitary business income; otherwise, apportionment by formula is used. Specific allocation is used for nonbusiness income; apportionment by formula, for business income. S Separate accounting, apportionment by formula, and specific allocation are all used. Note: For key to 2.Ietter abbreviations of State names, see above, p. 181. PAGENO="0218" 198 TABLE B-1O.---STATE POSITIONS ON CONSOLIDATION OR COMBINATION OF AFFILIATED CORPORATIONS IN DETERMINING THE TAX BASE Reported position (and number of States) State Required (5)' AR, CA, KY, NE, and OR. Not required: Mayberequiredincertaincases(16) AZ, GA, HI, ID, IA, MA, MN, MT, NC, ND, OK, SC,SD, UT, VA, and Pi. May be permitted in certain cases (4) FL,2 ME, NY, and OH.2 Not permitted (5) CT, DC, MD, MS and NJ. Reported simply as notrequired (16)_ AL, DE, IL, IN, KS, MI, MO, NM, PA, RI, TN, TX, WA, WV, WI, and WY. *No~answer (6) AK, CO, LA, NY, NH, and VT. Does not appI~ to insurance companies, except in Nebraska. 2 Refers to nonincome taxes. Note: For key to 2-letter abbreviations of State names, see above, p. 181. PAGENO="0219" APPENDIX 5 Responses of State Bank Supervisors to the Board's Inquiry Concerning State Taxation of Banks SALLY M. HEY Economist, Government Finance Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System I. INTRODUCTION In November 1970, the Board of Governors of the Federal Reserve System sent a letter to the supervisors of State banks in each of the fifty States and in Puerto Rico and the Virgin Islands. The super- visors were asked to reply by letter to four questions concerning State and local taxation of commercial banks. The answers received are summarized in this appendix.1 Because Public Law 91-156 specified that the Board, in conducting its study, should consult with State banking authorities, copies of this law, the earlier section 5219 of the Revised Statutes, and the detailed questionnaire which had been addressed to State taxing authorities also were sent to the bank supervisors in order to inform them about the new law and the study. Responses to the questionnaires were not expected. For several States, however, completed or partially completed ques- tionnaires were returned in addition to the letters requested.2 These and other supplementary materials transmitted by some of the re- spondents have proven very helpful in the Board's study. The letters and materials which were received are not reproduced here, since many of the individual responses are so similar that full quotation would be repetitious. Where elaborated or unusual u.nswers were received, however, they are quoted in parts II and III of this appendix or summarized in tables in part IV. Respondents for the most part limited their concern to the position of State-chartered banks vis-a-vis national banks and supported the "permanent amendment" of section 5219. The responses, or the gist of them, are presented below, question by question, and some general comments and conclusions appear in part V. II. QUESTIONS 1 AND 2 (1) Do you regard the "permanent amendment" of section 5219 (in sec. 2 of P1,. 91-156) as improving the competitive position of State banks relative to national banks? If so, please explain. 1 AnsWers ~vere eventually receive(l from all supervisors except in the Virgin Islands. The assistance of Mr. Alexander \V. Neale, Jr., Legislative Representative of the National Association of Supervisors of State Banks (now the Conference of State llaiik Supervisors) ifl ex~~eclitirig replies is appreciated. 2 Responses to the tax administrators questionnaires Were received from bankinç' 5111)ervisOrs in Minne- sota, Missouri, New II smI)Shire, New Mexico, Pennsylvania; additional materials Were received from super- visors in Arkansas, Maryland, Massachusetts, New York, North carolina, Oregon, \Vashington, and Puerto Rico. (199) PAGENO="0220" 200 (2) When the present limits in section 5219 are terminated January 1, 1972, will there be a need for other Federal legislation that would restrict States in their taxation of commercial banks or financial institutions generally? If so, what type of action or provision do you think is needed? Questions 1 and 2 concern the desirability of having the second sec- tion of P.L. 91-156 go into effect on January 1, 1972, in its present form. This section is as follows: SEC. 2. Permanent amendment of section 5219, Revised Statutes. (a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read: "SEC. 5219. For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." (b) The amendment made by subsection (a) becomes effective on January 1, 1972. The first section of P.L. 91-156, to be in effect from approval of the law on December 24, 1969, until January 1, 1972, is referred to as the "temporary amendment." Briefly, this section of the law allows the States and their pOlitical subdivisions to extend to national banks domiciled within the State any tax except a tax on intangible property as long as it is imposed generally on a nondiscriminatory basis and is the same on State-chartered banks. Regarding taxation of national banks domiciled in other States, the States and localities are em- powered under the temporary amendment to impose sales and use taxes, real property taxes, transfer and documentary taxes, tangible personal property taxes, and fees or taxes on the ownership, use or transfer of real property. Overwhelmingly, the response of the banking supervisors was that the permanent amendment will indeed improve the competitive position of State-chartered relative to national-chartered banks, that such equalization is entirely warranted because of the identical functions of State and national banks, and that there is no need or justification for any Federal statutory restrictions on State authority to tax banks and other financial institutions other than the require- ment that State and national banks domiciled in the same State be treated equally. In the following 44 States or areas the State bank supervisors supported the "permanent amendment" as it stands. Alabama Louisiana* Ohio Alaska Maine3 Oklahoma Arizona Maryland Pennsylvania' Arkansas' Massachusetts Rhode Island California3 Michigan3 South Carolina Colorado Minnesota South Dakota Connecticut Mississippi Tennessee Delaware Montana3 Utah Hawaii Nebraska3 Vermont Idaho Nevada Virginia Illinois 3 New hampshire Washington Indiana New Jersey Wisconsin Iowa' New Mexico Wyoming3 Kansas 8 New York Puerto Rico Kentucky North Dakota The reasons given for supporting the amendment varied, however. For 20 of the States not quoted in the following discussion, the respondents answered simply "yes" to question 1 and "no" to question ~All or part of the answers to questions 1 and 2 are quoted in the discussion below. PAGENO="0221" 201 2, or else they did not amplify their answers appreciably beyond the general opifliofls stated above.4 In five of the 44 States (California, Iowa, Michigan, Nebraska and New York) the respondents expanded their affirmative answers to question 1 by explaining that tax equality between State and national banks would require the permanent rather than just the temporary amendment of section 5219, because of the interstate aspects of banking activity and taxation. These answers, or excerpts from them, follow: California: 1. . . . When State and national banks domiciled in California transact business in other States, they are, depending upon the State involved, sometimes sub~ect to differences in taxation, and where such differences exist, they usually favor national banks over State banks. The "permanent amendment" of Revised Statutes Section 5219 will pave the way for elimination of such differ- ences, and for this reason we believe that the "permanent amendment" will improve the competitive position of State banks relative to national banks. Iowa: (1). . . . It is my opinion that in the future we will see a continuing growth in the amount of business conducted by banks across State lines and we must have tax equalization in order to continue the dual banking system. Michigan: (1) .. . The permanent amendment will improve further the compu tive position of State banks by removing the tax immunity which national banks have but State banks do not have when they do business across State lines. This advantage will become more important in the future as more banks become in- volved in interstate business. The permanent amendment therefore is necessary to achieve full competitive equality. Nebraska: (1) .. . Yes, we feel that the final enactment of section 2 of the Act in its present form is necessary to equalize the competitive position of State banks relative to national banks. Particularly is this true with respect to removing the tax immunity which national banks have, but State banks do not have when they do business across State lines. Such preferential treatment if continued could well become a compelling factor in whether a State bank might convert to a national charter. New York: The "permanent amendment" to section 5219 of the Revised Sta- tutes, which becomes effective January 1, 1972, will establish competitive equality between the national and State banks insofar as interstate taxation is concerned. The presently effective "temporary amendment" to section 5219, while a sub- stantial improvement over prior law, does not achieve equality. The temporary amendment, among other things, permits a State to levy certain specified taxes on national banks whose principal office is outside the taxing State if those taxes are imposed generally throughout the State on a nondiscriminatory basis. National banks, unlike their State-chartered counterp~rts, remain immune from all taxes other than those few specified. . . . The "permanent amendment", by treating national and State banks exactly the same for interstate taxing purposes, would rectify this situation. This is especially important in view of the likelihood that banks will, in the future, conduct an increasing amount of their business across State lines. Many respondents, however, in discussing the competitive positions. of State versus national banks, seemed to be referring at least in part to inequalities of State tax treatment between State and national banks which have been eliminated, or which could be eliminated by State action, under the temporary amendment of section 5219 (i.e., section 1 of P. L. 91-156). That is, they seem to be saying that the provisions of the temporary amendment represent a major step toward equal treatment, and consequently they al)pea.r to be approv- ing changes effected by the provisions in section 1 of P. L. 91-156 more than they are supporting the "permanent amendment" per se. This was true for example of the Vermont reply and also the replies excerpted below. `In addition, the Wisconsin reply simply said that the questions were "answered In the negative," with. no explanation. PAGENO="0222" .202 Hawaii: 1. National banks are presently exempted from the Hawaii General Excise Tax and the Use Tax while State banks are not exempted. It appears that the "permanent amendment" of section 5219 will improve the competitive position of State banks only very slightly. Maine: 1. Yes. Prior to amendment of section 5219, State chartered financial institutions were subject to State sales tax. National banks had an unfair advan- tage and the equalization of taxation should be permanent. Massachusetts: 1. The "permanent amendment" . . . removes what hereto- fore has been a discriminatory restriction on the ability of a state to tax national banks . . . Of particular interest in this connection in Massachusetts is the case of First Agricultural National Bank of Berkshire County v. State Tax Commission . Ohio: (1) In my opinion, the "permanent amendment" of section 5219 (in sec. 2 of P. L. 91-156) definitely improves the competitive position of State banks relative to natio~ial banks. Prior to the adoption of this amendment, national banks in the State of Ohio were exempt from the 4 percent sales tax . . . The same situation existed regarding the franchise tax The replies from several States focused on bank taxes in the partic- ular State, rather than on general issues in State taxation of banks. 01 those that supported the "permanent amendment" in unchanged form, two respondents (from Arkansas and Montana, quoted below) felt that the "permanent amendment" would be useful in equalizing the competitive Position of State and national banks, but respondents from Colorado, Louisana, Mississippi, New Mexico, Rhode Island, and Puerto Rico seemed to imply that it was redundant for that purpose. The Arkansas respondent was unusual in mentioning the matter of equality betweeii banks and other businesses: Arkansas: . . . It is hoped that the next Legislature, convening in January, 1971, will work out some formula for taxation that complies with the federal statutes and with Arkansas constitutional restrictions. I think the "permanent amendment" of section 5219 will improve the com- petitive position of State banks, relative to national banks; but still, in Arkansas, we are confronted with an internal problem. Any system devised for taxing banks here must not discriminate against the present methods of taxing ordinary business corporations. Montana: (1) Because our 1967 Legislature finally achieved substantial equality in taxation between national and state banks in Montana, the "permanent amendment" of section 5219 would not materially improve the competitive position of State banks under the laws of Montana as they now stand; however, should ow Legislature ever impose a tax on State banks which prior to the amendmen. of section 5219 could not have been imposed on national banks, the permanent amendment would be of material benefit in retaining tax equality. What the 44 respondents agreed on was that other Federal restric- tions on State taxation after January 1, 1972, would not be needed. Several respondents suggested that State legislatures are competent to determine taxes, and some expressed this view even more strongly, as seen below: Illinois: (2) . . . It is our feeling that economic conditions and the responsive- ness of the various taxing bodies to public opinion will very effectively insure against any taxing abuses. Kansas: . . . It is my opinion . . . that sufficient safeguards are provided when the provisions of section 5219 are terminated on January 1, 1972 New Jersey: . . . [C]onsidering the various forms of taxation and the many different rates levied by the fifty States, it would seem to be an enormous task to enact Federal legislation which would not be unduly restrictive to some, while allowing others to avoid their fair share of the cost of local government. Ohio: (2) I do not believe that any need will exist after January 1, 1972, for additional federal legislation to restrict States in their taxation of commercial banks or financial institutions. I believe that adequate supervision of these institutions exist so that there is no need for the historic animosities and distrust of bankers and financiers which was so prevalent in this country in the 19th PAGENO="0223" 203 century. I believe that State legislators and executives are sufficiently cognizant of the importance of strong banks and other financial institutions and that sufficiently adequate supervision exists so that the unscrupulous can be controlled through other means than taxation. Pennsylvania: Certainly, the financial segment of the business world should be subject to sharing the tax load just as any other type of business is. Sufficient checks and reins exist to prohibit discriminatory taxation of banks. * Wyoming: State legislatures are competent to judicially deteiinine the needs and responsibilities of their respective constituents. Banks, collectively, are just another segment of the commercial world and have the responsibility individually and through the several State banking associations to prove that they are con- tributing their fair share to the public interest and are taxed accordingly.5 Although a large majority favored the pennanent amendment of section 5219 with n~ restrictions or modifications, there was (IiSseflt, quite strong in some cases, from seven States. Respondents from Georgia and Oregon warned in general of the ominous implications of pressures for increased State and local revenues, while those from Florida., Missouri, North Carolina, Texas, and West Virginia suggested need for safeguards against (a) intangibles taxation, (b) undue taxation of interstate activities, and (c) discriminatory taxation of banks relative to other corporations. Excerpts from these replies are presented below: Florida: (1) We do not regard the permanent amendment of section 5219 as improving the competitive position of State banks. Florida statutes have and continue to provide that State banks have the same immunity from State and local taxation that national banks have from time to time under the laws of the United States. (2) We consider that the congress acted in the best interests of the States in enacting the "temporary provisions" of section 5219 and would recommend that the permanent amendment retain the exemption on intangible personal property. This office and the Florida Bankers Association were actively concerned with this particular legislation because of certain court actions initiated in Florida and our position and our reasoning was clearly presented during 1969. We continue to feel that States should have primary taxing authority over banks domiciled in their jurisdictions, but need not have total taxing authority. Georgia: 1. The State of Georgia has maintained in all their taxation programs an equal position between state banks and national banks. Section 5219 was used as a cornerstone in the imposition of State taxes. So, the permanent amendment will add additional tax burdens on both State banks and national banks. 2. In my opinion, Federal legislation is needed to repeal the permanent amend- ment of Section 5219. I believe that the banks can live with the temporary amend- ment imposing sales and use taxes on banks. The remaining provisions under Section 5219 will remain in force and thereby restrict States in their further taxation of commercial banks. Missouri: (2) It would be advisable to provide a restriction against State- imposed intangible taxes on both State and national banks. Under current ~`ndi- tions, most State governments are desperate for additional sources of revenue. Bank accounting is not understood by most legislators. Bank income often appears to be an attractive target for additional taxation. It is possible that the * imposition of heavier taxes on banks than those imposed upon other business and financial corporations could lead to unsound banking practices, or could even endanger the banks' solvency. North Carolina (from a memorandum of the North Carolina Bankers Associa- tion transmitted with the response of the Bank Commissioner): . . . The "per- manent amendment" of Section 5219 is not necessary to achieve equality of taxa- tion between state and national banks in North Carolina. The interstate taxation of banks, particularly on a bank's income, would disrupt the free-flow of capital throughout the nation and undoubtedly have an adverse effect on the economic efficiency of the banking systems of the nation. Ho~vevtr, this respondent later mentioned a "very inequitable situation" regarding shares taxation of newer relative to older banks. PAGENO="0224" 204 ~ Since banks are restricted (except for loan production offices) from interstate branching or operations, they should be protected from interstate taxation. The "permanent amendment" of section 5219 removes the protective provi- sions of discriminatory taxation of national banks and indirectly exposes State banks to the same possible discriminatory taxation. The economic role of the banking industry has been badly misunderstood by some in recent years and the possibility of discriminatory taxation in such a climate is certainly a reality. Banks have little opportunity to shift their tax burden or their taxable situs. Serious economic effects on the banking industry would result from interstate taxation of banks, discriminatory taxation of banks, and the application of in- tangible tax laws to banks. Both State and national banks need protection from the possible serious economic implications in these areas and Federal legislative action to restore these protective provisions to section 5219 would be advisable. With some clarification of the terms "rate," "rates" and "nondiscriminatory," the adoption of the "temporary amendment" or some modification thereof, as the "permanent amendment," would seem to accomplish these objectives. Oregon: (1) . . . it is my understanding that the tax differential in Oregon is very little, if any, at this time. However, the Oregon Legislature will doubtless be searching for new revenue sources. If both national and State-chartered banks are treated equally, the former would not gain an advantage over the latter at some future date, at least as far as taxation is concerned. (2) It all depends upon the financial needs of the States during the coming years. If limits are not placed on taxing powers, it is quite possible, and probable, that banks will be a source of additional revenue. Texas: (2) In my judgment, there is a need for a provision in the Federal statute prohibiting any State from imposing any tax or use of any method of taxa- tion applicable to banks or the shareholders of banks which differs from taxes or methods of taxation applicable to an ordinary business corporation or the share- holders of an ordinary business corporation. Banks, and banks only, are singled out for special treatment [under shares taxation]... In order to facilitate the payment of dividends and transfer of shares, most, if not all, Texas banks actually pay the taxes on shares on behalf of their share- holders. . . . As a result bank shares are the only class of shares of corporate stock which reach the tax rolls with any degree of uniformity or regularity. There are other reasons for a provision in the Federal statutes like the one sug- gested above. Banks are tied to their domicile, whereas the ordinary business corporation can move to another jurisdiction to avoid onerous tax treatment. The State constitutional requirement that taxes be equal and uniform sounds good, but the problems of proving alleged tax discrimination are often so burdensome and expensive that they become prohibitive, especially to a small bank. West Virginia: (1) . . our State Legislature has been reluctant to impose taxes exclusively on State banks. The State, as a whole, has suffered more than the State banks. The amendment will, no doubt, result in new taxation for both State and national banks. (2) Yes, there could very well be a need for some type of restrictive legislation to prevent legislatures from imposing crippling taxation on financial institutions. I would suggest legislation that would prohibit taxation of financial institutions unless the tax applies equitably to all corporations. III. QUESTION 3 (3) With special reference to interstate business, does your State permit banks chartered by other States to qualify to do business in your State? If so, please describe any special limitations on this privilege not applicable to other types of foreign business corporations and indicate whether or not they have particular significance for State or local taxation of out-of-State banks. Question 3, On interstate banking activity, involves three separate matters. First, there is the question of the extent to which the various * States allow State-chartered banks domiciled in other States to * engage in activity in the State, and how this differs from the situation of other businesses. A second aspect is the extent to which such activity foi~ma11y constitutes "doing business" in the State, requiring permission from the State. Thirdly, there is the question whether and PAGENO="0225" 205 to what extent such activity could provide the State with a basis for claiming taxing jurisdiction over the non-domiciliary bank. The respondents in general did not make a clear distinction among these aspects, and the responses were hard to interpret in some instances. The predominant view, however, seemed to be that in most States non-domiciliary State banks are not permitted to engage in activities of the sort that would be considered "doing business" in a legal sense in that State and that such interstate banking activity as occurs does not have any taxing implications worth mentioning. Respondents from the 16 States listed below answered the question in the negative or stated that banks chartered by other States cannot do business in the State, without giving any further elaboration.6 It might be that out-of-State banks can carry on certain types of activity in these States but that this does not legally constitute doing business; the "doin~ business" question is discussed in greater detail below and in appendixes 10 and 12. Appendix 10 includes a supplementary note summarizing State laws on this subject. Arizona New Hampshire Arkansas New Mexico Connecticut Oklahoma Idaho Rhode Island Louisiana7 South Dakota - Maine Tennessee Maryland Virginia Minnesota Wisconsin A State would probably assert jurisdiction to tax an out-of-State bank if the bank maintained an office, branch, or other place of business within the State. The 9 respondents quoted below explained that maintaining an office is not permitted; the implication, where it is not explicitly stated, is that out-of-State banks are therefore not subject to any significant taxation, although they may engage in some activities that do not involve the maintenance ol~ a place of business in the State. Florida: Florida statutes do not describe methods by which out-of-State banks may qualify to do business in Florida and such banks are expressly prohibited from establishing offices in Florida. Since physical situs is normally determinative of taxable situs of real and tangible personal property, and of the appropriate jurisdiction for recordation of lien thereon requiring payment of recording fees or taxes, we find no particular significance for local taxation. Georgia: The State of Georgia prohibits statewide banking and for that reason would not permit banks chartered in other States to do business in Georgia through the use of production loan offices or branches. Kansas: . . . the anti-branching and anti-holding company statutes in this State prohibit a bank chartered in another State from establishing a branch or facility, or a holding coml)any chartered in another State from establishing a branch or facility, or a holding company chartered in another State from acquiring ownership of a bank in this State. Kentucky: (3) The State of Kentucky does not permit State or national banks domiciled in other States to have offices within Kentucky. Mississippi: (3) No. Banks chartered by other States may not have branches in Mississippi. They may conduct correspondent l)an king business or make loans, but they would not be subject to Mississippi taxation. South Carolina: 3. Banks chartered in another State cannot establish branches in South Carolina. They can, however, do business across State lines such as make loans, accept deposit accounts, etc., and [a bank] does not have to qualify to do this. In addition, the respondent from Alabama d~d not reply to this question. The Louisiana response was that `(i) Out-of-state banks are not permitted to be chartered in Louisiana." 79-421 0 - 72 - 15 PAGENO="0226" ~o6 Texas: 8 Texas is a non-branching State. Art. 16, section 16 of the Texas Con- stitution applies to State and national banks doing business in Texas, and provides in part: "Such body corporate shall not be authorized to engage in business at more than one place which shall be designated in its charter. No foreign corporation, other than the national banks of the United Stktes, shall be permitted to exercise banking or discounting privileges in this State." Vermont: Several out-of-state banks are registered with the Secretary of State to conduct business in Vermont, but we are informed that there is no differential in treatment of out-of-state banks and other foreign corporations. We should point out that none of the banks so registered have offices in Vermont and, to the best of our knowledge, are not subject to fees or taxes beyond that required for registration as a foreign corporation. Collaterally, no Vermont banks operate branches outside of the State. Most respondents answered question 3 by specifying certain types of transactions or activities in which an out-of-State bank could engage but which presumably would not be considered the "doing of busi- ness", and would not establish taxable status for the out-of-State bank. Sc ~ie States allow no banking activity by out-of-State banks except where every phase of the transaction takes place outside the State, while other States allow out-of-State banks to engage in varying types of activity in the State without taxing consequences even when the activity occurs on a regular and substantial basis. Nebraska and Nevada typify the former approach: Nebraska: (3) Any business conducted by banks chartered by other States must originate at that hank; this would not prevent Nebraska residents from doing business at such banks. Nev~ada: (3) No, we do not qualify foreign banks to operate in Nevada[;] how- ever, it is a known fact that loans and other transactions are made across State lines. Respondents from the fo]lowing 9 States clearly indicated that the limited activities allowed do not have taxing significance, except for "grandfather clause" branches in Washington: Hawaii: (3) Banks chartered by other States upon receiving a certificate from the Director of Regulatory Agencies may he permitted to engage in limited bank- ing business in the State. Such banks are limited to the business of making and collecting loans, buying and selling, paring and collecting bills of exchange, issuing letters of credit, receiving money for transmission and transmitting the same by draft, check, cable, or otherwise. Taxation of out-of-State banks doing this type of business is of no particular significance. Indiana: . . . (3) Indiana does permit State banks chartered in other States to qualify to do business in Indiana. This authority to do business is given with certain qualifications and restrictions. The restriction with regard to intangible personal property is such that State and local taxation of out of state banks would be insignificant. Iowa: (3) The State of Iowa does not have provisions for qualifying out-of- state banks in Iowa. Out-of-state banks do not file tax returns with the State Department of Revenue on the business that may have been conducted with Iowa companies, corporations, or other firms. Fiduciary relationships have been handled on a reciprocal basis . Montana: (3) Montana ~ioes permit banks chartered in other States to qualify to do business in Montana to a very limited degree. Out-of-state banks are per- mitted to lend money to borrowers residing in Montana and to administer trusts involving Montana residents and Montana real property. We can see no partic- ular significance that this limited privilege might have for Montana's taxation of out-of-state banks. Ohio: (3) Ohio does not permit any banking by any corporation which is not incorporated under the laws of the State of Ohio or of the United States. The only exception is for "foreign" banks which qualify to do a trust business. There is no significance so far as taxation is concerned $ This Is Irons tin' reply sent by counsel for the l)epartment of Banking. The banking comrni'sioner's letter (whieli was the sourie quoted in part 11, ahove) sai(l only, "Texas does not permit banks rha:tered by other States to qualify to do business in our State." PAGENO="0227" 207 Pennsylvania: (3) Pennsylvania law permits out-of-state banks to qualify to do business in the Commonwealth if there is a reciprocal agreement . . . Penn- sylvania does not tax out-of-state banks for their limited activities in the Commonwealth. Washington: . . . The answer in general is "no". . . . Banks chartered in other States may not conduct a general banking business or accept deposits in this State. (With two exceptions which conic under the Grandfather Clause. . .) . . . Summary to question 3 may be stated that there is no indication of particular significance for State or local taxation of out-of-State banks. West Virginia: (3) West Virginia Code 31A-2--5(f) provides: "nothing contained in this code shall authorize any person to engage in the banking business in this State except corporations chartered to conduct a banking business under the laws of West Virginia and which hold a license or certificate to do so issued under this section, or associations authorized to conduct a banking business in West Virginia under the laws of the United States and having their principal place of business in this State." However, West Virginia Code 31-1-79(a) provides that foreign corporations acquiring secured loans on real or personal property and some related activities in this State are not considered doing business. I do not believe that this would be an area of particular significance for State or local taxation of out-of- state banks. Wyoming: (3) Wyoming does not authorize branch banking and has found little need to qualify banks chartered by other States to do business in this State. We interpose no restrictions on foreclosure actions by out-of-state banks desiring to redeem collateral and require only the employment of a Wyoming attorney by out-of-state banks acting in behalf of estates. To the best of my knowledge, no out-of-state bank has been inconvenienced by these limitations. Taxation of foreign banks is limited to propeirty owned. In a similar vein, the restricted activities permitted out-of-State banks in Colorado, Illinois and North Dakota probably involve no taxing consequences, while the extent and tax consequences of per- mitted activity by out-of-state banks in Delaware and Utah are unclear from the replies received. Responses from these five states are as follows: Colorado: (3) . . . the implications of the Colorado Corporation Code in con- junction with the Colorado Banking Code is such that qualification is not coun- tenanced . . . This is not to say that foreign banks do not engage in certain types of transactions in Colorado in the same manner as occur in other States. We do not consider this a problem Delaware: (3) No . . . "No bank or trust company . . . shall transact any business in this State or open a place of business in this State without having first secured from the State Bank Commissioner a certificate . . ." Illinois: (3) The State of Illinois does not permit banks chartered by other States to qualify to do business within Illinois. A possible exception to this would be that we do have a reciprocal law in connection with corporate fiduciaries. North Dakota: (3) State law only provides that foreign banks or trust companies may serve in fiduciary capacity in State. Utah: (3) Utah law (Section 7-3-4, Utah Code Annotated 1953, as amended) forbids any foreign corporation from conducting a banking business in this State until it has first complied with the laws of this State relating to banks and with other laws of this State relating to foreign corporations. I do not believe this provision has any significance for State or local taxation of out-of-state banks. Such banks would be taxed as any other foreign corporation operating within the State. Among the nine jurisdictions remaining, the extent of taxation of out-of-State banks was unknown to the respondents from Alaska, * Massachusetts, and New Jersey. No out-of-State State-chartered banks are presently doing business in North Carolina or Puerto Rico, although this is apparently permissible and might involve taxable status. Under certain conditions, out-of-State banks could be taxable in California, Michigan, New York (Edge Act subsidiaries), and Oregon. The responses from these States were lengthier and more specific than from most other States. PAGENO="0228" 208 Alaska: (3) Yes, banks chartered by other States are permitted to qualify to do business in Alaska under the provisions of our Model Foreign Bank Loan Act. This Act enables foreign or out-of-state banks to make and purchase loans in this State, and the question has arisen as to whether the income derived from these activities was taxable by the State. It appears that the permanent amend- ment would clarify this situation. California: (3) . . . even when a foreign banking corporation has complied with the California Corporations Code and obtained consent of the Superintendent of Banks, it may conduct only such business as permitted under the California Financial Code, and a bank incorporated under the laws of another State would not be permitted to accept deposits in California. (California Financial Code Section 1756(b)). There are two important exceptions to the rule that a foreign banking corpora- tion must obtain a certificate of qualification from the Secretary of State and the consent of the Superintendent of Banks before engaging in the banking business in California. First, a foreign banking corporation may acquire loans secured by real or personal property located within this State, so lpng as it carries on such activities from outside California. (California Corporations Code Section 6450 et. seq.) Second, a foreign banking corporation may make loans in this State secured by real property located in California, so long as it does not maintain an office in this State. (California Financial Code Section 1757). The second exception is an exception only from the requirements of the California Financial Code. The first exception, however, applies not only to the California Financial Code but also to the California Corporations Code and the California Revenue and Taxation Code, which contains the tax laws of this State. Massachusetts: (3) Under section 45A of Chapter 167 of the General Laws, * . . national banks and State-chartered commercial banks having their principal places of business in other States may, with the permission of the Board of Bank incorporation, exercise fiduciary powers in Massachusetts. This section refers to the taxation of such banks.9 This office has not had occasion to deal with problems which might arise relative to the extent of such taxation. Michigan: (3) Banks from other States can establish "loan production offices" in Michigan. A foreign banking corporation can be admitted to do business in ?~1ichigan under the General Corporation Act under a restricted certificate of admission. Such certificate would permit only business of a non-banking type which a corporation formed under the Michigan General Corporation Act could conduct. New Jersey: In regard to interstate business, "foreign banks" must qualify to do certain fiduciary business in New Jersey. At the present time there are forty-four out-of-State banks who have requested and received this authority. The volume of business they are doing and the profit derived therefrom is unknown; consequently, the significance for State or local taxation is a matter ~or conjecture. These banks do, of course, pa~ qualifying and annual renewal fees to the Department of Banking for the right to do fiduciary business in New Jersey. New York: (3) New York State does permit banks chartered by other States to qualify to do business in New York. At present, the only foreign banking corporations qualified to conduct a banking business in New York are agencies and branches of foreign banks domiciled outside the United States. In addition, Edge Act subsidiaries of foreign banks domiciled in States other than New York operate in New York under the supervision of the Federal Reserve Board. * There are numerous special limitations on the privilege of doing business in New York which are applicable to banks but not to other types of foreign business corporations. For example, a foreign bank must keep at least $100,000 of specified assets on deposit in the State at all times. Our reciprocity provision constitutes another special limitation North Garolina: 10 * * there are no out-of-state banks doing business in North Carolina at this time; therefore, the question of taxing them is not pertinent . The out-of-State bank would probably be considered to be a lending agency sub- ject to the income tax rather than a bank subject to the excise tax . . . [and] might also be subject to the corporation franchise tax. The law cited, which ~vas included with the reply, states in Part ths~ "Any such banking association or corporation hoidine a certificate as aforesaid and appoitited a fiduciary snail lie subject to the provisions of general law with rsnect to tile llp~)0itittfltnt 01 agitits by foreign iidieiaries and to tile same taxes, olli- ations and pciiaitis. wilt respect to its activities a~ such iniucuity and the property heid by it in its fidtm- ciaty capacity, us like ussociutittlis or corporutioiis having their priIiliiiui oiiicc in hits cOmfllliOIi\VCUliIi 10 Tnis quotation is from tile letter Written by tile i)epartment of Tax Research. PAGENO="0229" 209 Oregon: (3) Oregon's laws do not permit banks chartered by other States to qualify to do business in Oregon, with minor exceptions. Banks chartered in other States which have a trust department can qualify to do a limited trust business in Oregon under the terms set forth in ORS 713.010(2); ORS 713.010(4) also gives out-of-state banks some latitude as it allows such banks to loan money in Oregon on mortgage security. These banks may "not accept deposits or receive from citizens or residents of this State property or money in trust on deposit or for investment." 11 Puerto Rico: . . . our banking law provides for the authorization of banks chartered in other states to do busihess in Puerto Rico. However, in practice, arid as a matter of public policy, for many years no State bank from another State has been authorized to do business in the Commonwealth of Puerto Rico, and no additional national or foreign banks have been authorized to open branches within our bounds. It is interesting to compare the State banking supervisors' answers to question 3 with the replies to a similar question asked of State tax administrators. Item number 3.411 of the questionnaire sent to tax administrators asked whether out-of-State State-chartered coinmercitil banks "that do business in your State" are "now subject (No- vember 15, 1970) to taxation in your State". In 26 States 12 and Puerto Rico such banks reportedly are subject to State net or gross income taxes and in some cases to other taxes as well, while in another four States 13 they reportedly are subject to taxes based on the value of capital stock. In many of these States, however, no banks chartered by other States actually "do business"-in some instances because only banking activity that does not legally constitute "doing business" is allowe'd-so that the banking supervisors were correct in saying that banking activity by State banks from other States does not have any particular significance for State taxation. It appears from the banking supervisors' letters that the major banking States 14 differ considerably in the kinds of activity that are permitted for out-of-State banks without establishing taxability and in the kinds of activity that are permitted at all. In summary, there appears to be considerable variability among the fifty States in the extent to which banking activity is carried on from across State lines and in the tax treatment of out-of-State banks. For State-chartered banks, at least, interstate banking activity seems to be tailored to the States involved and the types of activities in such a way that little or no taxing liability is involved outside the domiciliary State. IV. QuEsTIoN 4 (4) In the laws, regulations, or supervisory practice affecting commercial banking in your State, or in bank operations, have there been recent changes or developments of particular significance for State or local taxation? Do you foresee developments of this kind over the next few years? If so, please describe any of these changes that have particular signiflcan~;e for State or local taxation. In its final question to the banking supervisors, the Board sought information on both recent and foreseeable developments which Ii ORS 71 `.010 also provides, in subsection (1). that "Except as provided in snl)eeCt ion (4) of this sc~tion, every foreign bank or tr~~st company doing business in this State is subject to all the provisions of the bank Act to the same extent as banks, bankers or trust companies organize(l or doing business under or by virtue of the laws of this Slate." 12 Alabama, Arii,o~ia, Arkansas, California, Connecticut, ltawaii, Idaho, Illinois, Indiana, Maine, Mary- land, Massachusetts, Minnesota, Missouri, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oregon, South Carolina, South l)akota, Tennecsee, L'tah, Washington, and Wisconsin. 13 Montana, New Jecsey, Ohio, and \\ est Virginia. 14 The top 10, in terms of total issa operating income, are New York, California, Illinois, Pennsylvania, Texas, Ohio, Michigan, New Jersey, Florida, and Massachusetts. PAGENO="0230" 210 might influence the type, amount, or consequences of State and local taxes applicable to banks. The answers received by no means cover all the changes which have taken place, but they do give considerable insight into why certain changes occurred and why certain others are expected. Twenty-two States did not report any recent or foreseeable changes affecting bank taxation. Some of these States had in fact had some tax changes, but the respondents apparently did not consider them to be particularly significant or else they were limiting their answers to banking regulations and practices rather than to changes in the taxing laws or in the applicability of taxes to banks. The 22 States are as follows: Alabama Arizona 1\'Iississippi Nebraska South Carolina 15 South Dakota Connecticut Nevada Utah Kansas Kentucky Massachusetts Michigan Minnesota 15 New Hampshire New Mexico Oregon Pennsylvania Rhode Island Washington West Virginia Wisconsin Respondents from 20 States reported instances of recent changes in taxes affecting banks, or of recent developments affecting banking. The items reported are summarized in table 1. Some of these items are not especially new, but were mentioned because they have a bearing on recent or expected developments. Additional information from State tax administrators on recent changes in tax laws or regu- lations affecting banks is included in brackets. TABLE 1.-RECENT CHANGES OR DEVELOPMENTS REPORTED BY STATE BANKING SUPERVISORS WHICH AFFECT STATE OR LOCAL TAXATION OF BANKS 1 Category of change, and State Comments Regular corporate income tax replaced special bank income tax for State and national banks, 1970. Corporate income tax rate was raised and some exemption of interest wan deleted. Income tax was enacted, 1969. Franchise tax was enacted, 1969, [replacing bank shares tax and] increasing taxes paid by banks by up to $2,000,000. Income tax was imposed, effective July 1, 1969. Franchise tax on financial institutions replaced capital stock tax, July 1, 1968. (See table 2.) Excise tax rate was raised, 1969. Rate was increased and other changes made in corporate income tax. [Also, income tax was extended to banks in New Hampshire (State banks only), New Mexico (replacing shares tax, 1969), Tennessee (national banks), and Washington (gross income tax), and modifications were made in Arizona, Kansas, and New York.] Taxes on value of shares or capital structure: Arkansas Shares tax was held unconstitutional in 1961 ("in practical effect * * * an assessment of intangible properties and * * * a gross discrimination against banks * * *") but is being paid under 1969 voluntary formula. Louisiana Rate is being gradually reduced starting 4 years ago. New Jersey Rate was doubled, tax is now distributed half to State and half to counties. - [Also, shares tax on shares held by individuals lapsed in Illinois (1971, constitutional change), franchise tax was extended to national banks in Tennessee after Dec. 24, 1969, and rate was raised in Pennsylvania (1971).] Income taxes: Colorado Delaware Illinois Iowa Maine Maryland Montana North Carolina Puerto Rico See footnotes at end of table, p. 211. 15 South Cafolina did, however, mention existing bank taxes, and both Minnesota and South Carolina mentioned the pressures for additional revenue at the State and local levels. PAGENO="0231" 211 TABLE 1.-RECENT CHANGES OR DEVELOPMENTS REPORTED BY STATE BANKING SUPERVISORS WHICH AFFECT STATE OR LOCAL TAXATION OF BANKS-Continued Category of change, and State Comment Sales and use taxes: Arkansas State and national banks paid s.nles and use taxes, starting in 1969. under voluntary agreement. California Test case pending on sales tax on national bank purchases prior to Dec. 24, 1969. Colorado State and local sales and use taxes were extended to State and national banks, 1970. Maryland State banks were exempted from sales tax (like national banks), July 1, 1968; [banks became liable to the tax alter Dec. 24, 1969j. North Carolina 2 Sales, use taxes were extended to purchases by national banks after Dec. 24, 1969. Texas Banks became subject to sales tax, through comptroller's ruling. Vermont National banks became subject to sales tax on equipment purchases, after Dec. 24, 1969. Wyoming National banks are now paying sales tax and are collecting it on their sales. [Sales and use taxes were also extended to national banks since Dec. 24, 1969, in Arizona, Connecticut, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Utah, and Wisconsin, and to both State and national banks in Ala- bama, Florida, Georgia, and Louisiana.J Other taxes: Arkansas Court held stamp tax on real estate transfers unconstitutional, 1970; it is still being paid, proceeds being held in suspense. Colorado Tangible personal property tax was extended to State and national banks, 1970. Florida "In 1970 the Florida Legislature broadened the assessment base for State banks and authorized retention of the full amount for operation of the Division of Banking." [Tangible ~ersonal property taxes were also extended to banks since Dec. 24, 1969 in Arizona, Florida, Iowa, Kentucky, Louisiana, and Ohio, and to national banks in Connecticut, Idaho, Illinois, Kansas, Nebraska, Rhode Island, and Utah. Documentary taxes were entended to banks since Dec. 24. 1969, in Alabama, Florida, Georgia, and Kentucky, and to national banks in Illinois, Iowa, Nebraska, New York, Ohio, and Oktahoma.J Equalization of tax treatment of State and national banks: Arkansas 1967 statute gave State banks the same tax status as national banks. Montana 1967. State banks were exempted from corporation license (net income) taxes, because national banks were exempt. Texas 4 ... 1963 law equalized tax treatment of State and national banks, resulted in State bank exemption from franchise tax. Virginia 1968 law placed State and national banks on equal footing for taxation. [Equalized treatment of State and national banks, as a policy or in practice, was also mentioned or implied by the bank- ing superintendents of California, Colorado, Florida, Georgia, Louisiana, Maryland, Mississippi, New Mexico, Rhode Island, and, since February 1970, Tennessee.J Other developments: Idaho 2 Law provides for no deposit of State moneys after Jan. 1, 1970, in any banks failing to pay all State and local taxes. Indiana State banks were recently authorized to lease personal property. New Jersey Banking has expanded rapidly since the acceptance on July 17, 1969, of be- yond-county branching and of statewide holding companies. New York International banking activities have been expanding substantially. 1 Information in brackets covers other changes reported by State tax administrators which were not mentioned by the bank supervisors. 2 Information is from memorandum of North Carolina Bankers' Association, lorwarded by banking superintendent, and from tax research department letter. 3 Information is from banking commissioner's letter. 4 Information is from department of banking counsel letter. 5 Includes corporate inceme or franchise taxes, sales and use taxes on purchases of tangible personal property, and real and personal property taxes on property owned or leased. Likely future developments were reported by 10 of the States which had reporte(1 recent changes 1111(1 also by 9 States which ic- ported no i'ecent changes. In some instances, the future changes mentioned were very specific. and were anticipated with confidence. In other cases, the developments foreseen w'ere rather vague and were said to be desire(I or feared rathet' than eXI)ected. The repoi'ted future devehopments ale summarized in table 2. PAGENO="0232" 212 TABLE 2.-LIKELY FUTURE STATE AND LOCAL BANK TAX DEVELOPMENTS REPORTED BY STATE BANKING SUPERVISORS' Category of change, and State Comment Income taxes: Alaska Rate increase of business license tax on financial institutions, proposed in 1968, is likely to be reconsidered in next 3 to 5 years. Delaware - Further rate increase is possible. Florida General corporate income tax may be considered, 1971. Montana "Almost certain" that corporation license tax will be extended to banks, 1971; [and this has occurredj. New York Taxable base (income attributable to operations in the State) will probably lag behind bank profits as international operations expand, Ohio Corporate franch ise tax rate on banks may be raised to that on other corpora- tions. Texas Comotroller 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).J Taxes on value of shares or capital structure: Florida Capital stock tax, on all corporations, is likely to be considered, 1971. North Carolina Banks might become subject to franchise tax on capital used in State and to intangibles tax, but both are unlikely. Wyoming 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 legistatiooJ. [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.l Other specified taxes: Hawaii General excise (sates) tax and use tax may be extended to national banks. Indiana Bank exemption from tangible personal property tax may be reviewed, because of leasing authorization (see table 1). North Carolina 3 Banks may become subject to tangible personal property tax under State-local * property taxes, following amendment of the excise tax. [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 Iowa. Real estate transfer taxes are pending in Arkansas, Missouri, North Dakota, and Texas. Indiana may repeal its intangibles tax effective July 1, 1972.1 Unspecified tax changes: California Manner and extent of State and local taxation of banks are under consideration. Georgia Tax changes under permaoent amendment, involoing redactions of compen- satory rates, could appear to reduce bank taxes, thus "open the door for flagrant discrimination among the various Ststes in the taxing of financial institutions as against other business corporations." Missouri Complete bank tax review resulting in increased taxation of both State and national banks is probable. North Dakota Tax bill affecting banks is being presented. Oklahoma "Tax reform will be an issue in the 1971 legislative session." Other banking developments: Tennessee "Some though[t[ should perhaps be given to some moans-through taxation or otherwise-to further discourage holding company acquisitions and hype- thecated ownership." Vermont Prohibition against holding companies may be dropped, 1971. I Information in brackets covers other likely developments reported by tax administrators or in Commerce Clearing House reports. In addition, svidespread rate increases are reported as likely. 2 The North Carolina Bankers' Association reports that this "could conceivably" hapsen, 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 snpervisors strongly support FL. 91-156 as it stands The response from the supervisors of State banks was strongly in favor of 1)erlnanently amending section 5219 of the Revised Statutes in the form provided in section 2 of F.L. 91-156. Support for the permanent, amendment conic fi'owi supervisors Ilk a large number of PAGENO="0233" 213 States, including New York, California,16 and indeed all of the larger banking States eXCCJ)t 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.L1. 91-156, the commitment of State bank super- visors 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 autoinony in meeting the fiscal needs of the States and their political subdivi- sions." 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 po~vers. (~) 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 ar- rangements of Public Law 9 1-156 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,'9 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 I)ayrng 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 han(1, \V(nt on recOr(I 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. it Louisiana was the only State reporting a reduction in tax rates affecting banks. PAGENO="0234" 214 of the States and their political subdivisions." In addition, Public Law 9 1-156 eases restrictions on State and local taxation that apply specifically to banks. Misunderstanding regarding the taxable capacity of banks 20 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 treat- ment 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 nondomiciiary 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. 9 1-156, 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 oppor- tunities 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 i_Juded with the New York return. This statement was published in "Taxes on National Banks," Hearing before the Senate Commit- tee on Banking and Currency, 91st Congress, 1st session, on S. 2065, and H.R. 7491 (September 24, 1969), pp. 52-57. PAGENO="0235" 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 tool~ 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.' One purpose of the act was to pro- vide for a stable currency while another was to assure a market for sale of the bonds issued by the Federal Government.2 The banking associations provided for by this act could issue circulating notes equal to 90 percent of the market v~ilue 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 adequateIy.~I am especially indebted, to Mr. Robert \V. Baumgartner, head of the Docu- snents 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 numerous. SISIEON E. LELAND. 1 12 U.S. Statutes at Large (Boston, Little, Brown & Co., 1865, edited by George P. Sanger), 37th Con- gress, 3d session ch. LVIII, pp. 665ff. Cf. Davis Rich Dewey, Financial History of the United States (New York: Loogmans Green & Co. 7th ed., 1920), pp. 310-11, 320-28. (215) PAGENO="0236" .216 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,4 especially since the Act of 1863 did not prohibit such taxation. B. National Bank Act of Ju~ne 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,~ which made numerous changes in the details of banking and made it easier for State banks to convert to the national system. Likewise provision w~s 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." 6 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.7 So have the origins of State taxing powers over national banks been reviewed.8 The tax provisions of the Act of 1864 were as follows: ~Har1ey L. Lutz, The Evolution of Section 5219, United States Revised Statutes," Bulletin of the National Tax Association, vol. XIH, 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). I 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, on. 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 reaUy 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, bc. cit., p. 206. Albert S. Bolles, The Financial History of the United States from 1861 to 1885, New York: D. Appleton and Company, 1886, pp. 197-226, 381-72; Andrew McFarland Davis, The Origin of the National Banking System, Publications of National Monetary Commission, vol. v, no. 1. 2 parts, Senate document 582, 618t Congress, 2d Session, Washington, 1910, 213 pp.; Dewey, op. cit., chs. XIII and XVI; Leonard C. Ilalder- man, National and State Banks: A Study of their Origins, Boston: Houghton Muffin 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 34. `V. Sprague, History of Crises Under the National Banking System. National Monetary Commission Publica- tions, vol. v, no. 3, Washington, 1910; W'illiam 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 Assodation, vol. 1 (1893) pp. 23-39. $ Lutz, bc. 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. \Voosley State Taxation of National Banks, Chapel Iii!!, University of North Carolina Press. 1935, especially ch. I and II; John D. Jielinherger, 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 Journol, vol. 24, pp. 149-61 (1914-15); Samuel B. Chase, Jr., "State Taxation of Banks." Law and Contenv)orary Prohlem~. Duke University School of Law, vol. 32, no. 1. pp. 149-67 (Winter 1967); Fred R. Fairchild. "Stats and Lo~al Taxation of Banks," American Economic Review, vol. 6, pp. 851-868 (1916); Robert Murray Ilatz. "Should flanks Be Taxed and How?" Proceedings of the National Tax Asso- ciation, 1929, pp. 385-3Sti. Thomas J. lloltlysh, "Tax Immunity and Taxation of National Banks: One Hun- dred and Fifty Years after MeCulboch v. Maryland," University of Illinois Law Forum, vol. 1969, No. 2, 1970, pp. 2~4-47; WalterW. 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," it)id., pp. 401-12: Saxe. "Stale Taxation of Banks" in Current Problems in Public Finance, Com- merce Clearing House, New York, 1933, pp. 207-12. PAGENO="0237" 217 "SEC. 41. And be it further enacted, * * * Provided, That nothing in this~ act shall be construed to prevent all the shares in any of the said associations, held by any person or body corporate, from being in- cluded in the valuation of the personal property of such person or corporation in the assessment of taxes imposed by or under State authority, at the place where such bank is located, and not elsewhere, but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State: Provided further, That the tax so imposed under the laws of any State upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any of the banks organized under authority of the State where such association is located: Provided also, That nothing in this act shall exempt the real estate of associations from either State, county, or municipal taxes to the same extent, according to its value, as other real estate is taxed." Since the question later arose as to whether the national banks were "instrumentalities" of the U.S. Government, it is important to note that several important functions were given the national banks. The Secretary of the Treasury was empowered to designate them as "de- positories of public money, except receipts from customs." They might also "be employed as financial agents of the government; and they shall perform all such reasonable duties, as depositories of pub- lic money and financial agents of the government, as may be required of them." To insure prompt payment of public money deposited with *them and to assure the faithful performance of their duties as finan- cial agents, the Secretary of the Treasury was to require such security as the deposit of "United States bonds and otherwise." As deposi- tories they also had to accept at par all national currency hills "by whatever association issued." ~ As indicated in the quotation above, Congress specifically conferred (or recognized) the right of the States (1) to tax the shares of stock in national banks, as personal property, to persons or corporations at the place where the bank was located (and not elsewhere) at a rate no greater than was applied to shares of State banks, and (2) to tax real estate of national banks to the same extent, according to its value, as other real estate was taxed. Local governments also were permitted to tax bank real estate situated in their jurisdictions. These enumerated provisions correspond with practices then prevalent in the States.'° Some of them taxed shares of stock as personal property, although the personal property tax was a badly administered tax everywhere and never had been made to work uniformly or equitably. All the States and localities imposed taxes on real estate where it was located. In essence, therefore, the taxes provided for in the Act of 1864 were usual and customary. Nor were the States forced to develop new tax devices to reach the national banks. What was intended was the equal taxation of State and national banks. Or, stated another way, taxes on national banks were not to be at a greater rate than taxes on State banks. Congress sought to prevent State tax discrimi- nation against national banks or in favor of State banks, since it wanted to encourage the chartering of additional national banks. As it was, State banks then greatly outnumbered national banks. The State tax provisions in the Act of 1864 were liberal and fair, so far as Act of June 3, 1804, bc. cit., sec. 4~. 10 Jfl later pages the State tax systems about .1860, 1922, anti 1969 are briefly describeti. Infra, pp. 341-347, 358-379. PAGENO="0238" 218 the intentions of Congress were involved.'1 There seems to be no ques- tion that Congress could have exempted national banks from all taxation had it chosen to do so. C. Tax on State bank notes, 1865 The Act of 1864, although it was a great improvement over the national bank act of 1863, did not restrict the circulation of issues by State banks. Accordingly, in the Act of March 3, 1865, Congress im- posed a tax of 10 percent beginning July 1, 1866, on all State bank issues.'2 This tax effectively stopped all such issues.'3 It created much resentment among the States.'4 While the Act of 1865 provided a prohibitive tax on the circulation of State bank notes,'5 it did not directly affect or relate to the taxation of national banks by the States. it provided an impetus to the forma- tion of new national banks, giving the States more national banks to tax.'6 Although this act said nothing about how these banks were to be taxed by the States, it had a significant indirect effect. it added to the resentment against national banks, particularly in the West, where greater quantities of currency were needed. it was also regarded by many as an encroachment on States rights, it was a greater handicap to State banks than anything in the national bank act. Mr. Justice Nelson concluded his dissenting opinion in Veazie Bank v. Fenno with these words: `~ * The purpose [of the law] is scarcely concealed, in the opinion of the court, namely: to encourage national banks. It is sufficient to add, that the burden of the tax, while it has encouraged these banks, has proved fatal to those of the States; and if we are at liberty to judge of the purpose of an act, from the consequences that have followed, it is not, perhaps, going too far to say that these consequences were intended. Bitterness over this interference may have played a part in the attempts of States to extract increasing sums from the taxation of the rival national banks. Bolles described the law as "giving the State banks another strong boost out of existence." 18 D. Act of February 10, 1868 The Congress in 1868 made a slight modification in the bank tax provision of the Act of 1864 concerning the place where national bank shares were to be taxed. It authorized the legislature of each State to I' Cf., Leland, The Classified Property Tax In the United States, Houghton Miffiin Co., Boston, 1928, p. 204. U 13 Stat. at L., 469. at p. 484 (38th Congress, 2d session). The title of the Act was, "An Act to amend an Actentitled, `An Act to provide Internal Revenue to support the Government, to pay Interest on the Public Debt, and for other Purposes, approvedJune thirtieth, eighteen hundred and sixty-four.'" The taxing provi. sion was as follows: "Sec. 6. And be it furl her enacted, `That every national banking association, State bank, or State banking association, shall pay a tax of 10 per centum on the amount of notes of any State bank or State banking association, paid out by them after the first day of July. eighteen hundred and sixty-six.'" For an Interesting discussion, see Judge Thomas M. Cooley, "Federal Taxation of State Bank Currency," Publications of Michigan Political Science Association, no. 1, pp. 40-56 (1893). 13 This tax was upheld in Veazie Bank v. Fenno, 8 Wall. (75 U.S.) 533 (1869). In reviewing the legislative history of the Act, ChIef Justice Chase pointed out that under the Act of February 25, 1863, a tax of 2 percent annually was imposed on circulation but that soon after, under the Act of March 3, 1863, 12 Stat. at L., p. 712, a lighter tax "of 1 percent annually was imposed on the circulation of State banks, In certain proportions to their capital and of 2 percent on the excess; and the tax on the national associations was reduced to the same rates." (At p. 538.) He mentioned also that under the Act of June 30, 1864, the rate of tax was continued at 1 percent and that the shareholders of the national banks were subjected to taxation by the States on their Ihares. Ibid. He also pointed out that at first (in 1863) "Congress was inclined to discriminate for, rather than against, the circulation of State banks; but that when the country had been sufficiently furnished with a national currency. . . the discrimination was turned, and very decidedly turned, in the opposite direc- tion." Ibid., p. 539. 14 Cf. Chcrles S. Tlppetts, State Banks and the Federal Reserve System (New York: Van Nostrand Co., 1929), pp. 7-8. 15 For example, one bank in Arkansas had to pay $160,000. Statement by Mr. Stevenson, Congressional Record, House, vol.64, pp. 955-6 (Dec. 17, 1922), hereafter abbreviated 64 C.R., pp. H95.5-6 (Dec. 17, 1922). ~ On November 15 1864, only 584 national banks had been organized; by October 1, 1865, 1,566 associations had been organized. bavis, op. cit., p. 103. ~ 8 Wall. (75 U.S.), at p. 490. It Albert S. Boles, op. cit., p. 228. PAGENO="0239" 219 determine and direct the manner and place of taxing all the shares of national banks located within the State, except that shares owned by non-residents of the State could be taxed only in the city or town where the bank was located.'2 E. Enter Section 5219: 1875 A codification of United States statutes as they existed on December 1, 1873, was printed in 1875.20 It included the Act of June 3, 1864, as amended in 1868, covering State taxation of national banks. Here for the first time the relevant provisions of these acts became Section 5219.21 Even though in later codifications this section came to be known as title 12, Section 548,22 the designation of 5219 has stuck with the provision, and generally in the literature, whenever State taxation of national banks is discussed, reference is made to the provisions of section 5219. In the codification of 1873 a few minor changes in words were made, compared with texts of the Act of 1864 as amended in 1868. These changes appear to be textual or literary rather than substantive.23 A change in the words governing the place where national bank shares were taxable has already been noted. Of this change, Welch has said: 24 "The amendment [of 1868], as both houses were repeatedly assured by the chairmen of the reporting committees, involved a single change. l'Act of February 10, 1868; 15 Stat. at L., 34; ch vii. For the text of the act, see section C in appendix 1, at p. 4 above. 0 Revised Statutes of the United States, Passed at the First Session of the Forty-Third Congress, 1873-74, with an Appendix Containing "An Act to Correct Errors and Supply Omissions," Government Printing Office, Washington, 1875. (Since the codification was of statutes as they existed in December 1, 1873, that date may be used as a reference as well as the publication date, 1875.) 21 Ibid., title LXII ch. 3, sec. 5219, p. 1015. The origin of section 5219 has frequently been given as 1878 where sec. 5219 also appears. Second Edition, Revised Statutes of the United States, passed at the Forty- Third Congress, 1873-74; with an appendix; Government Printing Office, Washington, 1878; title LXII, cli. 8, sec. 5219, p. 1009. Cf. Saxe, "State Taxation of Banks," in Current Problems In Public Finance, Com- merce Clearing House, Chicago, 1933, p 207. ~` As for example In the U.S. Code, 1940 ed., title 12, cli. 4, section 548, at p. 838, or United States Code, 1904 edition, Supplement v, U.S. Government Printing Office, Washington, 1970, title 12, ch. 4, sec. 548, at p. 673. 23 The wording of sec. 5219 is identical in the Revised Statutes printed in 1875 and 1878. Differences from the 1864 and 1868 version are as follows: Line of sec. 5219 in 1873 Words substituted in Revised Words in acts of 1864 and 1868 1873 Revised Statutes Statutes "in this act" "shall be construed to" "herein" omitted 1 1 "of the said" omitted 1 "associations" "association" 1-2 "held by any person or body corporate" "of such person or corporation" "in the assessment of taxes" "imposed by or under state authority" "at the place where the bank is located," "but" omitted "of the owner or holder of such shares" "in assessing taxes" "imposed by authority of the state" "within which the association is located;" "and" 2 3 3 3-4 4 4 "said" "the" 7 "subject to the restriction" "And provided always" "national bank" "said bank" "subject only to the two restrictions" omitted "banking association" "the bank" 7 9 10 11 "Provided also that" omitted 12 "nothing in this act" "shall exempt" "real estate" "real estate" "nothing herein" "shall be construed to exempt" "real property" "real property" 12 12 12-13 14 `Welch, op. cit., p. 16, citing Packard v. The City of Lowiston, 55 Me. 456 (1867) and Austin v. Board of Aldermen of the City of Boston, 96 Mass 359 (1867). PAGENO="0240" 220 Instead of requiring that all shares be taxed `at the place where such bank is located,' the place at which shares of resident stockholders were to be taxed was left to the discretion of the State. The interpre- tation of this phrase in the earlier act had already been called into question in two of the New England States where it was customary to tax i_personal property at the residence of the owner." Welch called attention also to the fact that the second of two earlier separate limitations upon the magnitude of a tax on shares was not included in the revision of 1875. In the Act of June 3, 1864, that limi- tation was as follows: "Provided further, that the tax so imposed under the laws of any State upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any bank organized under the authority of the State where such association is located." Welch commented that, "no mention having been made in the act of 1868 of the second limitation, it was deleted in the Revised Statutes." ~ But the Revised Statutes did state another limitation exactly as it had appeared in the Act of February 10, 1868, "That the shares of any national bank owned by nonresidents of any State shall be taxed in the city or town where said bank is located and not elsewhere." It would seem that Congress intended this to be substituted for the proviso set forth in the Act of June 3, 1864. The codifiers so inter- preted the 1868 amendment. F. Taxation of notes and deposits: 1894 * On August 13, 1894 Congress passed an act providing for the taxa- tion of bank notes, U.S. circulating notes, coins, and bank deposits by States at the same rate as other money within the State.25 This act has been almost uniformly ignored, or passed over, in writings on the taxation of national banks by States, perhaps for the reason that the act specified that its provisions were not to be "deemed or held to change existing laws in respect to the taxation of national banking associations." However, Ronald Welch, in his State and Local Taxa- tion of Banks in the United States, not only discussed the law but also printed it with other federal acts pertaining to section 5219.27 Despite the disclaimer that the act was not to affect section 5219, Congressional consent to State taxation of money and deposits to individual owners was the same type of action as the permission given m the Act of 1864 for States to tax bank shares to the owner, except that shares were to be taxed "at the place where such bank is located." Since most intangibles then and since have been taxed where the owner is domiciled, the amendment of 1868 provided that for resident stockholders "the place" could be anywhere within the State as would be determined by State law. Thus, for stockholders living within the State where the bank was located, the situs of taxation might be either within the jurisdiction where the bank was located or the place where the stockholder lived and paid property taxes. "Ibid. Cf. Woosley, op. cit., p. 17. Saxe, bc. cit. in Current Problems in Public Finance, p.. 207, says that the reference to State banks was eliminated "for the reason that shares in State banks constituted `other rnonied capital' and further, to leave the States free to tax their own banks by whatever method they saw fit." "Act of August 13, 1894, ch. 281, sees. 1,2; 28 Stat. at Large, 278; reproduced above in appendix 1-F, p. 8. ~ Welch, op. cit., pp. 115 and 222-23. PAGENO="0241" 221 The law with respect to the taxation of bank shares was the subject of continuing litigation over the meaning of "other moneyed capital" and the taxation of intangibles "in the hands of individual citizens of such State." 28 No such cases seem to have arisen in connection with the taxation of money, circulating notes, or bank deposits seeking the invalidation of taxes on national banks. Where owners of intangi- bles were taxed at lower rates than national banks, the differential, as in the Richmond case,2° was fatal, but the cases did not arise specifically as to bank deposits, even though the individuals whose activities were held to be "in competition with national banks" may have had money on hand or in bank deposits. At the tir~e the Act of 1894 was passed, several States, among them Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode Island, and Vermont, were taxing bank deposits, usually savings deposits, to the bank. ].n Pennsylvania all money was taxed to indi- viduals. Later as the movement to adopt low-rate taxes on intangibles spread, special bank deposit taxes were widely adopted.3° A discussion of these taxes, interesting as they are, will not be carried further be- cause it would lead away from developments under section 5219. A parallel between State taxes on bank shares and bank deposits is further seen in the application of collection-at-the-source to both taxes. To help make the share tax effective, the Act of 1864 required each bank to keep a list of stockholders "in the office where its business is transacted" open to the inspection of shareholders, creditors, "and the officers authorized to assess taxes under State authority." 31 The lists were also to be transmitted to the Comptroller of the Currency. These provisions made the share tax "the most effectively enforced of all personal property taxes." 32 But as long as all property under the general property tax was treated uniformly under the law, discrimina- tion which resulted from poor administration did not, at first, invali- date taxes on national banks to which similar tax rates were applied. However, later decisions of the courts invalidated even general property taxes on national banks where substantial discrimination was shown to exist in fact. In some States, particularly in New England, where special taxes were placed on deposits (usually savings), the tax was generally levied on the banks. In other States, deposits, like money, were listed for taxation by individuals. The self-assessed taxes proved to be defective-like other personal property assessments. Hence collection of such taxes from the banks as agents of depositors, with rights of reimbursement, began to develop. The tax was legally assessed against the depositor but was paid for him by the bank. By 1930, 11 States were collecting their low-rate taxes on deposits at the source.33 In 1942, 19 States and the District of Columbia did not impose ad valorem taxes on bank deposits.34 In 22 States, depositors had to report for taxation the amount of their deposits, and pay taxes on them. In Georgia the banks could report the tax if authorized by the depositors; 28 For further discussion, see infra, pp. 165-89, 195-202, 216-17, 251-52, 311, 323-25. 29 Discussed below, pp. 245-246, 265-272. 30 Cf. Leland, op. cit., pp. 216-21; Welch, op. cit., pp. 117-21, 125-32. 31 Section 40, quoted in Woosley, op. cit., pp. 11-12. 32 Ibid., p. 12. `~ Cf. Welch, op. cit., pp. 126-30. ~ Details in this paragraph are based upon "State ad valorem taxation of bank deposits." Survey made by Legal Department of American Bankers Association, as of January 1, 1942 (mimeo., 14 pages). 79-421 0 - 72 - 16 PAGENO="0242" 222 in Indiana the bank could elect to pay the tax but if it did the tax could not be charged against the depositors. In many places no effort was made to assess deposits. It was said that taxes on deposits could not be imposed on national banks because of section 5219; therefore assessments were made in the names of depositors. In Ohio, the taxes were assessed in the name of the bank but the bank was given a lien for reimbursement. In Kentucky, no State deposits taxes were paid*. by banks, but out-of-State deposits were reported and the taxes paid by the depositors. North Carolina followed the same policy. In practice, many banks assumed and paid the tax for depositors, as in Ohio and Illinois. Competition for deposits led many banks to absorb the deposit taxes, regardless of. law, as a matter of good business. However much the taxes on deposits may have figured in the development of State taxation devices, they were not the primary concern of Congress. Indeed, deposit taxes were not even mentioned in debates reported in the Congressional Record when the taxation of notes and deposits was being considered. Nor had they been men- tioned in Congress in connection with the Acts of 1864, 1865, or 1868, "yet such a tax would be as effective in destroying these important functions as was the Federal tax upon the circulation of State banks in destroying their note issues".35 The law of 1894 was dii ected primarily at permitting the taxation of U.S. notes (greenbacks) and bank notes, which had been made legal tender and were intended to circulate as money. Non-circulating bonds, obligations of the U.S., were recog- nized as non-taxable. But the general practice among the States had been~to tax bank notes and greenbacks as money subject to assessment to individuals, as other personal property.36 Considerable furor had been caused by a decision of the Mississippi Supreme Court in 1876, which held that national bank notes were obligations of the United States and therefore not taxable by States and local governments.37 It was reported in Congress that Mississippi was the only State which adhered to this opinion.38 Nevertheless the decision in Mississippi and the use of greenbacks and bank notes as devices to avoid State and local property taxes created much concern for remedial legislation among State taxing officials and members of Congress. The State Tax Board of indiana petitioned Congress to act. When H.R. 4326 in the 53d Congress was being debated in the House, Mr. Cooper of indiana said: "~ * * in Indiana * * * we have yet found ourselves wholly unable to secure honest returns of money on hand or on deposit without the assistance of Congressional action." The use of greenbacks for tax avoidance loomed large in the debates on H. R. 4326. Nor were these practices limited to greenbacks; they could be (and were) facilitated by the use of U.S. bonds.40 (And it should be added that Federal tax-exempt securities were so used in many general property tax States and have doubtless continued to be so used until the present time.) How the system worked was clearly 11 Welch, op. cit., p. 315. 2626 C.R., p. 117140 (July 5, 1894). 27 1. R. Home, Tax Collector v. 1. & T. Green, 52 tfiss. 452 (1876). ~ Statement of Mr. Cox, 26 CR., p. H7143 (July 5, 1804). $6 Ibid., pp. 117177 (July 6, 1894). 4° See ibid.. pp. 117141, 7146, 7151, and ef. statement of Mr. McCall, ibid., July 6, 1894, p. H7176. H.R. 4320 was signed by the President on August 16, 1894. PAGENO="0243" 223 stated by Mr. Hall (Mo.), citing a Leavenworth case with this state- ment of facts: 41 "A man with a little over $19,000 in currency in one of the banks the day before the assessors came made his check out for his $19,000, and asks that it be paid him in greenbacks. It is handed to him, and he puts it in an envelope and makes a special deposit of the same. The assessor comes the next day and the- holder of the $19,000 of green- backs says, `1 have no money that is subject to State or municipal taxation.' This is simply used as a cloak, a stalking horse, a shield to cover the men who desire to make fraudulent returns of their property for assessment purposes; and the Government of the United States, by letting this law remain on the statute books, becomes part iceps criminis to that proceeding. 0 6 .0 "He reconverted them the second day afterward." After some discussion, Mr. Hall added: 42 "These Treasury notes are now used by the trust companies of the United States and are used by unscrupulous men of all kinds and classes to shield themselves from taxation by making a return similar to the Leavenworth man to whom I have referred. We cannot afford to lay down such precedents." In its decision on the Leavenworth case, the Supreme Court said: "U.S. notes are exempt from taxation by or under State or municipal authority; but a court of equity will not knowingly use its extra- ordinary powers to promote any such scheme as this plaintiff devised to escape his proportional share of burdens of taxation." - But bona fide transactions involving the conversion of notes or bonds have been held to be legal 44-a cover which amply protected tax avoidance maneuvers in many States for many years. Those who opposed the adoption of a law to permit State taxation of Treasury notes because they facilitated tax dodging had a good answer to the arguments of the proponents. Mr. Johnson (md.) remarked: ~ "Why, sir if the mere fact that governmental powers are used by dishonest men for improper purposes be a reason for surrendering those powers or cedings them away, you will soon emasculate the General Government and leave it stripped of every attribute of sov- ereignty; for I know of no particular power which cannot be made the subject of abuse by bad and unscrupulous men." The fact that greenbacks (Treasury notes) had been issued as tax exempt and that this "obligation" was now being repudiated bothered many members of Congress, especially in the Senate. It was argued that the issue of notes created a contract with those who accepted and held them. Some thought that the issuance amounted oniy to coining money. Others thought since the good faith of the nation was at stake if the notes were to be taxed, they should be called and reissued as taxable notes.46 Proponents of the bill could see little difference 41 26 CR., 117141 (July 5, 1894). The case referred to Is Mitchell v. Board of Commissioners of Leavenworth County, Kansas, 91 Sup. Ct. 206 (1875). Similar instances were cited by Mr. Powers; ibid, p. 117151, and by Mr. Connors (111.) p. 117180 (July 7, 1894) Fraudulent use of notes was referred to In the Senate by Sen. Purple, p. S8209 (Aug. 4, 1894). 42 Ibid., p. 117141. (July 5, 1894). 4291 Sup. Ct. 206, at p. 208. ~` Cf. Stlllwell v. Corwtn, 55 md. 433 (1876). 4' 26 CR., p. 117145 (July 1. 1894). ~ Act of March 3, 1863. 26 CR. (July 6, 1894), p. 117151; (July 5, 1894) pp. 117151, 7170, 7171, 7172, 7177, 7178, 7179, 7180. But It was not a contract In perpetuity; Mr. Turple, p. S8209 (Aug. 4, 1894). PAGENO="0244" 224 between greenbacks, bank notes, gold and silver coin, and even horses and cattle as personal property taxable to the holders.47 More- over, one form of circulating notes or legal tender could easily be exchanged for another and then spent for any kind of taxable property. Senator Kyle (Miss.) remarked,48 "Why * * * is there any equity or justice in exempting my property from taxation because I have greenbacks or Treasury notes . . . [but taxing] my neighbor's property because it happens to be invested in gold or silver or national bank notes?" Nor was the issue of Federal vs. State authority overlooked. Mr. McCall thought national sovereignty was being surrendered by giving States and municipalities the right to tax greenbacks.49 But Mr. Cooper thought that the "States were capable of self government" and "ought to be allowed to do some self government in the matter of collecting taxes." ~° The issue of taxing greenbacks and bonds had even been made a political issue in campaigns in Ohio, Illinois, and "in all our northern States." 51 The debates, like others on section 5219, evidenced much confusion and frequent digressions. Members of Congress were not always clear whether the taxes they were considering were to be upon the banks or upon individuals, as stockholders. Instrumentalities, agencies, and government property also were drawn into the debate. On the whole, more concern and discussion revolved around the taxation of green- backs than over the taxation of national bank notes. Even the cost to the States of the exemption of notes got short shrift.52 In due course H.R. 4326 became the Act of August 13, 1894 (reproduced in appendix 1-F above). Two things were made perfectly clear by this act: (1) That States were not permitted to impose discriminatory taxes on circulating notes or currency, be they greenbacks or national bank notes; and (2) that the new law did not change existing law (section 5219) regula- ting taxation of national banks. G. The Federal Reserve Act of 1913 Although the Federal Reserve Act, adopted in 1913,M did not change a single word, jot, or tittle of section 5219, it so changed the functions and positions of national banks as to undermine their status as "instrumentalities" of the United States government. As "instrumentalities," national banks long enjoyed a preferred position with tax immunities under the decisions of the Supreme Court. However, since the creation of the Federal Reserve System their role in the scheme of things governmental has so changed that it is believed to be only a matter of time until national banks are no longer regarded as federal "instrumentalities." ~ Mr. Hepburn, ibid., p. 117181 (July 6, 1894). On coining money, Mr. Northway: Let the government re- deem them and `let the tax be levied on what is u cd to accompii3h that redemption." Ibid., p. 117175. Mr. McCall expressed the same view, ibid., p. H7l76. Mr. liublick concurred, ibid., p. H7177. Ibid., pp. 117143, 7144, 7150 (horses and cattle) (July 5, 1894). Difference between notes and gold and silver coin is for the Senate to determine; Mr. Sherman, p. S8145 (Aug. 3, 1894). Free coinage advocates added an amendment assec. 3 and 4; presented by Sen. Stewart (Nevada), p. S8147 (Aug. 3, 1894). `3 IbId. p. 117180, July 7, 1894. `3Ibid., p. 117176, July 6, 1894. See also pp. 117146-49, 7170. "Ibid., p. H7146, July 5, 1894. ~1 Mr. Northway, Ibid., p. 117175, July 6, 1894; Mr. Grosvenor, p. H7l78. "Mr. Cooper; ". . . in most of the cities and towns of this country, including county and State taxation, the rate of taxation is at least 2)~ percent . . . . We are therefore payIng 23-i percent on these notes by exempting them from taxation." Ibid., p. 117173. The total issue of greenbacks was said to be $346,381,016, with $268,772,371 In circulation-Mr. Hulick, Ibid., p. 117177. But Mr. McC 11 pointed out that if all the States taxed greenbacks the yield would be very small. Ibid.. p. H7176. Beyond this little was said as to the cost of such exemption to the States. `3Act of December 23, 1013 (12 U.S. Code ch. 3). PAGENO="0245" 225 In the economic history of the nation the establishment of the Federal Reserve System ranks as one of the most important steps taken by the United States government-along with creation of the national banking system in 1863. The Federal Reserve System was imposed upon the national banking structure, not only without upsetting that established system but making it stronger and more efficient. The new arrangement was tested immediately by the financial exigencies of World War I. It is doubtful if that war could have been financed successfully without it. Perhaps the most significant thing about the Federal Reserve Sys- tem was that it provided a currency designed to be responsive to the needs of trade, which supplemented and eventually superseded the earlier inelastic system of national bank notes. Initially, this new currency was secured by commercial collateral, such as notes, drafts, bills of exchange, and acceptances, but later gold and direct obliga- tions of the United States also were made eligible. It had long been apparent that the national bank notes, backed by bank-purchased portfolios of selected Government obligations deposited with the Secretary of the Treasury, did not satisfy the currency needs of the growing economy of the country. The supply of notes had proved to be perversely elastic.~ It was often excessive when the need was least; when expansion of the money supply was needed the banks were often in no_position to provide it. The panic of 1907 clearly demonstrated this. Even the retirement of U.S. bonds by the Treasury reduced the money supply. This inelasticity was recognized before the Federal Reserve System was created, and was one of the effective forces for its establishment.54 Under the Federal Reserve Act the new asset currency-Federal Reserve notes-began to supplant national bank notes. by 1935 the latter were completely retired. Thus the national banks were deprived of their function of supplying a large part of the necessary money sup- ply. Nevertheless, with the growing acceptance of checks and drafts as the customary mode of settling commercial transactions, the role of national banks in supporting the money supply (defined to include demand deposits as well as currency) continued important. Deposit creation, too, has been made more efficient, more responsive to business needs, and given both direction and control by the Federal Reserve. This, however, is not the place to discuss the operations of that system. It is enough to indicate that the traditional role of the national banking system in providing a nationally uniform currency has been superseded. The Federal Reserve banks were made depositaries for Treasury and other U.S. funds, a function formerly performed by the national banks. They took over also the fiscal agency functions-the sale, issuance, retirement, and exchange of various Federal bonds, notes, bills, etc., which, expecially during World War II, was a large scale operation. The Federal Reserve banks also buy and sell bankers acceptances. They perform a clearing function for checks drawn against banks that remit at par. They fix rates of interest member banks may pay on time deposits, and do various other things not only for national banks but also for other member banks. I he Federal Reserve System is completely integrated into the banking system of the country. All national banks were required to N See Alexander Dana i'~oyes, history of the National Bank Currency, National Monetary Commission, Senate Document No. 572, 61st Congress, 2nd sessIon, Washington, D.C., 1910, pp. 9-20. PAGENO="0246" 226 subscribe and pay into the system a small part of their capital; State banks also were permitted to join. Both are functioning "member" banks and the stockholders of the System, which is under the direction of a federally-appointed Board of Governors. As is indicated in subsequent pages, when the 1923 and 1926 amendments to section 5219 were being considered, it was frequently argued, in and outside Congress, that tampering with these provisions might injure the national banks and through them undermine the Federal Reserve System. There was little substance i11 such talk. Neither the banks nor the Federal Reserve System were in any real danger. An interesting feature of the Federal Reserve Act was a provision permitting States and localities to tax Federal Reserve Bank real estate.M This was in recognition of the fact that the exemption of Federal Reserve Bank buildings and land would cast a burden upon taxpayers in the communities where the banks were located, whereas the benefits of the System would extend throughout the country. In other respects the banks were to be exempt from taxation by Federal, State, and local governments. With the advent of the Federal Reserve System and changes made over time in the powers and functions of national banks, it was natural that the immunities of the national banks as "instrumentalities of the United States" should be questioned. The issue came to a head in First Agricultural National Bank v. State Tax Commission when the Supreme Judicial Court of Massachusetts sustained the Massachusetts sales and use taxes on purchases of tangible personal property by national banks.56 The Massachusetts court held that national banks were not "instrumentalities" of the United States government and hence were not entitled to immunity from sales and use taxes. This decision was promptly reversed by the United States Supreme Court, June 18, 1968.~~ The majority opinion by Justice Black held that, since sales and use taxes were not listed among the permitted state taxes on national banks in section 5219, such taxes were void. Justice Black found it unnecessary to decide whether national banks were Federal "instrumentalities": 58 "The decision below recognized the strong precedents against taxa- tion, but the Massachusetts Supreme Judicial Court was of the opinion that the status of national banks has been so changed by the establish- ment of the Federal Reserve System that they should no longer be considered nontaxable by the States as instumentalities of the United States. Essentially the reasoning of the Supreme Judicial Court is that under present-day conditions and regulations there is no substantial difference between national banks and State banks; and the implication of this is, of course, that national banks lack any unique quality giving them the character of a Federal instrumentality. Because of pertinent congressional legislation in the banking field, we find it unnecessary to reach the constitutional question of whether today national banks should be considered nontaxable as Federal instrumentalities." *5 Act of December 23, 1913, sec. 12 U.S.C. 531. See appendix 1-D(1), p. 5, above, for the text. *5353 Massachusetts 172, 229 N.E. 2nd 245 (1967). See discussion in Thomas J. lioldych, "Tax Immunity andTaxation of National Banks: One Hundred and Fifty Years After McCulloch v. Maryland," Uni- versity of Illinois Law Forum, vol. 1969 no. 2 (1970), pp. 224-47. *7 First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339, 20 L. Ed. 2d 1138, 88 S. Ct. 2173 (1968). ~Ibid., p. 341. PAGENO="0247" 227 However the dissenting opinion, written by Justice Thurgood Marshall and joined in by Justices Harlan and Stewart met the "instrumentality" issue head on-contending that national banks should no longer be treated as Federal "instrumentalities."59 Observing that decisions of. the Court tended toward restricting "the scope of immunity [from taxes] of I)l~ivate persons seeking to clothe themselves with governmental character," Mr. Justice Marshall suggested that the wisdom of that trend counseled a rejection of the constitutional argument in the Agricultural Bank case. The Court at its last term had declared that "there is no simple test" for ascertaining whether an institution is a tax-immune instrumentality and, over the years, had applied different formulations of "the controlling test" in different cases, using various specific factors and characteristics to determine the status of specific institutions. His opinion then continued: "Under any of those rubrics and applying the factors listed above- a national bank cannot be considered a tax-immune Federal instrumentality. It is a privately owned corporation existing for the private profit of its shareholders. It performs no significant Federal governmental function that is not performed equally by State- chartered banks. Government officials do not run its day-to-day operations nor does the Government have any ownership interest in a national bank. "Appellant points to two factors as leading to the conclusion that national banks are Federal instrumentalities: that they `owe their very existence to congressional legislation,' and that they are subject to extensive Federal regulation. But the fact that institutions `owe their existence to,' i.e., are chartered by, the Government, has been definitely rejected as a basis alone for determining they should be tax immune "Similarly, a whole host of businesses and institutions are subject to e:tensive Federal regulation and tha~t has never been thought to bring them within the scope of the `Federal instrumentalities' doctrine. The plain fact is that one could hold that national banks have a constitu- tional tax-immune status today only by mechanically applying the three seminal cases of M'Culloch, Osborn, and Owensboro." Having referred to "three seminal cases," Mr. Justice Marshall examined the functions performed by national banks involved in those cases. He pointed out that the Second Bank of the United States, involved in McCulloch and Osborn, was partly owned by the United States; was directed by a Board that included Presidential appointees; was the designated depositary for all Government funds, subject only to snecial exceptions; issued legal tender currency; transmitted funds for the Government without charge; and acted as fiscal agent of the Government. "Even the national bank involved in O~vensboro," the opinion continued, "might warrant tax-immune status were it in existence today." This bank, established under the National Currency Acts of 1863 and 1864, had an important currency-issuing function. All of this, said the Justice, was radically changed with the passage of the Federal Reserve Act of 1913 and by subsequent developments with respect both to the Federal Reserve System and to national banks: "To capsulize those developments greatly, suffice it to say that the Federal Reserve. Banks (and System) are now the monetary and fiscal &~ Ibid., pp. 352-59. Footnob's in quotations that follow are from the opinion, numbered as in the opinion. PAGENO="0248" 228 agents of the United States. 12 USC 391. By 1935, the power of national banks to issue currency had ceased and now Federal Reserve banks are the only banking institutions that can do so. . . . The diminished importance of national banks as Federal functionaries was compensated for by the enactment of legislation designed to make them more competitive with State banks, e.g., branch banking, 44 Stat 1228 (1927), as amended, 12 USC 36(c); fiduciary powers, 76 Stat 668 (1962), 12 USC 92a; rate of interest on loans, 48 Stat 191 (1933), as amended, 12 USC 51; and interest on time and savings deposits, 44 Stat 1232 (1927), 12 USC 371. "To be sure, the Federal Reserve System could not function without national banks, which are required to be members therein, 12 USC 222, and in that sense they are part and parcel of the establishment and effectuation of the national fiscal and monetary policies. But, in my view, that does not make them sufficiently quasi-public to enjoy the tax-immune status of Federal instrumentalities. If that alone were enough, then it would seem that State banks which elect to join the Federal Reserve System should also be tax-immune Federal instrumentalities.7 "In any event, there is little difference today between a national bank and its State-chartered competitor: the ownership, control and capital source of each is private; each exists for private profit. More importantly, neither may issue legal tender. "Today the national banks perform no significant fiscal services to the Federal Government not performed by their State competitors. Any federally insured bank, State or national, may be a government depository. 12 USC 265. The principal checking accounts of the Government are carried today, not by national banks, but by the Federal Reserve banks. `When a new issue of government securities is offered, the Federal Reserve banks receive the applications of purchasers. When government securities are to be redeemed or ex- changed, the transactions are handled by the Federal Reserve banks. Those banks administer for the Treasury the tax and loan deposit accounts of the banks in their respective districts. "In Graves v. New York ex rel. O'Keefe, 306 US, at 483, 83 L Ed at 935, 120 ALR 1466, Mr. Justice Stone wrote for the Court: "`[T}he implied immunity of one government and its agencies from taxation by the other should, as a principle of constitutional construc- tion, be narrowly restricted. For the expansion of the immunity of the one government correspondingly curtails the sovereign power of the other to tax, and where that immunity is invoked by the private citizen it tends to operate for his benefit at the expense of the taxing government and without corresponding benefit to the government in whose name the immunity is claimed.'8 That is precisely the situation here; I would heed those words and hold that national banks, today, are not immune from nondiscriminatory State taxation as Federal instrumentalities.9 I might also add that I am a bit mystified that "As of December 31, 1966, membership in the Federal Reserve System was composed of 1,351 State- chartered, and 4,799 national, banks. The Federal Reserve System: Purposes and Functions, [5th rev. ed. 1967), . . . at 24-25." 8 "Accord, Indian Motorcycle Co. v. United States, 283 US 570, 580, 75 L Ed 1277, 1283, 51 5 Ct 601 (1931) (Stone, 3., dissenting)." 8 "Compare the rejection of a national bank's contention that it, as a Federal instrumentality, should be exempt from the Federal labor laws, NLRB v. Bank of America, 130 F2d 624, (CA 9th Cir. 1942) (footnote omitted): It is a privately owned corporation, privately managed and operated in the interest of its stockholders. The United States did not create it, but has merely enabled it to be created PAGENO="0249" 229 under the Court's decisions in this field the Federal Government in practical effect must pay a State tax in dealing with its contractors (who pass the tax on to the Government), see, e.g., Alabama v. King & Boozer, 314 US 1, 86 L. ed. 3, 62 S. Ct. 43, 140 A.L.R. 615 (1941), but that a national bank, a private profit-making corporation, is constitutionally immune from State taxation." Should the reasoning of Justice Marshall be supported by a majority of the Justices of the Supreme Court, the Federal Reserve Act will no longer affect the taxable status of nationmil banks one way or the other. When the permanent section 5219 goes into effect in 1972, as provided in P.L. 91-156, national banks can be taxed the same as State banks under nondiscriminatory laws. Thus, Congress has re- moved the shield national banks have enjoyed as "instrumentalities" of the United States. It would seem that Congress recognized the changed status of national banks under the Federal Reserve Act whereas the majority of the Supreme Court had not. Will the courts also recognize that national banks are no longer Federal "instrumen- talities," and, if so, when? H. The years of litigation: 1864-1921 The histbry of Section 5219 cannot be confined to a review of legisla- tion, no niatter how detailed it may be. The provisions may seem clear to the reader but until the courts have interpreted the various words and phrases their meaning in the statutes will lack certainty. After the courts have spoken the States must conform. An understanding of Section 5219, therefore, requires careful study of decisions of the Supreme Court and State courts. From its adoption in 1864 until the enactment of the amendment of 1923, the courts were busy interpreting the provisions of Section 5219. Over fifty-five such cases came before the Supreme Court, fourteen were heard by lower Federal courts, and more than fifteen decisions were rendered by State courts.6° The litigation of this period and up to the early 1930s, was carefully described by John B. Woosley in his State Taxation of Banks and by Ronald B. Welch in his State and Local Taxation of Banks in the United States,6' volumes frequently quoted and cited in this study. The discussion by Welch is largely topical, so that decisions are considered in the substantive areas to which they apply. Woosley's discussion of court decisions is mainly historical and for the most part deals with the State taxation of shares of national bank stock. Since States could tax national banks only on their shares and real estate from 1864 to 1923, Woosley's chapter III, "The Interpretation of Section 5219 by the United States Supreme Court," is an invaluable reference and a work of genuine authority. In the short time available for this study, it seems better to incorpo- rate Woosley's discussion of the decisions of the courts from 1864 up to the time of the 1923 amendment than to review these decisions again and write another account of their meaning and significance.62 `° Count based on Welch, op. cit., pp. 238-40, and Hearings before the Committee on Banking and Cur. rency of the House of Representatives, 61st Congress, 2nd Session, on II. R. 7752 (11. R. 12490), part I, May 9, 1930, pp. 162-63. The lists were obviously incomplete as to cases before lower Federal courts and State courts. (I Woosley, op. cit., was published in 1935 and covers court decisions through 1932. Welch, op. cit., was published as Special Report of the State Tax Commission, No. 7,by the State of New York, J. B. Lyon Co., Printers, Albany, 1934, and deals with decisions as late as 1933. (2 incorporation of \Voosley's painstaking work in this report gives the writer real pleasure because Woosley made his study at the University of Chicago in 1931, as a doctoral dissertation under my direction. It was later revised for publication. John B. Woosley was not only my student but a valued friend. Reproduction here of this part of his 1)00k recognizes, in part, hi3 valuable contribution to the literature on bank taxation. Accordingly, his text is incorporated with grateful acknowledgment. PAGENO="0250" 230 The incorporation of Woosicy's chapter in full results in some duplica- tion of discussion of such decisions as the Richmond case and the Guthrie Center case which arose before and after the 1923 amendment of section 5219. This will serve not only to indicate how different scholars view these events but also to emphasize the work of the courts and the confusion created by some of the decisions. PAGENO="0251" 231 [The text reproduced here (with i.vritten permission from the publisher, The University of North Carolina Press) is chapter III of the monograph, State Taxation of Banks (1935) by John B. Woosley, late professor of economics, the University of North Carolina.] ChAPTER 111 * HE INTERPRETATION OF SECTION 5219 BY THE UNITED STATES SUPREME COURT P1~I-IE perusal of the few lines which comprise Section 5219 I does not reveal clearly the scope of this law. A careful sur- vey of the numerous relevant decisions of the Supreme Court of the United States alone demonstrates its ramifications. Certain powers the states' clearly do not have. The states cannot tax any property of the bank other than its real property,2 save only the investment in shares of other national banks. Nor could a license or franchise tax be levied against a national bank until the amendment of 1926 so provided.3 Exemption of the assets of the banks, other than the real property, extends likewise to insolvent banks in the hands of receivers,4 but the shares of such insolvent banks, if of any value, are taxable. While thc shares are taxable, the capital may not be assessed.5 Assessment of shares in solido is not permissible if operating as a tax on the bank.6 Finally, states cannot tax the shares of state banks owned by national banks, but they may tax the shares of national banks ~ Defined to include territories. Talbott v. Silver Bow County, 139 U. S.438 (1891). Bradley v. The People, 4 Wall 459 (1866); Rosenblatt v. Johnston, 104 U. S. 462 (1881); Oweusboro National Bank v. Owensboro, 173 U. S. 664 (1899); Third National Bank of Louisville v. Stone, 174 U. S. 432 (1899); Home Savings Bank v. Des Moines, 205 U. S. 503 (1907); Bank of California v. Richardson, 248 U. 5. 476 (1919); First National Bank of Gulf port v. Adams, 258 U. S. 362 (1922). Oweusboro National Bank v. Owensboro, 173 II. S. 664 (1899). See chap. 6, infra, for franchise tax as authorized in 1926. `Roscnblatt v. Johnston, 104 U. S. 462 (1881). ~ National Bank v. Commonwealth, 9 Wall 353 (1869); Aberdeen Bank v. Chchalis County, 166 U. S. 440 (1897); Third National Bank of St. Louis v. Stone, 174 U. S. 432 (1899). °Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897). PAGENO="0252" *232 owned by another national bank.7 However, the taxable value of such national bank shares, so held, may be deducted from the value of the bank's own shares.8 The theory underlying these limitations on the state taxing power is that the federal govern- ment in its own sphere possesses sovereign powers and its agencies, in this instance national banks, are immune from the potentially destructive taxation of the states.° The positive, taxing powers of the states with respect to na- tional banks also are limited. Both by statutory enactment and by judicial interpretation the real estate owned by national banks is taxable to the bank in the same degree that other real estate is taxed.1° Whether or not "real property" in Section 5219 includes the furniture and fixtures of a bank has not as yet been adjudi- cated' by the United State~ Supreme Court. Since the term "real property" was substituted for "real estate" in the revision of federal laws in 1878, it is reasonable to assume that no change in meaning was contemplated. Both the practice of assessing officers and the decisions of state courts vary on this issue. In addition to the real property of national banks, national bank shares are taxable to the stockholder. In determining the basis for the taxation of such shares, the court, from the begin- ning, took the position anticipated by Senator Johnson and others in the debate on the bill ;h1 namely, that the interest of the stock- holder and that of the corporation are separate and distinct prop- erties. Therefore, a tax on the shares is not a tax on the capital of the bank.'2 Consequently, the stockholder may be taxed on the full value, and not merely a fractional part, of his interest Bank of Redemption v. Boston, 125 U. S. 60 (1888); Bank of Cal- ifornia v. Richardson, 248 U. S. 476 (1919). ~ Bank of California v. Richardson, 248 U. S. 476 (1919). C McCulloch v. State of Maryland, 4 Wheaton 316 (1819). ~ Owcnsboro National Bank v. Owensboro, 173 U. S. 664 (1899). See chap. 2, supra. `~ Van Allen v. The Assessors, 3 Wall 573 (1865). PAGENO="0253" 233 therein. The court has consistently followed18 its rulings in this respect with but one exception.14 The practical significance of this principle is far reaching. The occasion for the enunciation of the rule arose out of the efforts of banks to deduct from the value of the shares the amount of their holdings of tax exempt government securities, their argu- ment being that to tax the full value of the shares was in effect the forbidden taxation'5 of the securities themselves. The court denied the validity of this contention in the Van Allen case. In view of the large holdings of government securities by national banks the permission of such deductions would nullify all share taxes.16 For similar reasons, the Federal Reserve Bank stock owned by national banks may not be deducted from the shares of national banks.'7 But, as previously indicated, the taxable value of shares of national bank stock held by another national bank is deductible.18 The principle of the taxation of the full value of the stock- holder's interest early led the court to the conclusion that the People v. Commissioners, 4 Wall 244 (1866); National Bank v. Corn- ,nouweaUh, 9 Wall 353 (1869); Evansville Bank v. Briton, 105 U. S. 322 (1881); Bank of Commerce v. Tennessee, 161 U. S. 134 (1896); New Orleans v. Citi.ren.s Bank, 167 U. S. 371 (1897); Owen.sboro National Bank v. Ozc~cnsboro, 173 U. S. 664 (1899); Cleveland Trust Company v. Lander, 184 U. S. 111 (1902); Home Savings Bank v. Des Moines, 205 U. S. 503 (1907); Peoples National Bank of Kingfisher v. Board of EquaL- izaiwn, 260 U. S. 702 (1922); Des Moines National Bank v. Fairweai her, 263 U. S. 103 (1923). Bank of California v. Richardson, 248 U. S. 476 (1919). Within five years the court reaffirmed and has since maintained its original posi- tion. See Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923). Weston v. City Council of Charleston, 2 Peters 449 (1829); The Banks v. The Mayor, 7 Wall 16 (1868); Banks v. Supervisors, 7 Wall 26 (1868). ~° The book value of national bank shares on June 30, 1931, was $3,625,- 131,000 and these banks held $4,253,488,000 of exempt government securi- ties. 17Des Moines National Bank v. Fairweat her, 263 U. S. 103 (1923). Bank of California v. Richardson, 248 U. S. 476 (1919). PAGENO="0254" 234 shares were taxable above par value.'9 This principle further implies that the states are not required by the federal statute to allow a bank to deduct the value of its real property from the value of its shares, though such is the common practice.2° Irre- spective of the property in which the share capital is invested, the full value of the shares is subject to taxation if the states so require. How may the state reach such shares? Intangibles have a way of disappearing on the day of assessment.2' Protection against such evasion by national bank stockholders is assured through assessment and collection at the source. Section forty of the National Bank Act provided that every bank shall keep a stockholders' list which shall be open to the assessing officers dur- ing business hours. Assessment at the source being made possible by statutory provision, judicial interpretation sanctioned collection at the source.22 Accordingly, the bank may be used as an agent of the stockholder to collect the tax and may reimburse itself from the dividends or other income to be distributed to the shareholder, and may bring suit in behalf of the stockholder.23 These superior administrative features insured the effective taxation of national bank shares in practically all the states in marked contrast to the evasion of a large proportion of other intangibles when subjected to the general property levy.24 Hepburn v. The School Directors, 23 Wall 480 (1874); People v. The Commissioners, 94 U. S. 415 (1876). Commercial Bank v. Chambers, 182 U. S. 556 (1901); Amoskeag Saztings Bank v. Purdy, 231 U. S. 373 (1913).. Leland, op. cit., pp. 27-30, 131. ~ National Bank v. Commonwealth, 9 Wall 353 (1869); Lionberger v. Rouse, 9 Wall 468 (1869); Tappan v. Merchants' National Bank, 19 Wall 490 (1873); Waite v. Dowley, 94 U. S. 527 (1876); Citizens National Bank v. Commonwealth of Kentucky, 217 U. S. 443 (1910). Cummings v. National Bank, 101 U. S. 153 (1879); Hills v. change Bank, 105 U. S. 319 (1881); Citizens National Bank v. Common- wealth, 217 U. S. 443 (1910). a~ Leland, op. cii., pp. 411 if. PAGENO="0255" 235 Another question of administrative procedure is that of tax situs. Section 5219 prescribes that the national bank shares held by non-residents shall be taxed at the sit us of the bank. The fact that the shares of a national bank are held by a national bank situated in another state does not preclude their taxation by the state in which the bank is situated.26 While the rule of business .situs applies to the shares held by non-residents, the state may assess the shares of residents at their domicile or at the location of the bank.2° Though the states were restricted until 1923 to the taxation of the real property and the shares, they could impose a tax on the savings deposits in a national bank to the depositor, and the bank, if it so agrees, could pay the tax thereon.27 While in legal con- templation such a tax is a levy on the depositor, it often falls on the bank. The successful use of this method28 of indirect taxation of banks by certain states in New England gives rise to some wonder that other states have not resorted to similar impositions. Ohio and Indiana adopted this device in 1931 and 1933, respec- tively.2° The specific limitations on the state taxation of national bank shares is really the heart of the present problem. The original ad of 1864 provided two limitations, (1) the rate on other mon- eyed capital and (2) the tax burden on state banks. The Amend- ment of 1868 drop~ed the latter limit and left the shares of national banks to be taxed as the legislature of each state might determine, save only (1) that non-resident shares must be taxed at the situs of the bank, if taxed at all, and (2) "that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State." ~ Bank of Redemption v. Boston, 125 U. S. 60 (1888). ~ Tappan v. Merchants NationaL Bank, 19 Wall 490 (1873). IT Clement NationaL Bank v. State of Vermont, 231 U. S. 120 (1913). ~ Leland, op. cit., pp. 218 if. Laws of Ohio, 1931, p. 722 as amended by Laws of Ohio, 1933, S. B. No.30; Acts, Indiana, 1933, chap. 83. PAGENO="0256" 236 The purpose of Congress in providing these limits on the state taxation of national banks was, in the opinion of the court, to prevent the states from favoring competitors of national banks and thus discriminating against them.3° With respect to the "rate of taxation" the court has held that the phrase refers to the rate on taxable moneyed capital ;81 hence the exemption of certain properties,82 such as that of schools, churches, and charitable in- stitutions and municipal bonds,83 does not affect the rate on national bank shares. The rate of taxation, moreover, includes the entire process of valuation and assessment.34 Discriminations may arise as a re- sult of different rules of valuation quite as effectively as by using different percentages in computing the taxes on fixed valuations. Since the restriction in Section 5219 does not require that the state shall apply the same mode of taxation to national bank shares that it applies to other property provided no injustice, inequality, or unfriendly discrimination arises therefrom,85 the rate of tax- ation must refer to "the actual incidence and practical burden of the tax upon the tax payer."36 Little effort has been made to inquire into the incidence of taxation either on banks or com- peting moneyed capital in the cases presented to the court. For Lionberger v. Roi&ce, 9 Wall 468 (1869); Adams v. Nashville, 95 U. S. 19 (1877) ; Boyer v. Boyer, 113 U. S. 689 (1885); Mercantile Bank v. New York, 121 U. S. 138 (1887); First National Bank of Garnett v. Ayers, 160 U. S. 660 (1896); First National Bank of Wellington v. Chap- man, 173 U. 5. 205 (1899); Anioskeag Bank v. Purdy, 231 U. S. 373 (1913); Bank of California v. Richardson, 248 U. S. 476 (1919); Des Moines v. Fairweather, 263, U. S. 103 (1923); First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). `~People v. The Commissioner, 4 Wall 244 (1866). ~Adams v. Nashville, 95 U. 5. 19 (1877). Boyer v. Boyer, 113 U. S. 689 (1885); Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923). `~People v. Weaver, 100 U. S. 539 (1879). "Covington v. First ,National Bank of Covington, 198 U. S. 100 (1905) ; Amnoskeag Savings Bank v. Purdy, 231 U. S. 373 (1913). `~ Amoskeag Savm~gs Bank y Purdy, 231 U. S. 373, 386 (1913). PAGENO="0257" 237 the most part it has been merely an issue of impact. The court has been concerned only with the effective rate on these shares. What inequalities constitute discrimination? Exact niatheniat- ical equality of burden is not required.37 Some differences in the rates of taxation are not discriminatory within the meaning of the restriction. The fact that two state banks operating in Missouri were exempted, by virtue of charter rights, from all taxation save only 1 per cent on their paid-in capital, while national bank shares were subject to a rate of 2 per cent did not constitute a discrim- ination, as the state of Missouri had complied to the extent of its ability with the requirements of the federal statute.38 Again, the assessment of bank shares at market while bonds and mortgages were assessed at par or nominal value did not constitute a discrim- *ination.8° The fact that national banks may not deduct from the value of their shares the amount of their capital invested in real property situated outside the state does not produce a discrimina- tion against the bank,4° though the court later suggested that it might be argued that such ~ cle~uction was within the intent of Section 5219.~' Nor does the deduction of the debts of unincor- porated bankers from their credits constitute a discrimination against national banks ;42 and, similarly, the deduction of tax ex- empt bonds from the assets of private bankers is not violative of the rule of substantial equality.43 The state can exempt moneyed Lionberger v. Rouse, 9 Wall 468 (1869); Tappan v. Merchants' Na- tional Bank, 19 Wall 490 (1873); National Bank v. Kimball, 103 U. S. 732 (1880); J3oyer v. Boyer, 113 U. S. 689 (1885); Davenport Bank v. Davenport, 123 U. S. 83 (1887); First National Bank of Wellington v. Chapman, 173 U. 5. 205 (1899) ; First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). Lionberger y. Rouse, 9 WaIl 468 (1869). `Hepburn v. The School Directors, 23 Wall 480 (1874). ~ Commercial Bank v. Chambers, 182 U. S. 556 (1901). ~First National Bank v. Albright, 208 U. S. 548 (1908). ~ First National Bank of Wellington v. Chapman~ 173 U. S. 205 (1899). ~ Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923). 79-421 0 - 72 - 17 PAGENO="0258" 238 capital, such as deposits in savings banks or funds of charitable institutions, if such exemption is for reasons of public policy without producing thereby a discrimination against national bank shares.44 In regard to the competitive status of savings banks, the court has varied in its position. In the three earlier cases45 involving such banks the position assumed was that deposits of savings banks were not in rear competition with national banks. In Aberdeeuv. CheliaUs County, they were recognized as belonging to the genus of competing moneyed capital, but the fact that the exemption from taxation was for reasons of public policy, and not as an unfriendly discrimination against national banks, pre- vented such exemption from invalidating the taxes on national bank shares.4° The rule of equality of treatment, it is to be noted, applies as between national bank stockholders and holders of other moneyed capital. DiScrimination as between shareholders of the same na- tional bank, or as between stockholders of different national banks are not prohibited by the court.47 The fact that the shares owned by non-residents may be taxed only at the situs of the na- tional bank, while the shares owned by residents may be taxed either there or at the domicile of the owner makes equality of tax burden as between shareholders of the same institution contingent upon the administrative policies of the states. ~ Aberdeen Bank v. ChehaUs County, 166 U. S. 440 (1897); Mercan.. tile Bank v. Ne~ York, 121 U. S. 138 (1887); Davenport Bank v. Daven- tort Board of EquaUzation~ 123 U. S. 83 (1887); Bank of Redemption v. Boston, 125 U. S. 60 (1888). ~Mercantile Bank v. New York, 121 U. S. 138 (1887); Davenport Bank v. Davenport Board of Equo~iization, 123 U. 5. 83 (1887); Bank of Redemption v. Boston, 125 U. S. 60 (1888). ~ Aberdeen v. Cheha1is County, 166 U. 5. 440 (1897). ")~ferchants' and Manufacturers' Bank v. Pennsylvania, 167 U. S. 461 (1897); Covington v. Coiington First National Bank, 185 U. S. 270 (1902); Citizens National Bank v. Cor,nnonwealth of Kentucky, 217 U. S. 443 (1910); Anioskeag Savings Bank v. Purdy, 231 U. S. 373 (1913). PAGENO="0259" 239 One other type of innocuous inequality should l)e noted. In Hepburn v. Tue School Directors the court held that a partial e.t- cm/'f ion of other moneyed capital did not constitute a discrimina- tion against national bank shares. In that case all mortgages, judgments, recognizances, and moneys owing upon articles of agreement for the sale of real estate were exempt from the tax- ation. In spite of these facts~ the court held that there might be some moneyed capital in the community which was taxed, and hence no discrimination existed against national banks.48 In a number of cases the court has found actual discrimina- tions. Before these discriminations can be intelligently analyzed it is essential first to examine the interpretations of the courts as to what constitutes "other moneyed capital in the hands of indi- vidual citizens." Several considerations compel a careful canvass of the court's interpretation of this phrase. The charges of gross judicial inconsistency have been so general as to cause the court to take notice thereof and to affirm its own consistei~icy.~° Again, it has been urged that the phrase has no meaning in either law or economics. "It is a sack, a catch-all phrase which will hold as much or as little as the courts choose to empty into it."6° Finally, the multitude of suits in state and federal courts involving dis- criminations of this type emphasize the necessity of finding out, if possible, what the court conceives such property to be. The court in defining the limits of the disputed phrase has resorted to the usual methods of exclusion and inclusion. Certain investments, the value of which is expressed in terms of money, are outside the category of moneyed capital. For reasons of pub- lie policy, as already indicated, bonds issued under state authority and deposits in savings banks are excluded from the list of other moneyed capital. Nor was the stock of insurance companies in- ~Hcpburn v. The School Directors, 23 Wall 480 (1874). `~ First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). Lutz, "Evolution of Section 5219," Bul. N. T. A. XIII, 212. PAGENO="0260" 240 cluded within its scope.51 Likewise, railroad shares, investments in manufacturing and mining compahies or "any other corporation of that description" are excluded.52 Investments in telephone companies, as well as wharf53 and gas companies,54 are not com- petitive with national banks, and their exemption does not invali- date the tax on national bank shares. Though the court experienced little difficulty in ruling these investments outside moneyed capital, it found itself in great straits when the issue of investments in trtist companies was pre- sented for adjudication. In the first consideration of this issue the court, after recounting the powers conferred on trust com- panies by the New York law, expressed the view that such institu- tions were not banks, and then further alleged that the evidence presented did not prove the rate on trust companies to be in fact lower than that imposed on banks.55 The issue was rais~d again in Jcnkfns v. Neff. Here it was contended that the conditions were different from those obtaining in Mercantile Bank v. New York since an amendment to the New York law had increased the powers of trust companies to such an extent as to bring them into competition with national banks. But the court, though admitting that the trust companies come into "limited competition" with national banks, did not find any inten- tion on the part of the state to discriminate against national banks.~ In a later casey however, the court recognized trust corn- ~` People v. The Cornmissioncrs, 4 Wall 244 (1866); Mercantile Bank v. New York, 121 U. S. 138 (1887); Bank of Redcmption v. Boston, 125 U. S. 60 (1888); Aberdeen Bank v. Chehali.c County, 166 U. S. 440 (1897). Mercantile Bank v. New York, 121 U. S. 138 (1887); Taibot v. Sit- ver Bow County, 139 U. S. 438 (1891). ~ Bank of Redemption V. Boston, 125 U. S: 60 (1888). "Aberdeen Bank v. Chehalis County, 166 U. S. 440 (1897). "Mercantile Bank v. New York, 121 U. S. 138 (1887). "Jenkins v. Neff, 186 U. S. 230 (1q02). PAGENO="0261" 241 pany shares as Competitive moneyed capital.67 But the issue of discrimination was not raised in that instance. Thus, the status of investments in trust companies in relation to Section 5219 is not certain. It is difficult to see how the courts fairly can exclude them from this category since national banks have been given power to engage in extensive trust operations,58 and these ex~ panded powers would apparently broaden, as in the analogous case of real estate mortgages,59 the limits of other moneyed capital. The first case which called forth a positive definition of other moneyed capital was Hepburn v. The School Directors, in which the court said: We cannot concede that money at interest is the only moneyed capital included in that term as here used by Congress. The words are "other moneyed capital." That. certainly makes stock in these banks moneyed capital, and securities might be included in that descriptive term.6° This broad definition would include, inferentially, practically all securities since both stock and bands ~were enumerated by the court. Seven years later further content was given to the concept when the court held that credits, rights, demands, and money at interest, as used in the Indiana statute, were moneyed capital..°1 In this case the court distinguished moneyed capital from the category of personal property. In 1885 the court was forced to adjudicate a second case from Pennsylvania in which railroad securities, shares of certain cor~ porations, mortgages, judgments, recognizances, corporate bonds, and moneys due on contracts for the sale of real estate were exempted from local taxes. The amounts of involved properties ~ Amosleeag v. Purdy, 231 U. S. 373 (1913). United States Statutes at Large, XLIV, 1224-30. First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). ~` Hepburn v. The School Directors, 23 Wall 480, 484 (1874). ~ Evanwilk Bank v. Britton, 105 U. S. 322 (1881). PAGENO="0262" 242 `were admittedly large, and state banks were subject to the same local tax as was imposed on national bank shares. The court con~ cluded that the amount of other moneyed capital so exempt was substantial and gave the sought~for relief.02 Relative to the claim of the counsel that equality of taxation as between state and na~ tional bank shares was all that the federal statute required, the court observed: If by this language it is meant that an illegal discrimination against capital invested in national bank shares cannot exist where no higher rate or heavier burden of taxation is imposed upon them.than upon capital invested in state bank shares, or in state savings institutions, we have to* say that such is not a proper construction of the act of Congress. Capital invested in national bank shares was intended to be placed upon the sarnc footing of s'u-bstantial equality in respect of taxation by State authority, as the State establishes for other moneyed capital in the hands of individual citizen.s, however invested, whether in State bank shares or otherwise.°3 The court in this case took cognizance of the effect of the Amendment of 1868 to Section 5219 as requiring equality of treatment not only as between national banks and state banks, but giso between national banks and moneyed capital not invested in state bank shares. The success of the attorneys for the bank in Boyer v. Boyer led them to other fields of conquest. They turned to New York City where the bankers, taking comfort from this decision, ap. pointed a committee to consider the advisability of a suit to pre~ vent the collection of bank taxes.°4 This committee reported that, in view of the fact that there was estimated moneyed capita! in the hands of individual citizens in the state of New York to the amount of at least $1,778 millions of which not more than $262 millions was taxed, the banks of New York would have a better* ~Boyerv. Boyer, 113 U. S. 689 (1885). °` Ibid., p. 702. Italics by the writer. "Bankers Magazine, XL, 68. PAGENO="0263" `243 case thaii in foyer v. J?oyer. It consequently rcconuncndcd that joint suit be undertaken, and that the counsel employed in foyer v. Boycr be engaged upon a retainer fee of $100 from each bank and acontingent fee not to exceed 10 per cent of the one year's saving in tax.65 * The result was the presentation of the issues ~in Mercan-' tile Bank v. New York. Since the court, in its previous definition of other moneyed capital, had emphasized the amount of such `privileged moneyed capital, the strategy of the counsel for the banks was to storm the judicial fortress with quantitative data. It was alleged that under the New York laws there was the mate- rial exemption of other moneyed capital of the following species and amounts: corporate shares, other than those of banks, trust and insurance companies, totalling $755,018,892; trust and insur- ance company shares of $32,018,900; and shares of life insurance companies of $3,540,000, which companies in turn owned mort- gages, bonds, and stock of $195,257,305; savings banks and de- posits therein of $437,107,501, with an accumulated surplus of $68,669,000; certain municipal bonds of New York City totalling $13,467,000; and shares of stocks of foreign corporations in the hands of their holders equalling $250,000,000.66 Obviously, if the court was to rely solely on the quantity test, the facts seem to favor the banks. But the court found no discrimination existed against national bank shares and, in so doing, evolved a further definition of other moneyed capital. Since the purpose of Congress was to prevent unequal and unfriendly competition with national banks by favor-' itism shown competing moneyed ~capital, "The true test of the distinction. . . can only be found in the nature of the business in which the corporation is engaged."°T And what is the business. of banking? To this the court replied, Ibid. °~ Mercantile Bank v. New York, 121 U. S. 138 (1887). Ibid., p. 154. Italics by the,writer. PAGENO="0264" 244 The business of banking as defined by law and custom, consists in the issue of notes payable on demand; intended to circulate as money where the banks are `banks of issue; in receiving deposits pay- able on demand; in discounting commercial paper; making loans of money on collateral security; buying and selling bills of exchange; negotiating loans, and dealing in negotiable securities issued by the government, state and national, and municipal and other corporations. These are the operations in which the capital invested in national banks is employed, and it is the nature of that employment which constitutes it in the eye of this statute "moneyed capital." Corpora- tions and individuals carrying on these operations do come into com- petition with the business of national banks, and capital in the hands of individuals thus employed is what is intended to be described by the act of Congress.°8 So it is not the form of the investment nor the fact that a corporation may have a large part of its capital invested in securi-~ ties, payable in money, which distinguishes such funds as "other moneyed capital." It is, rather, the nature of the business and the character of its operations which determine its status. Hence shares of railroad, mining, insurance, and other like corporations are outside the scope of the category, for such companies are not engaged in the business of banking, nor do they participate in the operations which banks perform. As to what is included in the concept the court said, The terms of the act of Congress . . . include shares of stock or other interests owned by individuals in all enterprises in which the capital employed in carrying on its business is money, where the ob- ject of the business is the making of profit by its use as money. The moneyed capital thus employed is invested for that purpose in secur- ities by way of loan, discount, or otherwise, which are from time to time, according to the rules of the business reduced again to money and reinvested. It includes money in the hands of individuals em- ployed in similar way, invested in loans, or in securities for the pay- ment of money, either as an investment of a permanent character, or temporarily with a view to sale or repayment and reinvestment. In ~` Ibid., p. 156. PAGENO="0265" 245 this way moneyed capital in the hands of individuals is distinguished from what is known generally as personal property.°° In this epochal decision the first vital distinction between mon- eyed capital and investments valued in terms of money is drawn. It is the competitive employment of funds by individuals and corporations in those operations and transactions characteristic of the business of banking. Such moneys, so used in discounts, loans, and investments of the types in which national banks en- gage, are moneyed capital in the hands of individual citizens. In ruling that only competitive moneyed capital was within the mean- ing of Section 5219 the court made new law.7° The definition evolved in this decision has been repeatedly affirmed.71 Moneyed capital was again sharply defined in 1921 in Mer- chants' National Bank of Richmond v. City of Richmond. This case involved the validity of a state law taxing bank shares at 35 cents per $100 and a city ordinance imposing a tax on them of $1.40 per $100, while bonds, notes and other evidences of indebt- edness were taxed at a combined rate of 95 cents per $100. The counsel for the City of Richmond rested his case on the ill-founded contention that Section 5219 required only equality of tax treat- Ibid., p. 157. ~ T. R. Powell, "Indirect Encroachment on Federal Authority by the Taxing Powers of the States," Harvard Law Review, XXXI, 353. `1Davenport Bank v. Davenport Board of Equalization, 123 U. S. 83 (1887); Palmer v. McMahon, 133 U. S. 661 (1890); Talbott v. Silver Bow County, 139 U. S. 438 (1891); First National Bank of Garneil v. Ayers, 160 U. S. 660 (1896); Aberdeen Bank v. ChehaUs County, 166 U. S. 440 (1897); First National Bank of Wellington v. Chapman, 173 U. S. 205 (1899); Jenkins v. Neff, 186 U. S. 230 (1902); Ainoskeag Sav- ings Bank v. Purdy, 231 U. S. 373 (1913); Merchants' National Bank of Richmond v. Richmond, 256 U. S. 635 (1921); Des Moines Bank v. Fair- weat her, 263 U. 5. 103 (1923); First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926); First National Bank of Hartford, Wis- consin, v. C~ity of Hartford, 273 U. S. 548 (1927); Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927); Georgetown National Bank v. McFarknd, 273 U. S. 567 (1927); Montana National Bank of Billings v. Yellowstone County, 276 U. S. 499 (1928). PAGENO="0266" 246 inent as between national and state banks. But the court called attention to its interpretation of the effcct of the Amendment of 1868 as stated in Boycr v. Boycr, and redefined moneyed capital as including: not only moneys invested in private banking, properly so-called, but investments of individuals in securities that represent money at interest and other evidences of indebtedness such as normally enter into the business of banking.72 This decision raised protests and charges of inconsistency, but no change in position is apparent in this highly dramatized case.7& * In a later case74 the court enumerated explicitly real estate mortgages as competitive moneyed capital, the court taking judicial notice of the amendment to the National Bank Act which author- .ized national banks to lend on real estate mortgages. However, in a more recent decision in which a tendency to narrow the basis for bank tax invalidities was in evidence, the court was not con~ vinced that the mere ownership of real estate mortgages by na~ tional banks proved that they brined money on real estate as such mortgages may have been taken to secure other loans.76 The significance of the court's interpretation of other mon-V eyed capital can best be gathered from an examination of the cases in which discriminations against national bank shares were found to exist. Most of these discriminations involve the mon- eyed capital limit on state taxation. However, some involve only discrimination as between state and national banks. Thus a tax ~ Merchants' National Bank of Richmond v. City of Richmond, 256. U. S. 635, 639 (1921). For the political significance and results of the decision see chaps.. 4.5, infra,~ "First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). Compare with Aberdeen v. C'Jiehaiis County, 166 U. S. 440~ (1897) in which the court had enumerated "investments in mortgages" as being excluded from other moneyed capital. ~G First National Bank of Shreveport v. Louisiana Ta: Commission,. 289 U. S. 60 (1933). * . * . PAGENO="0267" 247 on the c~pital of state banks, which permits a deduction of the tax exempt securities held by them, while national bank shares are fully taxed to the holder, constitutes a discrimination against such shares and invalidates the tax thereon.7° As previously observed, the deduction of the tax exempt bonds of an unincorporated pri- vate banker from his assets does not constitute a discrimination, the theory being that such bonds are represented by deposits rather than the invested capital of the banker.77 A second fertile source of discriminations has been the deduc- tion of debts from the credits of a tax payer, a practice rather generally permitted by state laws. Do such deductions constitute a discrimination against the holders of national bank stock? The answer of the court has not been an unequivocal affirmative. In People v. Weaver,78 the court held that the New York law, which refused to permit a stockholder of a national bank the privilege of deducting his debts from the v~Uue of his bank shares, was in conflict with Section 5219. Other cases support this general posi- tion~ but there are qualifications of note. Deductions of debts by private, unincorporated bankers are not a discrimination as the net assets of the banker are still taxed and the deductions do not prevent substantial equality with bank shares.8° Nor was the deduction of debts from credits, unknown in amount, held to be a violation of Section 5219 as the court was unable to say whether the inequality was substantial.8' Again, the fact that the Van Allen v. The Assessors, 3 Wall 573 (1865); Bradley v. The People, 4 Wall 459 (1866); Montana National Bank of Bitlings v. Yel- lowstone County, 276 U. S. 499 (1928). "Des Moines National Bank v. Fairweat her, 263 U. S. 103 (1923). "People v. Weaver, 100 U. S. 539 (1879). "Supervisors v. Stanley, 105 U. S. 305 (1881); Hills v. Exchange Bank, 105 U. 5. 319 (1881); Evansville Bank y. Britton, 105 U. S. 322 (1881); Boyer v. Boyer, 113 U. 5. 689 (1885); Wliitbcck v. Mercantile National Bank of Cleveland, 127 U. S. 193 (1888); Lander v. Mercantile Bank, 186 U. 5. 458 (1902). ~ Des Moines National Bank v. Fairweather, 263 U. S. 103 (1923). National Bank of WeUington v. Chapman, 173 U. S. 205 (1899). PAGENO="0268" 248 * law in Kansas permitted some debts to be deducted from some credits, while there was a large and important class of moneyed capital from which debts were not deductible, did not establish, in the absence of positive proof, the existence of a discrimination against holders of national bank shares who were not permitted such deductions.82 The fact that the Supreme Court of Kansas had previously ruled that bank shares were not credits within the mçaning of the Kansas statute received judicial cognizance in the decision. A New York law which imposed a tax of 1.0 per cent on national bank shares, with no deductions of debts allowed therefrom, while other personal property was taxed at general property rates of 1.6 per cent, with allowances for debts, was held `valid in the absence of proof showing actual discrimination.83 Finally, the court held that the Utah Supreme Court, in refusing to permit debt deductions from bank shares, was not `in violation of Section 5219 since the local court had held that shares of stock were not credits within the meaning of the term in that state.84 Consequently, the refusal of the state to permit shareholders of national banks to deduct their debts from the value of these shares, while permitting individuals to deduct such obligations from their credits, may not produce discriminations against such shares, the issue being contingent upon the legal status of such credits and shares in the individual state. That credits are, for the most part, moneyed capital in the hands of individual citizens can scarcely be doubted. In those cases, therefore, where the court has mod- ified its position as to the effect of such deductions on the tax on national bank shares, either legal categories have failed to coincide with financial realities or proof of substantial inequalities has been lacking. The absence or presence of discrimination, in the final analysis, ~First National Bank of Garnett v. Ayers, 160 U. S. 660 (1896); see also First National Bank of Wellington v. Chapman, 173 U. S. 205 (1899). ~ZAtnoskeag Sa?fings Bank v. Purdy, 231 U. S. 373 (1913). `~C~ommerciaiBankv. Chambers, 182 U. S. 556 (1901). PAGENO="0269" 249 turns on the question of the relative amount of competitive mon- eyed capital which is accorded a privileged tax position by the state. In Hepburn v. The School Directors, the amount of cx- enipt moneyed capital was not material,85 while in Boyer v. Boyer, a case involving a similar legal situation, the court held that a discrimination existed since the amount involved was admittedly large. The rule of substantial competition has been consistently affirmed in the later cases coming before the court.8° But simple averment of competition is not sufficient to establish discrimina- tion. The competition of other moneyed capital must be shown and the moneyed capital identified.87 As indicative of what inequalities have constituted discrimina-* tions, the following instances may be cited. In Whitbeck v. Mercantile National Bank of Cleveland88 the court held that the equalized assessment of the shares of this bank at 65 per cent of their value, while other moneyed capital was assessed at 60 per cent fri that county and in twelve other counties, constituted a See also Adams v. Nashville, 92 U. S. 19 (1877); Evansville Bank v. Britton, 105 U. S. 322 (1881). Boyer v. Boycr, 113 U. S. 689 (1885); Mercantile Bank v. New York, 121 U. S. 138 (1887); Bank of Redemption v. Boston, 125 U. S. 60 (1888); Davenport Bank v. Davenport Board of Equalization, 123 U. S. 83 (1887); Whitbeck v. Mercantile National Bank of Cleveland, 127 U. S. 193 (1888); First National Bank of Garnett v. Ayers, 160 U. S. 660 (1896); Bank of Commerce v. Seattle, 166 U. S. 463 (1897); First Nag- tional Bank of Wellington v. Chapman, 173 U. S. 205 (1899); Jenkins v. Neff, 176 U. S. 230 (1902); Clement National Bank v. State of Vermont, 231 U. S. 120 (1913); Merchants' National Bank of Richmond v. Rich- inond, 256 U. S. 635 (1921); First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926); First National Bank of Hartford v. Hartford, 273 U. S. 548 (1927); Georgetown National Bank v. Mc- Fczrland, 273 U. S. 568 (1927); Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927). ~ Hills v. Exchange Bank, 105 U. 5. 319 (1881); Aberdeen v. Chehalis County, 166 U. S. 440 (1897); Bank of Commerce v. Seattle, 166 U. S. 463 (1897); Commercial Bank v. Chambers, 182 U. S. 556 (1901); Ainoskeag Savings Bank v. Purdy, 231 U. S. 373 (1913). ~ Whit beck v. Mercantile Bank of Clevekind, 127 U. S. 193 (1888). PAGENO="0270" 250 discrimination against the bank. But in Albuquerque Bank v. Perea.,8° the fact that the bank was assessed at 85 per cent of its full value and other property at 70 per cent did not constitute a discrimination when this did not come from any design or system- atic effort on the part of county officials.°° In San Francisco Bank v. Dodge, the court held that the assessment of state banks on their property and franchise did not take into account all the in- tangible elements of value and was therefore discriminatory against national banks whose shares were assessed at market.°1 The court has not established rnany objective standard indic- ative of what amounts of moneyed capital constitute substantial competition, but has followed the practice of deciding in each mdi- vidual case whether the competition, as shown, possessed the requisite degree of substantiality to be violative of Section 5219. In the Richmond case the existence of tax privileged bonds, notes, and other evidences of indebtedness amounting to $6,250,- 000 as compared to national bank shares with an aggregate value of $8,000,000 constituted substantial competition and therefore was discriminatory. Again, the fact that there were moneys and credits in Guthrie County amounting to approximately $5,000,000, which were taxed at the rate of five mills, while the total value of state and national bank shares taxed at general property rates in the county ~did not exceed $316,852 constituted a discrimination.92 Perhaps the most significant comparison which may be made is Albuquerque Bank v. Pcrca, 147 U. S. 87 (1892). Compare with the ruling in Supervisors v. Stanly, 105 U. S. 305 (1881), where the court stated that if "it can be proved that the assessors habitually and intention- ally, or by some rule prescribed by themselves, or by some one whom they were bound to obey, assessed the shares of the national banks higher in proportion to their actual value than other moneyed capital generally, then there is ground for recovery." `°Albuquerque Bank v. Perea, 147 U. S. 87 (1892). °~ San Francisco Bank v. Dodge, 197 U. S. 70 (1905). First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). PAGENO="0271" 251 that of the Wisconsin03 and Minnesota94. decisions with the Georgetown Bank case,°5 all of which werc delivered on the same day. Data in the Wisconsin case showed that real estate firms operating in the vicinity of the plaintiff's bank loaned annually between $250,000 to $300,000; that various individuals, partner- ships, and corporations were engaged in buying and selling notes, bonds and mortgages in that area; and that other firms located in Chicago and Milwaukee were similarly engaged, one of these firms having sold a portion of some $25,000,000 of bonds and securities in that locality. Such a situation constituted substantial cornpe- tition, and since these items were exempt from property taxation and bank shares were taxed at the full property rate, a discrimina- tion existed. In the Minnesota case moneys and credits were listed for tax- ation to the amounts of $830,000,000 in the county, and $400,- 000,000 in the city, where the bank was situated. Individuals had returned for taxation in Ramsey County promissory notes total- ling $2,480,446 and bonds amounting to $7,595,975. Further- more, note brokers operating in the state loaned funds amounting to $100,000,000. Cattle loan brokers also handled $22,000,000 of cattle loan paper, $13,000,000 of which was sold to banks, cor- porations, and firms in the state. It was further shown that national banks in Minnesota had invested in real estate mortgages to the amount of $19,000,000, in United States bonds, $41,000,- 000, and in other securities, $33,800,000. Since intangibles, other than tax exempt bonds, were taxed at a three mill rate and bank shares at the full property rate, and since the evidence convinced the court of substantial competition, a discrimination existed against national bank shares. A contrary decision was rendered, however, in the George- First National Bank of Hartford, Wiscon~sin, v. City of Hartford, 273 U. S. 548 (1927). "Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927). "Georgetown National Bank v. McFarland, 273 U. S. 568 (1927). PAGENO="0272" 252 town Bank case. The facts here alleged were that there were 205 individual citizens in Scott County who had invested over $1,060,000 in mortgages and purchase money notes, at least half of this amount being in the hands of money lenders. Two wit- nesses professed to know ten parties who loaned $122,300 to twenty-six borrowers in the county on notes of bankabl&grade. It was further averred that national banks in the county had invested over $800,000 in real estate mortgages. But the court held that evidence was not conclusive of discrimination.96 The extremely able brief presented by the defendant-in-error no doubt played an important role in this decision, though it is patent that the factual evidence submitted was not as imposing as in the two preceding cases. It does compare favorably with the data presented in Fjrs: National Bank of Guthrie Center v. Anderson.97 Not only has the court refused to establish objective criteria of substantial competition, but it has also been hesitant to indicate the exact area of compct~tion.V8 It is not necessary in establishing the fact of competition to show that national banks and competing investors solicit the same cus- tomers for the same loans or investments. It is enough as stated if both engage in seeking and securing in the same locality capital in.. vestments of the class now under consideration which are substantial in amount. Competition may exist between other moneyed capital and capital invested in national banks, serious in character and therefore well within the purpose of Section 5219, even though the competition be with some but not all phases of the business of national banks.°9 The court in this case expressed alarm for the safety of na- tional banks when subjected to the competition from tax-favored Georgetown National Bank v. McFarkznd, 273 Ti. S. 570 (1927). VT First National Bank of Guthrie Center v. Anderson, 269 U. S. 341 (1926). ~ Whit beck v. Mercantile National Bank, 127 U. S. 193 (1888). First National Bank of Hartford, Wisconsin, v. City of Hartford, 273 U. S. 548, 559,557 (1927). PAGENO="0273" 253 specialized financial institutions. But, recently, the court, with a change in personnel, viewed the situation more realistically and discovered no discrimination in the Louisiana law which did not tax building and loan associations, auto-finance companies, Morris Plan and Morgan Plan banks, real estate mortgage, investments, and bond brokers on a parity with national banks.'°° Here the court referred to the basic differences between national banks which operate largely with deposits, and financial institutions which make loans mainly from funds secured otherwise than by deposits. Emphasis was also accorded the fact that some of the institutions handle unbankable paper. The fact that industrial, railroad, and public utility bonds were by law assessed at 10 per cent of market value did not establish a discrimination against bank shares in this instance. It is submitted that the court was here concerned not only with the way in which allegedly com- peting funds were being employed, but it properly took cognizance of "the character of those who compete" as well as the essential nature of the banking process. While shades of distinction, thus * closely drawn, are easily subject to over-emphasis, one can but conclude that there is in this pronouncement a much clearer analysis of the issues involved and a much more realistically defensible position assumed. Who can deny that deposit banking and specialized financial institutions, while unquestionably com- petitive in certain areas of their operations, are, however, sub~~ stantially different in their financial functions? The existence of substantial competition, in the final analysis, is a matter of subjective determination by the court in each case, in the establishment of which both the facts presented and the relative skill of the counsels play an important role. That the court gives careful consideration to the factual evidence cannot be questioned, but it is also true that the absence of objective First National Bank of Shreveport v. Louisiana Ta: Commission, 289 U. S. 60 (1933). * * 72-421 0 - 72 - 18 PAGENO="0274" 254 standards of substantial competition forces the court not infre- quently to such general defenses as "the evidence as a whole" or "the spirit of the law" or "the intent to discriminate." In other cases instances of actual competition are cited and analyzed. Such a policy makes the status of national bank taxation un- certain and unpredictable. It is not unique in the realm of law as its counterpart may be found in the law of criminal conspiracy, secondary boycotts, sympathetic strikes, and picketing. To an ~extent such a condition is irremediable, but the court has at times complicated the bank tax situation by adopting a conception of competition which, when viewed from the standpoint of economic reality, approaches the realm of absurdity. How, for example, could the operations of individual investors be declared to be corn- petitive with the business of national banks when the court had so much trouble in determining the status of trust companies, or ~whcn insurance companies, which hold millions of dollars of securities of the types banks l)Uy, are excluded from the realm of competition? How real is the competition of individuals in their investment operations with national banks, when these operators do not have to solicit the same customers? It is illuminating to compare the court's former conception with that of the Federal Reserve Board which is required, under the Clayton Act, to de- termine when two national banks are in substantial competition in order to prevent interlocking directorates. The board says: In general .. . two banks. . . would be deemed to be in substantial competition . . . if the business engaged in by such banks under natural and normal conditions conflicts or interferes, or if the cessa- tion of competition between the two would be injurious to customers or would-be customers, or would result in appreciably lessening the volume of business or kinds of business of either institution. . . Two banks engaged in the same character of business . . . would be in substantial competition if their fields of activity extended over the * same geographical territory. . . . Again, if they conducted their opera- tions in the same place, but because of their comparatively small size PAGENO="0275" 255 in relation to the total banking opportunities of the locality, and be- cause of the fact that they did not deal with the same class of custom- crs . . . they would not necessarily be deemed in substantial com- petition. Or, if their operations were conducted in the same locality, but the character of business engaged in differs fundamentally (for example, where one does only an essentially commercial banking busi- ness, while the other does only an essentially trust-company or fidu- ciary business), such banks need not be regarded as in substantial competition.10' In the Louisiana case the court has more nearly approached the above interpretation. It remains to be seen whether this posi- tion will be maintained. It may also be suggested that the court might examine the fiscal effects of low rates on competing intangibles in the deter- mination of discriminations against bank~ as the circuit court did in National Bank v. Balthnore.102 .Where the assessment of in- tangibles at low millage rates results in increased revenues from this source by eliciting larger aggregate assessments, other tax payers, including national banks, are benefited rather thin prej- udiced. Such a position would take cognizance of financial real- ities as well as legal categories. So long as the court looks only to the latter, and the states are forced to tax intangibles at general property rates in order to validate share taxation of national banks, these intangibles will indubitably be driven to cover. Experience at this point is conclusive. Immediately following the Richmond decision a number of states, among them New York and Iowa, sought to circumvent the effect of this decision by classing competing moneyed capital with bank shares for tax purposes while other intangibles were either taxable at low rates 201 Federal Reserve Bulletin, II, 390 if. For an excellent discussion of this consideration, see Lutz, "Evolution of Section 5219," Bul., N. T. A. XIII, 260 if. National Bank of Baltimore v. Mayor of Baltimore, 100 Fed. 23 (1900). PAGENO="0276" 256 or exempt from property levies.103 In such cases it was left to the tax officials to ferret out the competing moneyed capital. The * administration of the law in New York resulted in appeals to the state courts to identify the other moneyed capital. The decisions were not satisfactory to the national banks and the issue was car- ried to the federal court, the banks contending that the tax officials, acting under the interpretations of the New York court, had not in fact assessed taxable competing moneyed capital. A very ex- haustive brief showing the existence of such non-assessed capital led to a decision favorable to the banks in the lower courts which was sustained by the United States Supreme Court in a mem- orandum decision.104 Thus, the position was taken that competing moneyed capital, when legally taxable at the rate applied to na- * tional bank shares, must in fact, be so assessed or the bank tax is null in toto. A somewhat similar case, arising in Iowa, was also favorable to the banks. In this instance competing moneyed capital was tax- able at general property rates, `a«= were also bank shares, but the assessor had wrongfully listed the competing moneyed capital as moneys and credits, taxable at five mills. The Iowa court held that the act of the assessor was usurpative and without the author- ity of the state and hence did not create a discrimination. The United States Supreme Court reversed the Iowa court.105 With respect to the state bank involved, in this case, the discrimination rested wholly on the equal protection clause of the Fourteenth Amendment in so far as any federal right was involved. The counsel for the bank in Union Bank and Trust Company v. Phelps, in a later case from Alabama, relied heavily on the above See chap. 5, infra~. Keating ci ai. v. The Public National. Bank, 284 U. S. 578 (1931). For the nature of the evidence see, Brief for Appdllee, Keating v. Public National Bank. ~ Iowa-Des Moines NationaL Bank v. Bennett et ai., 284 U. S. 239 (1931). PAGENO="0277" 257. decision in seeking to nullify the share taxes on state banks fol- lowing the invalidity of the same on national banks, but the court held that the classification of state banks for tax purposes was, in this instance, valid.'06 In view of these decisions, it would appear that to validate the share tax on national banks, the competing moneyed capital, when legally taxable at the rate applied to such shares, must in fact be so taxed. It is not certain, however, that state banks can success- fully invoke the protection of the federal statute in such situations in the light of Union Bank and Trust Company v. Phelps. Since human ingenuity has as yet failed to devise any method by which * . competing moneyed capital can be fully assessed, it is obvious that national banks, and perhaps state banks as well, may completely annul their share taxes by a clever assembling of data showing a substantial volume of undertaxed or non-assessed competing mon- eyed capital even if, legally, such capital is taxable at the rate applicable to bank shares. . . Discriminations against national bank shares are not restricted merely to the privileged treatment of state banks and moneyed capital. In those states in which the several constitutions require the uniform taxation of all property, discriminations against banks may arise as a result of the undertaxation of other property. In Cummings v. National Bank'°T the court held that the assessment of real estate at one-third its value constituted a violation of the uniformity provision of the Ohio constitution, and the banks by paying taxes on one-third of the value of their shares had fulfilled their tax liabilities. * .. The effect of discriminations on the status of the state law presents another interesting problem. If the discrimination is against a particular class of national bank shareholders rather ~ Bank and Trust Company v. Phelps, 288 U. S. 181 (1933). See chap. 9, infra. * Cummings v. National Bank, 101 U. S. 153 (1879). PAGENO="0278" 258 than against all stockholders, the law is not wholly invalid. State statutes which did not permit the deduction of debts from national bank shares, while permitting such deductions from ~thcr credits, were voidable only to the shareholders who had legally established such debts and merely to the extent of the assessed value of their shares which were offset by these obligations.108 Discriminations against all stockholders of the same national bank, occasioned by the assessment of the shares at a higher percentage of their value than other assessed personal property, did not invalidate the assess- ment in toto but only that amount which was in excess of ti percentage applied to other property.'°° When the discrimination against national bank shares arose from the imposition of different nominal rates of taxation c'n such shares and other moneyed capital, the court has not been. so meticulous. The taxation of bonds and other evidences of debt in Virginia at a combined state and municipal rate of 95 cents per $100, while bank shares were taxed at a combined rate of $1.75, constituted an obvious discrimination which invalidated the state law and city ordinance imposing the tax in so far as national bank shares were concerned.~° In like manner, the taxation of in- tangibles in Iowafl' at five mills and in Minnesota~'2 at three mills per dollar, when national bank shares were taxed at the general property rate, rendered the assessment of national bank shares completely void. In these later cases the position of the court has been that the statutes themselves were in conflict with Section 5219 and therefore void as to such shares, since a dis- People v. Weaver, 100 U. S. 539 (1879); Supervisors v. Stanly, 105 U. S. 305 (1881); Hills v. Exchange Bank, 105 U. S. 319 (1881); Evans- ville Bank v. Britton, 105 U. 5. 322 (1881); Whitbeck v. Mercantile Na- tional Bank, 127 U. S. 193 (1888). ~DO Whit beck v. Mercantile National Bank, 127 U. S. 193 (1888). ~`°Merchants' National Bank v. Richmond, 256 U. S. 635 (1921). First National Bank of Guthrie Center v. Anderson, 269 11. S. 341 (1926). Minnesota v. First National Bank of St. Paul, 273 U. S. 561 (1927). PAGENO="0279" 259 criminatk~n was iml)licit Ofl the face of the statute. For similar reasons the taxation of national bank shares at general property rates was invalid in Wisconsin when other moneyed capital, ex- empt. from property taxation, was taxed on the income there-. from.118 In opposition to this view it may be suggested that, in so ruling, the court may have disregarded the principle that the rate of taxation has reference to the tax burden on such banks and other moneyed capital, in which case only the excess of the tax on bank shares was invalid. The Supreme Court of Massachusetts took this position, the court holding that the taxation of bank shares at the rate of $28.48 per $1000, when Only the income from intangibles was taxed at 6 per cent, did not entirely inval-. idate the tax on national bank shares.~4 But in this issue the Supreme Court of Massachusetts is not supreme. . There remains yet to be cOnsidered the court's interpretation of. the constitutional status of Section 5219. It will be recalled that' the court in McCuioch v. Maryland took the position that Maryland had original power to tax the interest of its citizens in the Second United States Bank. It will also be remembered that Congress, in its debate on the tax provisions of the National Bank Act, discussed the constitutionality of the issue at considerable length, and its final solution was in line with the dicta of the court.115 The position of the court and the attitude of Congress point to the conclusion that the taxation of bank shares was a power resident in the sovereignty of the states. If this position had been maintained by the court in its later decisions, many problems, which became the source of great vex- ation to tax officials and the court itself, might easily have been avoided. Instead, it resorted to inconsistent interpretations of the First Nationat Bank of Hartford, Wisconsin, v. Hartford, 273 U. S. 548 (1927). . . . . ~"Centrai Nationai Bank v. Lynn, 156 N. E. 42 (1927). 336 See chap. 2, supra~ . . PAGENO="0280" 260 nature and source of the power which thc states exerci'sed in the taxation of national bank shares.11° In Van Allen v. The Assessors, the court recognized the orig- inal power of taxation vested in the states, but asserted that Con- gress and the states had concurrent powers over certain subjects, and by virtue of the paramount authority of Congress it could permit or exclude the state from the exercise of such concurrent power. State taxation of the means and instruments of the fed- eral government fell into this category.117 The extent to which federal agencies are subject to taxation by the state is indicated in a later decision in which the court, in discussing the proposition that the power to tax may be the power to destroy, observes: The principle we are discussing has its limitation, a limitation growing out of the necessity on which the principle itself is founded. Thai lhnitatio-n is, thai the. agencies of ~the Federal government are only escmptcd~ from Statc legislation, so far as thai legislation may interfere with, or im~a.ir their efficiency in performing the functions by which they arc designed to serve that government. Any other rule would convert a principle founded alone in the necessity of exercising the legitimate powers, into an unauthorized and unjustifiable invasion of the rights of the States.118 Applying this general principle in 1876 to a Vermont law which required national banks to provide assessing officers with certain pertinent data, the court held that such a provision was not an infringement of the functions of these federal agencies. The position of the court is stated as follows: We have more than cince held in this Court that the national banks organized under the Acts of Congress are subject to State U' See A. 3. Schweppe, "State Taxation of National Bank Stock," Mm-. 4zesota Law Review, VI, 219 if.; Henry Rottschaefer, "State Taxation of National Bank Shares," Minnesota Law Review, VII, 357 if.; R. 3. Tray- nor, "National Bank Taxation," California Law Review, xvii, 83 if. U' Van Allen v. The Assessors, 3 Wall 573 (1865). `~National Bank v. Commonwealth, 9 Wall 353, 362 (1869). Italics by the writer. PAGENO="0281" 261 legislation, exccpt where such lcgisThtio-n is in conflict with some act of Congress, or where it tends to impair or destroy the utility of :uch banks, as agents or instrumentalities of the United States, or interferes with the purposes of their creation."119 It would appear, therefore, that the states may tax national bank shares, by virtue of their original power of taxation, only to the extent that Congress and the court hold such taxation to be free from any essential impairment of the functions which these banks were designed to perform. 1~'rorn the theory that the states had original power to tax na- tional bank shares, the court shifted to the view that the power of the states to tax national banks was the result of a direct grant by Congress. The distance between these opinions was not nego- tiated in one leap. The court in Farmers' and Mechanics National Bank v. Dearing,12° in discussing the constitutionality of Section 5219, classified the powers of government as follows: (1) those belonging exclusively to the states; (2) those belonging exclu- sively to the national government; (3) those which may be exer- cised concurrently and independently by both; and (4) those which may be exercised by the states but only with the consent, express or implied, of Congress. The power of the states to tax national banks, continued the court, belongs to the last named, and when- ever the will of the nation intervenes exclusively in this class of cases, the authority of the state retires and lies in abeyance until a proper occasion for its exercise shall recur, the federal law being supreme. State taxation of national banks is exercised, therefore, solely by consent of Congress. This, however, does not represent the final position of the court. Just four years later the court held that the power of state taxation of national banks arises solely from Section 5219, which ~ Waite v. Dowley, 94 U. S. 527, 532-33 (1876). Italics by the writer. Farmers' and Mechanics National Bank v. Dearing, 91 U. S. 29 (1875). PAGENO="0282" 262 provision was necessary to authorize the states to impose any tax ~whatsoevcr on these bank shares. The court said: As Con grcss was con fcrring a powcr on the States which they would not othcrwisc have had, to tax these shares, it undertook to impose a restriction on the exercise of that power, manifestly designed to prevent taxation which should discriminate against this class of property as compared with other moneyed capital.12' By judicial fiat the power of the state to tax national bank shares is thus conferred by Congress on the states; without such a direct grant the states would be impotent. How far this decision may be harmonized with the dictum of the Van Allen case in which it was stated that the states were not capable of receiving such a grant of authority, even if Congress had the power to confer it, which in the mind of the court it did not have, is not clear to the layman. However, the solution of this judicial skein is no more difficult than the position next taken in Talbott v. Silver Bow County,122 in which case the court stated that national bank shares were tax- able by states solely by the, consent of Congress, and then pro- ceeded to justify this position upon the dicta of Chief Justice Marshall in McCulloch v. Maryland, and Osborn v. Bank of the United States, using the distinguished Justice's logic, but over- looking entirely the qualifications there made relating to the tax- ation of real estate and the interest of the citizens of the state in the federal bank. The court here contends that the state taxation of national banks, their property, assets, or franchise rests solely upon the permissive legislation of Congress. This position it has maintained in its later decisions.123 People v. Weaver, 100 U. S. 539, 543 (1879). Italics by the writer. ~ Taibott v. Silver Bow County, 139 U. S. 438 (1891). `~ Qwcnsboro National Bank v. Oweusboro, 173 U. S. 664 (1899); Home Savings Bank v. City of Des Moines, 205 U. S. 503 (1907); Bank of california v. Richardson, 248 U. S. 476 (1919); Des Moines National Bank v. Fairwcathcr, 263 U. S. 103 (1923); First National Bank of Gulhrie Center v. Anderson, 269 U.S. 341 (1926). PAGENO="0283" 263 As the later position of the court is inconsistent with its for- nier attitude, the probable interpretation which it would now make if it were confronted with a case turning solely upon the consti- tutionality of the national bank share tax is of course a matter of conjecture. It has. been suggested that the court might revert to the original position taken in McCulloch v. Maryland. There are reasons to believe otherwise. Since the issue of the taxation of federal agencies is not covered by an express provision in the fed- eral Constitution, the doctrine of immunity from taxation was first enunciated by the court as a reasonable hypothesis to meet a concrete situation. The court does not, however, consider itself the sole arbiter of the extent to which the federal government may waive immunity from the state taxation of its agencies. It has held that Congress may exercise, within certain limits, its dis- cretion in such matters. Evidence of this fact is seen in the posi- tion of the court with respect to tl~e taxation of obligations of the * federal government, payable upon demand. In 1868 the court held that United States notes, payable upon demand and re~eiv- able for all public dues, though they were intended by Congress to circulate as money, were, nevertheless, obligations of the fed- eral government and exempt from state taxation.124 In this case the court said: We think it clearly within the discretion of Congress to determine whether, in view of the circumstances attending the issue of the notes, their usefulness, as a means of carrying on the government, would be enhanced by exemption from taxation; and within fe con- stitutional power of Congress, having resolved the question of use- fulness affirmatively, to provide law for such exemption.125 Congress, in 1894, authorized the state taxation of national bank notes, and other notes and certificates of the federal govern- ment, payable upon demand, subject to the restriction that the rate Bank v. Supervisors, 7 Wall 26 (1868). ~zbid.; pp. 30 if. PAGENO="0284" 264 and manner of taxation should be the same as for other money.'2° The waiving of this exemption from taxation by Congress re~ ceived judicial cognizance in Hibc'rnia Savings Society v. San Francisco in a case involving the liability to state taxation of checks drawn by the Treasurer of the United States and payable upon demand within four months. The checks were the property of the bank, having been drawn in payment of the interest on United States securities held by the bank. The court held these checks to be taxable despite the tact that they were obligations of the United States which were not intended to circulate as money. The court cited the federal statute of 1894, and said: * Although the checks in question were not intended to circulate as money, and therefore do not fall within the letter of the statute, the reasqns that apply to that class of obligations we think apply with equal force to checks intended for immediate payment, though not intended to circulate as money.121 It is conceivable, therefore, that the court would recognize as valid the proper exercise of the discretion of Congress on the matter of waiving, or removing the waiver of, immunity of na~ tional banks from state taxation, so long as such taxation does not hinder them in the efficient exercise of their proper powers and does not prevent them from discharging their functions as federal agencies. If this view be correct, the conclusion is reached that Congress has the constitutional power to determine the manner and extent of the taxation of national banks within the limits of the theory of national sovereignty.'28 United States Statutes at Large, XXVIII, 278. Hibernict Savings Society v. San Francisco, 200 U. S. 310, 316 (1906). An interesting parallel case arose in Australia in which the court there held that the Commonwealth may authorize state taxation of federal salaries previou~y held~ invalid without such authority. See Chaplin v. Commissioner, 12 Comm. Law Rep. 375 (Australia, 1911). PAGENO="0285" 265 I. Tile Richmond Decision: 19~3O While the national banks were busy litigating discrimination against them under State laws `-few, if any, of which were intended to dis- criminate-the States also were busy trying to improve their tax systems.2 The general property tax, long the chief support for both State and local governments, was proving to be as defective in opera- tion as it was in theory. Among reforms espoused at this time were the separation of the sources of State and local revenues and the adoption of classified property taxes, particularly low-rate taxes on intangibles. Under both types of reform, discriminations in fact and in law were produced against national banks. Perhaps it would be more correct to say that discriminations against banks were "continued," for under the general property tax they had been the victim of discriminatory assessments. The inability of the States to reach intangibles, primarily of individuals, had led many, including bankers, to champion the adoption of low-rate taxes on intangibles.3 States that employed them were able to collect greater revenues under the moderate rate than had previously been collected under the high rates applied to real estate. `When these low-rate taxes were not extended to bank stock, charges of discrimination under section 5219 began to be heard. The issue came to a head in the famous Richmond Case-Merchants' National Bank of Richmond v. City of Richmond-decided June 6, 1921.~ * 1. The facts.-This case involved both the separation of the sources of State and local revenues, and the application of the principle of classification to intangibles. The taxes involved in the dispute were local taxes levied by the City of Richmond. Under a 1915 law, the State of Virginia levied a tax of 35 cents per $100 of valuation on State and national bank stocks and permitted its charter cities to levy an additional tax of $1.40 on bank stock. Other intangibles were taxed at a State rate of 65 cents, to which cities were allowed to add a tax of 30 cents. The combined rates were, thus, $1.75 per $100 on bank stocks (State and national) and 95 cents on individually owned intangibles. It was said that the banks paid the State tax but protested the local levy.5 The Merchants' National Bank took the City to court, contending that both the law of the Commonwealth and the ordinance of Rich- mond violated section 5219. In the Hustings Court of the city the bank won; the case was then taken to the State Supreme Court. The Virginia Supreme Court upheld the law and the ordinance, because there was no discrimination between national and State banks.6 The case was then taken to the United States Supreme Court which re- versed the decision. The opinion of the Court was delivered by Justice Pitney; Justice Brandeis dissented but did not write an opinion. 2. Opinion of the Court.-The Supreme Court opinion noted that the bank's petition alleged, and the evidence showed without a dispute, that State and city taxes at the $1.75 rate were imposed I Cf. the preceding section. 2 Changes in State tax systems are discussed elsewhere in this report. See infia, at pp. 271-272, "Effects of Richmond decision." See Leland, op. cit., pp. 179ff. 256 U.S. 635. It was long thought that mortgage recording taxes were not affected by section 5219, but see Dickinson v. First National Bank of Homestead, 393 U.S. 409 (1969). See infra, p. 308. 5 See I. Vaughan Gary in Proceedings of the National Tax A.ssociation, 1921, p. 397; George Bryan, ibid., p. 414; Virginia Acts, 1915. ch. 117, p. 160, cited by the Court, p. 637. 6 124 Va. 522, 98 SE. 643 (1919). PAGENO="0286" 266 upon national and State bank stocks in an aggregate value of $14,000,000 or more, while taxes at a lower aggregate rate ($.95) were imposed upon bonds, notes and other evidences of indebtedness aggregating $6,250,000. Mr. Pitney continued: * "It is to be inferred that a substantial part of this aggregate was in the hands of individual taxpayers; the precise amount does not appear. It also was shown without dispute that moneyed capital in the hands of individuals, invested in bonds, notes, and other evidences of indebtedness, comes into competition with the national banks in the loan market." ~ The opinion pointed out that these facts and the competitive * character of the investments were alleged by the plaintiff; they were not controverted by the counsel for the City of Richmond; and this evidence was not reviewed by the State courts- . doubtless because, under their respective views of the applicable law the facts referred to were immaterial. But this omission does not relieve us of the duty of examining the evidence for the ~purpose of determining what facts reasonably might be, and presum- ably would be, found therefrom by the State court, if plaintiff in error's contention upon the questions of Federal law should be sus- tained, and the facts thereby shown to be material. "The [State] Supreme Court of Appeals entertained the view that the purpose of section 5219, Rev. Stat., was confined to the prevention of discrimination by the States in favor of State banking associations as against national banking associations, and that since none such is shown here, there was no repugnance to the Federal statute. This however is too narrow a view of section 5219. It traces its origin to section 41 of the Act of June 3, 1864, chap. 106, 13 Stat. 99, 111, 112, in which, besides the restrictions that State taxation of the shares of national banking associations should not be at a greater rate than is assessei upon other moneyed capital in the hands of individual citizens of such State, there was an express proviso that the tax should not exceed the rate imposed upon the shares of State banks. But this was modified by Act of February 10, 1868, chap. 7, 15 Stat. 34, in a manner which as was pointed out in Boyer v. Boyer, 113 U.S. 689, 691, 692, 28 L. ed. 1089, 1090, 5 Sup. Ct. Rep. 706, precluded the possibility of an interpretation permitting the States, while imposing the same taxation upon national bank shares as upon shares in State banks, to discriminate against national banks in favor of moneyed capitLi not invested in State bank stock. `At any rate,' said the court, `the acts of Congress do not now permit any such discrimination.' In the amended form the provision was carried into the Revised Statutes as section 5219, which prescribes that State taxation of shaves in the national banks `shall not be at a greater rate than is assessed upon other moneyed capital in the hands of citizens of such State.' * "By repeated decisions of this court, dealing with the restrictions here imposed, it has become established that while the words `moneyed capital in the hands of individual citizens' do not include shares of stock in corporations that do not enter into competition with national 7 256 U.S. 635, p. 638. * * . * * PAGENO="0287" 267 banks, they do include something besides shares in banking corpora- tions and others that enter into direct competition with those banks. They include not only moneys invested in private banking, properly so called, but investments of individuals in securities that represent money at interest and other evidences of indebtedness such as normally enter into the business of banking." 8 The opinion cited a decision in 1882 in which a deduction of indebt- edness granted to individuals but denied national banks had invalidated taxes on the national banks; and another in 1887 in which the court had declared: "The terms of the Act of Congress, therefore, include shares of stock or other interests owned by individuals in which the capital employed in carrying on its business is money, where the object of the business is the making of profit by its use as money. * * * It includes money in the hande of individuals employed in a similar way, invested in loans, or in securities for the payment of money, either as an investment of a permanent character, or temporarily, with a view to sale or repayment and reinvestment." ° Mr. Justice Pitney reiterated other decisions, to the effect that "the rule of construction thus laid down had since been consistently adhered to. No decision of this court to which our attention is called has qualified that rule, or construed section 5219 as leaving out of consideration the rate of State taxation imposed upon moneyed capital in the hands of individual citizens invested in loans or securities for the payment of money ~ such moneyed capital comes mto competition with that of national banks." 10 The court concluded its opinion with these words: "In the present case, there is a clear showing of such competition, relatively material in amount, and it follows that, upon the undisputed facts, the ordinance and statute under which the stock of the plain- tiff in error was assessed, as construed and applied, exceeded the limit prescribed by sect~on 5219, Rev. Stat., and hence that the tax is invalid." ~ 3. A question of procedure.-The national banks had won another case. The decision was criticized in congressional and professional dis- cussions, partly on grounds that attorneys for the City of Richmond had made an inadequate presentation. The city based its case on absence of discrimination between State and national banks and saw no need to introduce evidence that might controvert the bank's allegation that individually-owned intangibles were in competition lIbid., pp. 638-9. IbId., pp. 639-640, cIting Evansville National Bank v. Brltton, 105 U.S. 322 (1882); MercantIle Bank v. New York, 121 U.S. 138 (1887), quoting p. 157. Italics in Court'; opinion. 10256 U.S. 635, p. 641, citing Amo;keag Saving; Bank v. Purdy, 231 U.S. 373, 390-91; and First National Bank of Wellington v. Chapman, 173 U.S. 205, 219. 11 266 U.S. 635, p. 641. PAGENO="0288" 268 with national banks. in congressional debates it was pointed out that * the burden of proving such competition was upon the banks.'2 4. Attitudes of State officials and Members of Congress.-The de- cision in the Richmond case came as a surprise to many State tax officials, "like a bolt from a clear sky." Some professed that it gave the share tax provision of section 5219 a different meaning from that which they had ascribed to it. It "broadened the meanmg of `other moneyed capital'." `3 A committee of the National Tax Association declared that the decision had had "a disturbing effect" in some 20 States and probably would be "a controlling deterrent" in other States which might wish to adopt "more modern and intelligent methods of compelling intangible personal property to bear its just share of the tax burden." 14 For 25 years before the decision, many persons believed that "other moneyed capital" meant only shares in State banks. Senator Kellogg thought that the Supreme Court in the Richmond case had misunderstood the act. Mr. Mills told the House that the decision changed the interpretation of the law. Moreover, it was argued, the competition of individuals with banks was negligible.'5 Mr. Oscar Leser, member of the Maryland Tax Commission, in the hearings in 1922 on proposed amendments, used much stronger lan- guage concerning competition to national banks from private invest-. 12 Cf. Senator Glass in 64 CR, pp. S1453, 1460 (Jan. 1, 1923); Senator Kellogg, ibid., p. S1459; Senator Pepper, ibid., p. S1463; Mr. Wingo, ibid., P. 11302; Mr. Stevenson, ibid., P. 114789, citing Boyer v. Boyer, 113 U.S. 689, and Bank v. Chalmers, 182 U.S. 560. See the discussion in Proceedings of the National Tax Association, 1921, Pp. 381-426. One of the participants in that discussion was Judge Oscar Lesser, tax com- missioner of Maryland, who subsequently testified in congressional hearings on proposed amendments to sectIon 5219 that the Merchants' National Bank testimony as to the competitive character of individuals' moneyed capital was considered inconclusive by the trial court and Irrevelant by the State Supreme Court of Appeals but was accepted as relevant and undisputed by the U.S. Supreme Court. 67th Congress, Com- mittee on Banking and Currency, State ~Faxation of National Banks, Hearings on HR. 9579 (1922, 2 parts), p. 101 (hereafter referred to as Hearings, H.R. 9579 (1922)). However, Mr. Justice Pitney noted that neithe~ of the State courts passed on this evidence or made findings of fact thereon (cf. the text reference, supra, to the opinion of the Court). Cf. Welch, op. cit., p. 36. The only defense of the counsel of the City of Richmond that the writer has found came from Martin Saxe, a New York lawyer with long experience in bank tax problems. He argued that the city had no need to prove that bonds, notes, and other evidences of indebtedness owned by individuals did not, in fact, come Into substantial competition with banks because such proof would have contravened the interpretation of section 5219 handed down by the Supreme Court 40 years earlier In Boyer v. Boyer, 113 U.S. 689 (1885), a decision which the State court disregarded. Cf. Proceedings of the National Tax Association, 1923, PP. 183-230, 361-2, 370-402; comments of Mr. Sara at pp. 215-216. In the later similar case of First National Bank of Guthrie Center v. Anderson, 269 U.S. 341 (1926) discussed below, the Supreme Court declared that the Richmond decision had not enlarged the prior meaning of section 5219 but had adopted prior decisions. The opinion added that the Richmond case was unusual in one respect-the narrow scope of the defense. "If the outcome was open to criticism, it was not because any enlarged meaning was attributed to the term, `other moneyed capital,' but because the facts bearing on the question of competition were not sufficiently brought out at the trial and shown in the record." (269 U.S., at p. 349.) P Samuel Lord, Minnesota tax commissioner, In Proceedings of the National Tax AssocIation, 1922, p. 250; Walter W. Law, Jr., ibid., 1923, p. 203; Helmberger, op. cit., pp. 25, 106. Evidently, some State officials knew what section 5219 meant or were aware that it might be invoked to prevent special treatment of bank shares. Professor C. J. Bullock, who at the time was the chief advocate of the classified property tax and of low-rate taxes on intangibles, was of the opinion that the 3-mill tax in Massachusetts might make trouble for the State with its banks. His doubts apparently were made known for the first time in 1921. Proceedings of the National Tax Association, 1921, p. 395. Indiana in 1919 considered a plan to assess intangibles at 25 percent, while other property would have to be assessed at full value. Bankers informed the legislature that if such a law were enacted, banks also would have to be assessed at 25 percent. This killed the proposal. Philip Zoercher in Ibid., 1922, p. 371. 14 Ibid., p.346. 11 Cf. Senator Kellogg in 64 CR, p. S849 (December 22, 1922), citing Aberdeen Bank v. Chehalis County, 166 U.S. 440, 458 (1897); National Bank of Wellington v. Chapman, 173 U.S. 205 (1899); and ibid., pp. 81459, 81460 (January 9, 1923). Also Senator Glass in 64 CR, p. S1458 (January 1, 1923); Mr. Mills in Ibid., p. H4785 (February 27, 1923). Representative Volstead, commenting on the Richmond case In the House of Representatives January 14, 1923 saId: "i'o insist that a promissory note must be taxed at the same rate as a share in a national bank cannot be defended. Bank stock represents a share in a growing business that has a franchise and a goodwill of great value, neither of which receives any substantial consideration in estimating the value of bank stock for tax- ation purposes. That value is usually assessed upon the book value of its assets. A bank earns nearly all of Its dividends not on its own money but upon the money of its depositors, still it pays no tax upon such deposits. (Bank of Redemption v. Boston, 125 U.S. 60)." 62 CR, p. 118739 (January 14, 1922). PAGENO="0289" 269 inents: it "is all moonshine and humbug; . . . there is no real com- petition from this source and no real discrimination." 16 5. Position of banks.-Opinions to the contrary were expressed by counsel for the banks and some members of Congress. Mr. Thomas B. Paton of the American Bankers Association pointed out to delegates attending the National Tax Association Conference in 1921 that the Richmond Case merely followed previous decisions of the Supreme Court. Mr. Saxe, not only a bank attorney but also a former president of the New York Tax Commission, was of the same opinion. Mr. E. E. Colladay, an attorney of Washington, D.C., told the 1922 National Tax Conference: "The Supreme Court of the United States in 1885 decided exactly as it did in 1921 on this question." Congress- man Otis T. Wingo of Arkansas told the House of Representatives that the Richmond decision was not a departure from previous holdhgs which had been repeatedly affirmed, nor was the blame on Congress for a supposed change in the Federal rule. "if anybody has been bamboozled it is the legislature and the courts" (of New York where the controversy was particularly intense). 11 6. Heimberger's criticism of decision.-A different line of criticism of the Richmond decision is found in Helmberger's study of State and Local Taxation of Banks, completed in 1960. it is based upon the nature of the share tax and differences in assessment methods. Heimberger points, out that in the beginning Congress intended the share tax to be on individuals, or at least never made clear what it did intend. The States, however, considered it to be a tax on the banks. Its levy and collection had been limited to the location of the bank, and no deductions from share value had been required. The tax, more- over, was collected from the banks and could be offset by them against dividends or billed to the shareholders. When the Federal income tax became effective, State taxes paid upon shares were allowed as a deduction from bank income. The fiction of assessing the tax in the name of the stockholders was followed by many States, although nearly all required the banks to pay the tax. Hence it was still possible to regard the tax as on shareholders or on the banks. Heimberger's analysis of the case is as follows: "If one views the share tax as a tax on shareholders, the logic of the position of the banks and of the United States Supreme Court was unassailable, since neither the bank's stockholders nor the holders of other intangibles were allowed a deduction for debt. This logic was unassailable, that is, provided the holders of the other intangibles were competing with the banks. Many State tax officials and legis- lators, while agreeing that the rate on bank shares was higher than that on other intangibles, denied that these other intangibles were competing moneyed capital. They argued that only State banks were m competition with national banks. Their position is unconvincing. Surely non-bank financers of real estate buyers, consumers, and even other businesses were in competition with banks. The Court so held, finding that it was only necessary to establish that such competing capital was significant in amount and taxed at lower rates than bank shares to invalidate the tax on the latter. "Hearings on HR. 9579 (1922), p. 101. See also Leser in Proceedings of the National Tax Association, 1923, p. 219, and Mr. Sattc'~ lee's comment that Leser's "humbug" was "rather mild than otherwise" (ibid., p. 380). "64 C.R., p. H1659 (Jan. 12, 1923). 79-421 0 - 72 - 19 PAGENO="0290" 270 "In the Richmond case, the bankers merely alleged that such com- peting capital existed and was significant in amount. The defense, the City of Richmond, made no denial of the bankers' allegation, holding that it was irrelevant since national bank shares were taxed at the same rate as State bank shares, which was all that was necessary to validate the tax. The defense was not based on fact but on prece-' dent. The identification of `other moneyed capital' of section 5219 with State bank shares was so general and had held sway so long that the defense was not bothered by facts. Incidentally, had the defense taken the trouble to investigate share tax litigation thoroughly, it would have found instances in which capital apart from State bank shares had been included in other moneyed capital by some courts.'8 The identification of other moneyed capital with State bank shares simply could not have stood indefinitely. The basic trouble was the attempt to levy a constant tax under an invariant section 5219 in a changing world. The amount of moneyed capital outside of banks had been increasing relative to the amount of bank capital. As banks and other lenders developed, they competed with each other more ~iud more. These were economic facts which simply could not be denied forever. The surprising thing about a `Richmond' decision is that it came so late. One might view the delay as (1) a result of the fact that States did not tax banks nearly as heavily as section 5219 permitted, since they allowed deductions from share value without. being required to do so, or (2) a reflection of bankers' respect for tradition, which equated other moneyed capital with State bank shares, or both. "Despite the above, the writer is not in accord with the Richmond decision. The, acceptance of the decision as rendered hinges on one's acceptance of the share tax as a tax on shareholders. It is difficult to understand how one can maintain that the share tax is not a tax on banks, m view Qf the fact that [it} is collected from banks and deducted from the banks' net income for income tax purposes. "If one views the tax as a tax on banks, the logic of the decision evaporates. [The basic assessed valuations to which Richmond applied tax rates of $1.75 per $100 for bank shares and $0.95 for other moneyed capital were not comparable valuations, because there were significant differences in the extent to which debts might be deducted in valuing these assets.] . . . . [If] the debts of the holders of such other moneyed capital were sufficient to bring their burden to $1.75 as properly measured for comparative purposes, then there was no discrimination against the bank and the Richmond decision was a mistake. It is entirely possible that the Merchants' National Bank's tax burden was smaller rather than larger than the legal burden on other moneyed capital outside of banks. According to Judge Oscar Leser, Commis- sioner of Taxation in Maryland and long time student of bank taxes, the American Bankers Association makes an absurd comparison of a tax on bank shares (net worth) with a tax on other moneyed capital (gross assets) ~19 The Court and the defendant as well as the plaintiff appeared to look only at rates while ignoring the base. It should be noted, however, that in all probability, except for an `honest' fringe, 1$ Citing "Taxation of Banks," a discussion in Proceedings of National Tax Association, 1921, pp. 381-397. 1~ Citin~ "Report of the Committee of the National Tax Association upon Proposed Changes in U.S.R.S. Sec. 5219,' In the Proceedings of the National Tax Association, 1943, pp. 33-34. PAGENO="0291" 271 holders of other moneyed capital simply evaded the tax. This appears also to have been overlooked." 20 7. Effects of Richmond decision.-The first effect of the Richmond decision in Virginia was confusion. The Virginia Bankers Association agreed to discourage attempts throughout the State on the part of other banks to invoke the protection of section 5219. The banks urged the legislature to adopt a tax of $.55 per $100 on intangibles individ- ually-owned and promised to pay double that rate on bank shares. Such a law was passed in 1922; had the banks broken this agreement, the protection of section 5219 could have been invoked again. Pay- ment under this voluntary agreement was labeled by Senator Kellogg as "the Chinese method of taxation." 21 Most other States were affected directly or indirectly by the Rich- mond decision. In the States with low-rate taxes on intangibles the decision meant that (1) the low-rate taxes would have to be abandoned or (2) taxes on bank stock would have to be reduced to the rates on individually owned intangibles, or (3) bank stock would have to be exempted, leaving national banks taxable only on their real estate. 22 Abandonment of low-rate taxes or of more complex classifications meant a return to the general property tax, which, it had long been demonstrated, could not be enforced as to personal property. Even this course would not. have assured the validity of national bank taxes. While there were no outright discriminations in the wording of the statutes of which banks could complain, actual assessments often did discriminate against them. Burden of proof of this rested upon the banks but such proof had been adduced in many of the litigated cases. And if local officials were not successful in putting on assess- ment rolls substantial amounts of individually owned intangibles, section 5219 could be invoked where those intangibles could be proved to be competitive. Either way the national banks were in a position to contest taxes on their shares. Thus, those who thought that general property tax States were not affected-and many State officials were of this opinion-were not fully informed about the decisions of the courts. Few people, too, favored discrimination against other property for the benefit of banks Previously a few States-Delaware, Penn- sylvania and New Jersey-had passed laws differentiating in favor of bartks.23 The low-rate taxes in about 20 States were immediately in jeopardy with the announcement of the Richmond decision. In Minnesota the banks were able to get the fractional assessments on banks reduced from 40 percent of true value to 333~ percent by litigation, agreements, and legislation. In 1931, the percentage applied to banks was further reduced to 25 percent. In Montana where banks were assessed at 40 percent prior to 1929, the assessment fraction was reduced to 7 per- cent for two years by judicial action. In Iowa, bank taxes were re- duced to 5 mills per dollar-the level for personal intangibles. In Rhode Island, all banks in the State were able to get off with taxes `°Helmberger, op. cit., pp. 106-9; cf. IbId., pp. 24-5. ~1 Gary, in Proceedings of the National Tax Association, 1921, pp. 399-400. See Leland, op. cit., P. 209. Cf. remarks of Senator Kellogg, 64 CR, p. S849 (l)eceinber 22, 1922). He thought this agreement did not indicate any real competition between banks and Individually owned intangibles. Heimberger, op. cit., p. 110. suggested also that bankers might have wanted the $.55 rate on their own (non.bank) intangibles. ~` Discussion based on Leland, op. cit., pp. 203-211. 23 Cf. Zoercher In Proceedings of the National Tax Association, 1922, p. 372; Leland, op. cit., p. 206. PAGENO="0292" ~272 of only $3,000 or $4,000, except on real estate, and were strong enough to prevent any change in the law.24 Problems were created also in States having personal and corporate income taxes.25 Until 1923 income taxes were not a permitted option under section 5219. In New York, with the adoption of the income tax, personal property including: intangibles had been exempted from taxation. This exemption invalidated New York's 1 percent tax on national bank stock. Between June 6, 1921 and February 8, 1922, at least 100 legal actions contesting bank taxes had been started in New York. It was estimated that New York would have to refund no less than $18,000,000 in back taxes with interest, so that governments were losing $6,000,000 yearly "from some of the most prosperous corporations in the State." This meant a 5-point increase "in our tax rate, and ultimately a 20-point increase." In Massachusetts there were 40 similar suits, four of which involved refunds of $2,500,000.26 An unknown number of suits were started also in North Dakota and South Dakota. There is little doubt that the Richmond decision spawned an increase in tax litigation by national banks. The conflict between States and banks did not end here. There was also retaliatory action and legislation to be taken into account. In Maryland banks could not secure refunds unless the contested taxes had been paid under duress. Judge Leser said none of the banks could meet this condition; they had cheerfully paid the tax. A few States even passed laws saying that public funds could not be de- posited in banks that had not paid the taxes levied against them.27 It is no wonder, then, that the Richmond case stimulated amend- ment of section 5219, accomplished in 1923. That the amendment did not overcome the Richmond decision was not clear until ~.926. J. The amendment of section 5219: 1923 1. Di,fferences from cuts of 1864 and 1868.-The second amendment of section 5219 was approved by the President March 4, 1923. Its provisions are reproduced in appendix i-C, above. The amendment of 1868 related only to the place at which national bank shares were to be taxed. Under the Act of 1864, shares were to be taxed at the location of the bank, but the 1868 amendment declared that "the place where the bank is located" meant "the State within which the bank is located," and the legisle~tures of the States were to determine "the manner and place" of taxing such shares within each State. This was to enable some States to continue taxing resident taxpayers on their shares at their domicile rather than at the place where the bank was located.28 But so far as nonresidents were con- cerned the 1868 amendment provided that their shares were to be taxed "in the city or town where said bank is located and not else- UCI. Sen. Kellogg. 64 CR, p. 5849 (Dec. 22, 1922); Mr. Mills, Ibid., p. H1539 (Jan. 10, 1923). For lists of States affected, see Proceedings of National Tax AssocIation, 1922, pp. 344-46; Leland, op. cit., p. 210. On Minnesota and Montana, cf. Welch. op. cit., p. 96; Helmberger, op. cit.. p. 113. Iowa: Discussion of Messrs. Dickinson and Mills In 64 CR, p. 111540 (Jan. 10, 1923). Rhode Island: Leser In National Tax Association, Ibid., p. 377. ~` These came Into focus in connection with the 1926 amendment, discussed below. `7Cf. Sen. Shortrldge. 64CR, p. S847 (Dec.22, 1922); Rep. Mills, 64CR. p. 111540 (Jan. 10, 1923). HearIngs on H.R. 9579 (1922), p. 203. For the country as a whole, up to the time of the Richmond decIsion, 36 cases Involving section 5219 reportedly had been carried to the Supreme Court and all hut 10 of these were said to have been decided against the banks (Wall In Ibid., p. 204). As to Massachusetts, cf. Woosley, op. cit., p. 54. `7Proceedings of the National Tax AssociatIon, 1921, p. 416. As to public deposits, Cf. a Minnesota law of 1927; Leland, op. cit., p. 214n. "See also supra pp. 147, 148. PAGENO="0293" 273 where." 29 The substance of the Act of 1868 was incorporated in the 1923. amendment. The proviso that shares could not be taxed "at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State," as contained in the Act of 1864, was repeated in the Act of 1868. The 1923 amendment, however, said that shares shall not be taxed "at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks." 30 And with intent to clear up dilemmas created by the Richmond case,3' a new proviso was added: "Provided, That bonds, notes or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the bank- ing or investment business and representing merely personal invest- ments not made in competition with such business, shall not be deemed moneyed capital within the meaning of this section." Whether this proviso merely put the Richmond decision into statute law, as some contended, will be considered in detail later.32 The last phrase indicates that the most that could be said about indi- vidually-owned intangibles was that their ownership created a pre- sumption (always rebuttable) that individually-owned intangibles were not in competition with the business of banking. Evidence, of course, might prove otherwise, or competition might be conceded by counsel, in which case the share-tax option in the 1923 amendment had not effectively corrected the situation brought about by the Richmond decision. To this extent, it was as if the provisions of the Act of 1864, as amended in 1868, remained in effect.33 The provisions of the Act of 1923 with respect to the taxation of real estate differed only in words, not in meaning or intent, from those in the Act of 1864. The real estate of a national bank has always been taxed like real estate belonging to other taxpayers at the place and within the political subJivisions where it is situated.34 The taxes on real estate and bank shares were the only State taxes on national banks permitted under the Act of 1864, but the Act of 1923 added an income tax option. A tax on the net income of a national bank was not to be at a higher rate "than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon the net income of mercantile, manufacturing, and business corporations doing business within its limits." This was more specific than the share tax and provided a basis against which bank taxes could be measured. The Act of 1923 also permitted the inclusion of dividends in the taxable income of share owners or holders. But the tax was "not to be at a greater rate than is assessed upon the net income from other moneyed capital." This proviso was as vague as the "other moneyed ~This provision was Introduced by the words, as if for emphasis: "And provided always." ~ italics added. "See supra, pp. P8-203. ` See infra. pp. 214-17, Mr. Newton made this latter allegatfod. 64 C.R., p. 114799 (February 27, 1923). U One state official described the 1023 amendment as an "enforced treaty." Gary, "State Taxation of Banks in the Light of the Recent Amendment of section 5219, Revised Statutes," Proceedings of National Tax AssocIation, 1923, p. 183. ~4 The wording of these Acts regarding taxation of national bank real estate is as follows: 1864: ". . . nothing in this act shall exempt the real estate of associations from either State, county or municipal taxes tu the same extent, according to Its value, as other real estate is taxed." 1986: "Nothing herein shall be construed to exempt the real property of associations from taxation In any State or in any subdivision thereof, to the extent, according to Its value, as other real property Is taxed." PAGENO="0294" 274 capital" share-tax limit in the Act of 1864; and less specific than the proviso governing share taxes in preceding sections of the Act of 1923. Up to this time many had believed that States had a sovereign right to tax national bank dividends to individuals along with other non- exempt income accruing to them, although the share tax and the tax on bank real estate were the only methods specified in section 5219. When personal income taxes came to be adopted by the States, following the example of Wisconsin in 1911, dividends from national bank shares were included along with other dividends and earned income as taxable income to which the specified rates were applied. Missouri, New York, and Virginia applied their taxes to dividend- income received from national banks. But in the aftermath of the Richmond case, the Supreme Court ruled in 1923 that such taxation was not permitted. Congress had not given its specific permission to States to tax national bank dividends to resident stockholders and until it did such taxes were void. Permission was then given in the 1923 amendment.35 The States thus were allowed an entirely new alternative to the share tax. However, each State could select only one method of taxing national banks (aside from taxes on their real property). Each could elect to tax (1) the~hares, (2) the net income of the bank, or (3) the dividends received by the owners or holders of the bank's stock. Any one of these "three forms of taxation shall be in lieu of the others." And in the case of nonresident owners or shareholders, these taxes (or the tax) were to be levied "in the taxing district where the association is located and not elsewhere," upon return made by the bank as agent of the nonresident shareholders. Finally, the Act of 1923 included a validation provision permitting States to legalize or confirm taxes on national banks which had been collected previously but were illegal under decisions in the Richmond and similar cases. 2. Legislative history of 1923 amendment-The Supreme Court handed down its decision on the Richmond Case on June 6, 1921. Less than a month later, Senator Nelson at the request of Mr. Samuel Lord, Chairman of the Minnesota Tax Commission, introduced a bill (S. 2200) to amend section 5219. This was referred to the Committee on Banking and Currency and by it to a subcommittee under the chaIrmanship of Senator Newberry. This subcommittee requested "the thoughtful consideration of the American Bankers' Association of this bill and their comments thereon." On August 1, 1921, Mr. Volstead (Minn.) introduced in the House an almost identical bill (H.R. 8015) which was referred to the Committee on Banking and Currency. On October 20, 1921, Mr. Mills (New York) introduced another bill (H.R. 8784) to amend section 5219 and it too was referred to the House Committee on Banking and Currency. This bill provided for the taxation of national banks on the basis of income, as well as property and shares. None of these bills was ever reported out by the Committee.36 "People ex rel. Hanover National Bank v. Goldfogle, 118 Misc. Rep. 79 (1922), 137 N.E.611 (1922), 261 U.S. 620 (1923). In the Hanover case, the Supreme Court declined to review a decision adverse to the State of New York. Cf. Welch, op. cit., p. 177. 8~ The Richmond case is discussed in the preceding section. On the introduction of the several bills, cf. 61 C.R., pp. S3300 (July 1, 1921), 4504 (Aug. 1, 1921), and 6557 (Oct. 20, 1921). Cf. also Hearings, H.R. 9579 (1922), p. 218. PAGENO="0295" 275 On December 15, 1921, Representative McFadden, Chairman of the House Committee on Banking and Currency, at the request of mem- bers of the National Tax Association, introduced H.R. 9579, which had been drafted by them in accordance with a resolution adopted by the Association at Bretton Woods, N.H., on September 16, 1921.~~ This bill also was referred to the Committee on Banking and Currency and was the subject of hearings held during January and February 1922. - The bill would have authorized the legislature of each State to pro- vide for taxation of real property therein of any national banking asso- èiation located therein in the same manner and at the same rate as other real Property in the same taxing district was taxed; and also to provide for the taxation of either the income or the shares of such an association, subject to the restrictions that whichever of these classes was chosen, the rate of tax was to be no greater than the lowest uniform rate or graduated rates imposed in respect of that class on State- chartered banks, banking associations, or trust companies doing a banking business, other than savings banks or similar non-stock mu- tual corporations. If the shares were taxed, any shares owned by non- residents of the State were to be taxed in the taxing district where the association was located and not elsewhere. If the State provided for the taxation of individual incomes, tile legislature might include as a part of taxable income the income from the shares of national banking associations; but only if the income from the shares of State-chartered banks, banking associations, and trust companies doing a banking business also was so included. H.R. 9579 provided further that any share tax previously paid, levied, or assessed was "legalized, ratified, and confirmed" as of the date of its imposition if the tax was in accord with other provisions of the bill. However, on June 7, 1922, Mr. McFadden, on behalf of the House Committee on Banking and Currency, introduced H.R. 11939, which had been unanimously agreed to by the Committee and its subcom- mittee.38 This subsequently became the bill which, with amendments, was carried to final passage. Mr. McFadden reported back H.R. 11939 without amendment the next day (Report No. 1078). This bill kept the share tax and added net income as an alternative for taxing national banks. The validation provision legalized the levy or reten- tion of only those taxes which could be levied under H.R. 11939. The bill was called up and passed in the House on June 14. On June 15, the bill was referred to the Senate Committee on Banking and Currency.39 H.R. 11939, as passed by the House, read as follows: "Be it enacted, etc., That section 5219 of the Revised Statutes of the,United States be. and the same is hereby, amended so as to read as follows: ~ The conference resolution was as follows: "Be it resolved, That in the opinion of this conference, section 5219 of the United States Revised Statutes should be so amended as to permit the States to tax national banks or the shares thereof or the income there- from, according to such systems as they may consider desirable, provided that such taxation shall not be at a greater rate nor impose a heavier burden than is assessed or imposed upon capital invested in general banking business and the income derived therefrom." Proceedings of National Tax Association, 1921. p. 497. On December i2-14, 1921, officials from 16 States met in Washington. at the invitation of Mr. Samuel Lord, Chairman of the Minnesota Tax Commission, and drafted an amendment and a lengthy resolution. This group appeared before the Committee on Banking and Currency and actively sponsored the amendment. For an account of these activities see Lord, "Presidential Address," Proceedings of National Tax Associa- tion, 1922. pp. 242-60 esn. 251ff. See also Hearings, HR. 9579 (19221, p.3; 62 CR., p. 11433 (Dec. 15, 1921). 862 CR., p. 118368 (June 7, 1922). On the Senate side, Senator Wadsworth introduced S. 2903 on January 4, 1922. This bill, like others, was referred to the Committee on Banking and Currency and was not heard of thereafter. 62 C.R., p. S748 (Jan. 4, 1922). On Juno 8, Senator Kellogg introduced S. 3695. 3$ 62 C.R., pp. S8399 and 118437 (Juno 8, 1922), 118720-8736 and 8738 (June 14), and 118748 (June 18). The text of the bill is from ibid., p. 118720. - PAGENO="0296" 4276 "`SEC. 5219. That nothing herein shall prevent all the shares in any association from being included in the valuation of the personal prop- erty of the owner or holder of such shares in assessing taxes imposed by authority of the State within which the association is located, but the legislature of each State may determine and direct the manner and place of taxing all the shares of national banking associations located within the State, subject to the following restrictions: "`1. (a) That the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of the individual citizens of such State coming into competition with the business of national banks. "`(b) That in any State where a tax in lieu of a property tax is assessed upon the net income derived from such other moneyed capital, such State may, in~ lieu of a tax on the shares, impose upon the bank an income tax, assessed upon the net income of the bank, but such tax shall not be at a greater rate than is assessed on the net income of such other moneyed capital. "`2. That the shares of any national banking association, owned by nonresidents of any State, shall be taxed in the city or town where the bank is located and not elsewhere. Nothing herein shall be construed to exempt the real property of associations from either State, county, or municipal taxes to the same extent, according to its value, as other real property is taxed. "`3. That the provisions of section 5219 of the Revised Statutes of the United States as heretofore in force shall not prevent the legalizing, ratifying, or confirming by the States of any tax heretofore paid, levied, or assessed upon the shares of national banks, or the collecting thereof, to the extent that such tax has been or is in accord with the provisions of paragraph 1 of this section: Provided, That this shall not apply to taxes attempted to be levied before January 1, 1917.'" 3. Hearings on H.R. 9579.-The House Committee on Banking and Currency held hearings on H.R. 9579 on January 26 and 27 and on February 7-9, 1922. The hearings in January were devoted primarily to the proponents of the bill-the State tax officials; the February hearings to the opposition-the bankers.4° Twelve representatives of the States, mainly tax commissioners, testified. They stressed the financial chaos produced by the Richmond decision, which required refunds of millions of dollars in State and local taxes. They were certain that intangibles in the hands of individuals did not compete with banks. Such competition had been erroneously conceded by counsel for the city of Richmond in the bank tax case, but the tax officials believed such competition was not a fact generally or in Virginia in particular. They pointed to the added revenues which had been collected by the States from low-rate taxes on intangibles, a reform which many bankers had worked for, and which had been the basis for voiding State taxes on national banks in States where classi- fied property taxes had been adopted. They emphasized changes which had taken place both in State tax systems and in the nature of the national banking system since States were given specific authority to tax national banks in 1864. They were sure that legislatures could be trusted not to discriminate against national banks. Consequently section 5219 was no longer needed. The point of view was well cx- 40 Sec Hearings, H.R. 9579 (1922), pt. 1, PP. 3-108, 223-45. Only a brief summary of the tax officials' well- known position is given here. They also presented a brief, pp. 245-62. For the bankers' views, see Ibid., pt. II, pp. 111-223; also pp. 38-44, 46-56, 66-80, 108. PAGENO="0297" 277 pressed by Mr. Thomas E. Lyons, Chairman of the Wisconsin Tax Commission, as follows:4' * "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.43 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.44 The advantages to private bankers, particularly as they existed in New York and Boston, should be removed.45 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.4° The banks also feared that changes in section 5219 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.47 In short, the typical banker's attitude was that the less change in section 5219, the better. "in Proceedings of National Tax Association, 1922, p. 369. His testimony at the hearings was of similar Import. Hearings, H.R. 9579 (1922), pp. 57-66. 42 Their position is shown in the following quotations from Hearings, HR. 9579. at the pages indIcated: Mr. Sands: "Our position is that 5219 remains as it is, but if it is amended it should only be amended to the extent of income tax" (p. 114). Mr. McAdams: I believe it is fundamental that this section should remain unchanged" (p. 119). Mr. Divet: ~ * * the bankers' association are opposed to any change in the principle that Is involved in eection 5219" (p. 123). Mr. Favinger: "We are amply protected by section 5219. Add to it, if you will, the income tax clause, but that is all; do not change the principle involved" (p. 139). Mr. Helm: "I am opposed to it [the McFadden bill] because it gives us no basis for protection and com. parison, if you are left solely with the State banks, because the legis~lature has shown its willingness, where classification is possible, to classify State banks, leaving the title companies and others outside of that class" (p. 157). V Mr. Freeman: " * ~ frankly say that the present method of taxation Is satisfactory to the banks of New ~ersey" (p. 170). Mr. Garm: `~. . . we would like to see 5219 maintained or the principle maintained; or if it is necessary to make some amendments to accommodate the States that have different systems of taxation, an income or classified-property tax, then we would favor the amendment allowing bank shares to be taxed on their income." The Chairman then asked: "But so far as your own State is concerned, since the Richmond decision you are perfectly satisfied to let it remain where It is?" V Mr. Garm: "Yes sir, it makes no difference to us at all. There is no justification on that score and it will not make any difference either to the State or national banks" (pp. 185-6). Mr. Paton: " * we object to any amendment to 5219, on the ground that it is needed for the protection of the national banks; that there is no demand for it from the tax commissioners of a large majority of the States, and that in the few States where their classified systems are out of harmony with 5219 it should be incumbent upon those States to amend their tax laws rather than to seek the amendment of the long-standing Federal protective laws" (p. 207). 43 Of similar, though opposite, import was the expression by Oscar Leser, Maryland tax commissioner, in an early comment on the Richmond decision: If the banks prevail, impose a tax on deposits. Proceedings of the National Tax Association, 1921, p. 416. 44 Ibid. p. 424 (Thomas B. Paton of New York). As to an income tax, see statement of Mr. Favinger, quoted above in footncte 42. 43 " * they are all using part of their moneyed capital in the hands of individuals, and those various concerns are getting the same kind of money from the same kind of transactions." Mr. Favinger, Hearings, ILR. 9579 (1922), p. 132. "Hearings, H.R. 9579. E.g., Mr. McAdams, pp. 118-19; Dupuis, pp. 142-44; Adams, p. 147; Freeman, pp. 170-1. Woosley, op. cit., p. 57, points out that only 7 percent of the State banks had joined the Federal Reserve System, whereas national banks were required to be members. lie also made this comment: "While the services performed by the Federal Reserve System cannot be minimized, it Is a mistaken conception of membership to regard it as a claim for a tax preferred position" (ibid). `7 Cf. also: "If banks * * * are put in a boat by themselves, and the State also is allowed to tax them as they please, there is danger that they may be taxed more highly than they should." Paton, Proceedings of National Tax Association, 1921, p. 425. PAGENO="0298" 278 :S. 3695, introduced by Senator Kellogg, was said to have been drafted by tax officials interested in amending section 5219.~~ 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 na- tional banks were treated alike." ~° Shortly thereafter, on January 4, 1923, Senator Pepper submitted a report of the Committee on Banking and Currency on HR. 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 computa- tion of such averages came up for considerable discussion in the de- bate.86 Senator Pepper explained that H.R. 11939 provided not only 4162 C.R., p. S8399 (lime 8, 1922); Woosley, op. cit., p. 58; Proceedings of the National Tax Association, 1922 p. 253. ~~Fhe bill is reprinted in ibid., p. 254. 1064 C.R. pp. 5846, 847, 850 (December 22, 1922). Van Aistine in Proceedings of National Tax Associa. tion, 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." Ii 64 0.11.. p. 51218 (Senate report 986; January 4, 1923): p. 51455 (January 9, 1921). Senator Glass thought that 11939 did the same thing. Ibid., p. 51458. 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. 81463. 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 ragard 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 CR., p. 51455. * * * * * * * Son. Lenroot asked: "110w was the average to be determined without valuing every share of stock in the State?" (p. S1456). Son. 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. PAGENO="0299" 279 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, manu- facturing 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 votmg.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 (lone 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 pro- visions 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 sum- marized above. Proponents were sure that individual deposits did not constitute "other moneyed capital" coming in competition with na- tional banks, as had been held in the Richmond ease. 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.~° 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 $2 Ibid., p. S1456. 1364 C.R., p. 31563 (January 10, 1923), and p. H1843 (January 16, 1923). * $4 Ibid., pp. S2219, 2224 (January 23, 1923). Cf. ibid., pp. S2172, 2173 (January 22). U Conferees were appointed January 26, 1923. For the House, conferees were Messrs. McFadden, Dale, end Wingo; and for the Senate, Senators McLean, Pepper, and Fletcher. 64 C.R., pp. 112504, S2472 (January 26, 1923), and pp. H4779-4783 (February 27, 1923). E~ ibid., pp. S1458, 1450, 1460, 114800-i. The 1891 act was not meationei in either the hearings or the de. bates. * *. * PAGENO="0300" ,280 expediency.57 The same could not be said of the income tax, an oytion not permitted until after adoption of the 1923 amendment. New I ork, 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 restric- tions imposed by section 5219. Under a ruling of the State attorney general, bank dividends were included in the net income taxable to mdividuals 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.159 Nothing else received quite as much attention. Regardless of the reason many reprded the situation as "scandalous." 60 Fears were expressed that this competition would drive State and national banks out of existence. Aiid tO preserve the Federal Reserve System, national banks ne~eUed Federal protection.6' 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.65 On the other hand, it was frequently pointed out that many bankers voluntarily paid the taxes assessed against them and willmgly 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' con- tention that equal taxation of "individually-owned intangibles coming into competition with banks or the business of banking" was proper.64 This was the position of the Supreme Court in the Richmond case. ~7 `There Is "no morality in intangible property tax favoritism." Mr. Wingo, 65 C.R., p. H1542. As to the smture of intangibles and taxes upon them, see Leland, op. cit., pp. ii7ff. ~ Welch, op. cit., p. 40; 64 CR., p. Hl541. ~ Cf. Sen. Kellogg, ibid., p. S1463, Mr. Mills also pointed out that before the New York income tax was adopted, ~&-7 million had been collected; afterwards collections were $35 million. Ibid., p. H4785. In New York an institution like Kuhn, Loeb & Co. will pay $60,000; on the same basis a bank like the Han. over National will pay $240,000. Mr. Jones (Texas) 64 CR. H1542. Mr. Garner asked, should national banks pay more than 3. P. Morgan & Co? No, said Mr. Mills; Ibid., p. H1540. The New York law exempts "from ~Ikc taxes such poor taxpayers as 3. P. Morgan & Co., Kuhn, Loeb & Co. and other poor concerns engaged In the banking business." Sen. Shortrldge, 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. Hl545, 1546, 1659, 1842, 4803. ~ Mr. Mills in ibid., p. H1540. Mr. Wlngo agreed but added that It was not the fault of Congress. Ibid., p. 111659. 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 docu- ment 659, p. 205. He indicated that In large cities they were a'Ijuocts to brokerage businesses; in small com- munities, chiefly In agricultural sections, they furnished credit. Ibid., p. 206. "Mr. Wingo In 64 C.R., p. Hl542. 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: " * * ~ cannot say there was * because no witnesses were examined in the ordinary way, although representatives of a great many points of view were given * * ; butt * * 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. Sl457. LNorth Dakota had a comprehensive classification system, including low rates on individually-owned in- tangibles.) Also Mr. MacGregor in House, ibId., pp. 111842-3. U The ` whole proposition seems to be that the banks desire to escape taxation." Mr. McGregor, 64 C.R., p. 111842. 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. ~4 E.g., Sen. Walsh, 64 C.R., p. Sl463. 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). PAGENO="0301" 281 Others, as has been indicated, opposed this point of view. Many wanted State and national banks taxed alike.65 Others wanted all financial institutions included-some aiming especially at the private banks.as And still others thought banks should be treated like other businesses.67 This point of view prevailed, for the Senate Committee recommended, as explained by Senator Pepper, that the rate upon national bank shares "shall iiot 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 corn-. ing into competition with them are taxed." 60 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. WTingo: Let the states "clean their own house and quit quarreling with Con- gress." 70 This view was expressed by an editorial in The New York World (January 12, 1923), twice reprinted in the Congressional Record.7' 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. Pep- per.73 Thus, the consideration of alternatives or of complete freedom to tax banks did not get far. `"Cf. Mr. Wingo, 64 CR. p. 111512, including private banks; Williamson, Ibid., p. 114793. However, Sen. Pepper was of the opinion that if the rate was limited to what the State does to State banks and trust corn. panles, "we would be segregating bank capital, as such, as an object of hostile taxation." 11.11. 11939, he said, was an attempt to guard against that danger. Ibid., p. S1456. ~ Sen. Kellogg, ibid., p. S1455; Mr. Mills, ibid., p. 111510; Mr. Wingo, Ibid., pp. H1542, 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). ~` Sen. Kellogg, 64 C.R., p. S1459 (January 9, 1923); `~ IbId., pp. 81455-6 (January 9, 1923). "Ibid., p. H4797. 70 Cf. Mr. Stevenson, ibid., p. 11954; Son. Swanson, Ibid., p. S2175; Mr. Wingo, Ibid., p. 111542. Also of; to same effect, pp. 111541, 111(359. 71 IbId., pp. 81622, 111660; favorably referred to by Mr. Wlngo, p. 111(350. ?2Helmberger op. cit., pp. 19-20. 78 64 CR., p. ~1461. PAGENO="0302" 282 * An interesting point was raised by one member in each House, but was immediately passed over. Mr. Stafford contended that shares owned by nonresidents would not be taxed under the income tax. Mr. Wingo pointed out that they could only be taxed at the location of the bank, and read into the Record the proposed section 5219 as agreed to by the conferees.74 Other corporate intangibles or income from them are taxed at the owner's domicile (unless the business situs is different), but this treatment could not be applied to national bank shares under section 5219. In the Senate, Senator Smith observed that collection of the share tax at the location of the bank deprived the county where the shareholder lived of tax revenues from such shares. Senator Kellogg's reply was, "that has always been the law for taxing national banks."75 So not much more attention was given to this, although the Senate did discuss the income tax on nonresidents. 6. Validation controversy.-Although the question of validating previously levied State taxes on national banks involved a transitory problem, the debate which it engendered-particularly in the House- was as heated and almost as extensive as the discussion of other aspects of the proposed amendments to section 5219. Validation was also among the last of the disagreements to be settled between the House and Senate. In the end, the House prevailed.76 Several members were doubtful that Congress had power to validate the State taxes. Senator Kellogg contended that the Congress should give its consent to validation of the taxes by the States themselves. He presented a legal brief in support of this position. The Senate was concerned also with the morality and wisdom of validation. Some members thought this action would constitute a legislative veto of a judicial decision. On the other hand, Senator Johnson pleaded that anything that could be done to correct the situation should be done. In the end, affirmative action was taken.77 Validation was especially important to Massachusetts, New York, and North Dakota., with their income and low-rate taxes on in- tangibles. It was estimated that Massachusetts would lose $12 million unless State taxes previously levied were made valid, and New York from $17 to $20 million.78 7. Passage of amendment.-On February 27, 1923, the House receded from its disagreement to the Senate amendment relative to validation and concurred therein with 220 yeas, 85 nays, and 122 not voting. Mr. Mills remonstrated that the matter before the House had been seen by only three members, and that after having been before the House for two years it had to be passed in an hour's time. Mr. Wingo pointed out, however, that the Conference Committees had agreed on all of the section 5219 amendment, except the share tax provision. This remained in dispute. He told the House that the Senate proposal would continue the "special privilege" of lesser taxation of private bankers in some States, whereas the House pro- posal would protect national banks against discrimination in favor of private bankers. The State could tax national banks without limit - ~4 IbId., pp. 114800, 4801. "Ibid., pp. S2172-3. "Cf. Ibid., pp. 112504 (Jan. 26, 1923), S4959-60 (March 1), 115556 (March 3). 7' Ibid., pp. S846, SS47, S819-50 (December 22, 1922), S2220-23 (January 23, 1923), 112504-5 (January 26), H4782-95 (February 27). 71 IbId., pp. S2220, S2221, 4788. PAGENO="0303" 283 "just so it imposes the same burden on competing capital employed in private banking."79 The first paragraph after the enacting clause of the House and Senate versions differed only slightly in phrasing. But, subdivision 1(b) relating to the basis for taxing shares of stock of national banks differed materially, as may be seen from the following quotations: 80 House version of paragraph 1(b): "In the case of a tax on said shares. the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business qf national banks: Provided, that bonds, notes. or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or invest- ment business and representing merely personal investments not made in competition with such business shall not be deemed moneyed capital within the meaning `of this section." Senate version of paragraph 1(b): "In the case of a tax imposed by a. State or any agency thereof on said shares the rate of taxation shall not be higher than the rate applicable to other moneyed capital employed in the business of banking within the taxing State: Provided, that whenever by any taxing district the shares in mercantile, manu- facturing or business corporations doing business therein are taxed the rate applied by said taxing district to the shares in banking associa- tions 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." On March 1, 1923, Senator McLean submitted the conference report on H.R. 11939; and the Senate agreed to it, accepting the House amendment. Senator Kellogg explained that unless the Senate adopted the House version there would be no law at all. The Senate had also provided in the real estate tax provision that if bank real estate taxed, that assessment had to be deducted from the bank's capital before the shares could be taxed. The House struck out that proviso "because some States tax the real estate and then they tax the stock at a rate sufficiently lower to make it up." There were also differences in the validation provisions.8' K. Further amendment of section 5219: 1926' 1. Preliminary events.-In spite of the protracted congressionat consideration of the 1923 amendment of section 5219, complaints ~ For the vote, cf 64 CR., pp. H4794-5. Mr. Mills' protest appears at p. 114800: "How in the name of commonsense can we discuss a technical amendment which not only undertakes to limit States as to the taxation of national banks, but has literally tied up that limitation with every form. of taxation that I can think of, except public service corporations?" For Mr. Wingo's remarks, cf ibid., pp. 114801-2. Six months later Mr. Mills still felt the same way: "Insofar as the House of Representatives is concerned, the measure that became law was substituted for the measure that had been considered for 2 years, at the last moment. It was not in printed form before the Members of the House; there were only two typewritten copies in the House at the time and the members had to vote, after simply hearing the law read-and you gentlemen know how well you can understand a tax law if a clerk reads it from the desk. Some of the gen- tlemen were so interested in preventing a proper understanding, that one of them who had a typewritten copy denied me the use of it!" Proceedings of National Tax Association, 1923, p. 375. 80 Texts from 64 CR., p. S4959 (March 1, 1923). See also the discussion by Mr. Wingo, ibid., pp. H48O1-~ (February 27). Italics in the House version are his. ~ il)id.. pp. S4959-60 (March 1, 1923). Cf. Woosley's caustic summary (op. cit., p. 61): "The Senate. . . found itself in the position of having to take the House bill or nothing at all. If the House had really desired to amend Section 5219 in such a way as to eliminate purely private investments from the limit on national bank taxation and at the same time insure the equal taxation of private and incorporated banks, it is difficult to understand the objections to the Senate compromise. It would have excluded private investments from the measure of national bank taxation; the House provision succeeded admirably in keep- ing them within that limit . . . the general counsel of the American Bankers Association was able to report that the amended law `is virtually the bill advocated by the Special Committee on Taxation of the American Bankers Association.' On the other side, it may be remarked that the proviso in the Senate version of paragraph 1(b) was am- biguous and would have invited litigation. PAGENO="0304" 284 against it arose almost as soon as it became effective. The outcries of State tax officials probably reached their height at the annual con- ference of the National Tax Association, at White Sulphur Springs, West Virginia, in late September, 1923. It was contended that the 1923 amendment did not change the share tax at all but put into the statute the rule pronounced in the Richmond decision, even though it was, the supposed intention of Congress to correct the resulting uncertainty. The wording of the 1923 amendment was criticized as not clear. In the "other moneyed capital" clause, the words "in competition with the business of national banks" were likely to cause as much difference of opinion as the words "other moneyed capital." They would certainly open the door to further litigation.82 Officials of States utilizing corporate and personal income taxes, such as New York and Massachusetts, were particularly critical of the 1923 amendment. It did not allow them to tax the banks on net income and then include bank dividends in the taxable income of individual shareowners-as was done in the case of other corporations. A similar point was made by one who said the amendment "m~akes it impossible to tax the national banks * * * as farmers are taxed," by which he meant that farmers were taxed on their property and again on their incomes.85 This was prevented by the requirement in the amended section 5219 that each State choose a single method (in addition to the real property tax) for taxing national banks. This limitation of the choices within each State was a phase of the con- troversy that had received scant attention in the Congress. In short, the 1923 amendment was not what the State officials "had requested nor was it what they desired." ~ Several delegates at the 1923 National Tax conference were on the other side. One thought the 1923 amendment was "a very fair piece of legislation for the present." Another thought that, considering the times, legislatures could not be trusted to tax banks fairly. One of the New York delegates thought the amendment was acceptable to neither the States nor the banks.85 When it came to making specific recommendations about changes in the 1923 amendment, a considerable controversy arose (expressed largely in procedural arguments) over a proposed conference resolu- tion on the subject. Tjme resolution that was finally adopted asked that section 5219 be amended so as "to permit the States to tax national banks without any limitations other than those prescribed in the Fourteenth Amendment." 86 During debate on this resolution at the tax conference, outright repeal of section 5219 was advocated by a State tax official. But if that were done, others observed, the States might not be able to tax national banks at all; some form of congressional authorization was - ~ Proceedings of the National Tax AssociatIon, 1923, pp. 182-231, 366-402. Gary, at p. 191; Law, p. 211; Thomas, p. 218; King, p. 222; Satterlee, p. 226; Lord, pp. 385-7, 392-3. `3 King, In Ibid., p. 221; Satterlee, p. 226; McKenzie, p. 377. Martin Saxe, New York attorney representing various banks, said (ibid., p.216): `Without doubt, section 5219 as amended is not perfect. There is sound reason why, in the Income tax states, they should have the right to tax dividends of stockholders as personal Income if they also * * * tax the dividends of stockholders of corporations as personal income, and 1 think this would be conceded." S~ Gary, Ibid., p. 155. Mr. Gary, counsel to the Virginia State tax board, acknowledged that the amendment "did, however,. . . far surpass what they [the State officials] had reasons to hope for throughout the entire conflict. "Powell, Ibid., p. 213; B1odg~tt, ibId., pp. 3S9-90; Law (New York State senator), Ibid., p. 212. Cf. Bryan, attorney for the Virginia Bankers Association, Ibid., p. 218. $`For the text of the resolution, cf. IbId., pp. 361-2. The vote was 70 to 12 (IbId., pp. 401-2). PAGENO="0305" 285 required. Moreover, eliminatioii of section 5219 would not stop liti- gation-"we'd still have plenty of litigation." 87 2. Events of 1924 and 1925.-After the 1923 tax conference, agita- tion for further amendment of section 5219 quieted considerably, al- though individual State officials continued to work for change. No bills to amend the section were introduced in the first or second ses- sions of the 68th Congress.88 Nor is there any record of discussion or presentation of resolutions on bank taxation at the National Tax Association conference in St. Louis, Missouri, in September, 1924. However, at the next conference, in New Orleans, Louisiana, in mid- November, 1925, a resolution was adopted without discussion, creating a committee of the Association to "confer with similar committees of such other organizations as may be interested"-the American Bankers Association-"to the end that suitable amendments may be made," etc., to section 5219.89 This was just what happened. An agreed amendment was the result.°° its progress through Congress was rapid. -. 3. Legislative history of 1926 amendinent.-On March 3, 1926, identi- cal bills to amend section 5219 were introduced in the Congress. Mr. McFadden introduced H.R. 9958, and Senator Pep~er introduced S. 3377. The bills were referred to the respective Committees on Banking and Currency. Mr. McFadden explained to the House: before 1 introduced this bill I saw to it that it was approved by the American Bankers Association special tax committee; it was approved by the National Tax Association; and the heads of the State tax departments of both New York and Massachusetts appeared before the House Banking and Currency Committees and approved of this legislation." He also read telegrams from Governors Al Smith (New York) and Alvin Fuller (Massachusetts) urging adoption of the amendment.9' The purpose of the bill, Mr. McFadden explained, was- to enable States that have adopted income-tax methods to abandon the ad valorem taxation of the shares of national banks and apply income-tax methods to national banking associations within their limits, without thereby favoring national banks and their stock- holders, as compared with other corporations generally and their stockholders. In other words, to make it possible for income-tax States to tax national banking associations and their shareholders on a complete taxing panty with other corporations and their stock- holders." 92 The bill proposed no change in the Federal statutory provisioii relating to ad valorem taxation of shares in national banks, despite earlier contentions by State tax officials critical of the Richmond decision and the 1923 amendment and a fresh reaffirmation of the Richmond (lecision by the Supreme Court in January, 1926.~~ These officials contended that section 5219, as judicially interpreted, was a major deterrent to State efforts to develop and use classified property taxes in place of general property taxes on intangibles. $7 Cf. ibid., pp. 212-13, Celsus P. Link (Colorado T.tx Commission) and II. M. Powell; p. 219, Laser; p. 220, llough; p. 228, Bryan. U First session, December 3, 1923 to June 7, 1924; second sessIon, December 1, 1924 to March 4, 1925. No bills li3tcd in Congressional Record Index. $9 Proceedings of National Tax Asscelation, 192.5. p. 3.57. ~ Committees met in New York, January 22-23, 1926. Proceedings of National Tax Assceistlon, 1926, p. 283. "67 CR., p. 116084 (March 23, 1926). " Ibid., PP. 116032-3. ~ Cf. the next subsection, dls7ussing the Quthrlo Center case. 79-421 0 - 72 - 20 PAGENO="0306" 286 Debate was brief and perfunctory. The Senate approved the bill on March 18. `rue House acted a few days later, and the new law was signed by the President on March 25, 1926.~~ The text of the 1926 law is reproduced in appendix 1-A of this report,95 where it is identified as section 548 of title 12 of the U.S. Code before amendment by Public Law 91-156, December 24, 1969. There were no further changes in section 5219 during 1926-1969, although proposals for amendment w~re offered from time to time. These are reviewed in a later section. 4. The Gut hrie Center ca~e.-As the committees of the National Tax Association and American Bankers Association were arranging to confer about amendment of section 5219, the United States Supreme Court announced another decision declaring void a tax on national bank shares-in this instance, an Iowa tax levied in 1920. In the case of First National Bank of Guthrie Center v. Anderson, County Auditor,96 the Court concluded, on the basis of facts alleged by the plaintiff bank, that individually-owned intangible property, "con- sisting chiefly of notes, mortgages, and money loaned at interest," was "moneyed capital . . . in competition with the business of the.bank." These moneys and credits were taxed at a rate substantially lower than that applied to bank s1~ares. Accordingly, there was "serious discrimi- nation" and the tax was void. The bank alleged that all bank stock (of State and national banks) in the county was assessed at $316,850 and taxed at a rate of 143.5 mills on the dollar; and that the assessment of "notes, mortgages and other evidences of money loaned and put out at interest by individual citizens of the county," although not precisely known to the plaintiff, was believed to exceed $5 million and was subject to a tax rate of 5 mills on the dollar. Though the tax in question was levied for 1920, the Supreme Court commented on the 1923 amendment of the share tax provision of section 5219, in view of a contention by the defendants that this was intended as a legislative interpretation of the restriction imposed by the Richmond and earlier decisions-and that the congressional pro- ceedings that led to its adoption would show this. The opinion does not indicate that the Court examined the legislative record to ascertain the intent of Congress in approving the 1923 amendment, but it in- eludes the following comment: "But assuming that this is true the situation is not changed; for the reenactment did no more than put into express words that which, according to repeated decisions of this Court, was implied before. In Mercantile National Bank vs. New York, . . . it was distinctly held that the words `other moneyed capital' must be taken as iinpliedly limited to capital employed in substantial competition with the busi- ness of national banks. In later cases that definition was accepted and given effect as if written into the restriction. It, of course, would ex- clude bonds, notes or other evidences of indebtedness when held merely as personal investn1ents by individual citizens not engaged in the bank- ing or investment business, for capital represented by this class of investments is not employed in substantial competition with the busi- ~Cf. 67 CR., p. 115442 (March 11, 1926), S5446 (March 12), S5760-62 (March 17, including a reprint of House report 526 on H.R. 9958), S5822-23 (March 18), HGOSO-89 (March 23), S6124, S6150, and 116209 (March 24), and S6217 (March 25). Cf. Welch, op. cit., pp. 48-50; Woosley, op. cit., pp. 62-5. `I Supra, p. 1 $6 269 U.S. 341 (1926). PAGENO="0307" 287 ness of national banks. Thus, in legal contemplation and practical effect the restriction was the same before the enactment as after. What bearing a different legislative interl)retatlon might have on the tax already levied, as here, need not be considered." The defendants pointed out that the allegation of $5 million of other moneyed capital, or any portion of it, "does not of itself say" that it "was employed in competition with the bank." They argued that "the petition falls short of showing a discrimination in favor of a relatively substantial amount of moneyed ~apital so employed." The Court rejected this argument, declaring that this allegation was so related to the others that to be rightly understood it had to be read with them; that it was in accord with the theory underlying the other allegations; and that it served, with them, "to show a serious discrimination agamst the bank's shares and in favor of a relatively substantial amount of competing moneyed cal)ital." 98 In this case, as in the Richmond case, where the evidence also was not controverted, the existence of competition was inferred from the law as adjudicated earlier and from the plaintiff's allegations, rather than from demonstrated facts. In the Court's view, for share-tax purposes, individually-ow-ned intangibles were in competition with national banks unless otherwise proved.99 5. Changes made by 1926 amendment.-The major change made by the 1926 amendment from that of 1923 was the addition of a fourth option under which States could apply to national banks a tax "ac- cording to or measured by their net income." The tax base could include all income, even that derived from hitherto tax-exempt securities.100 But the excise tax was subject to the following proviso: "(c) In case of a tax on or according to or measured by the net income of an. association, the taxing State may, except in case of a tax on net income, include the entire net income received from all sources, but the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations doing business within its limits: Provided, however, That a State which imposes a tax on or according to or measured by the net income of, or a franchise or excise tax on, financial, mercantile, manufacturing, and business corporations organized under its own laws or laws of other States and also imposes a tax upon the income of individuals, may include in such individual income dividends from national banking associations located within the State on con- dition that it also includes dividends from domestic corporations and may likewise include dividends from national banking associations located without the State on condition that it also includes dividends from foreign corporations, but at no higher rate than is imposed on dividends from such other corporations." If a State imposed a general income tax on other corporations, it could not tax national banks at a rate higher than it applied~ to finan- cial corporations or than the highest of the rates assessed upon mercan- tile,_manufacturing, and business corporations. The amendment thus `~ 269 U.S. 341, at 319, 350. The Mercantile National Bank v. New York, 121 U.S. 138, here cited by the Court, was decided in 1887, 36 years before the 1923 amendment. `~ 269 U.S. 311, at 351, 352. " Ibid. Cf. Woosley, op. cit., p. 64. 100 This was In accordance with the decision in Flint v. Stone Tracy Company, 220 U.S. 107 (1911). Cf. Welch, op. (it., PP. 49-~0. PAGENO="0308" 288 cover~d the situation in New York with its general corporate income tax and that in Massachusetts with its selective rates. National bank dividends could be included in the taxable income of resident stockholding taxpayers, provided dividends of other corporations were similarly treated. If dividends from out-of-state corporations were included in personal taxable incomes of residents, dividends from out-of-state national banks could also be included. If personal taxpaying capacity is to be measured, it is important that income from all possible sources be included in the taxable income of the individual. If tax rates are progressive, the inclusion of all such income in the base is doubly important. As noted earlier, the 1923 provision relating to the taxation of shares was not changed. However, in order "to make it clear, that the phrase `taxing district' [in which banks were located and where shares owned by nonresidents could be taxed] should not be construed so narrowly as to prevent State administration," the phrase was made to read "shall be taxed by the taxing district or by the State where the association is located and not elsewhere." 1 The 1926 amendment, like those preceding it, made no change in the provision governing State or local taxation of bank-owned real property according to its value (paragTaph 3). The earlier validating provision was modified to permit States to legalize, ratify, or confirm taxes paid, levied, or assessed before March 25, 1926, upon the shares of national banks, if the tax would be valid under the amended law (paragraph 4). 6. Defects of 1926 amendm.ent.-The 1926 Amendment of section 5219 was in no sense a comprehensive solution of State problems in taxmg national banks.2 It was no solution at all of share tax problems, especially in light of the Supreme Court decision in the Guthrie Center case.3 Nor did it permit States to tax personal property, tangi- ble or intangible, of national banks. Many States tax the furniture and fixtures of State-chartered banks and trust companies. Some national banks may even voluntarily pay such taxes. Helmberger said about the 1926 amendment: * * * Section 5219 seems to require discrimination' in favor of national banks (and to encourage such discrimination in favor o State banks) only insofar as: (1) the tangible personalty of national banks may not be taxed, and (2) most States levy many different business taxes on other corporations-taxes which cannot be applied to na- tional banks. If a State has or chooses to adopt the excise tax on banks, a `corporate income tax, and a personal income tax which includes dividends generally in its base, and, if it chooses to abolish the other business taxes, the only remaining discrimination would lie in the fact that national banks' tangible personalty could not be taxed. All of the above, except the exemption of bank tangible personalty, are included in the recommendations of the Committee [of the National Tax Association] `on a Model System of State and Local Taxation." The limiting proviso in the 1926 amendment relative to "a tax on or according to or measured by" net income was vague. When it said I The reference is to paragraph 2 of the "conditions" set forth In section 5219. The change was made at the suggestion of the National Tax Association committee. See their report in Proceedings of the National Tax Association, 1926, p. 286. 2 Cf. ibid., p. 287. ~ See above, pp. 286-287. 4 Helmberger, op. cit., p. 122. PAGENO="0309" 289 that "the rate shall not be higher" than the highest of the rates assessed by the taxing State on financial, mercantile, manufacturing, and business corporations, it did not indicate whether the comparison was to be in terms of stated tax rates or actual (effective) tax burdens. Nor did it specify how comparisons were to be made, whether by averages of various types, single instances, or otherwise. It is not a simple matter to make comparisons on the basis of averages, as had been indicated to the Senate in 1923 by Senators Kellogg and Pepper and other proponents of an amendment to limit ad valorem rates on bank shares.5 Comparisons of effective rates or burdens require "elaborate statistical analyses of the tax burdens on other corpora- tions. . . ., unless such corporations are subject to the same type and rate of taxation as is applied to banks." ~ Most of those who have had occasion to compare bank taxes with other taxes have used statistical measures of burden-ratios of one kind or another. Writing in 1960, Helmberger noted that seven States then equated "rate" with "burden," and he commented as follows: ~ "Since these other corporations pay taxes other than the excise and real estate taxes, the overall burden (measured by net income) on them would be higher than that imposed on national banks if all corporations paid the same excise rate as such. The seven States have chosen in effect to interpret the excise rate on other corporations to mean the ratio to their net income of all State and local taxes paid by them other than real estate taxes. It is their view, for example, that an 8 percent excise tax on national banks accompanying a 5 percent excise tax on other corporations is within section 5219-provided that~ these other corporations paid taxes, other than the excise tax as such and real estate tax, equal to 3 percent or more of their net income. Excise rates on national banks are said to be `built-up' if those rates exceed the excise rate as such applied to other corpora- tions. The built-up concept can be utilized in two ways: (1) Applying the built-up rate to banks only, leaving the old (and lower) rate in effect on other corporations to compensate for the fact that the latter pay other taxes to which national banks cannot be made subject, and (2) Applying the built-up rate to all corporations alike but per- mitting the offset of State and local taxes paid other than real estate taxes. National banks would have no offset. "The first method of using the built-up rate concept is employed by six of the seven excise-tax States which use the built-up rates. The six are Alabama, California, Colorado, Massachusetts, Minnesota, and Missouri.15 The seventh, Oregon, uses the second method (the offset method) though it permits offsets for personal property taxes only, and even that is limited. Alabama, California, and Missouri really utilize both methods, since they apply the built-up rate to financial corporations rather than to banks only, and they permit financial corporations other than commercial banks to use as offsets the taxes they pay but commercial banks do not pay. At one time California utilized the tax offset method for all corporations other than banks but dropped it in favor of its current tax to avoid inequities `See above, pp. 278-279. 6 Woosley, op. cit , p. 86. 7 Helmberger, op. cit., pp. 37-9. italics and quoted footnotes are his. "13 Michigan currently taxes the shares of national banks. The Governor has recommended that thelegisla- ture enact `a corporate proSts tax' at the rate of 5 per cent on non-financial corporations and at the rate of 7 percent on financial institutions. Minneapolis Sunday Tribune, Feb. 15, 1958, 5B." PAGENO="0310" 20 1~etween other corporations with different amounts of tangible per- sonal property. Oregon, too, is backing away from the use of offsets. tlntil 1957, personal property taxes paid were allowed as an offset up to 50 percent of the excise tax for any corporation. Now only corporations engaged primarily in manufacturing may use personal property taxes as offsets, not all personal property taxes are eligible for use as offsets, and the offset is limited to 33.5 percent of the excise tax. In addition to this change, Oregon's new law increased the excise rate on banks to 9 percent while applying a rate of 7 percent to util- ities, and a rate of 6 percent to other corporations. Thus Oregon now uses a combination of the built-up methods. The national banks have challenged the constitutionality of the law. They filed a suit on May 12, 1960.16 "The American Bankers Association has argued that Section 5219 permits a State to apply an excise tax to banks even though it applies no excise tax nor income tax to other corporations.11 In such a case, the only way to determine whether the rate is within the restrictions of section 5219, if indeed the tax itself is, is to compare the ratio of the excise tax to net income for national banks with the ratio of all State and local taxes paid by other corporations other than real estate taxes to other corporation net income. South Dakota ha's chosen to levy an excise tax on banks (and other financial corporations) without levying either an excise tax or a net income tax on nonfinancial corporations. The legality of South Dakota's bank tax and the bank taxes of all excise-tax States which utilize the built-up rate concept is question- able." Nor was the 1926 amendment specific as to what "financial cor- porations" were to be used as a yardstick for net income or excise taxes.8 This was left to the courts to decide. Did Congress intend to include building and loan associations, savings banks, mortgage houses, insurance companies, and private security underwriters? The meaning of "banks" in the laws and court decisions has been, on the whole, quite clear. The broader term, "financial corporations," has not been uniform in State laws or in decisions of the courts. Nor is the concept of "mercantile, manufacturing, and business corporations" in common use; the inclusions and exclusions often differ from State to State. In connection with the dividends tax, Welch criticized the drafters for their reference to "domestic" and "foreign" corporations:9 "When the dividends tax is used as a supplementary tax upon national banks, its rate is apparently limited in two ways. It may not exceed the rate imposed Ul)Ofl the net income from other moneyed capital, nor may it exceed the rate imposed upon dividends from other corporations. All of the dividends paid by national banks within the State may be taxed as part of the income of the individual stockholders provided a similar tax is imposed upon dividends paid by domestic corporations. It seems that this tax may be laid upon dividend re- ceipts of non-residents as well as residents. Dividends, received by residents from national banks in other States may be taxed if dividends from foreign corporations are also taxable to residents. "16 Reported in questionnaire completed by the Oregon Tax Department, Sept. 1958, and in aletterto the writer from Donald Ii. Burnett of the Law Section of the Oregon State Tax commission, dated August 2, i960." [The Oregon rate for banks was reduced to 8 percent in 1963. The tax still applied in 1971-Ed.] "17 Welch, State Taxation of Banks, pp. 53-56 and Thornton Cooke, `Taxation: the Position of the Banks', In The Proceedings of the National Tax AssociatIon, 1930, pp. 270-283." $ Cf. Woosley, 01). cIt., p. 88; Welch, op. cit., p. 61. Welch, op. cit., p. 180. PAGENO="0311" 291 "This aspect of the Federal law is full of ambiguities, and without court decisions upon certain points its interpretation is highly ques- tionable. Suppose, for example, that a corporation operating wholly within a certain State is chartered by another State. The usual practice is to tax such a corporation on its entire net income but to exempt dividends received from it by resident stockholders. Would the exemp- tion of these dividends from a foreign corporation invalidate a tax upon dividends received by residents from national banks without the State? Our guess is that it would not, since it is customary to extend such exeml)tions to dividends only in the proportion that the earnings of the corporation are said to arise within the State, and it would doubtless be contended that the same provision applied to national banks. Nevertheless the choice of the words `foreign' and `domestic' by the drafters of section 5219 was unfortunate." Finally, by limiting States to a choice among four mutually exclusive options in their taxation of national banks, the statute denied them a freedom of choice which they enjoyed in the taxation of other corpora- tjOfls.b0 Their freedom respecting banks was not greatly enlarged by pro- vision for the secondary option of taxation of shareholders' dividends under the individual net income tax as a supplement to either basis for taxing the banks' corporate net income, since this combination was severely restricted by specifications included in the amendment. If a State chose the share tax option in taxing national banks (or was restricted to this method by its constitution), it was not permitted to include national bank dividends in the taxable income of share- holders who were subject to State income tax. States could not tax the personal property of national banks because such permission had never been extended. Other corporations, however, in most States, were taxed upon the personal property they owned. Other corporations, moreover, were subjected to a variety of other taxes that were not specifically permitted by section 5219. `rliey often paid franchise taxes based on capital stock, often with the addition of earned surplus. In many States, their purchases and sales were taxed. Property purchased outside the State and brought into the Statc for productive or other purposes was often subject to State use taxes. Insurance companies generally were subject to property and premium taxes. Most companies paid gasoline and other highway taxes. Some paid taxes on bank deposits or for recording mortgages and other documents. L. Attempts to amend section 5219: 1926-1969 1. The law and attempts at legislation.-The period from 1926 to 1969 saw no legislative changes made in section 5219. After the amend- ment of 1926 was passed, some States desired further changes in the law, particularly in the share-tax provision. This movement lost its force in 1935 and expired completely in 1937. A second, not too forceful drive for further changes, affecting taxes "according to or measured by" net income and also permitting the collection of sales and use taxes, began in 1941 but petered out in the early 1950s. No concerted movement for change preceded the 1969 amendment. The two early efforts for change will be described briefly. Decisions and legislative events in the State taxation of interstate commnr~rce were also affecting banks at this time and will be briefly considered. A move to apply the 10 Cl. Woosley, op. cit., pp. 89-90. PAGENO="0312" 292 protection of section 5219 to State banks was attempted. And finally, events leading up to P.L. 91-156 will be described. Even though the statute was not changed by Congress during 1926- 69, the Supreme Court was quite busy. It handed down a number of far-reaching decisions directly affecting the taxation of national banks under section 5219 and others with indirect effects related to the use of sales and use taxes, income taxes, and the doing of interstate business. No attempt will be made to present a chronological or complete account of these decisions. Rather, in the next section they are dis- cussed to~)ically in relation to the share tax, income taxes, and the sales tax. Nor will a review of alicases be attempted.'1 Both time and space dictate concentration on the major decisions. 2. The share-tax push: 1927-1935.-The 1926 amendment was bitterly received in many quarters-it had done nothing to change or improve the share-tax option to which many States were tied by constitutions or legislative choice. Hardly had the new provisions taken effect, when a movement to change the share-tax option began. The mainspring for the push came from Minnesota. In 1927 the legislature of that State created a Special Tax Commis- sion on State Taxation of National Banks. It took the Commission no time at all to decide that a State could do little or nothing to improve the situation; what was required was cooperation with other States to secure afurther amendment of section 5219.12 A Minnesota mortgage recording tax of 3 mills on the dollar had caused invalidation of national bank taxes in that State. The Commission and other State officials were reluctant to reduce the rate on bank shares to 3 mills. Use of the excise option would have required a State constitutional amendment.'3 Accordingly, the Commission set to work to enlist the support of other States in a further amendment of section 5219. At the National Tax Association conference in Toronto, Canada, in October 1927, the Commission chairman, State Senator George H. Sullivan, asked those interested in the bank tax situation to meet for a discussion. Repre- sentatives of 36 States attended. They adopted a resolution which recommended that section 5219 be amended as follows: "In thecase of a tax on said shares, the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital used or employed in the business of banking." A committee was appointed to represent all the States in pushing this amendment.14 Soon afterward, the Special Tax Commission of Minnesota arranged with Congressmen from the State to introduce the proposed amend- ment in Congress. On December 12, 1927, Senator Norbeck introduced S. 1573, which l)rovided that national bank shares could be taxed "at no greater rate than is assessed upon other moneyed capital used or employed in the business of banking." The bill was referred to the " Decisions up to 1934 are covered in Woosley, op. cit., and Welch, op. cit. 12 Minnesota Session Laws, ch. 382; Report of Special Tax Commission on State Taxation of National Banks, p. 22 (reptiut of Report along with pertinent chapter from Report of Minnesota Tax Commission. 1928; address of Coy. Theodore Christianson, bafore Governor's Conference at New Orleans, November 20, 1928; and extract from Governor's Message to Minnesota Legislature on taxation of national banks). Also printed in Eleventh Bisimial Report of the Minnesota Tax Commission to the Governor mci Legisla- ture of the State of Minnesota (St. Paul, 1928), p. 159-82. 11 Minnesota v. First National Bank of St. Paul. 273 U.S. 561; 71 1,. ed. 535 (decided March 21, 1927), Mjiiiesota Special Tax Commissior. Report (1928), p. 27; the attitude of Commission toward the excise option is presented at pp. 28 if. 14 Ibid., p. 23. Members of the Committee were: George IT. Sullivan, Chairman (Minnesota); M.D. Lack (California); J, V. Benton (Virginia); Henry F. Long (Massachusatts); C. P. Link (Colorado); George Vaughn (Arkansas); Was. H. I3lodgett (Connecticut), and Milbank Johnson (California). Ibid. PAGENO="0313" 293 Senate Coniniittee on Banking and Currency. 011 December 15, Senator Capper intro(Iuce(1 S. 1706; it was referred to the Committee on Finance, but later transferred to the Committee on Banking and Currency. On January 6, 1928, Mr. Goodwin introduced 11.11. 8727, which l)roPose(l to limit the share tax to the rate applied to shnres of State banks.'5 Hearings were held by the Senate Committee in late February, 1928, on Senator Norbeck's bill, S, 1573.16 rfl1e hearings on February 23 were devoted almost entirely to statements and testimony of State officials who favored the bill. Bankers and their representatives testified on the second day. On the last day a very short session was devoted largely to hearing former Senator Pepper, who was appearing at the request of three Pennsylvania banks, hearing the continued testimony of the Minnesota Attorney General, George Youngquist, and hearing the closing remarks of bank attorney Martin Saxe of New York. The argument of State officials in favor of S. 1573 was that the 1923 amendment of section 5219 had changed nothing so far as State taxa- tion of national banks shares was concerned. Courts still were holding share taxes void where individually-owned intangibles were taxed at lower rates or were incompletely assessed under general property tax rates. A brief filed by the State of Minnesota asserted that this clouded the tax on national banks in some 43 States. The Minnesota witnesses were especially concerned lest section 5219 invalidate national bank taxes because of the application of low-rate taxes to individually- owned intangibles and registry taxes to mortgages.'7 The opposition of bankers to S. 1573 was equally clear. They did not want the protection of section 5219 removed or changed. They objected to being placed in a class by themselves. They testified that States had an animus against banks and bank stock. Besides, the 1926 amendment gave the States three alternatives for taxing national banks, "and that ought to be enough." One banker argued that capital of merchants deposited in banks might be in competition with national banks because they sometimes loan money. Another believed that a man who paid $1,000 to a bank for a bond might be both a customer and a competitor-a customer of the bank from whom he bought the * bond, a competitor of all other banks.18 On May 10 and 11, 1928, the House Committee on Banking and Currency conducted a hearing on Mr. Goodwin's bill, H.R. 8727. This hearing added little to arguments previously produced by both sides. The States sought changes in the share-tax option so that it could be safely used without invalidating national bank taxes; the banks opposed the change, contending that other good options were available to States.'9 Following the House Committee hearings, two additional bills were introduced in the 1st session of the 70th Congress. Senator Norbeck 1569 C.R., p. 5476 (December 12, 1927), p. 5676 (December 15), p. 51001 (January 5, 1928), and p. 111124 (February 6). 16 70th Congress, 1st session, Taxes on Bank Shares, hearings before the Senate Committee on Banking and Currency on S. 1573, February 23, 24, and 29, 1928 (1028), 200 pages. 17 Ibid. Cf., e.g., Mr. Sullivan of Minnesota, p. 3; Mr. Egger, Michigan, pp. 23-4; Mr. O'Brien, Iowa, p. 29; brief filed by Minnesota, pp. 42-4; and note summary, pp. 61-7. Designated as the only States not affected by Supreme Court decisions were Georgia, Missouri, Pennsylvania, Texas, and Wisconsin (pp. 66-7). 18 IbId., p. 68, Mr. Paton; p. 72, Mr. Chapman; p. 93, Mr. Blngham; pp. 104-6, Mr. Cooke; p. 13.5 Mr. Mattson. As to competition, cf the discussion of tile Guthrie Center case, supra, pp. 216-17. 19 70th Congress, 1st session, hearing bafore the House Cornniittee on Banking and Currency on HIt. 8727, May 10 and 11, 1928; 194 pages. Cf. Woosley, op. cit., pp. 68-72; Report of (Minnesota) Special Tax Commission on State Taxation of National Banks, bc. cit., pp. 25-6: also Eleventh Biennial Report of the Minnesota Tax Commissi9n, 1928, pp. 164-65. PAGENO="0314" 294 introduced S. 4486 on May 17, 1928, and Mr. Goodwin introduced H.R. 14001 on ~\`Iay 24. These were referred to the respective Corn.. mittees on Banking and Currency. The bills sponsored by Mr. Goodwin (H.R. 8727 and .14001) provided that bank shares shall be taxed "at no greater rate than that assessed within the taxing district of the bank's location upon . real estate used for mercantile or like business purposes, nor higher than is assessed upon shares of corporations engaged in the business of receiving deposits subject to check or the capital of individuals likewise employed in that business." 20 At the National Tax Association Conference in Seattle in August 1928, representatives of the Minnesota Special Tax Commission held several meetings with tax officials from other States and other interested persons. As a result "a nationwide organization of such officials" was formed to promote the taxation of "property of national banks on a fair and equitable basis"-i.e., by amendment of section 5219. The organization took the name, Association of States on Bank Taxation. Governor Christianson of Minnesota also addressed the Governor's Conference in New Orleans, La., November 20, 1928, on problems of the States with section 5219 in the hope of arousing their interest and action. The Association of States was active in promoting the Goodwin bills in 1930 and proposed amend- ments to section 5219 for several years thereafter. It was the motivat- ing force behind the movement to change the share-tax option.21 With the 70th Congress about to expire, Mr. McFadden pointed out on February 26, 1929, that there could be no action at this session with respect to the State taxation of national banks. He also called at-. tention of the House to the position of the Comptroller of the Currency that none of the pending bills should be enacted into law.22 Speaking for himself, Mr. McFadden favored the use of options open to States other than the share tax: "It is manifestly impossible to vary a national 2069 C. R., p. S8928 (May 17, 1928), p.119793 (May 24). The quotation is from Mr. McFadden's explanation of HR. 8727 and H.R. 14001; 70 C.R., p. 114452 (Feb. 20, 1929). 21 Report of (Minnesota) Special Tax Commission on Bank Taxation, bc. cit., p. 26. Officers of the Associ- ation were George H. Sullivan (Minn.), President; Oscar Lcser (Md.), Vice President; John H. Leenhouts (Wis.), Secretary; James H. Stewart (Mont.) Treasurer. It is interesting that this organization was not referred to In the Minnesota memorial to Congress, reproduced in footnote 24, below. ~ 70 C.R., p. H4452. Cf. Annual Report of the Comptroller of the Currency, December 13, 1928 (1929), pp. 1-3. ~ * * * recommend that none of these bills be enacted into law." The Comptroller made specific reference to S. 1573, hR. 8727, S. 4486, and 1{.R. 14001, which he characterized as follows: "These bills have for their purpose the removal of the safeguard, which has existed for 64 years, and which prohibits the States from taxing shares of national banks at rates higher than those Imposed upon competing moneyed capital. * * * While the State tax authorities are undoubtedly sincere * * * the fact remains that under such bills the States would have the right to place an undue burden upon national banks and upon their own banks to such an extent as would make banking unprofitable or at least burdensome, which In the last analysis is the right to destroy a Federal instrumentality. * * * To place the power in Individual States to wreck a Federal instrumentality which is the foundation of the Federal Reserve System is not only unwise but dangerous and fundamentally unsound. * * * It must be remembered that It is often difficult to reach the property of Individuals for taxation purposes and that when the burden of taxation on moneyed captial employed by individuals becomes too great, it can and usually does leave the State which imposes the heavy burden. On the other hand the bank's property * * * can not leave the State and it must either pay or cease to do business. Moreover the individual will look with favor upon a heavy burden of taxation on banks when the result is to lighten his taxes, thus giving to the legislature * * * a strong temptation to impose the heavy burden on the banks. The safety of the Federal banking structure should not be left to the power of the legislatures to resist such a temptation. * * * It is not to the interest of agriculture or business that any of the pending bills should pass. If money invested in bank shares is taxed more heavily than other forms of property, less money will be so invested, * * * Without doubt discriminatory taxation, diminishhmg as it does the security behind deposits, has been a contributing cause of many of the bank failures of recent years. * * The States which tax all property, including bank shares, at uniform ad valorem rates obviously need no change in section 5219. * * * The States whose constitutions give them power to tax various classes of property at different rates have the right to use the excise alternative of section 5219 * * and this without amendment. of State constitutions as they stand today. States that hereafter amend their constitutions to give their legislatures classification power will be in the same class. In providing for tax classification very few States have tied the hands of their legislatures respecting batik taxation. It is for them to take the steps necessary to keep their systems in harmony with the existing statute rather than that the law should be amended * * * to permit the classification of banks as targets without any practical limitation upon the burdens then to be imposed." PAGENO="0315" 295 standard in order to meet the peculiarities of a few State taxing systems." Besides, the earnings of national banks "do not warrant permission to the States to t~x them at a greater rate than they tax the same kind of pt'operty as that in which national banks employ their funds nor more than they impose upon financial, mercantile, manufacturing and business firms."23 As Mr. McFadden predicted, Congress took no action on these bills at this session. Shortly before adjournment, the 70th Congress received identical resolutions adopted by the Minnesota and South Dakota legislatures urging amendment of section 5219. The report of the Minnesota interim commission on bank taxation also was placed in the Congres- sional Record. But no action was taken.24 hi the 71st Congress, Senator Norbeck introduced S. 1550 on June 17, 1929; it was referred to the Committee on Banking and Currency.25 In the next session, Mr. Goodwin introduced three bills to amend section 5219: H.R. 7139 on December 10, 1929; H.R. 7752, on December 18, 1929; and H.R. 12490 on May 20, 1930. They were referred to the House Committee on Banking and Currency. On February 24, 1930, the Senate received a short memorial from the State of Utah, asking that Congress amend section 5219, "to permit any State to devise and apply a reasonable and equitable plan of bank ~ 70 CR., p. 11 4452 (February 26, 1920). `~ Ibid., pp. S3634-53 (February 18 1929), p. 54818 (March 1), S5031 March 2), and pp. 55025-30 (March 2). A similar resolution of the Iowa legislature was presented early in the 1st session of the 71st Congress; 71 C.R., pp. S1311-12 (May 15, 1929). The text of the 5Iinnesota resolution is reproduced here In full because its preamble Is a good summary of the law and the predicament of many States. However, the statement that income and excise taxes "are neither practicable nor adaptable" was an overstatement: the situation was that some States that relied on ad valorem taxation could not adopt income or excise taxes without first amending their constitutions. "Joint resolution memorializing Congress to amend section 5219, Revised Statutes of the United States so as to permit the taxation of shares of national banks upon a fair and equitable basis. "Whereas the several States of the Union are prohibited from taxing the personal property of national banks, and may tax their shares only as pennitted by Congress under the provisions of section 5210 of the Revised Statutes of the United States, which, in effect, permits the taxation of such shares only at a rate not higher than the tax imposed upon money owned by individuals and by them invested In mort- gages, bonds, and other securities (commonly known as money and credits) in which national banks may Invest their funds; and "Whereas it is unfair to tax an individual sousing his own funds at as high a rate as bank shares, which derive the benefit of the Investment returns of from 7 to 10 times their own amount in the form of depos- its; and "Whereas every attempt at taxation of money and credits at more than a relatively nominal rate has always proved a failure, and the practice of taxing them at low rates has, in each of the many States employing that method, resulted in reaching enormously greater amounts of such property and in pro. ducing a larger revenue and in the better distribution and equalizing of the burden of maintaining government; and "Whereas the courts have held invalid taxes levied on bank shares In States that undertake to tax money and credits at the same rate as bank shares on the ground that a substantial part of such money and credits are not, and by reason of the failure of owners to declare them for taxation at a relatively high rate can not be taxed at all; and "Whereas the schemes contained in section 5219 of taxing bank shares l)y income or excise rather than by value are neither practicable nor adaptable to States raising their revenue by the ad valorem method of taxation, which method has always been and now is in use by substantially all of the States in the Union; and "Whereas the American Bankers Association and the associations of bankers in various States, en- trenched behind the wall raised about them by this act of Congress, have declared that they do not trust State legislatures to tax them, have united in exerting every effort in opposition to relief to the States by the necessary amendment of that section, and have demanded that the States abandon their present well-tried and satisfactory methods of taxation and substitute an income or excise tax, the result of which has been to reduce the tax on bank shares by more tItan one-half in every one of the three States in which It has been adopted, with the consequent increase of the burden to l)e borne by other taxpayers; and "Whereas there is no organization corresponding to the bankers' associations to protect the interests of the general taxpaying public In the 40 States whose present methods of taxing bank shares are now found to be unworkable and invalid under section 5219; and "Whereas the deplorable situation in which these States find themselves, faced as they are with the choice of radically altering their present taxation systems In compliance with the wishes of the bankers or of virtually exempting banks from taxation, demands immediate action in the amendment of section 5219 soas to permit the taxation of national banks on a basis that is fair and equitable to themselves and to the general taxpaying public: Therefore be it "Resolved by the &nate of the State of Minnesota (the House of Representatives concurring), That the con- gress of the United States be, and the same hereby Is, urgently petitioned and requested to amend section d219, Revised Statutes of the United States, so as to permit the taxation of the shares of national banks upon afair and e~uLtable basis, as contemplated by bills now pending before the Senate and the House of Representatives of the Cbngrcss and amendments proposed thereto." ~`7l C. R. p. S2940 (June 17, 1929). PAGENO="0316" 296 taxation which will be consistent and consonant with the system of taxation in such State." 26 Introduction of H.R. 12490 followed a hearing conducted by the House Committee on Banking and Currency on one of Mr. Goodwin's earlier bills, H.R. 7752. This bill, like its replacement (H.R. 12490), was a complicated affair-considerably longer than other proposed amendments to section 5219. It proposed to add a fifth option for taxing national banks: a specific tax on shareholders measured by dividends received and a proportionate part of undistributed profits. Its resemblance to the excise tax measured by time bank's net income is obvious. It was hoped that authorization of this form of tax would avoid the adverse effects of a new Supreme Court ruling in the case of Macallen Co. v. Massachusetts.27 On May 9, 1930, hearings were held on the Goodwin bill, H.R. 7752, by the House Committee on Banking and Currency. It imiriediatelv appeared that the bill had been drafted and subsequently revised in conferences between representatives of States and representatives of the American Bankers Association. Changes made as a result. of the consultations were described as "merely matters of procedure; merely matters of making the way clear to determine what the rate should be . . . [the bill] simply reenacts the present law word for word with two additional alternatives." The bill was subject to later approval by the convention of the American Bankers Association and to a like approval by representatives of States who were not l)resent at the Washington meeting. The revised bill eventually became H.R. .12490.28 Time "mere matters of procedure" and the determination of rates can be seen from the following excerpts from the "joint draft." In the paragraph on the share tax, the proposed bill provided: 29 "(b) In the case of an ad valorern tax on said shares, the tax imposed shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks: Provided, That bonds, notes or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or invest- ment business and representing merely personal investments not made in competition with such business shall not be deemed moneyed capital within the meaning of this section: Provided, That in any State in which bonds, notes and, other evidences of indebtedness are taxed according to value at a fixed statutory rate or rates, less than the rate assessed upon tangible property, a tax on said shares may be imposed at a rate no higher than the rate assessed upon the shares of otl1er financial corporations, nor upon the net assets of individuals, J)artfler- ships or associations employed or engaged in the banking, loan or investment business, nor higher than time rate assessed by the taxing 1~ 72 C. R. P. 11430 (December 10, 1929); p. 11927 (December 18); P. 119256 (May 20, 1930). For the ttah memorial, ibid., p. S4191 (February 24, 1030). 27 Cf. Woosley, op. cit., p. 77; Welch, op. cit. p. 58. The Macallen case is discussed infra, at pp. 256-59. The Supreme Court subsequently upheld the excise tax without overruling its Macallen decision. ~ 71st Congress, 2d session, house Committee on Banking and Currency, State Taxation of National Banks, Hearings * * * on JIlt. 7752 (lilt. 12490), MayO, 1930 (172 pages) at pp. 4~5, 9. The initial version of the bill was disapproved at the American Bankers Association convention, hut a conmsittee \V5S ap- pointed to work out the. problems. Ibid., p. 9, and cf. Thornton Cooke in Proceedings of the National Tax Association, 1030, pp. 270-82. t~ This and the following quotations are excerpts from the draft prepared May 8, 1930, by a joint drafting committee of representatives of banks and State taxing officials and offered as a substitute for Mr. Goodwin's bill in the hearing before the house Committee, May 9, 1930. hearings oil II. 11. 7752 (1930), cited above, p. 6. PAGENO="0317" 297 State upon mercantile, manufacturing and business corporations hy- ing their actual 1)rillcipal place of business within such State. For the purpose of this ~)rov~s~ the rate of taxation upon the shares of national banking associations in any such State shall be deemed to be no higher than the rate assessed U~Ofl said mercantile, manUfacturing and busi- ness corporations, if, so far as can reasonably be ascertaifle(1, the p'~- portion which the aggregate of the taxes imj)Osed upon the real pi'op- erty and the shares of national banking associations within such State bears to the aggregate of the net profits of such associations is no greater than the proportion which the aggregate of the taxes imposed upon such other corporations under authority of such State bears to the aggregate of the net profits of such corporations." Note that this provision tied the share-tax rate to the rate on shares of financial corporations and also to the rates on mercantile, manu- facturing, and business corporations having their pnncipal places of business in the State. The proposal also added a fifth alternative to section 5219, the specific tax, of which it was said, "most of the States are not interested in it." 30 It was as complicated as the provision relative to the share tax: "(c) In the case of a specific tax on the shares of national banking associations, the amount upon which the tax on each share shall be based shall be determined by adding together the total dividends paid during the preceding year by any such association and the amount by which the capital, surplus and undivided profits of such association at the end of such year exceeded the capitel, surplus and undivided profits of such association at the beginning of such year, less any a(lditions to capital or surplus paid in by the stockholders during such year, and dividing such total by the number of shares issued and outstanding at the end of such year. The rate of such tax shall not be higher than the rate assessed upon other financial corporations, nor higher than the rate assessed by the taxing State upon mercantile, manufacturing and business corporations, having their actual principal place of business within such State in l)roPortion to the net profits of such corporations: Provided however, That the taxing State may establish a minimum tax on each share under this paragraph, the base of which shall be the capital, surplus, and undivided profits of the national banking associ- ation divided by the number of shares issued and outstanding and the rate not more than 1 mill on each dollar." Welch in 1934 said of the proposed specific tax: "By reason of recent decisions of the Supreme Court supporting the excise tax, this proposal has become of historical interest only." 31 Use of either the share tax or the specific tax on national banks in any State was to be tied to a complex requirement for statistical reports that would provide a basis for determining the average rate of aggregate taxes borne by. other financial corporations and by `° Cf. ibid., p. 6, George II. Sullivan, chairman of Minnesota Interim tax commission. ~` Welch, op. cit., P. 58. PAGENO="0318" 298 mercantile, manufacturing, and business corporations, and for com- paring these average rates with those applied to the national banks.32 The hearings of May 9, 1930 proceeded mostly according to form. The provisions of the proposed bill were endorsed by several State tax officials without enthusiasm: it was an improvement over the existing law (the 1926 amendment); it would help some states, especially Minnesota.33 The first discordant note was sounded by the tax com- missioner of Connecticut, who expressed the view that the proposed bill was better than the existing law and then denounced the plan for the specific tax: ". . . I regard it as a grotesque proposal in the tax field, new and unheard of, fraught with litigation and [it] will bring little public revenue in the states where they undertake to apply it." 3~ After indicating difficulties and uncertainties that would arise in interpreting and applying the proposed law, Mr. Blodgett offered a letter from Professor Fred Fairchild of Yale University, who had made a survey of the bank-tax situation for a group of Connecticut national banks and trust companies. Professor Fairchild commented: "As each new draft of the proposed amendment to section 5219 appears, there seems to be a steady increase in complexity and minute details of restrictions. The so-called Saranac draft [IEI.R. 7752] was so complicated that no ordinary man without tremendous effort could understand its meaning, and the revisions . . . appear to increase the complexity and confusion . . . I very much fear that proceeding further in this direction may finally bring us to about the same result as if Congress had forbidden the taxation of national banks completely. Would it not be possible to put in the place of section 5219 a brief general statement expressing the spirit of Congress to the effect that States should be free to tax national banks according to their 32 This provision of the "joint draft" was as follows: "4. The second proviso in paragraph (b) of subsection (1) [i.e., in the share-tax option, as quoted above] shall not be applicable, nor shall a specific tax on the shares of a national banking association or tax on or according to or measured by the net income of such association be assessed hereafter, in any State which does not require the financial, mercantile, manufacturing, and business corporations with which a corn- parison is required hereunder to file annually with the appropriate State officials, statements under oath showing, in the case of each such corporation, the net income and the net profits as set forth in the last pre- ceding income tax return to the Federal Government in the statement therein of reconcifiation of net income, and the total taxes on real property and the total taxes other than on real property imposed on such cor- poration by authority of such State during the period to which such return relates, and does not also annually compile and publish statistics showing the respective aggregates of net income and net profits reported by, and of such taxes imposed upon (1) national banking associations; (2) all other financial corporations; (3) mercantile, manufacturing, and business corporations. Such statistics shall be competent evidence of the facts therein contained: Provided, however, That this subsection shall not apply in any State which imposes a specific tax on the shares of national banking associations or a tax on or according to or measured by the net income of such associations at a fixed statutory rate, and imposes a tax on or according to or measured by net income on financial, mercantile, manufacturing and business corporations at the same rate; and provided also that in any State in which a tax on or according to or measured by income is imposed upon such other corporations by authority of such State, if such corporations are required to file returns showing the net income and the net profits and a statement of reconciliation of net income, a further state- ment from such corporations shall not be required, and the statistics may be derived from such returns and from the records of such State or the political subdivisions thereof with respect to taxes other than on real property imposed on such corporations." 83 Cf. Hearings on H.R. 7752 (1930), cited above. For endorsements, see Henry F. Long, Massachusetts commissioner of corporations and taxation, pp. 68-9; John R. Spring, chairman, New Hampshire tax com- mission, p. 69; R. E. Hammond, Secretary, Utah State board of equalization, p. 70; Mark Graves, New York tax commissioner, pp. 72-4. The brief filed by the State of Minnesota was incorporated in the Hearings, pp. 99-lOS, as were several other documents mentioned earlier in this report-the compilation of 3. 5. Armson on the tax laws of the several States, pp. 106-22; the report of the Minnesota tax commission on the taxation of banks, pp. 124-35; the report of the special Minnesota tax commission on State taxation of national banks, pp. 135-45; and the address on national bank taxation delivered by the Governor of Minnesota before the Conference of Governors in 1928, pp. 145-50. Thomas B. Paton, general counsel of the American Bankers Association, provided a series of tables showing "that national banks paid a much greater proportion of their income in taxes than did the State banks," (p. 28) and also comparing banks with other categories of cor- porations (tables for all the States at pp. 30-65). `4 WillIam H. Blodgett, in ibid., pp. 75-84, at p. 77. Earlier, C. B. Randall, tax attorney of the Kansas tax commission, testified that his commission preferred the original bill to the substitute (pp. 70-i); and Erwin M. Harvey, Vermont tax commissioner, said (p. 75) that "in a little State like Vermont, [I do not believe] it is a fair standard of comparison to saythat a banking Institution shall be measured by the rate fixed on mercantile, manufacturing and business corporations." PAGENO="0319" 299 own tax systems without restriction by Congress, provided only that there be no discriminations against national banks? This I think, is the real spirit of section 5219 in its original form." `~ Mr. Blodgett concluded his testimony by offering a short "simplified bill" drafted by Commissioner Long of Massachusetts, under which States would be permitted to tax national banks on the basis of share values or gross or net income, provided the tax rates applied to national banks produced an aggregate tax burden no greater in proportion to net income than the tax burden upon competitive State-chartered banks or the most heavily taxed category of manufacturing, mercantile or agricultural corporations. Real estate taxes would be excluded in measurino~ comparative tax burdens. States could, in addition, tax individual shareholders on their dividend income if other corporate dividends were included in taxable income.36 * The secretary of the California State Board of Equalization sup- p~orted Mr. Blodgett's position on the bills before the Committee.37 The breach thus opened grew wider as other State officials began to doubt the wisdom of enacting the "agreed bill." in the third session of the 71st Congress, early in 1931, the chair- man of the House Committee on Banking and Currency, Mr. Mc- Fadden, introduced a new bill to amend section 5219. The following day, February 4, his committee held a further hearing focused pri- marily on the earlier bill, H.R. 12490, in which testimony and state- ments from State tax officials and bank representatives differed little from their presentations in the preceding hearing. Considerable attention was given, however, to the question whether mutual savings banks, building and loan associations, insurance companies, and other institutions should be excluded from the concept of "other moneyed capital" in competition with national banks.38 Another memorial from the State of Minnesota asked Congress to permit States to tax national banks on the same basis as State banks, referring to the bill "agreed upcn" May 9, 1929.~~ Near the end of the session, the Senate Committee on Banking and Currency reported favorably, without amendment, S. 1550, which Senator N orbeck, the Chairman, had introduced on June 17, 1929. The bill made no further progress.4° in the 72d Congress, first session, Mr. Goodwin introduced H.R. 7928 on January 18, 1932. in March, a memorial from the State of New York asked Congress to amend section 5219 to relieve States U Ibid., p. 81. When he wrote, Professor Fairchild was president of the National Tax Association, but he expressed only his personal opinions. *6 Ibid., pp. 82-3. *7 Ibid., pp. 157-60. A session on "The bank tax problem" at the October, 1930, conference of the National Tax Association was practically a rerun of the May 9 hearing. Commissioner Long, who presided was con- vinced that the limitations written into amendments of section 5219 had become too complicated and were 9n danger of becoming more so." He saw no end to future litigation and urged amendments in certain and concise language, observing: "It may well be questioned whether the banks have not gained more by way of strategic position from these amendments than have the States whose agitation induced them." The next speaker on the round table was Mr. Thornton Cooke, chairman of the taxation committee of the American Bankers Association. He urged State officials to support the "agreed bill' (H. R. 12490) developed In the May meeting of the bankers and the Association of States on Bank Taxation and endorsed by the A±nerican Bankers Association at its general convention. Commissioner Blodgett of Connecticut explained his reasons for opposing the measure then before Congress. (Proceedings of National Tax Association, 1930, pp. 264-328.) With this session, the National Tax Association seemed to lose interest in the subject of national bank taxation until 1941. It was mainly the activity of the Association of States on Bank Taxation which since 1928 had kept alive the movement to amend section 5219. $1 list Congress, 3d session, House Committee on Banking and Currency, State Taxation of National Banks: Hearings * * * on H.R. 12490, pt. 2, February 4, 1931, pp. 173-298. Mr. McFaddens new bill was ILR. 16831 (reproduced in the Hearings at p. 177); cf. 74 C.R., p E3911 (February 3, 1931). *674 C.R., p. H3997-8 (February 5, 1931). ~074 C.R. p. S6232 (February 27, 1931), and p. 86964. The report was Senate report 1806. This bill pro- vided that stares should not be taxed "at a greater rate than is assessed upon other moneyed capital used and employed in the business of banking." PAGENO="0320" L3O from the necessity of imposing taxes on mutual savings and loan associations lest the courts invalidate taxes on national banks. Sena- tor Norbeck introduced S. 4291, which was the same as an earlier proposal. it would have revised the share-tax provision (subdivision (b) of paragraph 1 of section 5219) to read as follows: "in the case of a tax on shares, the taxes imposed shall not be at a greater rate than is assessed upon other moneyed capital used or employed in the business of banking." Reference to moneyed capital in the hands of individual citizen~ would have been dropped. At Senate Committee hearings on this bill, State government wit- nesses from California, among others, expressed dissatisfaction with the excise method of taxing national banks and urged Congress to permit nondiscriminatory taxation based on equality of tax burdens on banks with the burdens of business and financial corporations doing business within the State and with taxes on their shares. The Senate Committee on April 30 reported S. 4291 favorably, without * amendment.4' There was no floor action. At the end of the session, Senator Norbeck introduced another bill, 5. 4986, which never emerged from the committee. In~ the House, Mr. Steagall introduced H.R. * 11118, with similar result.42 In the next session, for the first time since the 1926 amendment of section 5219, the House Committee reported favorably on a proposed further amendment. This bill, H.R. 13855, sponsored by the com- mittee chairman, Mr. W. F. Stevenson of South Carolina, would have modified the share-tax provision. In explaining its purpose, the Committee observed: "That it is, and has always been, the policy of Congress to protect national banks from hostile discrimination in favor of such businesses or such use of capital as [competes in a substantial manner with the business of national banks] . . . is unquestionable; nor can the fact be questioned that many States have taxed national banks at from five to ten times as high a rate as is imposed on such other competing capital, and it can not be doubted that they will continue to do so if they can obtain the authority from Congress. Such authority ought never to be given. * "On the other hand, there is a vast mass of capital in the hands of individuals and subject only to these low intangible taxes which is in no real sense in harmful competition with the business of national banks. . . . EA]nyone else who lends money at interest is in one sense in competition with banks. . . . We do not believe that the reasonable protection of national banks from competition favored by discriminatory taxation necessarily requires the taxation of occasional investors who put their savings into bonds, or loan their money as a matter of friendship, at the same rate as can reasonably and fairly be imposed on the shares of national banks." ~ Whereas the existing law permitted taxes on national bank shares at no greater rate than was assessed "upon other moneyed capital in 41 75 C.R., p. H2205 (January 18, 1932), p. H5461 (March 8), p. S7251 (April 1), p. S9299 (April 30). Cf. 72d Congress, 1st session, Senate report 625 to accompany S. 4291 (April 26, 1932). The report concluded: "Numerous requests for relief are at hand, including memorials or resolutions from several important State legislatures. Everyone admits the unfairness of the present situation. A great injustice results." (Ibid., p. 3.) 42 75 CR., p. 117520 (April 5, 1932), p. S15698 (July 16). `3 72d Congress, 2d session, house report 1941 to accompany HR. 138,55 (January 30, 1933), p.6. The bill was introduced December 21, 1932; cf. 76 C. R., p. 11869. The committee report Is recorded in ibid., p. 112943 (January 30, 19~). PAGENO="0321" 301 the hands of individual citizens of such State doming into competition with the business of national banks," the amendment would have permitted no greater rate "than is assessed upon other moneyed capital used or employed in business and coming into substantial competition with the business of national banks in normal banking activities of said banks." The 1923-1926 proviso excluding from "moneyed capital" personal investments in the form of bonds, notes, or other evidences of indebted- ness in the hands of individual citizens would have been dropped. In its place was proposed a provision expressly excluding from the category of "competing moneyed capital" any investments by building and loan associations, savings and loan associations, cooperative banks and homestead associations in loans to members of such organizations secured by mortgages of real estate or assignments of the members' stock in the associations. Such institutions were not to be considered "financial corporations" in the determination of comparative rates for taxes on, according to, or measured by net income.44 There was, however, no further action on the Stevenson bill or on other bills during 1933.~~ Pressures to amend section 5219 reached a high point in the second session of the 73rd Congress. On Febmary 15, 1934, Senator Fletcher .(Fla.) introduced S. 2788, a bill written by the American Bankers Association, which would have extended the protection of section 5219 to member banks in the Federal Reserve System. Two features were obnoxious to state officials: (1) national banks might be taxed only if the same treatment applied to State member banks in the Federal Reserve System, and (2) the tax rate on shares would not be allowed to exceed the average burden imposed on other taxable intangible prop- erty in the district in which the bank was situated. The Association of States on Bank Taxation pointd out that the share-tax provision was tantamount to exemption. In a brief floor discussion, Senator Overton objected that Louisiana would be permitted to tax shares of national bank stock only on the basis of an assessment at 10 percent of actual cash value, the ratio applied to individually-owned intangibles.46 On March 9, 1934 Senator Shipstead (Minn.) introduced S. 3009 which provided for taxation of national banks on property or income or both at rates no higher than were imposed on State banks. On March 10, the Senate Committee on Banking and Currency unanimously reported S. 2788 favorably, without amendment. Although the bill was supported by the American Bankers Association, action was deferred indefinitely.47 In the House, Mr. Steagall (Ala.), chairman of the Committee on Banking and Currency, introduced H.R. 9045 on April 10, 1934. This was similar to Senator Shipstead's bill. It was supported by State tax officials but vigorously op~)osed by thc bankers. Hearings held during the next two days were poorly attended and elicited little ne~v infor- mation. Bank witnesses preferred the Fletcher bill. For the States, it 44 72d Congress. 2c1 session, House report 1941, cited above, p. 1, quoting the bill in its entirety. Cf. Welch, op. cit., p. 59; and the provisions enacted in 1923 and 1926, reproduced above in appendix 1, at pp. 1 and 4. ~~An amendment to S. 4291 was offered late in the 73d Congress by Senator Carey of Wyoming; 76 C.R., p. S1266 (January 4, 1933). In the 73c1 Congress, 1st session, Senator Norbeck re-introduced his bill as S. 1502 (77 C.R., p. S2064, April 21, 1933), and Mr. Hancock of North Carolina offered HR. 5045 (ibid., p. 111859, April 17, 1933). There were no proceedings on these bills. 4678 C.R., p. 52543 (February 15, 1931). and p. 55727 (March 29, 1934), cf. Welch, op. cit., pp. 59-60. ~ 78 C.R., pp. S1041, S4227, S4879. S5727, and S5S39 (March 9, 10, 20, and 29, 1934); 73d Congress, Senate committee report 512 (March 10, 1934). 79-421 0 - 72 - 21 PAGENO="0322" 302 was reported that national bank taxes of $250 million had been lost in the preceding seven years because of delays in amending section 5219. The Committee reported the Steagall bill with an amendment, but the House took no further action. 48 This was the end of proposed amend- ments to section 5219 in the 73d Congress. Three bills to amend section 5219 were introduced in the first session of the 74th Congress. Another memorial from the Minnesota legislature was presented to the Senate. It revicwe.d the effect on the States of Supreme Court interpretations of section 5219. It condemned income and excise taxes on or measured by income as "entirely and wholly unjust, inequitable and inadequate," having reduced national bank taxes by 66 to 90 percent, compared with collections under share taxes. States with low-rate taxes on individually-owned intangibles had been compelled to reduce rates on national banks, so that taxes on these institutions had dropped from $79 million in 1922 to $48 million in .1932. The memorial pointed out, too, that corrective bills had been introduced in every session of Congress, that in 1934 the House Corn- * mittee on Banking and Currency had reported favorably upon the Steagall bill but no action was taken, and that identical bills were pending. It urged favorable action.49 Congress did not act. The share * tax push had reached its zenith. The only bill introduced in the next session was S. 4209, by Senator Fletcher, on March 9, 1936. On June 5, Senator Shipstead offered his earlier bill (S. 3009 of 1934) as an amendment to a general revenue bill then under consideration. The Senate rejected the amendment.5° Earlier iii this session the Senate voted to preserve immunity from taxation for bank securities owned by the Reconstruction Finance Corporation, a Government-owned agency which had been authorized to invest in shares of preferred stock, capital notes, and debentures of national and State banks to provide capital that would enable the banks to continue operations in the face of deepening depression. During the debate, Senator Couzens put in the Record a memorandum showing R.F.C. estimates that, in 31 States where bank shares were taxed, the annual tax applicable to $229 million of shares owned by the R.F.C. would exceed $5.5 million if these shares were fully taxed. Assessment ratios were reported to vary from 30 percent (in Montana) to 100 percent of full value (in several States). In 8 States which applied net income taxes to banks, the R.F.C. investment was $173 mihion-with.more than 70 percent of this in New York State alone. U 78 C.R., pp. H6375, H10294 (April 10 and June 1, 1934); 73d Congress, 2d session, House Committee on Banking and Currency, Taxation of National Banks: Hearing . . . on HR. 9045, April 11, 12, 1934; House report no. 1853, June 1, 1934; and of Woosley, op. cit., p. 79. Under the reported bill, each legislature would be permitted to direct the manner and place of taxing national banks within the State "upon their real and personal property and also upon their shares." In lieu of the tax on shares, a State could tax either the net income of the bank or impose an excise tax measured by net Income from all sources. Those taxes were to be at no greater rate "than are imposed, respectively, upon the real or personal property or shares or income of, or by way of excise (or franchiae) tax upon, State banks." In addition, States could Include national bank dividends in the taxable income of individual or corporate shareholders if dividends from State banks were similarly taxed. Definition of "State banks," "shares," and "dividends" were included in the bill. (house report 1853, op. cit.. pp. 1 and 10-11.) d'The bills were 5. 1115 by Senator Shipstead, S. 1700 by Senator Norbeck, and HR. 8610 by Mr. Steagall; 79 C.R., pp. S471, 51513, and H9898 (January 16, February 6, and June 21, 1935). For the Minnesota memor- ial, Ibid., p. S3797 (March 18). i° Senator Shipstead declared that 16 States favored his proposal. He inserted Into the Record a dozen letters supporting the revision, most of them written in 1932 to the special Minnesota commission on bank taxation. lie Inserted also a 1932 resolution of the Association of States on Bank Taxation. Senator Glass, chairman of the Committee on Banking and Currency, observed that the Shipstead proposal would separate all banks, national and State, from other enterprises for taxation and would let the States tax banks as they pleased; that the Committee had had this proposal before it from time to time over the preceding 14 years; and that every Secretary of the Treasury during that period had opposed this approach. Tie noted that in 1934 the Secretary of the Treasury had objected to S. 3009 (Mr. Sliipstead's bill) and endorsed S. 2788, the Fletcher bill. SO C.R., pp. S0093-9098 (June 5, 1936). PAGENO="0323" 303 in 10 other States (including the District of Columbia), the R.F.C. had bank investments of $57.5 million.5' in the first session of the 75th Congress, memorials were received from North Dakota, Minnesota, and Wisconsin. With these, the efforts of the States to secure action on the share tax option in section 5219 (or any other change) expired. Bills to effect changes were not again introduced until after World War 11.52 3. Second movement for change: 1941-54.---State tax officials active in the National Tax Association expressed renewed interest in national bank taxation in 1941. Senator Robert F. Wagner, as chairman of the Senate Committee on Banking and Currency in 1940, had sent a questionnaire to the American Bankers Association and Federal agencies relating to national banking and monetary policies. The following April, the American Bankers Association recommended a clarification of the law.'3 At the National Tax Association conference in St. Paul, Minnesota, in 1941, Henry F. Long, Massachusetts commissioner of taxation and corporations, who had long been active in seeking amendments, introduced a resolution asking for a com- mittee of the Association "to confer with an authorized committee of the American Bankers Association for the consideration of the amendment of section 5219." A preamble recited that the American Bal3kers Association had indicated the desirability not only of clari- fying the fourth option in section 5219 (the excise or franchise tax) but also of "authorizing the application of State sales and use taxes on national banks." It also mentioned minimum rates of tax for taxes measured by net income from all. sources, employed by some States. The resolution was adopted, and the new committee worked with a similar group from the American Bankers Association through the early 1950s to formulate and seek further amendments to section 5219.'~ Prior to 1941, States had acted independently in applying sales and use taxes to banks but there had been no concerted movement to change section 5219 to permit application of these taxes to national banks. The first report of the new N.T.A. committee, presented in 1942, made six recommendations for changes in section 5219: (1) It should be made clear that the forms of national bank taxation authorized by section 5219 are the only forms a State - may impose; 11 Ibid., pp. S2626-2641 and S2646-2651, esp. p. 2631 (February 24, 1936). Identical data were reported In the House; ibid., p. 112788 (February 25, 1936). The tabulations were not dated. 12 81 C.R., pp. 51192, 52000-1, and S4478 (February 15, March 11, and May 13, 1937). The next Introduction of bills to amend section 5219 was in the 81st Congress, first session, S. 2547, by Senators Maybank (S.C.) and Robertson (Va.) "by request." 95 CR., p. S12774 (September 13, 1949.) U Report of the Study Committee on Bank Taxation, I'roceedings of the National Tax Association, 1968, ~ 290. Cf. also 81st Congress, 2d session, Senate Committee on Banking and Currency, "State Taxation of atlonal Banks," hearing before a Subcommittee.. . on 5. 2547, July 20, 1950, p. 4, statement by C. Francis Cocke, chairman of the Committee on Federal Legislation of the American Bankers Association. 14 Proceedings of the National Tax Association, 1941, pp. 340-341, 707, 767. Among the committee members were three former N.T.A. presidents: Franklin S. Edmonds (chairman), Philadelphia attorney; Henry F'. Long, who later became chairman and was the (lriving force within the committee; and Seth T. Cole, attor- ney, Albany, N.Y. Other members included C. H. Slorrissett, Tax Commissioner of Virginia, and S. A. Youngquist, former attorney general of Minnesota. When Mr. Edmonds resigned, he was succeeded for some months as chairman by Prof. Robert Murray Ilaig of Columbia University and then by Mr. Long, who at his death in 11156 was succeeded by Carter T. Lout han, New York attorney. 18 Presented as a joint report of committees of the National Tax Association and the American Bankers Association, Proceedings.of the National Tax Association, 1942, pp. 200-2l0~(discussed at pp. 210-215). The committee (lid not present Its bill but did catalog the proposed changes In dt.tail, pp. 208-210. Subsequent drafts of the proposed bill were presented in full, ibid., 1943, pp. 20-32; ibid., 1U44, pp. 350-355. PAGENO="0324" 304 (2) It should be made clear that the tax on national banks "according to or measured by their net income" is an excise tax lipon the banks; 56 (3) The income or the excise tax on national banks should be made uniform throughout the State; (4) "The rate of income or excise tax imposed upon national banks should not exceed the rate of tax of like character upon the other financial corporations or the, business corporations of the State," the purpose being to stop the inclusion "of taxes of all kinds paid by business corporations" in the calculations used in several States to derive "built-up" rates of excise taxes applicable to banks;57 - (5) ~There should be a minimum tax in States employing in- come or excise methods, applicable to banks having no taxable income but continuing to pay dividends;" 58 (6) It.would be "wise to add a new paragraph to section 5219 authorizing the subjection of national banks to nondiscriminatory sales and use taxes, and to taxes upon payments for services." ~ Major objectives of the committee, thus, were (1) to prevent local governments from adding supplements to income and excise taxes, as had been permitted in New `1 ork and Kansas; (2) to regulate the use of "built-up" rates in the excise tax, as in California; and (3) to authorize States to apply nondiscriminatory sales and use taxes to national banks. The minimum tax was a secondary objective. A majority of the committee favored a minimum tax equal to 1 percent of dividends declared. (Later revisions of the bill suggested that a minimum rate not exceeding 2 percent of dividends should be permitted.) The com- mittee did not approve of a minimum tax on all banks measured by capital They contended that "one of the main objects of putting the taxation of national banks on an income basis is to avoid taxation of the capital of the banks." The report did not mention that a prime con- siderat.ion was to encourage States to use, and bankers to accept, excise or income taxes in preference to share taxes, in view of the difficulties that court decisions were creating for States that relied on share taxes. The report suggested that banks which could pay dividends should pay something more than a tax on real estate alone.60 The sales-use tax proposal in the draft bill was as follows:6' 66 This clarification would be accomplished by inserting the words, "impose an excise tax upon such asso- ciations' at the beginning of clause (4) in the first paragraph of section 5219. Reasons given were that the lan. guage of the existing law created confusion for persons not familiar with taxation and, more important, that the Supreme Court had referred to the tax as a "franchise" tax but the concept of a State tax on the franchise of a national bank was objectionable. Ibid., 1942, pp. 203-204. 17 Ibid., pp. 204-206. U Ibid., p. 207. "Ibid., p. 208. (0 One member of the 1942 committee objected to basing a minimum tax on dividends; he favored a mini- mum tax equal to 1 mill on each dollar of issued capital stock. Ibid., 1942, pp. 207, 210. The 2 percent mini- mum rate appeared in the next committee report, ibid., 1943, p. 31, and also in the last bill presented by the committec, ibid., 1954, p. 340. A minor revision of section 5219, included in the committee proposal, concerned payments required by a State in accordance with the Social Security Act. This wa.s tacked on to the provision in section 5219 permit- ting States to tax real estate, preceding the proposed authorization for sales and use taxes. The 1942 report proposed this change but did not suggest the precise wording (ibid., 1942, p. 210). This appeared in the next report, as follows: "2. Nothing herein shall be construed to exempt the real property. . . ; or to exempt associations from pay- ments required by a State in ac2ordance. with the Social Security Act, for which credit is permitted under said Act." Ibid., 1943, p. 31. In the 1954 version of the proposed bill, the final words had become: ". . . pay. ments required by a State Tinemployinent Compensation Act, for which credit is permitted under the Federal Social Security Act." Ibid., 1954, p. 341. "Ibid., 1943, pp. 31-2. PAGENO="0325" 305 "A State or any subdivision thereof may also subject such associa- tions to taxes upon the purchase, sale or use of tangible personal prop- erty or upon payments for services, provided that such taxes are im- posed upon individuals and other corporations generally." With some elaboration, this provision was contained in all sub- sequent drafts.62 The Committee pointed out that over the preceding decade about half of the States and some of the larger cities had adopted sales and use taxes but section 5219 prevented their applica- tion to national banks, and added: it has caused some irritation among taxing officials to find that national banks when they purchase stationery, furniture, equipment and supplies for their banking rooms and offices, are not subject to sales taxes; and even more irritation when a national bank, which by virtue of the foreclosure of a mortgage owns and operates an office building or an apartment house, or is otherwise engaged in a business in competition with private investors or businessmen, is able to claim exemption from sales taxes on coal, oil, equipment -and supplies used in connection with such business." 63 The committee pointed out that son~e national banks paid sales taxes voluntarily, exposing themselves to possible criticism by bank examiners and suits from stockholders for paying illegal taxes. Selective sales taxes, such as the gasoline tax, were no different, nor were taxes on public utility services. The committee proposal would cover all these situations. / It is difficult to see why the Committee did not object to supple- mental, piggy-back or separate sales taxes imposed by cities and other subdivisions when they so vigorously objected to similar arrangements for income and excise taxes :)fl national banks. The * principle was the same; only the amount of tax liability may have been different-in one case negligible, in the other substantial. The * way to prohibit supplementary, piggy-back, or additional local income and excise taxes was to argue that they should be uniform throughout the State. This the Committee did. Any nonuniform taxes "would create an undesirable (liscrimmation among the banks of different cities in the same State." Sales tax supplements would create similar differences among merchants! The Committee pointed to the desirability of geographical uniformity among St ate income and share taxes as settling the merits of the case, then concluded: "An invitation to lack of uniformity in income taxation should be definitely discouraged, especially in the case of banks, which hold - such a substantial part of the financial resources of the community. It is believed that the attempt to achieve such a result should be rendered impossible by unequivocal language in the statutes." The view that this policy should be written into the law was expressed from the beginning of the Committee's activities and continued to the end. - - The big guns of the joint committee were aimed at "built-up" rates of excise tax. The 1926 amendment provided that, while the 62 The 1954 version was: "A State or any subdivision thereof may also subject associations to sales taxes and use taxes complementary thereto upon the purchase, sale or use of tangible personal property and public utility services, provided such taxes and fees are imposed upon individuals and corporations generally. For the purposes of this subsection, the term `tangible personal property' shall have the meaning ascribed to it in cèmmon law, but coin, bullion and currency shail be deemed not to be tangible personal property." Ibid, 1954,p341. ` The committee commented that the amounts involved usually were not large ($2,000 to $5,000 annually for the larger banks outside New York City). Ibid., 1942, pp. 207-8. ~ Ibid., p. 201. PAGENO="0326" 306 excise tax could be based upon "the entire net income from all sources", the rate applied to national banks could "not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed . . . upon mercantile, manufacturing and business corporations doing business" in the State. It was assumed in some States that equality between these diverse corporations meant an equality of actual tax rates. Other States took the view that "rate" in the laws really meant "burden", particularly since nonbank corporations mentioned in section 5219 were subject to more and different taxes than were permitted for national banks. Therefore, if equality of burdens was to be achieved, national bank tax rates would have to increase by an amount equal to the relative "overtaxation" of other corporations.65 In the simplest case this meant an allowance to be added for the taxation of personal property to which nonbank concerns were subject, but national banks were not because of section 5219. A few States merely added to the excise rates on banks their estimates of what taxes on bank tangibles would cost national banks if they were taxable. Since tangible personalty of banks amounts to a very small part of their total assets, this method of buildup added inconsequential amounts to the rates for national banks. Moreover, it was ~judged unfair to types of business that used larger amounts of tangible property in earning income. California, after trying other approaches to the problem of equaliz- ing burdens between bank and nonbank companies, finally left the determination of the built-up rate to the State Franchise Board, which after careful research annually fixed the excise tax rate. This l)ractice increased the rate applicable to national banks considerably more than the addition of an estimated tax on bank tangibles, and it was con- demned by many banks. It was disapproved by the joint committee of the associations and would have been prevented by the draft bills. The committee report enumerated four objections: (1) no oppor- tunity was afforded for banks to verify the accuracy of the State- determined ratio; 66 (2) the rate was based on an inappropriate compar- ison when it included property taxes-"ad valorem taxation bears no relation to income" since the tax depends in each case on the amount of property used in different businesses to produce income; (3) Congress did not intend any basis of comparison between banks and other busi- nesses except with other excise taxes, and the law refers to the com- parison in terms of the rate of tax; 67 and (4) after 1929 bills had been proposed, but none were enacted, to authorize the comprehensive form of built-up rate or to specify just how the excise rate should be determined.68 As the joint committee of the National Tax Association and the American Bankers Association continued over the years to seek con- gressional approval of the proposed amendments, the issue of the "built-up" rate loomed larger and larger. Meanwhile, in California the Security National Bank had sued the Franchise Tax Board over its use of the "built-up" rate. The case was in the trial court eight years. In California and other States, the stake of the banks in tax C3 Built-up rates are also discussed infra, in subsection 7, particularly at pp. 260-61. CO But note comments of Mr. Justice Gibson about this contention against the California rate in Security National Bank of Los Angeles v. Franchise Tax Board of California, 55 Calif. 2d 407; 359 Pac. 2d 625, 630191 (1961), revIewed infra, at pp. 260-61. ` Cf. Martin Saxo, "Bank Tax Developments," in Proceedings of the National Tax Association, 1956, p. 343: " * the present [California] approach forces an opening to accommodate the `built-up' rate hardly within the clear intendment of section 5219." ~3 Ibid., 1942, pp. 205-6. PAGENO="0327" 307 refund claims for several years during 1933-1949 and for other charges was estimated at some $75 million.89 On January 14, 1956, the trial court handed (lown its (lecision in favor of the (lefendant Board. The case was appealed to the California Supreme Court and on February 23, 1961, the Board was again sustained. The United States Supreme Court denied a writ of certiorari on October 9, 196 i.~° At long last the use of "built-up" rates had been approved. The work of the joint committee of 1941-42 in developing an agreed bill finally resulted in its introduction in Congress-in the 81st Congress, in 1949. It became S. 2547, offered by Senators Maybank and Robertson. In the second session of the 81st Congress, Mr. Spence introduced the bill in the House of Representatives (H.R. 7896) on March 28, i950.~' A hearing on the Senate bill was held by a sub- committee on July 20, 1950. Witnesses from the American Bankers Association and the National Tax Association explained the origin of the bill and its main provisions and recommended its enactment. No opposition to the bill could be reported.72 House Committee hearings on H.R. 7896 also were scheduled but were postponed-indefinitely, as it turned out.73 In the 82d Congress, H.R. 3175 introduced by Mr. Spence on March 13, 1951, aroused bankers in four States which, in addition to California, were using "built-up" rates for their excise taxes on national banks. These States, instead of figuring the differential due to the taxation of nonbank tangibles of mercantile, manufacturing, and business corporations, had written into their laws one rate for general business corporations and a slightly higher rate (about 2 percentage points) for national banks. If H.R. 3175 was enacted, banks and other corporations would be taxed alike. The banks in the four States were satisfied with the way they were being taxed; in May 1951, they undertook a vigorous campaign against the bill. No effort was made to push it, and the bill expired with adjournment of the 82d Congress.74 No further bills were introduced to amend section 5219. Nor did the bankers ever~reconcile their internal differences. By 1955 they ~° Saxe, bc ci.. 70 Security National Bank of Los Angeles vs. Franchise Tax Board of CalifornIa, 55 CalIf. 2nd 407, 359 P. 2d 625 (1961); 368 U.S. 3 (1961). The case i3 discussed more extensively infra, at p. 260. 7' 95 C.R., p. S12774 (September 13, 1940); 96 CR., p. 114272 (March 28, 1950). 72 81st Congress, 2d session, Senate Committee on Banking and Currency, State Taxation of National Banks: Hearing before a Subcommittee . . . on S. 2547, July 20, 1950: 21 pages. Witnesses were C. Francis Cocke, chairman of the Committee on Federal Legislation of the American Bankers Association; Francis H. Beam, American Bankers Association and vice president of the National City Bank, Cleveland, Ohio; Henry F. Long, Massachusetts Commissioner of Corporations and Taxation and chairman of the National Tax Association Committee on Bank Taxation. Mr. Beam presented an explanatory memorandum on S. 2547 and H. R. 7986, submitted by Philip Nichols on behalf of the American Bankers Association; ibid., pp. 11-18. The record includes also letters voicing "no objection" to the bill from S. R. Carpenter, Secretary of the Board of Governors of the Federal Reserve System, April 4, 1950; E. H. Foley, Jr., Acting Secretary of the Treasury, April 6, 1950; and Maple T. Harl, Chairman of the Federal Deposit Insurance Corporation, April 5, 1950. Ibid., pp. 3-4. ~3 Report of Committee on Bank Taxation, Proceedings of the National Tax Association, lOóO, p. 399; IbId., 1951, p. 450. ~` 97 CII., p 112304 (March 13, 1951). Mr. Spence was chairman of the House Committee on Banking and Currency. Cf. report of the Committee on Bank Taxation, Proceedings of the National Tax Association, 1952, pp. 675-6, where the committee chairman, henry F. Long, reported developments as follows: "As a result, a hearing on this objection was held by the Administrative Committee of the American Bankers Association on January 16, 1952, which aroused great interest and was widely attended. "On the following day the Administrative Committee adopted a resolution reatfirming the principle that national banks should pay their just and equitable share of State taxes, but should be effectively pro- tected against taxes which would be discriminatory as comparetl with other corporate taxpayers, and recom- mending that the subcommittee on section 5219 should continue its study, jointly with a committee of the National Tax Association, in an endeavor to develop an amendment which would secure the fundamental objectives above stated; that further effort should be made to harmonize the views of the bankers of the respective States; and that pending further study no action should be takemi to urge consideration of 11.11. 3175. "We have been Informed that since this resolution was adopted negotiations have been carried on between the bankers who favor and those who oppose the contested feature of the proposed revision and that some progress has been made but no agreement has yet been reached." He asked (and obtained) a continuance for the N.T.A. committee. PAGENO="0328" 308 wanted to await a decision in the California case, mentioned above, before doing anything to amend section 5219.~~ This second movement to amend section 5219 had neither the vigor nor support of earlier efforts. The elapsed time was longer but the efforts were somehow more lackadaisical. There were no significant pressures upon Congress.76 4. Banks and interstate commerce.-In its report to the 1958 confer- ence of the National Tax Association, the Committee on Bank Taxation called attention to recent decisions of the United States Supreme Court concerned with the power of a State to tax a non- resident industrial corporation, doing only an interstate business in the State, upon its net income from sources within the State. Because it expected that the decisions in those cases would have considerable bearing upon possible future developments in the field of bank taxes, the committee planned to follow the situation closely.77 At the time, the Committee could scarcely have anticipated the impact that these decisions might ultimately have upon national banks, since section 5219 prevented taxation of out-of-State national banks. But a decade later, after enactment of Public Law 91-156, both in the temporary period between 1969 and 1972 and thereafter, national banks would be subject to nondiscriminatory sales, use, and other taxes that applied to State banks. The committee on bank taxation devoted most of its 1959 report to this subject. Bankers were warned in these terms ~ "In February 1959, the Supreme Court of the United States decided Northwestern States Portland Cement Co. v. Minnesota and Williams v. Stockham Valves and Fittings, Inc., 358 U.S. 450. Those cases involved situations where foreign corporations maintained sales offices in the taxing State which were used as headquarters by salesmen soliciting orders for goods, but maintained no other place of business or stock of goods in the State, accepted all orders outside of the State and shipped from outside of the State nfl goods used to fill such orders. In both cases it was agreed that the corporations were engaged solely in interstate commerce in the taxing State and that the net income upon which the tax was imposed had been fairly apportioned to the State. The Supreme Court held that under those circumstances the direct net income tax did not violate the commerce clause and that the taxpayer had a sufficient connection with the State to satisfy the requirements of due process. "In May 1959, the Supreme Court denied certiorari in International Shoe Co. v. Fontenot, 359 U.S. 984 in which the Louisiana Supreme 7' Ibid., 1955, p. 398; ibid., 1957, p. 342. ~ Two efforts were made at national tax conferences to get the National Association Committee to broaden the scope of Its recommendations. In 1943, Oscar Lcser, a veteran state official iii the struggle to amend sectIon 5219 after the Richmond decision, asked that the Committee "broaden its powers to take up the real mischief that is to be cured." Dixwell Pierce of California joined the effort, saying, "if more work is to be done of any significance, [it] will have to be under a resolution broader than that originally assigned." They lost the struggle. Proceedings of the National Tax Association, 1943, pp. 33-4, 459-65. At subsequent conferences perfunctory reports were rendered by the Committee Chairman with no discussion following. See IbId., 1944, pp. 350-55; 1946, p. 460; 1017, pp. 306-307; 1948, pp. 222, 562; et. seq. In 1948 the Executive Committee of the N.T.A. voted to discharge the committee but Henry Long, during the annual confer9nce, asked that the committee be revived, and this was done out of deference to him. Ibid., 1918, p. 222. lIe carried on thereafter almost alone until his death (1956), and whatever the committee accomplished was due largely to him. The lack of support is indicative of how little interest other States had in the proposed amenlm~nt. They did not attempt to block It, hut neither did they work for its adoption. The limited scope of the recom- mendations, particularly in not trying to improve the share tax option (which hankers oppos~d1, left the committee with almost no support from States whose tax officials had previously worked hard to amend sectIon 5219. fl Proceedings of the National Tax Association, 1958, p. 314. The Committee was now under the chair. manship of Carter T. Louthan, attorney, of New York City. "Ibid., 1950, pp. 214-15. PAGENO="0329" 309 Court upheld a direct net income tax U~Ofl the portion of the net income of a foreign corporation apl)ortioned to the State; the corpo- ration's only activity in the State being thesolicitation of orders for goods by traveling salesmen. No orders were accepted in the State nor did the corporation maintain any place of business or stock of goods in the State. * . * e * * "As a result of the strong representations which were made by mterstate businesses, Public Law 86-272 was enacted in September to prohibit States from imj)osing taxes U~Ofl net income derived within the State by a person engaged solely in interstate commerce if the only activity within the State is the solicitation of orders by the * taxl)ayer for the sale of tangible personal property. The statute directs that a further study of the situation be made by congressional committees. . * * * * * * * * "In view of the limited nature of the prohibition imposed by pres- ent legislation, it is obvious that many persons, including banks, earning income in interstate commerce still may be vulnerable to multiple taxation of net income by numerous States with which they have rather minimal contacts. "The Committee intends to follow closely the proceedings of the congressional committees in this field. The Committee also has been in touch with the American Bankers Association and intends to cooperate with the appropriate committee of that Association in an effort to work out a program which will give reasonable protection to interstate banking." In its next annual report, the National Tax Association committee made the warnings to the banking community even more spec~ific:79 "Although banks do not maintain offices outside of the State in which they have their head office, they frequently make loans to persons in other States and regularly send employees into such other States to keep in contact with such borrowers and correspondent banks. "Such business is frequently generated by correspondent banks which cannot, or do not wish to, handle the entire loan. Such loans are closed at the out-of-state bank's head office so that no liability for a privilege or franchise tax is incurred. However, the rule of the above-mentioned cases [Northwest and Stockham Valves cases, 358 U.S.. 450, and International Shoe, 359 U.S. 9841 seems applicable, so that if an income tax is imposed the only open question would seem to be whether there was a fair apportionment of net income to the taxing State. "In the simple case the borrower may do only a local business or may borrow the funds only for use within the taxing State. More frequently, the borrower will do both a local business in the second State and an interstate business in a third State and will borrow the funds for use in its entire business. Under such circumstances the interest may be said to have been earned partly in the third State and should not be considered in its entirety as a receipt within the second State, whether the allocation is to be made on a sejiarate " Ibid., 1900, p. 297. Mr. Louthan submitted the report. PAGENO="0330" 310 accounting basis or in accordance with a formula using receipts as one of the factors. Thus the difficulties which are encountered in using sales as one of the factors in an apportionment formula also will be encountered in using interest receipts as an apportionment factor in the, case of banks. "Furthermore, if the third State also imposes an income tax, the out-of-state bank may become liable for tax upon the net income deemed to have arisen in that State if it has sufficient activities in the third State to satisfy the due process clause. "The necessity of paying income taxes to several States with respect to interest received upon an out-of-state loan could involve such burdensome problems of compliance that there would be an inter- ference with the free flow of credit on an interstate basis. Since credit is the life blood of the national economy this problem deserves careful consideration by the Congressional Committees charged with the duty of studying the problems involved in the taxation of income earned in interstate commerce. It may be that the national interest will be best served where the bank's contacts with a State are minimal, if limitations are placed upon the power to tax so that there will be w~ impediment to the free flow of credit in interstate commerce." As indicated above, the Supreme Court in decisions in 1959 80 gave the States tax jurisdiction over foreign corporations doing business within their boundaries in situations where they had sales offices and traveling salesmen within the State. Business firms, particularly small enterprises, at once called for action by Congress to modify the con- sequences of these decisions. The result was the quick enactment of Public Law 86-272, on September 14, 1959. The limitations imposed upon the States can be seen clearly from the first paragraphs of the law (15 U.S.C. 381), reproduced in appendix 1-G, above.8' The power of Congress to regulate interstate commerce was invoked to restrict the taxing power of the States, an. action that was characterized by critics as "destruc- tive of sovereign rights. . . . [A] further encroachment by the Federal Government on the powers reserved to the States." 82 Sales and solici- tation of orders by independent contractors for more than one principal were excepted from the terms of the act.83 Title II of the Act directed the Committee on the Judiciary of the House of Representatives and the Committee on Finance of the Senate to make full and complete studies of State taxation of interstate commerce. Voluminous studies were indeed made by staff employed by the House Committee.84 Several bills to regulate the rights of States in taxing interstate commerce subsequently were introduced in Congress. Representative Edwin E. Willis, chairman of a special subcommittee of the Judiciary Committee, introduced H.R. 11798 on October 22, 1965.85 The next year he introduced H.R. 16491 to supercede H.R. 11798.86 In the 1967 SO In the Northwestern. Stockham, and International Shoe cases, ibid. See appendixes 11 and 12. below, pp. 505-584. 81 73 U.S. Stat. L. 555-56, approved September 14, 1959 (86th Congress 1st Session, 5. 2524), reproduced supra,pp. 8-9, 52 Guy Sparks, Alabama Commissioner of Revenue, "Taxation of Interstate Commerce: The Case for State Control," Proceedings of the National Tax Association, 1962, esp. p. 510. Cf. Leonard E. Kust, "A New Venture in Federalism: Toward a Solution to State Taxation of Multistate Business," in the Tax Executive, vol. 23, January, 1971, pp. 424-34. ~ P.L. 86-272, section 101(c); 15 USC 381 (c), (d) In appendix 1-G, supra, pp. 8-9. `~ Sections 201 and 202. 15 USC 381 note, In appendix 1-G supra at p. 9. The original reporting deadline, July 1, 1962, was extended to June 30, 1965. 86 111 C.R., p. H28659. Nine other members introduced bifls with the same title, HR. 11799 through 11807, on the same day. 88 112 C.R., p. 1116902 (July 25, 1966). On the same day, 10 other members introduced bills with the same title, H.R. 16492 through 16501. 11.11. 16491 was reported out by Mr. Willis on September 7; ibid., p. 1122015 (House report 89-2013). PAGENO="0331" 311 session this bill was reintroduced as H.R. 2158. On May 22, 1968 it passed the House by a vote of 286 to 89.87 About this time the Council of State Governments came forward with a plan to solve problems of tax jurisdiction over interstate com- merce through the use of interstate compacts instead of Federal legislation.88 A Multistate Tax Commission was formed to foster this approach through State action. More than 20 States have enacted legislation of this type. Another approach was through the National Conference of Commissioners on Uniform State Laws, which promoted the Uniform Division of Income for Tax Purposes Act. As the title indicates, this legislation has been more concerned with the division of income, or in some cases property, than with the ways in which States acquire jurisdiction to tax. The proposals have been designed to standardize allocation factors, about which there has been much debate. Of 39 States with corporate income taxes, 23 had enacted the Uniform Division of Income for Tax Purposes Act by 1969. Twenty- nine of the 41 States with corporation or personal income taxes used the Federal income tax, with some modifications, as the base for State purposes.89 So far the allocation formulae have been devised with. reference to mercantile and manufacturing businesses; formulae have not been worked out for financial corporations, including banks. On February 27, 1969, Representative Peter W. Rodino, Jr. of New Jersey introduced in the House another bill (H.R. 7906) to regulate State taxation of interstate commerce. On June 2, 1969, the Rodino bill was reported favorably by the Judiciary Committee. It passed the House on June 25, 1969, by a vote of 311 to 87. In the Senate, the bill was referred to the Committee on Finance where it died.9° The Rodino bill (H.R. 7906) was identical with the Willis bill (H.R. 2158) passed 13 months earlier, except that. it omitted pro- visions relating to taxation of personal income which had been added iii a floor amendment to the earlier bill. The bill provided that no State could (1) impose a net income tax or capital stock tax on a foreign corporation unless it had a business office in the State during the taxable year, or (2) require the collection of a sales or use tax on sales of tangible property unless a person had a business office in the State or regularly made household deliveries in the State, or (3) impose a gross receipts tax with respect to sales of tangible property unless the seller had a business location in the State. Where net income (or capital) was taxed, the maximum permissible allocation to the State would be determined by a two-factor formula based on property and payrolls. Excluded from the protection given by the act would be corporations doing at least 50 percent of their business in transportation of passengers for hire, telephone or telegraph service, sale of electric energy, gas or water, issuance of insurance or annuity contracts, "banking, the lending of money, or the extending of credit," 87 113 CR., p. H435 (January 12, 1967). On the same day, 8 other members introduced bills with the same title, H.R. 2159 through 2166, H.R. 2158 was reported with amendment March 7, 1967; ibid., p. 115747 (House report 90-69). For the debate, amendment, and House passage of H.R. 2158, cf. 114 CR., pp. H14398-402 and H14405-33 (May 22, 1968). Referred to Senate Committee on Finance May 24, 1968; 114 CR., p. S14889. 88 Drafted in cooperation with the National Association of Tax Administrators, Association of Attorneys General and the National Legislative Conference. Cf. Proceedings of the National Tax Association, 1967, p.241. 89 Representative Sisk (California) in 115 C.R., p. 17291 (June 25, 1969). ~s 115 C.R., p. 114758 (February 27, 1969); reported (House report 91-279), ibid., p. 1114472 (June 2) by Mr. MacGregor for the Committee on the Judiciary; rule reported (House report 91-308), ibid., p. 1115465 (June 11); rule debated, pp. 1117290-93 (June 25); bifi debated and passed, pp. H17294-322 (June 25); referred to Senate Committee, p. S17695 (June 30). PAGENO="0332" 312 or obtaining at least 50 percent of their ordinary gross income from dividends, interest, or royalties. Also excluded was any corporation with an average annual income over $1 million.9' For banks and other financial businesses and other excluded corporations, jurisdiction to tax and allocation of the tax base would continue to be determined by State laws and court decisions. The only standard rule applicable to all States appears to be Pub- lie Law 86-272, but this Federal statute concerns only the solicita- tion of orders and sales of tangible personal property delivered from a point outside the State on orders approved outside the State. The statute appears not to apply to any interstate activities of banks.92 If this is true, does a State acquire jurisdiction~ over a nondomicili- ary bank when that bank sends its nonresident representative into the State to solicit loans or deposits on which the nondomiciliary bank earns interest (or profits)? Suppose the representative, makes regular visits into the State each year (or season), does that create a different situation? Or if the dealings are with correspondent banks with which nondomiciliary money-market banks have had regular profitable dealings over long periods of time? Or if, instead of having loan and deposit production representatives make regular calls, the nondomiciliary bank also buys or sells mortgages or other securities from or to its correspondent? The dealings may go both ways on a reciprocal basis. Perhaps the bank also owns equipment which it leases to customers or correspondents; does that make n difference? This involves some tangible property that is being used to generate income, presumably both for the resident corporation, bank, or interstate firm and the nondomiciiary bank. If all or several of these activities take place, even if through the aegis of corporate subsidiaries, the State may be able to show that the nonresident bank is surely doing busi- ness within the State. Are the State laws broad enough to apply to banks? Generally, it would seem so. Under present law, there can be little doubt of State jurisdiction to tax nondomiciiary banks after 1971 in situations where such banks establish loan production offices, "warehouses," bookkeeping centers, or branches within the taxing State. If a bank has employees living and working in the State, or uses local brokers or commission men,93 this may be sufficient for a claim of tax jurisdiction. If a bank leases tangible property to customers in the taxing State, it may be taxable. If the bank transacts business in a State only by mail, jurisdiction is doubtful. While interstate branches of State banks are few in number and national banks are not permitted to establish such branches, save in foreign countries, the time may come when they are permitted. And where branch banks are established, they will be subject to State taxation on allocable net income. The permanent section 5219 (in P.L. 9 1-156) has opened this door wider than it was. These problems affect large banks, and particularly those in money market centers whose interstate business is of growing importance. Occasionally the problems may arise for banks situated close to or upon State lines. But most banks are still small local institutions unaffected by the complications of doing business across State lines. 91 Ibid., pp. 1117315-19, reproducIng the text of the bill. 92 Cf. supra, p. 240. 93 Cf. Scripto Inc. v. Carson, Sheriff, et al, 362 U.s. 207 (1960), where resident brokers and commission men sold goods in the State. Distinguished from Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954); where a Delaware company had no property in Maryland, accepted no mail or telephone orders, and sold goods only in Delaware, the Maryland use tax on a delivery to Maryland was void. PAGENO="0333" 313 Nevertheless, the State taxation of income from or of business trans- acted in interstate commerce may be expected to have an increasing impact on State and national banks in the years ahead.94 5. A section 5219 for State banks: 1967.-On January 17, 1967, Mr. Ottinger (New York) introduced in the House a bill (H.R. 2517) to eliminate certain inequities between State-chartered and Federally- chartered financial institutions in the conduct of interstate business.95 At the time practically all States taxed their own and national banks on the same basis.°1 On August 30, 1967. Senator Sparkman introduced S. 2364 "to extend the same privileges, protection and immunities to insured State banks as are available to national banks doing business across State lines." ~ The bills were referred to the Committees on Banking and Currency. Senator Sparkman indicated that he was introducing S. 2364 at the request of Mr. Frank Wille, Superintendent of Banks in the State of New York, who was then the newly-elected chairman of the' legislative committee of the National Association of Supeivisors of State Banks. The bill had been drafted by the New York State Banking Department. A letter and memorandum from Mr. Wille expalined its nature and purpose: "In doing business across state lines, State banks and savings and loan associations operate at a serious com- petitive disadvantage as compared to national banks and Federal savings and loan associations . . . In essence the bill would provide that a State bank or savings and loan association doing business across State lines shall enjoy the same privileges, protections and immunities as a national bank or Federal savings and loan association doing such business." Disadvantages under which State-chartered financial institutions operated were said to relate primarily to: 1. The necessity for compliance with "doing business" laws in other States; 2. The imposition of taxes by other States; and 3. The possibility that they may be sued wherever they "do business," whereas Federal law (12 U.S.C. 94) permits national banks to be sued only in their headquarters State. The statement attributed the special treatment of national banks and I~ederal savings and loan associations to their status as Federal instrumentalities. State banks have to comply with "doing business" laws and some States do not permit compliance by banks or savings and loan associations-[so that] they may find themselves unable to collect on defaulted loans and unable to enforce their security interest in loan collateral." national banks and Federal savings and loan associations can be taxed by the States only as Congress has specifically permitted (e.g., in 12 U.S.C. 1464h for Federal savings and loan associations). Under this line of reasoning, [FederaJ and State courts] . . . have held invalid license taxes, personal property taxes, and sales and use taxes "[For detailed examination of questions raised here, see infra, appendix 11 by Jerome R. Hellerstein, Federal constitutional limitations on State taxation of multistate banks, and appendix 12 by 3'. Nelson Young, Multiple State taxation of national banks: Division of tax base for income taxes and "doing business" taxes-Ed.] ~5 113 CR., p. 11714 (January 17, 1967). ""In the Committee's last report [1965] . . . we were able to point out that today practically all of the States tax national banks and State-chartered banks on the same basis. Full credit for this equality of taxa- tion must be given to section 5219." Report of the Committee on Bank Taxation, Proceedings of the Na- tional Tax Association, 1966, p. 270. ° 113 CR. p. S24544 (August 30, 1967). 1 Ibid., p. S24546 (August 30, 1967). PAGENO="0334" 314 levied on national banks. State-chartered banks and savings and loan associations have no such immunity from taxation in nondomiciliary States." The bill did not propose to limit the power of C3ngress over national banks nor to confer powers on State banks not given by States. It would not amend section 5219 but would add a new section 1831 to Title 12 of the U.S. Code under the sub-title "Federal Deposit In- surance." 2 No hearings were held, nor was the bill reported out of committee. This proposal was the inverse of section 5219. It was designed to protect State rather than national banks. If section 5219 had efficiently protected national banks from effective State taxation, why not invoke similar protection for State banks doing interstate business? One wonders why it took so many years for someone to make the attemut. 6. The latest chanqe: 1968-1969.-In the 90th Congress, 2nd Session, on July 29, 1968, Representative Podell (New York) introduced H.R. 19031, which read as follows: "Section 1. A national bank has no immunity from any sales tax or use tax which it would be required to pay if it were a bank chartered under the laws of the State or other jurisdiction within which its principal office is located." The bill was referred to the House Committee on Banking and Cur- rency.3 This was the beginning of P.L. 91-156-the 1969 amendment of section 5219. When he introduced the bill, Mr. Podell referred to the Supreme Court decision a few weeks earlier in First Agricultural National Bank of Berkshire County v. State Tax Commission.4 He declared that the Court had opened an "escape hatch" for national banks. He could see no sound reason why a national bank "should be per- mitted to escape tax responsibility for the support of State and local government. They receive a myriad of State and local services." ~ Early in the 91st Congress, numerous bills -were introduced to clarify the rights of States to impose taxes on national banks. Mr. Podell introduced another bill to clarify liability for sales and use taxes-H.R. 2116. Mr. Hosmer offered a similar bill, H.R. 2182. Mr. Patman introduced H.R. 7491 which eventually became P.L. p1-156. Mr. Ashley introduced H.R. 8642, and Mr. Sikes, for himself and eleven others, introduced H.R. 9794~6 On May 5, 1969, Senator Holland introduced a bill (5. 2065) of similar import, and on Sep- 2 Ibid.; and committee report by M. A. Zizzamia, in Proceedings of the National Tax Association, 1967, p. 240. 3 114 CR., p. 1123979 (July 29, 1968). Cf. Report of Committee on Bank Taxation in Proceedings of the National Tax Association, 1968, p. 291 (Harry Schroeder of New York. chairman). 4 392 U.S. 339; argued April 22. 1968; decided June 17, 1968. 5 Mr. Podell in 114 C.R., p. 1123960 (July 29, 1968). Mr. Podell also inserted in the Record additional ma- terials in support of 11.11. 19031 on September 11 and 30, 1968. These statements include copies of letters he wrote to the Honorable Wright Patman, Chairman of the House Committee on Banking and Currency, reporting that the Court decision entailed serious losses of revenue for New York City and State and for other States. Mr. Podell referred to a survey he was making of losses expected by other States. 114 C. R., pp 1126531-36 and 1128825-26 (Sept. 11 and 30, 1968). Further data coliected by Mr. Podell appear at 115 CR., pp. 113361-62, and in House Committee on Banking and Currency "Testimony received in consideration of hR. 7491 and related bills," Hearing . . . on HR. 7491 and related bills, May 26, 1969 (91st Congress, 1st ~ess.), pp. 3-19. 6 For the House bills, of. 115 C.R., pp. 192, 194 (Jan. 6, 1969), p. H4210 (Feb. 24), p. H 5982(Mar. 11), and p. 118203 (April 1). Mr. Ashley inserted into the Record remarks indicating the need for legislation in the wake of the First Agricultural National Bank decision; ibid., pp. H5991-92 (Mar. 11). PAGENO="0335" 315 tember 16, 1969, S. 2906.~ All these bills were referred to the respective Committees on Banking and Currency. Only H.R. 7491 will be considered further. The House Committee on Banking and Currency held a hearing on H.R. 7491 on May 26, 1969.8 The hearing started with the presenta-. tion of letters generally endorsing the amendment of section 5219, from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Treasury Department. Representative Podell presented the results of his survey, indicating that 21 states which responded to his inquiry estimated their annual revenue losses from inability to apply sales and use taxes to national banks at $25,303,000 per annum. The largest amounts were for New York and Pennsylvania, $5,000,000 each, including $3,500,000 for New York City. Tennessee and Virginia estimated revenue losses at $1,500,000 each; Mas- sachusetts and Michigan, $1,000,000 each.9 Supporting letters to Chair- man Wright Patman, some 31 from Governors and tax officials, also were presented, as were a number of statements, and resolutions.1° Except for the statement of Mr. Podell no other witnesses appeared. On June 9, 1969, Mr. Patman, Chairman of the Committee on Banking and Currency reported favorably H.R. 7491 with amend- ments, submitting House report 91_290.h1 As initially offered, H.R. 7491 was identical with H.R. 19031 of the preceding Congress, quoted above. As amended by the Committee, the bill read as follows: "(a) Section 5219 of the Revised Statutes (12 U.S.C. 548) is amended to read: "Sec. 5219. For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be deemed to be a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located.' "(b) The amendment made by subsection (a) becomes effective on the first day of the first calendar year which begins after the date of enactment." The report said: "The bill says that national banks shall be subject to the same taxation as State banks, and it means exactly what it says." `Ibid., p.511367 (May 5, 1969) and p. S25539 (Sept. 16, 1969). 5. 2065 provided: "A national bank has no immunity from any sales tax, use tax, personal property taxes, intangible personal property taxes, and docu- mentary stamp taxes which it would be required to pay if it were a hank chartered under the laws of the State or otheriurisdiction within which its principal office is located." On July 11, 1969, Senator Holland asked to have Senator Gurney's (Fla.) name added to the bill, ibid., p. S19271. S. 2906 was as follows: "In addition to any other tax which a national bank is authorized to pay under any other law, a State or any political subdivision thereof is authorized to impose on a national bank any sales taxes or use taxes complementary thereto, any taxes on tangible personal property (not including cash or currency), any taxes (including documentary stamp taxes) on the execution, delivery, or recordation of documents, or any license, registration, transfer, excise, or other fees or taxes imposed on the ownership, use or transfer of motor vehicles, which such national bank would be required to pay if it were a bank char- tered under the laws of the State or other jurisdiction within which its principal office is located." * 91st Congress 1st sess., House Committee on Banking and Currency, "Testimony Received in Con- sideration of HR. 7491 and Related Bills," Hearing . . . Ofl HR. 7491, May 26, 1969. Washington, U.S. Government Printing Office. 1969, 47 pp. ° Ibid., p. 5, with supporting letters at pp. 6-19. u Ibid., pp. 19-28. An additional letter to Representative Margaret M. Heckler from Governor Francis W. Sargent of Massachusetts also was included. Statements favoring change in section 5219 were presented from the Independent Bankers Association of America, signed by B. Myers 1-larris, President, and Bradford Brett, Chairman, Federal Legislative Committee; National Association of Tax Administrators, signed by Charles F. Conlon, Executive Secretary; Resolution of the Midwestern States Association of Tax Administrators, adopted at Osage Beach, Missouri, August 25-28, 1968; Orval Hansen, member of Congress; Pennsylvania Bankers Association, letter supporting equal taxation among banks, signed by Frank S. Smith, President with a resolution signed by B. L. Daniels. Executive Vice President; prepared statement of the Nationai Association of Supervisors of State Banks, signed by Frank Wille, Superintendent of Banks of New York aru5 Chairman of Federal Legislative Committee of the Association. 11 115 C.R., p. H15070 (June 9, 1969). PAGENO="0336" 316 The report stated that in California national banks paid no state taxes on motor v~ehicles, that in Florida their recently discovered ex- emption from documentary and - intangible property taxes would "cause an alarming loss of revenue," and that "all over the country they enjoy exemption from sales and use taxes." It explained the historical basis for section 5219 and the purpose of the amendment, adding that the proposed bill did not change any Federal tax law or attempt to solve problems of multistate taxation of interstate com- merce nor deal with questions of venue. The effective date of the chttnge in law would be January 1, 1970, so that the uncertainties of litigation "can be reduced to a minimum and very low level by making the changeover effective with the beginning of the next calendar year." The report also saw no reason for an extended delay in the effectiveness of the bill. In July, the Rules Committee reported a resolution for consideration of H.R. 7491. This was approved July 17 and the House resolved itself into the Committee of the Whole to consider the bill. The main argument was whether the broad approach to the problem of State taxation of national banks, as provided in the Committee bill, or a restricted approach proposed in an amendment by Mr. Garry Brown of Michigan should prevail. The Brown amend.men t was referred to as the "laundry-list" type since it enumerated specific taxes-sales, use, tangible personal property, documentary stamp taxes, etc.- which States could adopt. The amendment was defeated. When a vote was taken the bill was adopted, 344 to 4~12 *The Senate Committee on Banking and Currency held a hearing on H.R. 7491, 5. 2065, and 5. 2906, on September 24, 1969. This was really a "full dress" affair-a few State officials, several bankers or their representatives, a Governor, and a Federal official testified, and numerous statements, resolutions and letters were submitted.13 The position of the States was that they favored equality of taxation of State and national banks and that only section 5219 protected national banks from being taxed as other financial institutions, par- ticularly State banks. They argued that there was no good reason why national banks should not be subject to sales, use, documentary stamp, and similar taxes to which all other corporations were subject. They urged amendment or repeal of the statute. The bankers subscribed to the principal of overall tax equality not only among banks but among all taxpayers, particularly business 12115 C.R., p. 1119712, House report 476 (July 8. 1969); pp. 1119905-7 (July 17) for debate on the rule; and pp. 1119908-22 (July 17) for debate and vote on the bill. On Mr. Brown's amendment, cf. ibid., pp. H19913-2J; tellers were demanded: the vote was 65 for the Brown amendment. 66 against. 13 91st Congress, 1st sess., Senate Committee on Banking and Currency, "Taxes on National Banks," Hearing. . . on S. 2065, 5. 2906, and HR. 7491, Sept. 24, 1969. Washington: U.S. Government Printing Office, 1969, 6S pp. Testimony was given by the following: Senator Spessard L. Holland of Florida; Alfred A. McKethan for Florida Bankers Association; Ralph D. Turlington, member of the Florida House of Representatives and Chairman of its Committee on Appropriations; Honorable Norbèrt T. Tiemann, Governor of Nebraska; Robert Bloom, Chief Counsel to the Comptroller of the Currency; Tom Frost, Jr., for the American Bankers Association, with supplementary comments by Matthew Hale, General Counsel of the Association; Cleo F. Jaillet, Commissioner of Corporations and Taxation, Massachusetts; and Frank Wille, Superintendent of Banks, State of New York, on behalf of the National Association of Supervisors of State Banks. The record includes statements and letters from the following: Norman Gallman, Acting Commissioner, New York State Department of Taxation and Finance; Honorable William McChesney Martin, Chairman of the Board of Governors of the Federal Reserve System; Paul W. Eggers, General Counsel, U.S. Department of the Treasury; Honorable K. A. Randall. Chairman, Federal Deposit Insurance Corporation; Fred. 0. Dickin- soil. Jr., Comptroller of the State of Florida: J. L. Driscoll of the First Security Bank of Idaho; William D. Hussey, Executive Vice President, Florida Savings and Loan League; Robert G. Willmers, Acting Finance Administrator of the City ci New York; Charles R. McNeill, Director, Washington Office, American Bankers Association; Frank Wille, Superintendent of Banks, New York; Honorable Raymond P. Shafer, Governor of Pennsylvania Missouri Bankers Association; and Charles F. Conlon, Executive Secretary, National Association of Tax Administrators. PAGENO="0337" 317 corporations. In their view, the Blouse bill was an oversimplified approach to a complex matter and would guarantee "years of litiga- tion and confusion, followed by years of legislative activity and further confusion." Banker witnesses were concerned that proposed amend- ments might permit double taxation of capital and income and inter- state transactions. Also, they preferred a general statutory provision to a "laundry list." They offered a draft bill that left the basic struc- ture of section 5219 intact but would add provisions to make these changes: (1) authorize the home State of a national bank to impose nondiscrirninationatory sales, use, documentary stamp, motor vehicle, and other general taxes that it applies to State banks and other busi- nesses (other than taxes similar to the four older options and "in- lieu" taxes), (2) permit taxation of tangible personal property at its location in a State other than the home State, and (3) give an insured State bank the same privileges, protections, and immunities as na- tional banks in States other than the domiciliary State. The subject of State taxation of national banks did not receive further attention in the Senate until November 12, 1969, when Senator Proxmire, for the Committee on Banking and Currency, reported favorably on the bill (H.R. 7491) with an amendment.'4 With the bill was filed a report in which the Committee agreed in principle with the purposes of the bill-to give each State "the greatest possible degree of autonomy with regard to the formulation of its tax structure"-but indicated three problem areas which would require correcting amend- ments. These areas were the prohibition of intangible personal prop- erty taxes on banks, the designation of taxes which might be levied on national banks with headquarters outside the taxing State, and the mechanics of the change in the law. The Senate Committee wanted the Federal Reserve Board to make a study of the intangib]es and interstate tax problems and report to the Congress, which could then recQnsider the statutory changes on these subjects before they took effect. The Committee proposed, further, to* retain the existing lan- guage of section 5219 for a period that would allow the States to take legislative actions that might be necessary for imposition of newly authorized taxes or to adjust to the impending repeal of the old section 5219. It had been reported that some States (~vIissouri, for example) had tied their laws to section 5219 by explicit references, so that repeal of the existing Federal provisions might impair their authority to apply current State tax laws. Senator Tower, in a statement of his individual views, supported the motives of the bill but favored Sen- ator Holland's proposal (5. 2906) as simpler and less costly for the States. He favored eliminating the two-step process by keeping the "interim amendment" in effect until the Federal Reserve Board study was completed and considered. He proposed that the study include "all relevant matters concerning future revision of the statute." On November 21, 1969, the Senate considered H.R. 7491. Senator Proxmire explained the provisions of the bill: after which an hour was allotted to him and to Senator Bennett (Utah) for debate.'5 Senator Proxmire told the Senate about the three problems raised in the Committee report which were dealt with in the Committee bill before 14 115 ~.R., p. S33930 (Nov. 12, 1969); Senate Report 91-530. 15 115 CR., p. S35398 (Nov. 21, 1969). 79-421 0 - 72 - 22 PAGENO="0338" 318 the Senate. Senator Bennett raised a question as to whether the sav- ings provision (section 2) would not require all States to have their legislatures meet to consider taxes imposed upon banks.16 He declared that "apparently there is at least one State in which the existing taxes on the State banks are considered to be onerous, and the na- tional banks do not want to have that pattern of existing taxes automatically applied to them when the bill passes." He believed that national banks should not be included without specific acts by the various legislatures. After discussion it was agreed to take this up later in conference with the House committee. Sen ator Holland reported that Florida stood to lose $25 to $27 million a year unless remedial legislation were passed. The committee report was put into the Congressional Record. After a very brief discussion H.R. 7491, as amended, was then passed by the Senate and sent to a conference with the House, which appointed a conference committee on De- cember 417 The conference report, submitted to the House on December 9, 1969, by Mr. Patman, pointed out that the Senate struck out all of the House-approved bill after the enacting clause and substituted a new text. The conferees agreed to a substitute for the entire Senate amendment.18 The following day Mr. Patman called up the conference report and briefly explained what the committee had done. First, the permanent amendment of section 5219 would take effect on January 1, 1972, instead of on January 1 of the first calendar year after enactment. This would give States the time needed to change their laws. Meanwhile the temporary provision would allow States to collect sales, use, and certain other taxes except on intangibles. This provision was to be effective only until January 1, 1972. Second, as to the taxation of foreign or out-of-State banks, the States were limited to sales, use, documentary stamp taxes, and licenses until January 1, 1972, when the permanent amendment would give States full authority to imposè~ intangible property taxes and other taxes on national banks on the same basis as on State banks.19 Finally, Mr. Patman explained the requirement for a Federal Reserve Board study. He assured the House that the House-passed bill had prevailed and that the conferees of both houses were satisfied with the resulting bill. The House agreed to the report.2° 16 This section read: "Notwithstanding any other provision of law, no tax may be imposed on any bank by or under the authority of any State legislation in effect prior to the date of enactment of this Act if such bank is not required to pay the tax prior to such date, unless the imposition of such tax on such bank is authorized by affirmative action of the State legislature after such date." Ibid., p. S35400. 17 115 CR., p. S35398-404 (Nov. 21, 1969); ibid., p. H36928 (Dec. 4, 1969). Conferees for the Senate were Senators Sparkman, Proxniire, Williams of New Jersey, Bennett, and Tower; for the House, Representa- tives Patman, Barrett, Mrs. Sullivan. Reuss, Widiiall, Brock, and Clawson. 18 Ibid., p. H37997; House report 91-728. Therepoitwas included in the Record, pp. H37997-98, and ordered printed, p. H38014. 19 Ibid., p. H38108 (Dec. 10, 1969). 20 Ibid. PAGENO="0339" 319 The Senate took up the Conference Report two days later.21 Senator Proxmire reported thai Senator Bennett (who was unable to be present) was concerned that Congress would be acting before it had proper knowledge if it opened up section 5219 before the Federal Reserve Board study was completed. Senator Holland asked and received assurance that the legislation would permit Florida to impose without additional legislation sales and use taxes; taxes on tangible personal property (excluding cash or currency); and taxes on the execution, delivery, or recordation of documents, including documen- tary stamp taxes. These taxes, he noted, were enumerated in his bill, S. 2906. Senator Proxrnire observed: "I am unable to describe the precise effect this act will have on the mechanism of the tax laws of each State. Those laws are extremely complex and require experts on the law of each State to determine what action, if any, will be required by each State in order to take advantage of the act."22 Senator Tower reiterated the reservations expressed in his statement in the Senate committee report; he thought the provisions scheduled to take effect in 1972 should not be enacted before the Federal Reserve study was completed. The Senate agreed to the conference report without a record vote.23 The bill was signed by the President December 24, after Congress had adjourned. It became Public Law 91_156.24 M. Court decisions: 1926-1970 Court decisions affecting section 5219 up to the early 1930s have been discussed earlier in this appendix. Decisions from the enactment of the law of 1864 until immediately after adoption of the 1926 amend- ment are covered in the chapter by John B. Woosley on "The Inter- pretation of Section 5219 by the United States Supreme Court.," from his book on State Taxation of Banks, incorporated in earlier pages of this appendix.1 Some landmark decisions, such as the Richmoml case2 which led to the 1923 amendment of section 5219, and the Guthrie Center case ~ which demonstrated that the 1923 amendment had been of no avail, have been further considered with reference to proposals for statutory amendments.4 Problems with respect to the excise tax "upon or measured by net inc )me" created by the Macallen decision also have been noted.5 So have a few cases in the field of interstate 21 Ibid., pp. S38633-34 (Dec. 12, 1969). In opening debate, Senator Proxmire made a statement on behalf of Senator Bennett (who was absent) relating to two words "which were apparently inadvertently omitted from the report." lIe said that Mr. Bennett had asked that these words he inserted in the bill "to be sure that themeaning of the section is clear that the Congress is expressing no intent about the Federal instru- mentality issue concerning national banks." Mr. Bennett thought the "permanent amendment" should read as follows (italics indicating the insertion): "For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated the san~c as a bank organized and existing under the laws of the State or other juiisdic- tion within which its principal office is located." Ibid., p. S38633. Subsequently, Mr. Patman reported to the house his "firm . . . recollection" that the proposal to add these two words had not heels adopted. He inserted in the Record a staff memorandum recounting the conference proceedings and the recollection of various indivithsals, with the conclusion "that the text of the conference report, as a matter of law, is a faithful reflection of the legislative policy agreed upon at the conference." Extension of remarks by Mr. Patman, with memorandum by Orasty Crews II, assistant counsel in the Office of the Legislative Counsel, I-louse of Representatives, dated I)ec. 15, 1969, in ibid., pp. 1139763-4 (Dec. 17, 1969). 22 Ibid., p. S38634. 23 Ibid. Senator Tower voted "reluctantly" for final passage "in order to improve State revenue sources in the immediate future." 24 Cf. ibid., pp. S38709, H38903 (Dec. 12, 1969) and p. 1141010 (Dec. 23, 1969). Supra pp. 231-264 in this appendix. 2 Merchants National Bank of Richmond v. City of Richmond, 256 U.S. 635 (1921). First National Bank of Guthrie Ceister v. Anderson, 269 U.S. 341 (1926). Supra 195-218. I Macallen Co. v. Massachusetts, 269 U.S. 620 (1929); supra, p. 226, and discussed more fully infra, at pp. 256-59. PAGENO="0340" 320 ~omrnerce.6 Finally, the First Agricultural National Bank decision has been described; this case and a Florida documentary stamp tax case led to enactment of P.L. 91-156.~ Within the parameters fixed by these cases and those of the earl's- 1930s, the decisions of the courts need to be examined. The discussion of recent decisions will be arranged topically, with ernj)hasis determined by the importance and volume of cases decided. 1. Taxes on bank real estate.-Although the right of states to tax national banks on their real estate is as old as or older than section 5219, a few cases arose in this area. Banks were subject to this tax in the same manner as other real property owners. The manner of collec- tion was not limited by section 5219.8 Nor could national banks as owners escape liability to reimburse mortgagees who had paid real estate taxes for the titleholder (bank) because the property did not. produce sufficient income to cover taxes. The fact of being a national bank made no difference.9 One would have thought that over the years what was real estate would have been determined so precisely that there would be no recent litigation on that subject. But since personal property of national banks could not be taxed-and almost everyone knew it-the game was played of determining how bank fixtures would be classified. Oregon held them to be personal property. Connecticut agreed. Vault doors in California were different. They were improvements to real property and not personalty.1° 2. Taxes on personal property of banks.-~--Although States never had the right to tax personal property of national banks until the adoption of P.L. 9 1-156 in 1969, a number of States continued to try it unsuc- cessfully. It made no difference either that the bank erroneously but voluntarily listed its personal property on an assessment blank. The tax was still invalid under section 5219. States could be enjoined also from attempting to enforce this illegal tax." 3. Ulassilication of rates-Kentucky taxed deposits in banks out-of- state at 50 cents on $100 but taxed deposits in Kentucky banks at 10 cents per $100. The Kentucky Court of Appeals held that the lower rate applied only to deposits in banks in the State, the tax being on citizens of Kentucky. This fiscal mercantilism was sustained by the U.S. Supreme Court. It did not violate the due process, equal Protec- tion, or nnmunities clauses of the 14th Amendment.1' 4. The share tax.-The share-tax option in section 5219 is not only the oldest but the most frequently litigated portion of the national bank tax law. This was natural in the early years. A vast body of law had been established prior to 1930-35; nevertheless the volume of 6 Supra, pp. 238-395, 242. 7 First Agricultnral Nationni Bank of Berkshire County v. State Tax Comniicsian, 392 TJ.S. 339 (1ST); l)ickinson v. First National Bank of homestead. 393 U.S. 409 (1969). See above, pp. 156-59 and below, pp. 266, 308. Welch in his study, op. cit., discussed decisions of the courts through 1933. lBs discussion was tnpical whereas that by Woosley, op. cit., was lsrgelv chronological. Woosley dealt mainly with the share tax, but in a separate chapter (ch. VI) he examined "Income and Excise Taxation of Banks," op. cit., pp. 80-90. S Land Tide Thank and Trust Co. v. Ward. 20 F. Supp. 810 (1937). Stephens v. Reed, 121 F. 2d 696 (1941); `~ First National Bank of Portland v. Marion County, 130 P.269, 196 Ore. 545 (1912); First National Bank and Trust Co. v. Town of West haven, 62 A. 2d 671, 135 Conn. 191 (1948); San Diego Trust and Savings Bank v. Sami 1)iego County, 312 U.S. 679 (1940), eert. denied 16 Cal. 2d 142, 105 P. 2d 94. Assessment in the San 1)iego ease included elevators, marble and bronze decorations, air.eonditioning systems, grill work, cages, and counters. Traube Pittman Corp. v. Los Angeles County, 29 Cal. 2d 385, 175 P. 2d 512 (1946), vault door and frame. Sec also Sinsrns v. Los Angeles Cossnty, 340 U.S. 891 (1950), cert. denied, 35 Cal. 2d 303, 217 P. 2d 936 (1950). On the treatment of fixtures as real property in California assessments, cf. R. Bruce Ricks and Bruce M. Poliehar, "The taxation of national banks and l)ank fixtures: Inequitable methods, unpredic- tahle law," Southern California Law Review. vol. 40, no. 4, summer, 1967, pp. 669-95. ii First National Bank and Trust Co. of Oklahoma City v. McDonald, 289 F. Supp. 413 (1968); Gully v. First National Bank, 81 F. 2d 502 (1936); Bank of California v. King County (Washington), 16 F. Supp. 976 (1936). 12 Madden, Executor v. Kentucky, by Reeves, Tax Commissioner, 309 U.S. 83 (1940). PAGENO="0341" 321 litigation has continued, although, it seems, at a slower rate. More cases were concerned with the share tax up to 1970 than with any of the other options granted by section 5219. Even the question of the "fair market value" of shares received attention.'3 As has been indicated previously the Supreme Court invalidated several State laws immediately after the adoption of the 1926 amend- ment to section 5219 because these laws treated individually-owned intangibles more favorably than national bank stock with which other investments were competitive.14 At the same time the Supreme Court declined to invalidate a Kentucky classification law which differen- tiated in favor of individually-owned intangibles because evidence in the case did not establish that these investments were in competition with the bank." In some earlier cases such competition had been in- ferred from allegations or, as in the Richmond case, the contention was not controverted. But with the Georgetown (Kentucky) case, the Supreme Court began to require proof of substantial competition. This rule was followed in the Shreveport case.'6 The court indicated that national banks must prove that nonbank firms were actually competing with them.'7 The evidence showed, moreover, that the Morris Plan, Morgan Plan, and automobile finance companies did not compete with small loan departments of national banks in that locality. The court also held that exemption of building and loan associations, industrial loan associations and mortgage companies, because, of limi- tations on taxation of national banks, did not void taxes on other banks (State banks) accepting deposits.'8 That savings and loan associations were not competitive with national banks was affirmed in Michigan National Bank v. State of Michigan.'° National banks in Michigan were taxed at a higher rate than Federal savings and loan associations on the paid-in value of their shares.2° The banks accepted deposits and made loans many times greater than the aggregate value of their shares, whereas savings and loa.n associations could accept no deposits and made loans mainly out 13 Board of supervisors of City of Frankfort v. State National Bank of Frankfort, 189 SW. 2d 942, 300 Ken- tucky 620 (1945). 14 First National Bank of Guthrie Center v. Anderson, 239 U.S. 341 (1926); First National Bank of Hart- ford, v. City of Hartford, 273 U.S. 548 (1927); Minnecota v. First National Bank of St. Paul, 273 U.s. 561 (1927); Commercial National Bank of Miles v. Cu:ter County, 2~5 U.S. 502 (1927). 15 Georgetown National Bank v. McFarland, 273 U.S. 563 (1927). 16 First National Bank of Shreveport et al v. Louisiana Tax Commission et al, 289 U.S. 60 (1933). There was also a claim in this case that a small tax had been levied on the bank's furniture and fixtures. Georgetown case. supra cited with approval. 17 The Indiana Supreme Court held that the burden of proof of competition was upon the plaintiff. Davis v. Sextois, 210 md. 138, 200 N.E. 233 (1936). Moreover, no discrimination in the rate of assessment was shown, 200 N.E. at 239. In New York it was held that competition with national banks was a question of fact which had to be proved a~t the trial or else conceded. People's National Bank and Trust Co. of White Plains v. Westchester County, 261 N.Y. 342, 185 N.E. 405 (1933). In Minnesota "discrimination must be shown in fact." Cherokee State Bank of St. Paul v. Wallace, 279 NW. 410. 202 klinn. 532 (1938). In re National Bank of West Virginia et al at Wheeling, 73 SE. 2d 655, 137 W. Va. 637 (1952): "taxpayers failed to carry the burden of clearly establishing that the assessment fixed by the county court is erroneous." In Fir.st National Bank of Scottsboro v. Jackson County, 150 So. 690, 227 Ala. 443 (1933), there is dictum to the effect that "there must be unwarranted discrimination and this must be made to appear from the proof." 18 Union Bank and Trust Co. v. Phelps, 288 U.S. 181 (1933). Case cited also for holding that State banks can be more heavily taxed than national banks. In Flournoy v. First National Bank of Shreveport, 3 So. 2d 244, 197 La. 1067 (1941), where part of law relating to State banks was declared unconstitutional, share tax on national banks was held valid, but tax must be assessed to shareholders and is collectable from bank as agent for shareholders. 15 365 U.S. 467 (1961). Affirming 358 Mich. 611, 101 N.W. 2d 245, at p. 470. In 1933, the Montana Supreme Court held in Merchants National Bank of Glendive v. Dawson County, 19 P 2d 892, 93 Mont. 310 (1933) that building and loan associations did not compete with national banks. Among other things the court said: "There is nothing in the record to indicate that the business conducted by the building and loan associ- ations lessened the opportunities of plaintiff bank to invest all the capital it desired and more" (p. 896). Evesi some of the loans about which the plaintiff complained were made at the instance of the bank "to enable debtors to discharge an obligation owing to the hank. In such a situation it would be preposterous to hold that the act of making the loans was done in competition with the business of the bank." (Ibid.) 25 rate on national bank shares was 53/~ mills on the dollar; the rate on Federal savings and loan associ- ations in addition to other taxes was 33 of a mill per $1 on paid-in value of shares. Savings and loan a.ssocia- tions also paid a franchise tax of 34 mill per $1 on their capital and legal reserves. Cf. 365 U.S. 467, at p. 468. PAGENO="0342" 322 of the proceeds of the sale of their stock. The Supreme Court held, "Even if savings and loan associations were in competition with national banks the tax levied on shareholders of national banks is not so discriminatory in practical effect as to violate R. S. section 5219." The court declared that section 5219 was designed to prohibit "only those systems of State taxation which discriminate in practical oper- ation against national banking associations or their shareholders as a class." 21 The tax structure of Michigan did not have a discriminatory effect. Nor could the court say that its burden was so heavy as to "prevent the capital of individuals from freely seeking investment in its shares." Originally the Michigan National Bank had included in its suit insurance and finance companies, credit unions, and individ- uals, as well as savings and loan associations, but before trial all were dropped except the savings and loan associations. It was said that they competed with national banks for residential mortgage loans. In view of the broad grounds on which the issues were decided, the court did not have to consider whether such competition did in fact exist between the national bank and the savings and loan associations. A year later the Oregon Supreme Court decided that the General Electric Credit Corporation whose principal business was the pur- chase of conditional sales contracts from retail merchants was not a "financial corporation" or "financial institution" in competition with State or national banks. This case harked back to an Indiana case decided in 1936, that finance companies were not in competition with national banks.22 Even the manner of collecting taxes on shares was contested. An Ohio statute, like many others, required the banks to pay the taxes and collect from the shareholders. This method of collection was held valid, and if the bank failed to collect it was not discharged from its obligation by insolvency. But in Illinois the tax had to be assessed in the name of the shareholders and not against the bank, although practically all Illinois banks paid the tax for their shareholders.23 In Louisiana shares are assessed against the bank and the taxes are paid by the bank.24 The Ohio law, which made taxes on bank shares a lien on such shares until paid and required payment by the bank, did not violate section 5219.25 The lien, however, did not extend beyond the stock to the bank's real estate. National banks, like other taxpayers, were not absolved by section 5219 from pursuing administrative remedies before taking their cases to court. One bank tried to sue before its tax became final and while other administrative remedies were available. Its effort failed.26 Another bank affixed to its return a statement that competing capital should be assessed on the same basis and that the bank should not be ~nscriminated against. But it did not apply to the board of review for relief before starting suit. Judicial relief was denied.27 21 Ibid., p. 473. 22 General Electric credit Corporationv. Oregon State Tax Commission, 373 P.2d 974, 231 Ore. 570 (1962). Cf. Davis v. Sexton, 200 N.E. 233, 210 md. 138 (1936). Burden of proof is on plaintiff to prove competition, ~st p. 239 (N.Ei. 23 Findley v. Odland,. 127 F.2d 948 (1942). People v. First National Bank of LaGrange, 351 Ill. 435, 184 N.E. 645 (1933). 24 City of Hattiesburg v. First National Bank of Hattiesburg, 9 F. Supp. 519 (1935). Total tax against bank was sufficient to meet jurisdictional limit of fed3ral court. 25 Union Savings Bank of Bellaire v. Pancoast, 142 Ohio St. 6, 50 N.E. 2nd 157 (1943). In Brophy et al v. Powell, County Assessor, 121 P. 2d 647 (1942), bank did not foreclose lien against nonresident shareholder. Share tax sustained. In Atlantic National Bank of Jacksonville v. Simpson, 188 So. 636, 136 Fla. 809 (1938)~ bank failed or refused to file return on shares owned by nonresident stockholders. Assessor assessed such shares in aggregate against bank. Sustained. 26 First National Bank of Greenville v. Gildart, 64 F.2d 873. Certiorari denied, 290 U.S. 631 (1933). 27 Hammerstrom v. Toy National Bank of Sioux City Iowa, 81 F.2d 628. Certiorari denied, 299 U.S. 546 (1936). See also, Albertvffle National Bank v. Marshall County, 71 F.2d 848 (1934). PAGENO="0343" 323 Another bank was unsuccessful because it did not pay the tax under protest and did not sue before the statute of limitations expired.28 Administrative remedies need to be followed by all taxpayers before they resort to law suits. Section 5219 does not abrogate this fundamental rule. The deduction of tax exempt securities in valuing shares received some attention during this period. The Maryland Court of Appeals required the deduction of both federal securities and national bank stock in assessing the capital stock of a fidelity, guaranty, and insur- ance company.29 In Commonwealth v. Mellon National Bank and Trust Co., the Supreme Court held that Federal tax-exempt securities and Federal Reserve Bank shares were deductible in determining the value of national bank stock.3° The depression of the 1930s brought about the creation the Govern- ment-owned Reconstruction Finance Corporation which helped many corporations, including banks, solve critical financial problems in this emergency. The tax effects of R.F.C. purchases of preferred stock in national banks were soon tested in the courts as states attempted to tax the shares owned by the R.F.C. The first such case to reach the Supreme Court was Baltimore National Bank v. State Tax Commission in i935.~' The R.F.C. had subscribed to preferred stock in the closed Maryland Trust Company, and the Maryland Tax Commission assessed the stock to the R.F.C. The court held that the tax was upon bank shares and not the R.F.C.; the tax was valid and not prohibited by other Federal laws. As a share tax, the levy conformed to section 5219. However, under an act approved March 20, 1936, Congress withdrew its consent, making any such stock nontaxable by States or localities while it was owned by the R.F.C.32 The validity of this exemption was upheld.33 The court said. "In withdrawing pro tanto the consent which by R.S. section 5219 it had previously given to State taxation of shares of stock of national banks, Congress did not invade powers reserved to the States by the Tenth Amendment." ~ In two States it was held that Joint Stock Land Banks organized under the Federal Farm Loan Act came within the meaning of section 5219 for State taxation of their shares of stock.35 in Kentucky they were held liable for share taxes imposed by the State and counties. in Texas shares were held assessable and taxable to the bank as agent for nonresident stockholders, as was generally the case for national bank shares throughout the country. 28 First National Bank of Scottsboro v. Jackson County, 150 So. 690, 227 Ala. 448 (193~). 25 Fidelity and Guaranty Fire Corporation v. Leser, 193 A. 164, 172 Md. 652 (1937). In Miners National Bank of Butte v. Silver Bow County, 148 P.2c1 538, 116 Mont. 31(1944) a bank was not allowed to deduct a reserve for loss on bonds which did not also take into account appreciation on other bonds. ~° Commonwealth v. Mellon National Bank and Trust Co., 346 U.S. 87b (1953), certiorari denied. See 374 Pa. 519, 98A.2d 168. This case continued the controversy with the Schuykill Trust Company which arose in 1934 and was the direct result of the decision of the Supreme Court in Schuykill Trust Co. v. Pennsylvania, 302 U.S. 506 (1938). That case held that the deduction of Federal securities in valuing the stock of trust com- panies was not required by law but that the law could not include the value of national bank stock already taxed to the owner pursuant to section 5219. An earlier case, Schuykill Trust Co. v. Commonwealth of Pennsylvania, 296 U.S. 113 (1935), had held a share tax void because the State law did not allow deduction of U.S. tax-exempts and national bank stock. The history of this litigation is reviewed by the court in 346 U.S. 875. It is pointed out that statistics showed in the court below that national banks in 1934 paid almost twice the effective rate paid by trust companies and that the Mellon Bank paid at a slightly higher rate. 31 296 U.S. 538 (1935) certiorari granted; 297 U.S. 209 (1936). 32 49 Stat. 1185, 12 U.S.C. section Sid. The entire section was repealed June 30, 1947, by 61 Stat. 208. On tfle 1936 amendment, cf. supra, pp. 232-33 in this appendix. 33 Ex parte Bransford, 310 U.S. 354 (1940). An excessive valuation o'~ capital stock was also said to violate section 5219. iviaricopa County v. Valley National Bank of Phoenix, 318 U.S. 357 (1943). Cf. also United States v. Lewis, 10 F. Supp. 471 (1935), citing 15 U.S.C.A., section 611 et seq. 34 Maricopa County v. Valley National Bank of Phosnix, 318 U.S. 357, 361 (1943). 35 Land v. Kentucky Joint Stock Land Bank of Lexington, 131 SW. 2d 838, 279 Ky. 645 (1939); First Trust Joint Stock Land Bank of Chicago v. City of Dallas, 167 SW. 2d 783 (1939). PAGENO="0344" 324 Who could tax national bank shares was also decided in several cases. in 1935, the Supreme Court held that section 5219 was appli- cable to national banks in Puerto Rico.36 it may be assumed that the statute was also binding on Alaska and Hawaii, which joined the UniOn later. The court held also that a municipality, under proper grant of authority from a State legislature, could tax shares of stock in a national bank in conformity with section 5219.~~ Unless prohibited by their own constitutions, States have always been able to grant their own powers to municipal corporations which they have created. in a Georgia case it was decided that if a State elected to tax the shares of a national bank it could not also levy a tax on its branches measured by capital employed in their operations.38 It was decided by the Missouri supreme court that, having elected to tax national banks on the basis of shares of stock, the State could not also impose an income tax on the same banks for the same year.39 5. Taxes on diviclends.-The 1923 amendment of section 5219 opened the taxation of national bank dividends to trie States as an option in lieu of the share tax. As has been indicated,40 the revenue that could be derived was limited, so that few States adopted this course. Nevertheless a few recent cases have been concerned with the taxation of national bank dividends. In 1934 the Court of Appeals of Georgia decided .that since the State taxed national bank shares and exempted national banks from income taxes (as it had to do under section 5219), it could not include dividends on shares of stock in national banks in the taxable income of shareholders.41 Arkansas taxed national banks on the basis of shares up to 1941. The legislature then adopted a law providing: "That dividends derived from shares in State and national banks shall be taxable in the same manner and at the same rate as taxable dividends from foreign and domestic corporations." 42 JIn 1942 the Arkansas Corpora- tion Commission, on advice of the Attorney General, directed all local assessors to relieve national banks of ad valorem assessments on their shares. This was sustained by the trial court. in enacting the dividend tax the legislature did not repeal the share tax or make any reference to it. On appeal the Arkansas Supreme Court, while disapproving the repeal of laws by implication, held that where there is an irreconcil- able conflict between laws, the last enactment controls (even if taxes on the national banks were substantially reduced by this action of the legislature) ~ More important, however, is the case of Irvine v. Spaeth involving a bank holding company. Denying a writ of certiorari, the United States Supreme Court let stand a Minnesota decision that the immunities of section 5219 as to national banks did not extend through 36 Domenech, Treasurer of Puerto Rico v. National city Bank of New York, 294 U.S. 199 (1935). A tax on bank capital and net on shares was held to violate section 5219. 37 city of Longviea, Texas v. First National Bank of Longview, Texas, 327 U.S. 784 (1945) certiorari denied; 152 F.2d 97 (1946). First National Bank of St. Joseph v. Buchanan County, 205 S.W. 726, 356 Mo. 1204 (1947). But a municipality could not imp3se a license tax on national banks, although it could collect from State banks and trust companies. City of Shelbyville v. Citizens Bank of Shelbyville (Ky.), 114 S.W.2d 719, 272 Ky. 559 (1938). 38 Goodwin v. Citizens and Southern National Bank, 76 S.E. 2d 620, 209 Ga. 908 (1953). ~ First National Bank of St. Joseph v. Buchanan County, 205 SW. 726, 356 Mo. 1204 (1947) at pp. 1215-16. 45 See Welch, op. cit., pp. 177 if; also supra, p. 210. iii this appendix. 41 State Revenue Commission v. Hawkins, 172 SE. 845, 48 Georgia App. 414 (1934). 42 Act 129, section 5, quoted by court below. 43 City of Little Rock v. Arkansas Corporation Commission, 189 SW. 2d 382, 209 Ark. 18 (1945). PAGENO="0345" 325 them to bank holding companies.44 The case involved the First Bank Stock Corporation which operated a system of banks, some of which were national banks. The State Supreme Court pointed out that the First Bank Stock Corporation was an entity distinct from the banks it controls. Moreover, "the First Bank Stock Corporation is a complete `non-conductor' of the qualified immunity from State taxation enjoyed by national banks."45 No other section 5219 cases involving bank holding companies were discovered for the period under review. 6. Net income taxes.-The right of a State to tax the net income of a national bank under section 5219 was affirmed in People v. Loughman in 1938.46 The State was allowed to enforce its claim against the receiver of the bank and ahead of the claim of depositors. In another case, the National City Bank of New York established branches in Manila and Cebu. The Philippine government levied a tax on the net income of these branches which was paid. It levied an additional tax on capital and deposits, but since it had elected one option under section 5219 it could not impose additional taxes.47 7. Excise taxes.-Under the 1923 amendment to section 5219, income from tax-exempt securities could not be included in the base for State net income taxes on national banks. The law was changed in 1926 to permit State taxation of all net income received by national banks, provided the tax was "according to or measured by net in- come." 48 This tax is generally known as an "excise" or "franchise tax." In legal theory the tax is imposed by a State for the privilege of doing business in the State or, what amounts to the same thing, for the exercise of a corporate franchise to do business in the State. When Congress gave its consent to the State taxation of national banks "according to or measured by their net income," it placed these conditions on the use of that tax: (1) the rate shall not be higher than the rate assessed upon other financial corporations, (2) nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations doing business within its limits. Another proviso, common to all of the permitted options under which States could tax national banks, was that if a State imposed an excise tax it could not also impose other taxes, except on bank real estate.49 It is important in the discussion of the court decisions relating to the excise tax to have these provisions in mind. Certainly they were clearly stated in the law. ~ Irvine v. Spaeth, 210 Minn. 489, 299 N.W. 204; certiorari denied, 314 U.S. 575 (1941). ~` 299 N.W. 204, 205. 48 100 F. 2d 387 (1938), Circuit Court of Appeals, N.Y. 4' Posadas v. National City Bank of New York, 296 U.S. 497 (1935). The Philippine Islands were, at that time an insular possession of the United States. 48 12 U.S.C. 548, paragraph 1(c) prior to enactment of P.L. 91-156. For the text, see appendix 1-A, above at pp. 1-2. For discussion of the 1926 amendment, see above, pp. 213-21 in this appendix. ~° The dividend option permitted the inclusion of national bank dividends in the taxable income of individual stockholders, subject also to certain provisos, but did not affect the excise tax per se. Dividend taxes arc discussed above in subsectionS, pp. 254-55. That the election of one option in section 5219 precluded States from adopting other taxes on national banks was upheld by the Supreme Court in Johnson v. Meagher County 328 U.S. 689 (1945). Appeal dismissed for want of jurisdiction. Certiorari denied. 326 U.S. 809 (1945); rehearing denied. Case below, 155 P. 2d 750 (Supreme Court of Montana): Montana legislature adopted an income tax based on income from all sources without repealing its share tax. Court held that 1e'islature did not intend to repeal share taxes on national banks. Therefore that tax applied even though the bank had paid income tax. Other corporations had to pay oa both property and income but section 5219 gave States one option in taxing national banks. Cf. also Goodwin v. Citize'ss and Southern National Bank, 76 S.E. 2d 620, and First National Bank of St. Joseph v. Buchanan County, 205 S.W. 726 hire similar situation under share tax, noted supra at p. 254. PAGENO="0346" 326 In view of the importance of the excise method of taxing national banks, and as a preface to recent decisions, a brief review of early cases is included here even though it involves some repetition. Use of an excise or franchise tax "upon or measured by" net income had been approved by the Supreme Court in Flint v. Stone Tracy Co.5° The tax in question was the 1909 corporate franchise tax imposed by the Federal government. Net income involved in this case included income from tax-exempt securities. Congress in adopting the excise op- tion for taxing national banks knew of this decision and adopted the option in the belief that an excise on net income from all sources was legal. When Massachusetts adopted the excise option it appointed a special tax commission which recommended that an existing law be amended to include specifically the income from U.S. Government tax-exempt securities in net income used as the measure of the tax.51 The Massachusetts law was thus modified in 1925, but this proved to be a mistake! Instead of adopting a whole new law, the Massachusetts legislature merely amended an existing statute. Perhaps the State should have been forewarned, for in Miller et al., Executors, v. Milwaukee,52 in an opinion by Justice Holmes, the Supreme Court had ruled that- "Where income from bonds of the United States which by Act of Congress is exempt from State taxation is reached purposely, in the case of corporate-owned bonds, by exempting the income therefrom in the hands of the corporation, and taxing only so much of the stock- holders' dividends as corresponds to the corporate income not assessed, the tax is invalid." ~ Among other things, Justice Holmes said ~ "If the avowed purpose or self-evident operation of a statute is to follow the bonds of the United States and to make up for its inability to reach them directly by indirectly achieving the same result, the statute must fail even if but for its purpose or special operation it would be perfectly good." Perhaps the attorneys for Massachusetts thought that section 5219 had definitely taken care of such situations with respect to national banks. But the 1926 amendment to section 5219 (which followed the Massachusetts legislation) was adopted so that income from tax- exempt securities could be included in total income. Soon thereafter they learned from Macallen Co. v. Massachusetts,55 that where the legislature merely changed the definition of net income by striking an earlier permission to deduct interest derived from bonds, notes, and certificates of indebtedness of the United States, so that they were thereby included in the excise tax on national banks, that amendment was void. 56 The majority opinion was written by Justice Sutherland. Justice Stone dissented in an opinion in which Justices Holmes and Brandeis concurred. The wajority opinion stated that the act had the ii 220 U.S. 107 (191'). Concerning the application of the Federal tax to commercial banks, the Court said (at p. 171): "What we have already said disposes of the objections made in certain cases of life insurance and trust companies, and bants, as to income derived from United States, state, municipal, or other non-taxable bonds." (Italics added.) i~ The Massachusetts report is quoted in the opinion in the Macallen case; see next page. ii 272 U.S. 713 (1927). Justice Brandeis wrote a concurring opinion agreeing that the tax was void but emphasizing different considerations. a This quotation is from a headnote, rather than the opinion. i4 Ibid., p. 715. ii 279 U.S. 620 (1929). ii The State excise tax had been adopted in 1923 with a defimtion of net income that permitted the deduc- tion of income from U.S. tax-exempt securities. The Act of 1925 removed this deduction. PAGENO="0347" 327 effect of-"irnposiiig a burden upon the securities from which, by ex- press language, they had theretofore been free. This was a distinct change of policy on the part of the Commonwealth, adopted, as though it had been so declared in precise words, for the very purpose of subjecting these securities pro tanto to the burden of the tax. This conclusion is coufirmed, if that be necessary, by the report of a special commission appointed by the legislature to investigate the subject of taxation of banking institutions." ~" The court quoted four paragraphs from that report which recom- mended the inclusion of income from all sources in the excise tax. The State report pointed out that so far as banks were concerned the effect (tax increases) would be greater on banks than on other corporations- but was permitted under section 5219. Nevertheless the court held that the Massachusetts act was in derogation of the constitutional power of the United States to borrow money and of acts of Congress declaring United States securities non-taxable. Justice Stone in his dissenting opinion contended that, under a long series of Supreme Court decisions, the Commonwealth had power to impose an excise tax on a corporation for privileges the State con- ferred, "even though all of its property were tax-exempt securities of the United States and income derived therefrom." 58 The Washington Supreme Court followed the rule in the Macallen case in two decisions.59 But when a case involving the excise tax of New York reached the U.S. Supreme Court in 1931, enough changes in the composition of the court had taken place to provide a different result.6° The case of Educational Films Corporation of America v. Ward 65 raised the question whether income from copyrights could be included under the New York excise. This tax was imposed for the privilege of exercising a corporate franchise in the State, with the value of the privilege measured by the corporation's entire net income, "including all dividends received on stocks and all interest received from Federal, State, municipal or other bonds." The plaintiff contended that income from copyrights was not taxable. The opinion of the court was delivered by Justice Stone. It held the New York excise tax to be a nondis- criminatory tax upon the corporate franchise, notwithstanding the inclusion of tax-exempt property or income. Nor did the tax impose a direct burden on the Federal Government. The case was distinguished from the Macallen case because the New York excise was not aimed at copyrights nor intended for the very purpose of including copyrights.62 The California franchise tax was also upheld in Pacific Co., Ltd. v. Johnson, which involved the inclusion in net income of interest on municipal bonds.63 The next test involved the Georgia privilege tax, on a business licensing copyrighted motioLt pictures, measured by gross receipts ~ 279 U.S. 620 at 631-2. Briefs as amicus curiae were filed by the New York Tax commission and for a rehearing by california and Washington. a Aber lean Savings and Loan Association v. chase, 289 P. 536 (1930); Burr v. chase, 289 P. 551 (1930). ~f Welch op. cit., p. 51. 60 Chief Justice Hughes and Associate Justice Roberts had succeeded Justices Taft and Sanford, both of whom had died. Welch, op. cit., p. 52. 61282 U.S. 379 (1)31). . . . 62 289 U.S. 379, 393 (1931). Distinguishing the Macallen case, the court said that the Massachusetts amend- ment "was specifically intended to reach the income from tax-exempt national and municipal bonds which had reviously not been included in the measure of the tax. ~ 285 U.S. 480 (1932). The California excise tax, as applied to a manufacturing firm, was upheld also in Oliver Continuous Filter Co. v. McColgan, 120 P. 2d 682, 48 Cal. App. 2d 800 (1942. PAGENO="0348" 328 from royalties. This tax was sustained by the Supreme Court.64 The Court differentiated this case from the Educational Films Case, above described, because the Georgia tax was on gross receipts, whereas the New York tax was on net income. Nevertheless, an excise tax measured by net or gross income was sustained in the decision. In 1933, the Supreme Court again upheld the New York excise in a memorandum decision which did not disturb the decision of the court below.65 It cited Pacific Co., Ltd. v. Johnson, above, in affirming the judgment of the lower court. Three years later the Supreme Court upheld the California excise of 4 percent on the privilege of exercising a corporate franchise within the State based on income "according to or measured by" income from all sources.66 The income under litigation in this case included intrastate, interstate and foreign income. The court also upheld the privilege tax of Washington, for doing business in the State, the tax being measured by gross income from intrastate busi- ness.67 The next decision was in a bank tax case and again the tax was upheld, this time by the Oklahoma Supreme Court.68 The tax vali- dated was a net income tax "according to or measured by" income, including income from Federal securities. In 1940, a similar case reached the United States Supreme Court from Oklahoma contesting an excise tax on national banks in the State based on income from all sources. The income in question included dividends from Federal Reserve Bank stock (to which all national banks had to subscribe in joining the Federal Reserve Sys- tern) and interest from tax-exempt securities. Unlike the Massachu- setts statute which covered only tax-exempt securities, the Oklahoma law had included all income in the tax base. In Tradesmen's National Bank of Oklahoma City v. Oklahoma Tax Commission, the excise tax was upheld.69 Among other things the court said: "[As the Oklahoma law measures the tax] on the corporate franchise by the entire net income of the corporation, ~without any discrimina- tion between income which is exempt and that which is not, there is no infringement of any constitutional immunity.7° * * * * * * * "We do not now decide just what circumstances, if any, would bring the situation within the precise scope of the Macallen case, assitming that case still has vitality.7' * * * * * * * it is not a valid objection to a tax on national bank shares that other moneyed capital in the State or shares of State banks are taxed* at a different rate or assessed by a different method unless it appears that the different treatment results in fact in a discrimination unfavorable to the holders of national bank shares.72 * * * * * * * 0~Fox Film Corp. V. Doyal, 286 U.S. 123 (1932). 173 Ga. 403 was affirmed. T.he court also ~peciiicaIlv overruled Long v. Rockwood, 277 U.s. 142 (p. 131). 65 New York cx rel Northern Finance Corp. v. Lynch, 290 U.s. 601, 54 s.ct. 230 (1933); for decision below see 262 N.Y. 477, 188 N.E. 27. 66 Matson Navigation Co. et al v. State Board of Equalization of California, 297 U.S. 441 (1936). 67 Pacific Telephone and Telegraph Co. v. Tax Commission of Washington, 297 U.S. 403 (1936) Nor was the tax an undue burden on interstate business. ~ First National Bank V. Oklahoma Tax Commission, 185 Okla. 98, 90 P. 2d 438 (1939). 60 309 U.S. 560 (1940). 70 At p. 566, quoting Pacific Co., Ltd. V. 30hfl50fl, 285 U.S. 480, cited above. 71 Ibid. Italics added. 72 P. 567. PAGENO="0349" 329 "Discrimination is not shown merely because a few individual corporations, out of a class of several thousand which ordinarily bear the same or a heavier tax burden, may sustain a lighter tax than that imposed on national banking associations." Accordingly, it appears that a State excise on national banks can no longer be questioned. That conclusion was adopted by the Idaho Supreme Court in Grange Mutual Life Co. v. State Tax Commission.74 In this decision Chief Justice Taylor said: "The confusion wrought by the Macallen case has been for the most part eliminated by these subsequent decisions. So now it may be said: "`It is well settled by our highest judicial authority that a State has the power to levy a tax on a legitimate subject, such as a corporate franchise, measured by net assets or net income including tax-exempt Federal securities which, as such, could not be directly taxed. Werner Mach. Co. v. Director of Division of Taxation, 1954 N.J. Super. 444, 107 A. 2d 36 at page 39.' Even if the ghost of the Macallen case still walks, it would seem to be effectively chained or hobbled. The constitutionality of the excise option in section 5219 can no longer be of doubtful validity so long as income from Federal securities is not singled out, by one law or amendment, for specific taxation. Surely. the States have learned not to do this. One of the provisos relative to the excise tax on national banks, set forth above,76 was that the excise tax rate should not exceed the rate assessed upon other financial corporations. Thus, when a number of States adopted excise taxes on national banks, they recited this proviso in the law or provided that other financial corporations coming into competition with national banks should be taxed at the national bank tax rate. A number of court cases involve this point. A California court held that Morris Plan banks were in substantial competition with national banks within the meaning of the State franchise tax law and therefore were taxable at the bank rate-to comply with section 5219.~~ "Financial corporations" were also held by the Supreme Court of California to be in competition with na- tional banks under the franchise tax law.78 A loan service company, which negotiated small loans for borrowers from finance companies for which a fee was charged and guarantee of payment of the loan was given, was in competition with national banks under the Cali- fornia franchise tax.79 In New Jersey a company doing a second- mortgage business was in competition with nationa1~ banks under an annual excise measured by net worth.8° In California, a mortgage ~ P. 568. 74 283 P. 2d 187, 76 Idaho 303 (1055). Included in the opinion are dicta to the effect that life insurance com- panies as "financial corporations" are in competition with national banks within the scope of section 5219 73 Page 187. He also cited Nashville Trust Co. v. Evans, 195 Tenn. 205, 258 SW. 2d 173, A.L.R. Annota- tion section 81, p. 162. 76 Supra, p. 255. 77 Morris Plan Co. of San Francisco v. Johnson, 100 P. 2d 493, 37 Cal. App. 2d 621 (1941). 78 Crown Finance Corporation v. McColgan, 144 P. 2d 331, 23 Cal. 2d 280 (1943). Plaintiff engaged solely in business of purchasing conditional sales contracts and accounts from neighborhood retailers dealing in household furniture, furnishings, and clothing but never made loans. Bank officer testified banks did sub- stantial business in that field. Bank relied on credit of dealer whereas finance company relied on references of purchasers. "The only reasonable conclusion from that evidence is that plantiffs were in substantial com- petition with national banks" (p. 334). 76 HAS. Loan Service v. I\'lcColgan, 113 P. 2d 391, 21 Cal. 2d 518 (1943). 80 Morris and Essex Investment Co. v. Director of Division of Taxation, 161 A. 2d 491, 33 N. 1. 24 (1960). PAGENO="0350" 330 company which solicited loans from builders, realtors, and the public and which either made loans or sold them to others (borrowing capital from banks as needed) was held to be a "finance corporation" taxable at the national bank rate.81 Next to the cases upholding the constitutionality of the excise tax "measured by or according to" total national bank income, the most important case in recent years was the one upholding the "built-up" method of computing the bank tax rate for the California franchise tax. That case was Security-First National Bank of Los Angeles v. Franchise Tax Board. It came up to the United States Supreme Court on appeal from the decision of the Supreme Court of California and that appeal was dismissed. The California decision therefore stands.82 As has been indicated, the California law fixed the the rate on all corporations except financial corporations at 4 per cent but left the annual determination of the rate of the franchise tax on financial corporations to the Franchise Tax Board, which after in- vestigation fixed the rate so that the burden of the tax on national banks would not exceed the rate assessed upon other financial cor- porations nor exceed the highest rate assessed upon mercantile, manufacturing, and business corporations-as specified in section 5219. Nonfinancial corporations were required to pay, in addition to the franchise tax, taxes on real estate and personal property but section 5219 did not permit taxation of personal property of national banks. The Franchise Tax Board sought to equalize the burden be- tween financial and nonfinancial corporations, not by estimating what taxes on bank personalty might have been, but by estimating what the burden on other corporations actually was, a practice that the banks bitterly opposed. The argument that the law meant to measure burdens rather than tax rates was sustained by the Court: 83 "In determining whether a State tax on such* banks according to or measured by net income violates the limitations, consideration must be given to the State tax structure as a whole, not merely to taxes of the kind imposed on those banks. The State tax on them is valid so long as the resulting burden does not exceed the burden to which State banks, mercantile, business, manufacturing and financial corporations are subject. Tradesmens National Bank of Oklahoma City v. Oklahoma Tax Comm., 309 U.S. 560, 567-568, 60 S.Ct. 688, 84 L.Ed. 947; see Franchise Tax Board v. Superior Court, 36 Cal. 2d 538, 551-552, 225 P. 2d 905; H.A.S. Loan Service, Inc. v. McColgan, 21 Cal. 2d 518, 520, 133 P. 2d 391, 145 A.L.R. 349. In Tradesmens National Bank, the court, in upholding the validity of a bank franchise tax against a claim of discrimination, took into consideration not only franchise taxes imposed on nonfinancial corporatiolis but also their income and ad valorem taxes." The "built-up" method of fixing excise tax rates on national banks was thus sustained. The question as to whether the banks were denied due process because they were not permitted to examine the original tax returns of other corporations used in fixing the bank rate, these having been 81 Marble. Mortgage Co. v. Franchise Tax Board, 50 Cal. Reptr. 345, 241 C.A. 2d 62 (1966). 82 Security-First National Bank v. Franchise Tax Board, 359 pp 2d 625 (1961); appeal dismissed, 368 U.S. 3 (1961). This case is also discussed supra, at pp. 306-307. - 83 350 P. 2d 625, p. 628. PAGENO="0351" 331 declared by prior law to be confidential, was also laid to rest. The banks were given all of the statistical information needed to verify the accuracy of the computations both before and at the trial but they were not given the original corporate returns or other information from which the facts pertaining to individual companies could be identified, such disclosure being prohibited by law. "Defendant also offered on several occasions to comply with any other reasonable method of verification which might be proposed by plaintiffs, and as far as appears no request for production was refused where it could have been granted without violating section 35~" 84 The court also said: 85 "The nondisclosure provisions of section 35 merely mean that the plaintiffs `are confronted with the common situation wherein proof of alleged facts is rendered more difficult because of the existence of certain privileged communications, protected as such because under- lying public interests and policies outweigh the convenience of a particular litigant.' Franchise Tax Board v. Superior Court, supra, 36 Cal. 2d 538, 551, 225 P. 2d 905, 913. Much material helpful to plaintiffs in determining the accuracy of the rate was made available to them at both the administrative hearings and the trial, and the only information withheld was such that it would have revealed to them, contrary to section 35, the amount of income or business activities, reported by named nonfinancial corporations. We are satisfied that plaintiffs received all the information they reasonably needed." This ruling laid to rest the charges of "secrecy" surrounding rate determinations from confidential returns. The inclusion in the rate computation of the personal property taxes on cooperatives was also approved. An Alabama case involved the computation of the excise tax from an entirely different angle. The Alabama statute imposing the excise tax on national banks limited charge-offs for bad debts to the amounts required by bank examiners, but provided that the State tax commis- sion was not required to make these allowances. In State v. First National Bank, the examiner required the bank to write off pre- miums paid on bonds purchased. These were disallowed by the tax commission but the court held that plaintiff bank was entitled to the deductions required by bank examiners.86 In another case involving the Alabama excise tax the bank claimed a loss on a piece of real estate on which the State contended the bank made a profit. The court held that the tax could only be levied on the net income of the bank, not on sales of particular parcels of real estate. In the transaction in question, title to the property passed before the excise was adopted.87 In 1962, in Grayson County State Bank v. Calvert it was held that the equal protection clause of the Fourteenth Amendment was not violated by imposition of a franchise tax on State banks without the imposition of a similar tax on national banks.88 In 1967 it was held in Arizona State Tax Commission v. First Bank Building Corporation, that a privilege tax on a wholly-owned sub- sidiary of a national bank was a tax upon the subsidiary and not a tax `~ Ibid., p. 631. "Ibid., p. 632. a 196 So. 114, 239 Ala. 492 (1940). 87 First National Bank of Birmingham v. State, 77 S. 2d 653, 262 Ala. 155 (1958). 8~ 357 SW. 2d 160 (1962). PAGENO="0352" 332 on the national bank. The building corporation held title to thebank building and the directors of the bank were also the directors of the building corporation. The bank could not transfer the immunities of seètion 5219 to its subsidiaries.89 8. Sales and use taxes.-The development of State sales and use taxes in the depression of the 1930's and their continuing importance to the States as revenue producers brought many cases before the courts, prior to the First Agricultural National Bank case which was. decided in 1968.~° Not all these cases involved national banks but some decisions did affect them. In McGoldrick, Comptroller of New York City v. Berwind-White Coal Mining Co., a contract of sale made through a sales office in New York of coal mined in Pennsylvania, delivered by rail to New Jersey, and then moved by barge to New York City, was sufficient to support the sales tax levied .by the city. The sales tax was upon the seller and did not violate the commerce clause.9' Colorado imposed a 2 percent tax on the value of services rendered to safe deposit customers which the Colorado National Bank of Denver refused to pay, alleging that the tax violated section 5219. The Supreme Court, however, held that the tax was on the user and not on the bank, although collected in the first instance from the bank. The law requred the tax to be added to the service charges and made it a debt of the user until paid. Credit was given the bank for taxes so paid. The State court had held that the user is the payer; the Supreme Court agreed.92 Mail orders also caine to the attention of the Supreme Court. In Nelson, Chairman of the State Tax Commission, et. al. v. Sears, Roebuck & Co., the retailer-which maintained stores in Iowa-was required to collect the use tax on mail orders sent into the State from out-of-State branches of the corporation by direct mail or common carrier. Since the tax was paid by iowa purchasers, its imposition did not involve discrimination against interstate commerce.93 The court also held that the State could impose a sales tax on a purchaser who used the taxed property to perform a cost-plus contract for the United States~ government. The fact that the economic burden of the sales tax was passed on to the Federal Government did not make it a tax on the United States. The goods, moreover, were purchased in the name of the plaintiff who paid the tax in the first instance.94 In a similar case a contractor had to pay a use tax on material purchased outside the State but used within the taxing State in the performance of a cost-plus contract with the United States government. The Supreme Court sustained the tax; this, too, was not a tax on the United States. The contractor was not the agent of the United States, nor did the shifting of the economic burden to the United States make it a tax on the Federal Government.95 In 1952 the State of Arizona attempted to collect a sales tax on rentals received by a national bank from tenants of offices in a building 89429 P. 2d 481 (1967). `° Discussed supra at pp. 226-229, and infra, p. 336, in this appendix. "309 U.S. 33 (1940). 92 Colorado National Bank of Denver v. Bedford, 310 U.S. 41 (1940). `3 312 U.S. 359 (1941). The issue in Nelson, Chairman of the State Tax Commission et al v. Montgomery Ward & Co., 312 U.S. 373 (1941), was identical. "Alabama v. King and Boozer, 314 U.S. 1 (1941). The differing view that prevailed in Panhandle Oil Co. v. Knox, 277 U.S. 218, and Graves v. Texas Co., 298 U.S. 393, ~ overruled. "Curry, Commissioner of Revenue of Alabama v. United States et. al. 314 U.S. 14 (1941). PAGENO="0353" 333 owned by the bank. The court held that such a tax was not permitted by section 5219.96 That same year the Supreme Court of lVlichigan upheld a sales tax on a retailer who, when he sold food to a national bank, shifted the sales tax to the bank.97 The bank claimed it could not purchase food for its cafeteria without paying the tax. The court, however, pointed out that the legal incidence of the tax was on the retailer for doing business in the State; that he had to pay the tax and could add it to the price of goods sold,. even to a national bank. The Supreme Court of Illinois upheld a similar tax on a national bank in that State.98 California imposed a use tax on specially printed checks purchased from a Minnesota corporation whose principal place of business was in Chicago, the cost of which was collected by the bank from depositors. Orders for checks were approved by the bank and sent on to Chicago; printed checks were shipped from Chicago either directly to the depositor or to branches of the bank for delivery. Orders signed by depositors authorized the bank to charge their accounts for the printed checks. The bank refused to collect the use tax from depositors or file a return with the State. The use tax was upheld by the trial court and was affirmed by the State court.99 The famous Bellas Hess case was decided by the Supreme Court in 1967. The principal place of business of National Bellas Hess was in Missouri. From there twice a year catalogs were mailed to cus- tomers in the United States, including those in Illinois. Orders were sent by mail to the Missouri plant, whence goods were shipped by mail or common carrier to the person placing the order. Illinois at- tempted to collect its use tax from Bellas Hess on orders shipped into the State. The Supreme Court held that the commerce clause in the Bill of Rights prohibits a State from imposing the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or by mail. The decision was written by Justice Stewart, with Justices Fortas, Black, and Douglas dissenting.'°° In Liberty National Bank and Trust Company v. Buscaglia, the Supreme Court denied a writ of certiorari on appeal from New York which had applied its sales and use tax to a national bank. The State was without power to impose a sales or use tax on national banks without the consent of Congress.' The same rule was applied in South Dakota, where it was held that since section 5219 did not permit sales or use taxes, national banks were not liable for such taxes on food and refreshments served to and sold by national banks to employees and guests.2 The next pronouncement by the. U.S. Supreme Court was in First Agricultural National Bank of Berkshire County v. State Tax Com- mission which again held that since the legal incidence of the tax was* upon the bank (the purchaser), State sales and use taxes could not be applied to national banks without the consent of Congress.3 ~ O'Neil v. valley National Bank of Phoenix, 58 Ariz. 539, 121 P. 2d 646 (1952). ~7 National Bank of Detroit v. Department of Revenue, 54 N.W. 2d 278, 334 Mich. 132 (1952). 98 National Bank of Hyde Park, Chicago v. Isaacs, 188 N.E. 2d 704, 27 Ill. 2d 205 (1963). 99 Bank of America National Trust and Savings Association v. State Board of Equalization, 26 Calif. Reptr. 348 (1963). 100 National Bellas Hess, Inc. v. Department of Revenue of State of Illinois, 386 U.S. 753 (1967). I Liberty National Bank and Trust Co. v. Buscaglia, 396 U.S. 941 (1967). For the lower court decision, see 25 N.Y. 2d 776, 229 N.E. 2d 700 (1967). 2 Northwestern National Bank of Sioux Falls v. Giles, 148 N.W. 2d 293, 82 S.D. 457 1967). 392 U.S. 339 (1968). See also discussion of this case supra, at pp. 156-159, and infra, p. 265, in this appendix. 79-421 0 - 72 - 23 PAGENO="0354" 334 This case was followed by Oklahoma in 1970 in First National Bank of Stiliwater v. State ex rel. Oklahoma Tax Commission.4 In 1971, the Ohio Supreme Court upheld a use tax against a bank for building material purchased and incorporated in a building pur- chased by the State teachers' retirement board and leased back to the bank for 30 years, after which the board would sell the building to the bank for $100. The court held that legal incidence of the tax was upon the construction contractor, not on the bank.5 9. Gross receipts taxes.-Although the gross receipts tax was not a tax to which Congress gave its consent in section 5219, Congress did provide this mode of taxation for national banks in the District of Columbia.6 Such a tax was upheld in 1965 in District of Columbia National Bank v. District of Columbia.7 The court pointed out that 12 U.S. Cede 548 (section 5219) is not a restrictive statute. Congress, moreover, has the power to enact tax laws covering District of Colum- bia banks. Earlier it had been held that Congress could not discrimi- nate in favor of State banks and against national banks in the District of Columbia gross receipts tax.8 New Mexico imposed a gross receipts tax on national banks on the proceeds derived from rendering bookkeeping and accounting services to four other banks on its electronic data processing machines. The bank, in turn, shifted the tax to the banks it served, being under obligation to refund if it won its law suit. The court sustained the tax: ~ "(1) The services here performed are not reasonably necessary or incident to the business or functions of a national bank, and therefore, are not immune from taxation under provisions of 12 U.S.C. 548. "(2) In any event the bank is not the real taxpayer." 10. Other points of law.-Where is the principal office of a national bank? The First Bank Stock Corporation was a Delaware corporation doing business in Minnesota. It had a business office there and held meetings of stockholders, directors, and its executive committee there. From its office in Minnesota it offered advice to its subsidiaries, made recommendations on loans, interest rates, the sale and purchase of securities, etc. It owned stock in banks, trust companies, and other concerns in Montana and North Dakota. Minnesota taxed the shares of stock of the First Bank Stock Corporation and its shares in Mon- tana and North Dakota banking corporations. The Supreme Court upheld the tax.1° The plaintiff's activities had .established a commercial domicile in Minnesota. A New Jersey case held that the "location" of a bank was the place mentioned in the bank's charter, and if the place originally mentioned in the charter was subsequently changed, the last mentioned place was the bank's "location." ~ This law suit was between two cities because the county treasurer was required, to allocate 50 per cent of the revenues from the tax on shares to the district in which the bank's principal office wa~ located. 4466 P. 2d 644 (1970). Huntington National Bank of Columbus v. Kosydar, cited in Tax Administrators News, vol. 35, no. 3 (March 1971), P. 35. (Advance sheets not available at time of writing.) 6 Cf. 47 D.C. Code 1703. 348 F. 2d 808, 121 U.S. App. D.C. 196 (1965). 8 Hamilton National Bank of Washington v. District of Columbia, 176 F. 2d 624, 85 U.S. App. D.C. 109, certiorari denied, 338 U.S. 891, 70 5. Ct. 241 (1949). 9 First National Bank of Santa Fe v. Commissioner of Revenue, 460 P. 2d 65, 80 N.M. 699 (1969). 10 First Bank Stock Corp. v. State of Minnesota, 301 U.S. 234 (1937). 11 City of Passaic v. City of Clifton, 97 A.2d 437, 23 N.J. Super. 333 (1952). PAGENO="0355" 335 A case decided that same year (1952) dealt with what constituted doing business in the State and related to the sale of travelers checks issued by the Bank of America National Trust and Savings Association. This case held that the sale of travelers checks by a Massachusetts agent did not constitute doing business in Massachusetts by a foreign national bank issuing such checks. The Massachusetts law regarding foreign corporations was not intended to cover national banks, but if it so intended the tax would be repugnant to the banking laws of the United States and the Constitution. A State may not levy a license fee upon a foreign national bank.12 In Austin v. City of Seattle, a city license on persons making chattel loans was valid, except as to national banks. For them, a license requirement was void.'3 Suppose, however, that a State gives a national bank the option of paying a tax which is void under section 5219 or of paying a different but valid tax? Massachusetts gave a national bank the option of paying a minimum tax, measured by dividends paid, which was not permitted under section 5219, or of paying a valid tax conforming to section 5219, and the bank elected to pay the minimum tax. The court held that the bank was bound by its choice.'4 Finally, since it is not covered under other topics, the case of Dickinson v. First National Bank of Homestead should be mentioned. As has been indicated, that case held that the mortgage recording and documentary stamp taxes imposed on national banks by Florida could not be collected from them." This decision was one of the forces that led to enactment of P.L. 91-156. 11. Goncl'usions.-From this survey of court decisions since 1934 a few matters of law seem clear. rfhese conclusions relate to section 5219 before amendment by P.L. 91-156. The courts are unanimous that national banks can be taxed only with the consent of Congress. That consent has been embodied in section 5219 and the options there set forth have been controlling, as have been the limiting provisos. Both must be complied with by States and also by local governments where States have delegated some of their powers to municipalities. There can be no question now that the excise or franchise option permitting taxes "measured by or according to" net or gross income may include income from tax-exempt Federal obligations, provided the State law is a general statute not directed solely at including income from these sources, the Macallen case not having yet been specifically overruled. The "built-up" method of equating national bank taxes with those on other financial and nonfinancial corporations, as is done in Cal- ifornia, is also legal. There is no question either that national bank real estate can be taxed in the same manner as other real estate. It is equally certain that, prior to P.L. 91-156, the personal property of a national bank could not be taxed. The cases seem to be equally clear that the heavier taxation of State as compared with national banks is also constitutional. And where the classification of subj ects or objects of taxation is pertinent, the grouping of commercial banks or financial corporations in tax measures is a "reasonable" classification 12 Bank of America National Trust and Savings Assoc. v. Lima, 103 F. Supp. 916 (1952). 13 30 P. 2d 646, 176 Wash. 654 (1934). 14 Commissioner of Corporations and Taxation v. Woburn National Bank, 53 N.E. 2d 554, 315 Mass. 505 (1944). 12 393 U.S. 409, 21 L. ed. 634 (1969). PAGENO="0356" 336 within the laws. How many sab-groups banks or financial corporations can be divided into and still be "reasonable" is not so clear. Share taxes remain a valid option for States to use in taxing national banks, provided that "other moneyed capital coming into competition with national banks" is equally taxed. There seems to have been no change in the rule that discrimination in favor of such competing capital violates section 5219. This includes individually owned in- tangibles if, on facts shown or conceded, they compete with national banks. But the courts seem now to require adequate proof of sub- stantial competition before declaring national bank taxes void. Ad- missions by attorneys that such competition exists and is substantial are still fatal to those who endeavor to enforce tax laws. The cases have not been so clear as to the imposition of sales taxes. on national banks. Where the sales or use tax has been upon the ven- dor, the weight of authority seems to have sustained the tax; where the tax was on the vendee, the results would seem to be against appli- cation of sales taxes to national banks. P.L. 9 1-156 has established the right of States now to impose or collect sales and use taxes from national banks. As to what constitutes doing business in a State or what activities give a State jurisdiction to tax income on an apportionment basis, the cases are not so clear. The legal principles here seem only to be in course of evolution. Finally, the case law as it has recently developed is only a preface to consideration of the decisions to be forthcoming after the "perma- nent amendment" of section 5219 takes effect. N. Public Law 91-156: 1969 The latest amendment of section 5219-Public Law 91-156-was approved December 24, 1969. This legislation was enacted in response to complaints from States over the situation created by two decisions of the U.S. Supreme Court: First Agricultural National Bank of Berk- shire County v. State Tax Commission, 392 U.S. 339 (1968); and Dickinson v. First National Bank of Homestead, 393 U.S. 409, 21 L. ed. 634 (1969).' In the First Agricultural case, the court held, Justice Black deliver- ing the opinion of the court (with Justices Marshall, Harlan, and Stewart dissenting and Justice Fortas not participating),~ that the Massachusetts sales and use tax, enacted in 1966, could not be applied to national banks because sales and use taxes were not listed among the permitted State taxes enumerated in section 5219.2 Similarly, the court in the Dickinson case held that Florida's docu- mentary stamp tax could not be collected from national banks. The Federal District Court held that national banks were instrumentalities of the United States and that since the taxes in question were "not within thc purview of 12 U.S.C.A. section 548" they could not be collected from national banks.3 The judgment of this court was affirmed by the U.S. Supreme Court on January 20, l969.~ 1 On the legislative history of the legislation, see supra, pp. 244-49 in this appendix. 2 "It seems clear to us from the legislative history that 12 U.S.C. section 548 [i.e., section 5219] was intended to prescribe the only ways in which the States can tax national banks." 392 U.S. 339, at p. 344 (1968), 20 L. ed. 2d. 1138 at p. 1142. Justice Black cites and quotes Owensboro National Bank v. Owensboro, 173 U.S. 664, 669 (1899), 43 L. ed. 850, 852; -Bank of California v. Richardson, 248 U.S. 476 (1919), 63 L. ed. 372; Des Moines Bank v. Fairweather, 2631.1.5.103 (1923), 68 L. ed. 191. / 3 291 F. Supp. 855, 856 (1968). See comment at p. 308 infra. 4 393 U.S. 409. PAGENO="0357" 337 1. Provisions of P.L. 91-156.-The provisions of P.L. 91-156, "to clarify the liability of national banks for certain taxes," are reproduced in full in appendix 1-B .~ The law specifies how national banks may be taxed prior to January 1, 1972; and under the "permanent amendmefit" scheduled to take effect on that date, it directs that a national bank "shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." The primary concern of the statute is to permit certain enumerated taxes to be imposed by the States on national banks in the jurisdiction where their principal office is located. This place is referred to in the literature as the "home" or "domiciliary" State. Most of the litigation over State taxes on national banks has been concerned with such domiciliary taxation. To a limited extent, P.L. 91-156 also makes provision in the "tem- porary amendment" of section 5219 for the use of certain enumer- ated taxes which a State may impose "on a national bank not having its principal office located within the jurisdiction of such State." This is referred to as "nondomiciliary taxation," or the taxation of "foreign" banks. The statute with its enumeration of permitted taxes is both clear and specific as to State taxes on national banks prior to January 1, 1972. The power of States to tax nondomiciliary banks after that date is less clear. The "permanent amendment" says national banks "shall be treated as a bank organized and existing under the laws of the State * * * within which its principal office is located." Does this provision give the taxing State a clear right to impose taxes on a foreign national bank that has its principal office in another State? This question and collateral issues may have to be settled by litigation. 2. Plan of discussion.-The problems and issues in State taxation of national banks can be discussed most effectively if domiciliary and nondothiciliary taxes and problems are considered separately. Sim- ilarly what can be done before January 1, 1972, will be considered prior to the discussion of what can be done under the broader grant of power effective after January 1, 1972. The interim amendment is a temporary solution designed to give States an opportunity to recast their laws, and Congress, after receiving the st~udy made by the Board of Governors of the Federal Reserve System, an opportunity to appraise and develop further changes if these appear to be necessary.6 3. Domiciliary taxation under P.L. 91-156 prior to 1972.-To enable States to collect sales, use, documentary stamp, and motor vehicle taxes from national banks, Congress added a temporary new paragraph 5 to section 5219 specifying additional types of permissible taxes. All these specifications-those in the law since 1926 and those now added-are scheduled to expire December 31, 1971, when they are to be replaced by the brief, general "permanent amendment" quoted above. Sub-paragraph (a) of the new paragraph 5 is con- cerned with domiciliary taxation; sub-paragraph (b) relates to nondomiciliary taxation. Under sub-paragraph (a), States and their political subdivisions may go beyond the four methods of. taxation enumerated and per- `Cf. supra, p. 3, where a summary of the legislative history follows the text of the act. 6 ~f* Charles F. Conlon, "Repeal of National Bank Tax Immunity," National Tax Journal, vol. XXIII, No. 2, P. 225 (June 1970). PAGENO="0358" 338 mitted since 1926. They may impose "any tax which is imposed generally on a nondiscriminatory basis throughout the jurisdiction" of the taxing State or subdivision, other than a tax on intangible personal property. However, no sales tax or use tax complementary thereto may `be imposed under paragraph 5 upon purchases, sales, and use of tangible personal property which is the subject of a written contract of purchase entered into by a national bank prior to Septem- ber 1, 1969. Under a "saving provision" (section 3 of P.L. 92-156), no tax may be imposed on any class of banks by or under authority of State legislation in effect prior to December 24, 1969, unless the tax was imposed on that class of bank before that date or the imposition of the tax is authorized by affirmative action of the State legislature after December 24, 1969. However, this limitation is subject to exceptions. It does not preclude the application of the following taxes imposed by a State which does not impose another tax or an increased rate of tax (such as a "built-up rate") in lieu thereof: (1) any sales tax or use tax complementary thereto; (2) any tax (including a documentary stamp tax) on the execution, delivery, or recordation of documents; or (3) any tax on tangible personal property (not including cash or currency), or any license, registration, transfer, excise or other fee or tax imposed on the ownership, use or transfer of tangible personal property. 4. Nondomiciliary taxation prior to 1972.-In sub-paragraph (b) of the new paragraph 5 added to section 5219 by the "temporary amend- ment," Congress enumerated five categories of taxes which State legislatures may apply, or may authorize local governments to apply, to out-of-State national banks during the interval from December 24, 1969, through December 31, 1971. These taxes may be imposed upon nondomiciliary national banks if they are imposed generally through- out the taxing jurisdiction on a nondiscriminatory basis: (1) Sales taxes and complementary use taxes on purchases, sales, and use within the jurisdiction. (2) Taxes on real property or on the occupancy of real property within the jurisdiction. (3) Taxes (including documentary stamp taxes) on the execu- tion, delivery, or recordation of documents within the jurisdiction. (4) Taxes on tangible personal property (not including cash or currency) located within the jurisdiction. (5) License, registration, transfer, excise, or other fees or taxes imposed on the ownership, use, or transfer of tangible persona] property located within the jurisdiction. In these instances, also, no sales or use tax may be imposed upon purchases, sales, and use within the taxing jurisdiction with respect to tangible personal property which is the subject of a written contract of purchase entered into by a national hank before September 1, 1969 The "saving provision" of P.L. 9 1-156, described above in connec- tion with domiciliary taxation, is not by its terms limited to banks with their principal offices in the taxing State. Accordingly, the restrictions enumerated in this provision presumably apply also to PAGENO="0359" 339 taxation of out-of-State banks in circumstances where these restric- tions may be pertinent.7 5. Taxation under P.L. 91-156 after January 1, 1972.-On January 1, 1972, the previously described provisions expire and will be replaced by the "permanent amendment." The intent of Congress in substituting this new section for the old one is clearly exj)ressed in the "Statement of the managers on the part of the House" in the Conference report on H.R. 7491.8 "On [January 1, 1972], States will become free to impose intangible property taxes on national banks just as they have always been free to impose such taxes on State-chartered banks. Likewise any State will be free to impose taxes on income derived within its borders by the operations of a bank having its principal office in a different State, regardless of whether the foreign bank is State or National. This has always been the law with respect to State banks." Concerning nondomiciliary national banks that maybecome subject to the taxing.jurisdiction of a State, this statement in the Conference report-and the language of the "permanent" section 5219-appear to accord to each State authority to tax an out-of-State national bank as that State would tax a State bank chartered in the State whei~e the national bank has its principal office. Clear as the intent and meaning appear now, in the immediate wake of congressional action, the possibility remains that the interpretation will seem less certain after a period of discussion and litigation.. The congressional intention embodied in the amendment of 1923 did not appear to prevail when that amendment required interpretation. The likelihood is that new issues will emerge under the "permanent amendment." ~ 6. Federal Reserve study.-The requirement for a study by the Federal Reserve Board was added to H.R. 7491 by the Senate Committee. Section 3 of the bill as reported to the Senate and approved by that body directed the Board of Governors to study the probable effects on the banking systems of the imposition on banks of (1) intangible personal property taxes on banks and (2) taxes on banks whose principal offices were outside the taxing State. The Senate-approved provision read as follows: 10 "(a) The Board of Governors of the Federal Reserve System shall make a study to determine the probable effects on the banking systems of the Nation if banks were subject to (1) taxes on intangible personal property imposed by any State or other jurisdiction within which their principal offices are located, and (2) taxes (other than those enumerated in paragraph 5(b) of section 5219 of the Revised Statutes, `In the Conference report on HR. 7491 (91st congress, 1st sess., House Report 91-728, Dec. 9, 1969), the statement of the managers on the part of the House refers to the saving provision in the context of congres- sional concern that "the repeal of the prohibition in section 5219, without any compensating action by the State legislature, would have the effect of substantially increasing the tax burden on the banks" in some States. This concern related to domiciliary taxation. The discussion of taxes on nondomiciliary national banks does not refer to the saving provision. (Ibid., p. 5.) 8 Ibid. 9 For example, does the "permanent amendment" harbor the possibility of differences in the tax treatment of individual out-of-State national banks, the differences depending upon the States of their principal offices (somewhat as "foreign" insurance companies are accorded differing treatmentin reciprocity for the varying taxes in their home States)? Or would the "permanent amendment" effectively prevent a State from classifying banks so that out-of-State institutions were taxed more heavily than domiciliary banks on a given tax base? is For the text of the Committee bill as approved in the Senate, cf. 115 C.R., p. S35399 (Nov. 21, 1969). See also ibid., p. S35402, and Senate report 91-530, p. 6. The reference in paragraph (a) to taxes enumerated in paragraph 5(b) is to provisions identical to those finally enacted as paragraph 5(b) of sec. 1 in P.L. 91-156; the list is quoted supra, p. 268, and the statutory provision is reproduced in appendix 1-B at pp. 2-3, above. PAGENO="0360" - 340 as amended by this Act) imposed on a nondiscriminatory basis by any State, or political subdivision thereof, without regard to whether the principal offices of such banks were located within the taxing jurisdic- tion. In conducting such study the Board shall consult with the Secretary of the Treasury and appropriate State banking and taxing authorities. "(b) The Board shall make a report of the results of its study to the Congress no later than December 31, 1970. Such report shall include the Board's recommendations with respect to the desirability of permitting banks to be subject to the taxes referred to in subsection (a)." The provision was modified by the conferees. The managers on the part of the House reported that some apprehension had been expressed "as to whether the expanded taxing powers might be used in a way which could impair the mobility of capital or the economic efficiency of the banking system. For this reason, the conference substitute includes a section requiring a study by the Federal Reserve Board `to determine the proba~le~ impact on the banking systems and other economic effects of the changes in existing law to be made by section 2 of this act (the permanent amendment to section 5219) governing income taxes, intangible property taxes, so-called doing business taxes, and any other similar taxes which are or may be imposed on banks'." 11 The conferees added this comment: "The Federal Reserve Board is required to transmit its report of this study to Congress no later than December 31, 1970. Thus, if the report should disclose a serious danger or deficiency in the amendment to section 5219 to take effect in 1972, the Congress would have a full session in which to take remedial legislative action. The conferees from both Houses were agreed that their respective committees would give prompt and serious consideration to any recommendations transmitted by the Federal Reserve Board as a result of its study." 12 `When the conference report came up for Senate agreement, Senator Tower made his comments characterizing the procedure as "un- orthodox," on the ground that Congress was enacting "legislation for 1972 now which is substantially based on a study that has not yet begun." ~ He commented further: "We may well find that substantial revision of the 1972 provisions are needed when the study is completed, and yet in the meantime the banking industry and the State taxation authorities are going to be planning on the basis of the 1972 provision we are passing today."4 In the House, there was no discussion of the proposed study. Chairman Patman paraphrased the language of the conferees' state- ment to explain that the bill provided for a study and that the com- mittees expected to give "swift and serious consideration" to the findings and recommendations." IL CONFORMITY OF SECTION 5219 TO STATE TAX SYSTEMS The evolution of section 5219 from 1864 to 1971 has been traced in preceding pages. During this period the provisions or permissions 11 House report 91-728, conference report to accompany HR. 7491, December 9, 1969, p.,. l2Ibjd., pp.5-S. 13 115 C.R~, p. S38634 (Dec. 12, 1969). 14 Ibid. 11 Ibid., p. H38108 (Dec. 10, 1969). PAGENO="0361" 341 under which States could tax national banks changed greatly. Time and again it was indicated that many of those involved in the legislation and litigation were of the opinion that section 5219 forced changes in State tax methods and tax laws. This subject has been considered elsewhere and at various places in this study) Perhaps it is also true that the prevailing tax systems and practices in States shped from time to time the content or consents in section 5219. A. Periods to be considered The writer is not undertaking a history of the development of State taxation over the last 107 years, interesting and important os that is. This is a period in which there were significant developments in the theory, practice, and administration of American taxation at all levels of government. It was a period of tremendous change and expansion in the functions of government, the economy, and the social consciousness of the American people. To assess the impact of prevailing State tax systems upon the provisions of section 5219, three periods will be observed. The original grant to States of powers to tax national banks was made in 1864 at a time when Congress was preoccupied with financing the war and regulating the wartime economy. Few comprehensive statistics of State revenues or expenditures were collected at that time and no overall studies of government finances in that period have since been made. There are data for individual States and cities; and, of course, details of Federal Government finances are available from 1789 in the summary tables in annual reports of the Secretary of the Treasury. The Federal figures show better than any other data the magnitude of changes from 1789, or even from 1864, to the present, but they are of little help in describing State and local finances. Financial histories of individual States are an invaluable repository of the events and devel- opments in single commonwealths. The same is true of the financial histories of particular cities. Primarily from such sources, one may assemble fragments of fact to indicate the structure of State and local taxation that existed when Congress first gave permission to States to tax national banks.2 The sketch thus derived of State and local taxation during the period from about 1850 to 1870 will be taken as typifying the 1860s and particularly 1864. The second period for observation is the year~1922. That year is close to the time of the Richmond decision (1921) and the 1923 amendment of section 5219. The year 1922, moreover, is covered by a study, Wealth, Debt, and Taxation of State and Local Governments, made by the U.S. Bureau of Census.3 Comparative data can be secured easily from this study. 1 See also Welch and Woosley, op. cit. 2The Census Bureau did not begin to collect data on property assessments and make estimates of the true value of property until 1850. More complete financial data were not gathered until several decades later The Sixth Census in 1840 tabulated the value of produce of mines, agriculture, horticulture, commerce, fisheries, and manufacturers by States and counties. Capital invested in manufacture was also estimated. The Sev- enth Census of 1850 tabulated the assessed value of real estate and personal property, the true value thereof, and the total revenues, expenditures and debt of the States, together with annual taxes classified as State, county, school, poor, road, and others. Statistical View of the United States, by 1. D. B. DeBow, Washington, D.C., 1854, pp. 189-90. The Ninth Census of 1870 published Wealth, Taxation and Public Indebtedness, Washington, D.C., 1872, which included summaries of assessed and true property values, taxes by major units for 1870 and 1860 and public indebtedness for 1870. The Tenth Census of 1880 also had a volume on Valuation, Taxation and Public Indebtedness, Washington, D.C., 1884, which contained similar data and a table on the financial condition of cities having a population of 7,500 and over. As will be seen, there was no information about revenue sources other than the property tax and public indebtedness. 3 Earlier years covered by shnilar compilations were 1902 antI 1912. PAGENO="0362" 342 The final period for comparison is 1969, the date of the latest amendment. Ample statistical and descriptive data are now available to indicate the patterns, scope, and details of State and local tax systems, as well as of governmental services provided. Moreover, the nature of State and local taxation at this time is a matter of quite general knowledge. B. State taxes in 1864 The equalitarian sentiments of nineteenth century America were reflected in most tax systems of the States at that time. All property, real and personal, was to be taxed at the same rate in the jurisdiction imposing the tax. Universality and uniformity were the cardinal principles enshrined in constitutions and statutes.4 The general property tax, of course, was not the sole source of State and local revenue, but it was the major one.5 For some governments, such as school and road districts, it was almost the only source of funds. The smaller the unit of government the greater the dependence on the property tax. One writer called it "the American system" and said it was "the only direct tax known in most of our commonwealths."6 Save for one reference to classified property taxes, the only State tax mentioned in the debates in Congress on the National Currency Act of 1864 giving States the right to tax national banking associations was the tax on real estate and personal property.7 The aggregate assessed and true valuation of all real and personal property taxed and the per capita amounts for each series are shown in table 1. `Among State constitutions which at the time required uniformity in property taxation were: Illinois (1818, 1848, 1870), Missouri (1820), Arkansas(1836), Florida (1838), Indiana (1851)., Maryland (1851), Louisiana (1845), Texas (1845), California (1849),Virginia (1850), Oregon (1851). Ohio (1851), Minnesota (1857),Michigan (1850), West Virginia (1863), Virginia (1864), and Nevada (1864). A number of states had constitutions so broad that the legislatures were free to adopt such tax measures as were deemed "just." Many of them had adopted general property taxes. See Jens P. Jensen, Property Taxation in the United States, University of Chicago Press, 1031, pp. 38-40; Leland, op. cit., pp. 09-104. In general, statutory uniformity preceded constitutional provisions, Jensen, op. cit., p. 35. In Maryland statutory values were applied to land 1834-1888, then to personal property and slaves. The general property tax was adonted in 1841; Leland, op. cit., p. 71. Uniformity seems to have been the rule in local taxation since 1776; Ely, op. cit., p. 137. Connecticut. which had experimented with difierential taxes (classification) from colonial days, adopted uniformity in 1850 with property assessed at 3 percent. Tn 1860, 100 percent assess- ments were adopted: Leland, op. cit., pp. 65-69. Ohio which had a classified land tax prior to 1825 adopted the uniform rule in 1846; ibid., pp. 78-79; Ely, op. cit. p. 136. Vermont adopted listing according to true value in 1841; Leland, op. cit., p. 74. Mississippi had a classification system in 1857 but adopted the general property tax in 1876; ibid., p. 80. 5 Among the other taxes to be noted was the poll tax-termed "unworthy of a civilized nation in the nine- teenth century," by Ely, op. cit., p. 209. It was well known in New England, used extensively in southern States and in the Midwest: ibid.. pp. 209-13. There were numerous licenses and occupation taxes. Special charters granted to such corporations as railroads often provided for special taxes or payments to the States for urivileges granted. The gross receipts tax provided in the charter of the Illinois Central Railroad in 1851 is such an example. In 1886 it provided 15 percent of the State's revenue; ibid., p. 214. There were also numer- oiis corporation taxes in other states, particularly Pennsylvania and Massachusetts. See ERA. Seligman, Essays iii Taxation, 9th ed., MacMillan Co., New York, 1921, eh. VI for numerous examples of these early taxes. There were also income taxes; see Seligman, The Income Tax, MacMillan, New York, 1941, part II, ch. II, especially pp. 406-14. A few States had inheritance taxes. See T. S. Adams, "Taxation in Maryland," pp. 61-62: Barnett, "Taxation in North Carolina," pp. 108-109, in Studies in State Taxation, edited by J. H. Bollander, Johns Hopkins University Studies, series XVIII, nOS. 1, 2, Baltimore, Maryland, 1900. See also, Seligman, Essays in Taxation, p. 137. The evolution of the revenues of Providence, Rhode Island is shown in an interesting table in Stokes, The Finances and Administration of Providence, 1636-1901, The Johns Hookins Press, 1903. pp. 404-13. `Ely, op. cit., p. 131. 7 Cf. Mr. Francis Kernan (N.Y.), in Congressional Globe, vol. XXXIV, 38th Congress, 1st Session, p. 1271, hereafter referred to as 34 Globe 1271 (March 24, 1864). PAGENO="0363" 343 TABLE 1.-ASSESSED AND TRUE VALUE OF PROPERTY IN THE UNITED STATES, 1850-90 True valuation Assessed va luation of real and personal property taxed Total Per Increase Total Per Increase Year (millions) capita (percent) (millions) capita (percent) 1850 1860 1870 $7,136 16,160 30,069 $308 514 780 126.46 86.07 $6,025 12,085 14, 179 $260 384 100.58 368 17.33 1880 43,642 870 45.14 17,140 342 20.88 1890 65,037 1,036 49.02 25,473 407 48.62 Source: U.S. Bureau of the Census, report on Wealth, Debt, and Taxation, at the 11th Census: 1890, pt. II,Wealth and Taxation; Washington, D.C., 1895, p. 9. The defects of these aggregates-both true values and assess- ments-can be seen from the following remarks by Francis A. Walker, Superintendent of the Census. They were as true of 1864 (or almost any other time) as in 1872: 8 the customs of assessment vary greatly in different States, and oftentimes in the several counties of the same State-in some the tax- able value of the property not exempted by law being fixed at no more than a third of its recognized selling-price; in others, at fifty, sixty, seventy, eighty or ninety percent-it will be seen that the result of the first two inquiries [assessed value of real and personal property] is not to obtain wealth of the several States and Territories, but to present merely the actual basis of State or local taxation: * * * The utter want of uniformity in this matter of assessment for purposes of taxation can not be too strongly insisted on." TABLE 2.-ASSESSED VALUATION OF REAL AND PERSONAL ESTATES, 1860-90 [In millions of dollarsj Assessed value Personal Year Total Real estate property 1860 1870 1880 1890 $12,084 14,179 16,903 25,473 $6,973 9,915 13,037 18,956 $5,112 4,264 3,866 6,517 Source: U.S. Bureau of the Census, preliminary report of the 8th census, Washington, DC., 1862; report on valuation, taxation, and public indebtedness in the United States, as returned at the 10th census, June 1, 1880, Washington, D.C., 1884; report on wealth, debt, and taxation, pt. 2, Valuation and Taxation, final report, 11th census, 1890, decennial census publication 217, Washington, D.C., 1895. TABLE 3.-RANKINGS OF SELECTED STATES IN ESTIMATED PER-CAPITA WEALTH, 1850-80 1850 1860 1870 1880 State Rank State Rank State Raek State Rank Massachusetts 1 Connecticut 1 New York 1 New York 1 Rhode Island 2 Louisiana 2 Massachusetts 2 Pennsylvania 2 Louisiana 3 South Carolina 3 Connecticut 3 Ohio 3 South Carolina 4 Rhode Island 4 Rhode Island 4 Illinois 4 Connecticut 5 Massachusetts 5 California 5 Massachusetts 5 New York 11 New York 6 Pennsylvania 7 Missouri 6 Pennsylvania 13 Pennsylvania 21 District of Columbia 8 Indiana 7 Source: Compiled from Census of 1880. 8 The Statistics of the Wealth and Industry of the United States, June 1, 1870, Ninth Census, vol. III, Washington, D.C., 1872, p. 3. No attempt will be made to discuss the defects of the general property tax or of property taxes. They have been discussedmany times by scores of writers. See, e.g., Leland, op. cit., ch. I; Jensen, op. cit., cbs. III, IV, VI and elsewhere; Seligman, Essays in Taxation, 9th ed., ch. 11; Ely, op. cit., pp. 141-45, 149-59. PAGENO="0364" 344 The division of assessments between real and personal property in 1850 to 1890 can also be indicated, as in table 2. These data show clearly one of the several defects of the general property tax-the difficulty of securing adequate assessments of personal property. Complaints on this score were voiced repea1~ed1y at the time. The decline from 1860 to 1880 in the aggregate assessment of personalty- in a period when the stock of personal property was rising substan- tially-emphasizes this failure. Estimates of wealth were based primarily on "true value" estimates derived from property valuations for tax purposes. As table 3 illus- trates, the several States show interesting variations from 1850 to 1880 in their rankings in per capita wealth. These variations resulted largely from shifts in the economic development of the States and regions during these years. The composition of assessments in Connect- icut is worth noting, for assessments in that State were fairly typical of the way the property tax operated. Schedules on tax return forms used by assessors and individuals, in listing personal property for taxation have always been detailed inventories, presumably on the supposition that the more items enumerated, the fewer items were likely to be omitted. And when a taxpayer did not file an inventory with a statement of values, it was generally filled in by assessors with appropriate penalties added.9 While no actual schedules or lists are available to the writer, the "grand list" of Connecticut for 1864 names the items which taxpayers were supposed to return and the total of such valuations for that year. This "grand list" is shown in table 4. TABLE 4.-GRAND LIST" OF CONNECTICUT, 1864 Value Type of property Number (thousands) Dwelling houses 72, 664 $75, 067 Land (acres) 2,517,690 60, 819 Mills,stores,etc 7,519 21,582 Horses, etc 37,492 3,042 Neat cattle 191, 092 5,505 Sheep and swine 54,054 410 Carriages, etc 13,722 1,100 Farming utensils 128 Clocks,watches,etc 13,919 596 Pianofortes,etc 1,780 575 Household furniture, etc 1,305 Quarries, fisheries, etc 901 BRIDGE, ETC. STOCKS 216 BANK, INSURANCE, ETC., STOCKS 28,376 STATE STOCKS 776 RAILROAD, CITY, ETC., BONDS 3,454 Amount employed in merchandise 8,174 Investments in mechanical and manufacturing operations 16, 708 Investments in vessels, etc 2,819 MONEY AT INTEREST 13,789 MONEY ON HAND 764 All other taxable property 8,520 Additions by board of equalization and 10 percent by towns Amount 254,617 Polls at $3 each 21, 469 Total 276, 086 Source: Richard T. Ely, Taxation in American States and Cities, New York, Thomas Y. Crowell & Co., 1888, pp. 503-6, (Ely gives similar data for each year from 1864 through 1885. The amount shown for poll tax presumably is erroneous. since it implies payments for more than 7,000,000 persons annually, but similar amounts are reported for 1865 and 1866.) ° Cf. Jensen, op. cit., pp. 346-50. PAGENO="0365" 345 Categories of property named in the Connecticut list illustrate the scope of personal property taxes prevalent at the time and show what was included in the tax return expected of each individual. Intangibles, particularly bank stock and other securities, are designated by capital letters. Bank stock was treated exactly like bridge stock, turnpike stock, insurance stock, money at interest, etc. Assessments presum- ably were limited to State bank stock, since it is doubtful that many States tried in 1864 to tax the stock of any national banking associa- tions which had been formed under the National Currency Act of 1863. The Connecticut "grand list" for 1864 also indicates that next to dwellinghouses and land, the largest assessment category was "bank, insurance, etc., stocks"-$28,376,000, nearly $6,800,000 more than "mills, stores, etc." This tends to bear out contentions that bank assess- ments were generally more complete and closer to true value than as- sessments of other personal property.'° While the National Currency Act of 1864 was being debated in Congress, Representative Kernan (N.Y.) said: "All our banks in the State of New York are put upon the assess- ment rolls, and they pay a tax upon the real estate which they occupy for bank purposes and pay a tax upon their personal property paid in, deducting the value of the real estate." * * * * * *. * "In all our States we levy a tax upon property ". . . in the city where I reside the wealth, the personal wealth of the whole country, is gathered there in our banks. They pay a con- siderable portion-about one-fourth-of the city or municipal taxes, being rated like others. A great portion of our population is composed of mechanics who own their own houses and lots, and there are a few men who own stores." Words to the same effect were spoken by Mr. Giles W. Hotchkiss (N.Y.) a few days later: 12 there is no existing law that exempts the banking business in any State from taxation. * * * * * * * "The State banks now pay in all of the States, in most of the large towns, at least one-fourth of the State and county, the corporation, and school tax." They were listed the same as other corporations and individuals on lists similar to the one used in Connecticut. The New York law of 1865 assessed shares of stock in national banks at full value and taxed them as personal property.13 There was no change in the method of taxing State banks. 1. Property tax and section 5fd19.-The general property tax with which members of Congress were familiar had its impact on the tax provisions of the Act of 1864. Nothing in the act was to interfere with 10 Cf. "The New York assessors say in their report for 1881 that `banking capital is assessed fully eighty- five percent of its nominal value, while it is quite evident that other personal property is assessed at an average of less than ten percent.'" Ely, op. cit., pp. 176-177. 11 34 Globe 1271 (March 24, 1864). 1234 Globe 1393 (April 5, 1864). 13 Law declared invalid. Van Allen v. The Assessors, 3 Wall 573 (1865). PAGENO="0366" 346 the traditional method of taxing real estate.'4 Even in McCulloch v. Maryland (1819), Justice Marshall had said: 15 "This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, . . ." The tax on real property, however, was only one part of the almost universal property tax. The other part was the personal property portion which applied alike to individuals, firms, businesses, corpora- tions, and banks with listings or declarations similar to the one used in Connecticut described above. The writer believes it is this familiar tax which was in the minds of members of Congress when they in- serted into the Act of 1864 the often litigated proviso "that nothing in this act shall be construed to prevent all the shares in any of the said associations, held by any person or body corporate, from' being included in the valuation of personal property, . . . but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such state." 16 Congress has been criticized for not making plain what it meant by "other moneyed capital" and "in the hands of individual citizens." 17 Undoubtedly other words could have been used, but in the light of common practice at that time and earlier, perhaps Congress said what it meant to say. As was pointed out in connection with the amendment of 1923, many State tax officials and soñie others had been under the impression that "in the hands of individual citizens" really was intended to refer to State banks, so that if national and State banks were treated alike the permission of section 5219 was not `violated.'8 This interpretation was also arrived at by Professor Lutz in his careful review of the debates and amendments to the Act of 1864. He concluded: 19 ". . . there is no finally conclusive evidence as to what was meant by the expression `other moneyed capital in the hands of individual citizens,' but to the writer the evidence is persuasive in favor of the construction that the reference was to the stocks of State banks, and not to personal investments." 1\4r. Ronald Welch in his definitive study, State and Local Taxation of Banks in the United States, came to the opposite conclusion: 20 "Professor Lutz finds the evidence `persuasive in favor of the construction that the reference [in the term "moneyed capital"] was to the stocks of State banks, and not to personal investments' (bc. cit., p. 211). The writer is persuaded to the contrary. For one thing, some members of Congress still expected national banks to completely displace State banks, though this expectation was far less prevalent in 1864 than it was in the preceding year. In the second place, there existed at that time no such multiplicity of financia~l organizations as "The second proviso in the Act of 1864 read: "And provided always, That nothing in this act shall exempt the real estate of associations from either State, county, or municipal taxes to the same extent, according to its value, as other real estate is taxed." 15 Mcculloch v. Maryland, 4 Wheaton 316 at 436 (1819). 1~ Italics added. See appendix 1-C, p. 3 above for the entire section. 17 Lutz "The Evolution of Section b219, United States Revised Statutes," Bulletin of the National Tax Association, vol. XIII, no. 7, pp. 205 if. (April, 1928). Cf. also, Welch, op. cit., p. 17. 18 See discussion of the Richmond case, supra, pp. 195-202. 15 Lutz bc cit., p. 211. He bases his conclusions as to what was meant in 1864 in part on statements of Messrs. Paine and Pomeroy in the Congressional Globe in connection with the 1868 amendment; pp. 210-11. 20 Welch, op. cit., p. 17 note. PAGENO="0367" 347 we find today. Insurance companies had, in 1867, been excluded from the realm of moneyed capital on the ground that they were not com- petitive with national banks (People ex rel. Duer v. Commissioners, 4 Wall. 244). Hence, if `moneyed capital' meant anything more than shares of State banks, it probably extended to private investments. Finally, the Congressional debates show that most of the participants were thinking in terms of the general property tax, which was reaching the peak of its popularity at that time." The writer believes that Mr. Welch has the proper interpretation and has so concluded from reading the Congressional Globe. Professor Lutz in his admirable review of proceedings in the Congress is believed not to have given sufficient weight to what the members of Congress knew about the prevailing State tax systems or what they said about State taxes in introducing the various amendments which were presented and which Professor Lutz carefully detailed. What Congress meant is not an academic controversy but the meat, if not the core, of the vast amount of litigation over section 5219 involving the meaning of "other moneyed capital in the hands of individual citizens." If one accepts the Welch interpretation, the Supreme Court has correctly interpreted the intention of Congress; if the conclusion of Lutz is accepted, the Court has been mistaken about what those famous words actually meant. Under these circumstances, a "second look" at the debates in 1864 may be in order. 2. The debate on State taxation of banks: 1864.-The National Currency Act of 1864, as originally drafted, exempted the banks from State taxation. Some of the members of Congress thought this was wrong. Mr. Kernan (N.Y.) was the first to object. He pointed out the benefits banks received from the States and that exemption would throw the burdens of the State upon real estate.2' Mr. Kasson (Iowa) was of the opinion that the prohibition in the bill did not prevent the States from taxing the income of the stockholder in the bank. To which Mr. Kernan replied: "In all our States we levy a tax on property, and I do not see any mode of legislation by which a particular class of men may be taxed upon their income so as to make them equal with others. I may own $5,000 in a bond and mortgage, and although the man fails and I do not get a dollar of income, yet the capital is taxed, and is placed on the assessment roll. "Now, then, if this bill becomes a law all the State banks have got to come under its provisions . . . By exempting them from taxation you take all that personal estate from under taxation, unless it can be got at by some special legislation." Mr. Kasson explained that the exemption applied only to the bank; that the representations of that stock might be taxed to the individual. If Mr. Kernan invested $100,000 in a b~nk, he might be assessed on that amount. After a short speech he introduced an amendment per- mitting State taxation as follows :22 "And such associations and corporations shall severally be subject to such municipal taxation upon their real and personal estate the same 21 Mr. Kernan: ". . . Will you allow the wealthy men of the State to take their personal property and put it into one of these banks and say that shall be exempt from taxation and throw all the burdens of the State upon real estate owners, many of whom are men of comparatively small wealth? . . . Now, if you take millions of personal property from under the taxing power, the tax will be thrown upon real estate, and the effect would work great hardship." 34 Globe 1271 (March 24, 1864). 22 Ibid. Amendment offered again on April 1, 1864, 34 Globe 1392, infra. PAGENO="0368" 348 as persons residing at their respective places of business are subject to such taxation by State laws." The amendment was rejected. On April 1, 1864 the National Currency Act was again considered. Mr. Kalbfieisch (N.Y.) moved to strike "and such tax or duty [Federal] shall be in lieu of all other taxes on such associations" in order that the section might not be construed "to prevent States, counties and cities from imposing a tax on these banks." This was not agreed to. Mr. Griswold (N.Y.) offered an amendment at the request of Mr. Kernan who was absent: "And the said associations or corporations shall severally be subject to State and municipal taxation upon their real and personal estate, the same as persons residing at their respective places of business are subject to such taxation by State laws." This also was not agreed to. Mr. Kalbfleisch thought that national banks "should be subject to State and other taxes the same as individuals and other banks." Mr. Tracy (Pa.) then moved the following amendment: "Provided, That no provision contained in this act, or contained in any law of Congress authorizing the bonds referred to in the sixteenth section of this act, shall be so construed as to prohibit any State from imposing such tax upon the dividends of the several banking associa- tions organized therein, under this act, as shall to the Legislature there- of seem just and equitable." In support of this, among other things, he said: "I hope it is not proposed that all this great interest shall be released from taxation within the States. Sir, how can gentlemen answer, after this money shall have become the currency of the country, to the poor laborer, whose cow, \\Those oxen, whose horses are taxed for local and State purposes, if you allow the banker across the way, who furnishes, the currency of the country, to escape entirely from taxation?" Mr. Hooper (Mass.) thought that "the gentleman misapprehends the provision of the bill as it now stands. It does not exclude the States from taxing the personal property of an indi~vidua1 which is invested in the bank, but simply prevents the taxation of the bank itself." Mr. Eldridge (Wis.) thought that it might be hard to find these individuals to tax them upon their personal property. They might live in another locality from this one in which the bank is located, or even in other countries. Mr. J. C. Allen (Ill.) could not understand- upon what principle or reason, morality, or justice, [Congress] can exempt one particular species of property from taxation by the States and leave all other classes of property subject to taxation. . . be that property mules, horses, cattle or any other species of property. I know in my own neighborhood men who, for the purpose of exempting their property from taxation are investing in bonds of the Government. This bill holds out inducements to others to invest their means in bank stock so that they may avoid their portion of State taxation which should `fall justly on every individual in the State according to the value of his personal property." Mr. Washburne (Ill.) thought the bill favored city banks over country banks. lie believed all bank capital should be taxed but by the general government. Several members thought that the States would tax the national banks out of existence. PAGENO="0369" 349 Mr. Washburne opposed giving the States power to tax the capital of banks because it would inevitably bring the States into conflict with the general government. Mr. Hotchkiss (N .Y) proposed this amendment: "Provided, That nothing herein shall exempt any association organ- ized under this act from the same State and municipal taxation imposed upon other corporations in the States where such associa- tions are located." He thought this would protect the banks from being taxed out of existence since it proposed that "they shall impose no other taxes upon them than such as they impose upon citizens and other corpora- tions." ~ 1\4r. J. C. Allen remonstrated at the idea of exempting one class of taxpayers at the expense of others: "It tends to build up a moneyed oligarchy wherever you have a national bank established, by enabling capitalists to invest their money in this class of securities, and then, by depositing them in one of the banks, to relieve themselves from their fair proportion of State taxation according to the wealth and property they use and enjoy. * * * * * * * "Sir, there are other things beside~ Government bonds upon which the Government is dependent for its success and the maintenance of of its credit. Why should we exempt one species of property necessary for those purposes and not another? In order to sustain the credit of the Government, and maintain its integrity, you have to call into the military, organization the horses and mules of the farmers of the country. You have to feed your army, and you can not support it without calling on the farmers of the country for their beef and pork, and flour and corn. All these are essential to the maintenance of the national integrity. If you have a right to exempt from taxation by a State one species of property, you have a right to exempt that other species of property . . ." Shortly thereafter Mr. Kasson rose to perfect the amendment so that it would read: "And the taxes or duties imposed by Congress from time to time shall be in lieu of all other taxes on such association." This amendment was agreed to, whereupon the House adjourned.24 On April 4, 1864, Mr. Van Valkenburg (N.Y.) submitted the following additional section: "And be it further enacted, That nothing in this act shall be so con- strued as to prevent the taxation by the States of the capital stock of the banks organized under this act the same as the property of other moneyed corporations for State and municipal purposes." Mr. Davis (Maryland) objected to the amendment because it placed the banks "at the mercy of the States" and they could negate the existence of the new banking system. Mr. Kernan thought that under the amendment: ". . . the property of these corporations is to be liable to State and municipal taxation the same as other personal property existing at the place where they are located. Therefore the State laws will operate 23 Ibid., pp. 1392-30 (April 1, 1864). Among those who thought national banks might be taxed out of exist- ence were, e.g., Messrs. Grinnell (Iowa) and Stevens (Penn.), ibid. See also infra, p.280. 24 Ibid.;p. 1393 (April 1, 1864). 79-421 0 - 72 - 24 PAGENO="0370" 350 upon the capital of these banks precisely as they do upon the personal property of individuals or any other corporation at the place where they are located~ That will protect them from any unfair taxation." He thought that banks should pay their part of the expenses of city government-lighting, streets, sustaining the courts, etc. These burdens should not be "thrown upon other property in that locality." Moreover, the "object of the amendment is to provide that they [the banks] shall be taxed the same as other property is taxed." 25 Mr. Davis thought Mr Kërnan was mistaken in this interpretation:26 "He says that bank stock is merely to be liable to the same tax as other personal property. In the first place, sir, that is not the language of the amendment. In the next place, all personal property is not subjected to the same taxation. There is nothing to prevent a State from taxing a horse at one rate, a cow at* another, a hog at a third, insurance companies at a fourth, manufacturing companies at a fifth, State banks at a sixth, and national banks at a seventh rate. There is no such thing as a uniform limit of taxation to which this. section can refer. In some States there is a general pro rata tax on everything that a man is worth; in some there is an income tax; in some States there is a tax on lands at one rate and a. tax on personal property at another rate. There is nothing in this amendment that limits or confines or defines the rate of taxation which a State may impose; and it is almost im- possible to prescribe a limitation which will be effectual. It therefore does, as I said, leave the banks subject to the unrestricted taxation of the State." These statements hark back to earlier periods when a number of States-Maryland, Connecticut and others-employed classified prop- erty taxes, some on land, others on personal property. Does the fact that differential property taxes were once in vogue help explain the proviso that shares shall not be taxed "at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State"? Little attention, however, seemed to be paid to these remarks. Mr. Mallory (Ky.) said, ". . . we are told that if we give to the States power to tax these institutions at all we confer on the States power to destroy them. It seems to me that if we do not give the States this power, the banks will destroy the States." Mr. Morril (Vt.) then reaffirmed his opposition to all State taxes on banks-for the same reasons that Congress prevented State taxation of Federal buildings or ships of the United States. "If they could tax them at all, they could tax them out of existence." Mr. J. C. Allen replied that there was no substance to this argument: that they could not impose a rate of tax higher than on other capital stock. Mr. Strouse (Pa.) wanted to know in what particulars banks- differed from businessmen generally throughout the States who are taxed not only by the national Government, but by the States for State, county and municipal purposes? Why should we be so charitable, when men have loaned this money for purposes of mak- ing more, as to exempt them from taxation?"27 Next to take the floor was Mr. Hotchkiss who moved to add this amendment to the original amendment:28 25 Ibid., p. 1412 (April 4, 1864). 26 Ibid., p. 1413. "Ibid., p. 1414. 28 Ibid. PAGENO="0371" 351 "And no State shall impose any tax upon said associations, or. their capital, circulation, dividends or business at a higher rate of taxation than shall be imposed by the said State upon the same amount of moneyed capital in the hands of individual citizens of said State." This amendment, he thought, would obviate the objection that the States would tax the banks "out of existence." Mr. Eldridge added that States would not so tax institutions "which are for their benefit." Moreover, local taxes have to' bear uniformly upon all personal prop- erty. Mr. Van Valkenburg accepted the amendment of' Mr. Hotchkiss as his own. There was more discussion and parliamentary maneuvering and on April 6, 1864, the following amendment-the sixteenth offered-was adopted by a vote of 78 to 56:29 "Sec. 65. And be it further enacted, That nothing in this act shall be construed to prevent the taxation by States of the capital stock of banks organized under this act, the same as the ~roper~y of other moneyed corporations, for State or municipal purposes; but no State shall impose any tax upon such associations or their capital, circula- tion, dividends or business at a higher rate of taxation than shall be imposed by such State upon the same amount of moneyed capital in the hands of individuals of such State." On April 16, Mr. Holman asked the Clerk of the House to read section 41 which contained the following proviso: 30 "Provided, That nothing in this act shall be construed to prevent the market value of the shares in any of the said banking associations, held by any person or body corporate created by State law, being included in the valuation of the aggregate personal property of such person or State corporation in assessing any tax imposed by any State or municipal authority on the aggregate personal estate of all persons subject to the authority of such State or municipality." He raised a point of order, to the effect that this section was in the nature of a `tax bill that should have been considered first in the Com- mittee of the Whole. rfhis point was overruled, on the ground that the provision did not impose "a tax or charge upon the people." On April 18, 1864, the entire national currency bill came up for amendment. Mr. Fenton (N.Y.) offered the following amendment to section 41: "And that nothing in this act shall be construed to prevent the taxation by States of the capital stock of banks organized under this act, the same as the prO~)erty of other moneyed corporations for State or municipal purposes; but no State shall impose any tax upon such associations or their capital, circulation, dividends, or business, at a higher rate of taxation than shall be imposed by such State upon the same amount of moneyed capital in the hands of individual citizens of such State: Provided, That no State tax shall be imposed on any part of the capital stock of such association invested in the bonds of the United States, deposited as security for its circulation." There followed some parliamentary tactics after which the amend- ment was approved.32 The Senate again took up the debate on the currency bill on April 26, 1864. Senator Sherman (Ohio) presented the proposal of the 29 Ibid., p. 1452 (April 6, 1864). . . 30 Ibid., p. 1680 (April 16, 1864). 3' Ibid., p. 1682 (April 18, 1864). 32 Ibid. PAGENO="0372" 352 `Committee on Finance, the State tax provision of which was as follows: "Provided, That nothing in this act shall be construed to prevent the market value of the shares in any of the said associations, held by any person or body-corporate, from being included in the valuation of the personal property of such person or corporation in the assess- ment of all taxes imposed by or under State authority for. State or other purposes, buy not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of each State; and all the remedies provided by State laws for the collection of such taxes shall he applicable thereto: Provided, also, That nothing in this act [shall] exempt the real estate of associations from either State, -county, or municipal taxes to the same extent, according to its value, as other real estate is taxed." Senator Chandler of Michigan described taxes in his State-a city tax of two percent on all property and a State tax of one percent on banks which was in lieu of all other taxes on banks. He did notbelieve any bank could pay these taxes plus the Federal .taxes on note issues. He read the proviso quoted above and indicated that under it banks "are liable. . . . to the same taxation precisely as is all other indi- vidual property." Senator Fessenden (Maine) pointed out that the fear of excessive State taxation of the national banks was limited: "They must tax this property thus invested [in bank stock] precisely as they tax other personal property, and to no greater extent." rfhe burdens on the States were heavy in connection with the war now that it was proposed to 1~ake away from the States additional revenues, creating a difficulty- "which it will be very troublesome to get over." Senator Chandler told the Senate, "if you allow this local taxation, the bank stock will of course be assessed at its full value. . . . it is very well known, however, tha t in most cities real estate and other property is estimated at very much below its actual value." He opposed State taxation as it would militate against the establi~hment of the banking system.34 Senator Fessenden advanced this additional argument for taxation: "As a .general rule, those who put stock into a bank or who own the great majority of stock are those who are the most wealthy persons in the community. You hold out to them a great additional inducement to put their money into those banks if they are relieved from State taxation. What is the result? The result is that you increase the burdens of those who are the poorer classes, comparatively, and less able to bear the burdens of taxation." This dialogue it would seem illustrates some of the complexities of the property tax. Senator Sherman pointed out that the House bill left banks free from State taxation but permitted States to tax the shares to indi- vidual owners. He favored a. uniform system of taxing banks in the United States; this could only be achieved by the general government. However, they should "bear their full value of taxation." Senator Chandler favored a uniform tax-"tax them. heavily but let the tax be uniform"-umlorm w ithin and among the States 36 ~ Ibid., p. 1871 (April 26, 1864). The word "shall" in the final proviso was not in the Comniittee draft but was inserted by an amendment. ~ Ibid., p. 1872. "Ibid. 3' ibid., pp. 1873, 1874 (April 26, 1864), and p. 1891 (April 27, 1864). PAGENO="0373" 353 Senator Collamer (Vermont) explained the operation of state taxes as the people understood it: "You go to a town in New England, and the tax for the support of the poor every man understands and feels. The same is true of the taxes for the support of their schools and for the building of their highways and bridges. These are domestic, municipal affairs; taxes laid under State authority, to be sure; and every man understands and appreciates them. Again, sir, you may go into one of our ordinary- sized towns anywhere, in New York, Pennsylvania, or New England, and there are some few comparatively wealthy men, but not many. By fortuitous circumstances you may occasionally find in each town some man of wealth. The one that I will now mention would be no very unsupposable case. Suppose in a town of some three thousand inhabi- tants there lives a man of wealth, for us, a man worth, say, $300,000,. mostly money invested in bank stocks or some other corporation stock. We pass this law. This man immediately takes his stock in these banks under this bill. He either buys bonds and puts them in or puts in money with which they buy bonds. The town levies a tax for the purpose of repairing the highways or building a bridge. Some of the people pay in money; some turn out and labor on the road. Some- one asks, `Now, Mr. Taskmaster, who is on your tax-list for repairing this road and bridge?' `There are such and such men.' `Where is Mr. Stiles, our wealthiest man? He is not on your list at all. Does he pay anything for the building of our bridges and roads? Does he contribute anything for the support of town schools?' `No, sir; not at all.' `Does he do anything to support the expenses of the government of the State?' `No, sir; not at all.' `Is it the law of the land by which the wealthiest man among us is exempt from these contributions which all the rest of us feel and are compelled to pay?' His "no very unsupposable case" of Mr. Stiles was referred to fre- quently in the ensuing debates. Senator Sherman again took up the argument. He favored heavy taxation but- "1 am willing, as one of the friends of this measure, to impose on this property any burden of taxation that any Senator thinks it can bear and live. The only difference is that 1 do not wish any portion of this taxation to be diverted from national objects for State, county, and municipal purposes. Here we are creating corporations with power to bank; and the only question with us is, shall we confer on all the towns and counties and cities and States of this Union the power of taxation, to control their operations, and substantially to destroy them? It seems to me that is the only question, and not as to the rate of taxation." 38 And to prevent complete "sequestration" of bank property, like real estate belonging to English monasteries, he called attention to the provision allowing States and local governments to tax bank real estate ~ "Provided, That nothing in this act shall exempt the real estate from either county, State or municipal taxes to the same extent, according to its value, as other real estate is taxed." ~ Ibid., p. 1891. 5 ~` Ibid., p. 1897. S `° Ibid., p. 1898. PAGENO="0374" 354 This may have been the first time this permissive provision was mentioned in the 1864 debates.4° On the other hand, it is believed that the right of the States to tax bank real estate had been assumed from the beginning. Certainly the real property of State banks had been so taxed. On April 29, 1864, the Senate, as a Committee of the Whole, resumed consideratiOn of the National Currency bill. The Committee on Finance proposed the following provision in respect to State taxation 41 "Provided, That nothmg in this act shall be construed to prevent the market value of the shares in any of the said associations, held by any person or body-corporate, from being included in the valuation of the personal property of such person or corporation in the assess- ment of all taxes imposed by or under State authority for State, county or municipal purposes; but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State. And all the remedies provided by State laws for the collection of such taxes shall be applicable thereto." Then there followed the further proviso giving States the right to tax real estate, as indicated above. Senator iPomeroy (Kansas) proposed to insert instead of the first proviso the following: 42 "Provided nothing in this act shall be construed as exempting the capital stock of an association, beyond the amount invested in United States bonds and deposited with the Treasurer of the United States as part of its capital or as security for its circulating notes, from being subject to the same rate of State and municipal taxation as is imposed upon other personal property in the State, city or town in which the association is located." This amendment was intended to subject the entire capital of a bank not invested in government bonds to municipal taxation, including buildings and every other facility of the corporation. But the portion of capital invested in government bonds was to be taxed only by the U.S. Government. The amendment was rejected.43 Then Senator Howard (Mich.) proposed an amendment to limit State and local taxation of shares to the place "where the bank is situated." His object was this: that the States in which the banks are situated shall have the benefit of the taxation of the banks, and that the States where the capitalist owning the stock may happen to reside shall not, on account of that residence, be entitled to the benefit of the taxation. I am quite aware of the principle of common law that personal property is supposed to follow the owner wherever he may be, and that in contem- plation of that code, a man's personal property is attached to him and belongs to his residence. If the bill shall pass without this amendment, this will be the result: .that where the owners of the stock reside, for instance, in the State of Massachusetts or Maine, and their money is invested and employed in banking operations in Michigan or Indiana or Ohio or any western State where capital is not so abundant, the money thus invested will be taxed by the State of Massachusetts or 4° This is alsonoted by Lutz, be. cit., p. 209. 41 34 Globe pp. 1952-53 (April 29, 1864). 42 Ibid. ~3 Ibid., pp. 1953, 1957. ~ Ibid. PAGENO="0375" 355 Maine and the tax put into the treasury of those States instead of going into the treasury of the State where the bank is in its actual operation." Mr. Howard's proposal corresponded with the fact that most banks in fact were and still are primarily local institutions. Their stock for the most part has been subscribed to by local residents and the banks have always catered first to local needs. This proposal was debated but lost. ~ Discussion of the National CurrencyActwas continued on April 30. Senator Chandler proposed to limit the amount of State and local taxes to "the amount of taxes assessed by the State upon its local banks." 46 There was discussion as to where this amendment belonged. Senator Fessenden thought that it was already covered by the previous provision "that the taxation shall not be at a greater rate than the taxation on money in the hands of individual citizens, but 1 see the object is to prevent a State making a different rule to favor its local banks." Senator Chandler answered, "Precisely; that is the object." At the request of the Chairman of the Committee on Finance, Mr. Chandler withdrew his amendment but promised to renew it when the bill came before the Senate. This he did on May 5, 1864. The wording of the amendment was slightly different (perhaps improved) as follows.47 "And provided further, That no tax shall be imposed under the laws of any State upon the shares in any of the associations authorized by this act at a rate exceeding that imposed on the shares in banks organized under the authority of the State where such association is located." This amendment was agreed to immediately with no debate. On May 5, 1864, Senator Chandler spoke at length on making bank taxes uniform, that is, restricting their taxation to the national government, "but during the continuance of this war let banks be taxed, let individuals be. taxed, and let them be taxed to their utmost capacity to pay." 48 He favored heavy national taxation. The talk then drifted to circulation based on government bonds. Senator Fessenden referred to this amendment which was in the House bill: "Provided, That no State tax shall be imposed on any part of the capital stocks of such association invested in the bonds of the United States deposited as security for its circulation." He pointed out, too, that the Committee on Finance was of the opinion that the good of the bill itself, the good of these institutions would be advanced by not undertaking to say that the property of private citizens of the State invested in them should be free from State taxation; that such exemption would create a feeling of dissatisfaction and anger with regard to it that might in the end be fatal to the institutions themselves." ~ As for the fear of excessive* State taxation, Senator Fessenden thought that was provided against by the provision that* the tax *upon these national institutions cannot be made greater by ~ Ibid., p. 1959. 46 Ibid., p. 1989 (April 30, 1864). 47 Ibid., p. 2128 (May 5, 1864). :: ~~:: ~: ~?: PAGENO="0376" 356 any State legislature than that on the State banks, and it is so pro- vided. . . . but I deny that it has the slightest connection in the world with the question now before the Senate on this amendment; and that is whether or not the Government shall allow the States to tax the private property of their own citizens when invested in these institutions in the ordinary form." This illustrates, as has often been pointed out, that the Congress was really never quite clear whether it was talking about taxes upon the banks or taxes upon stockholders on their personal property. On May 6, 1864, when the national currency bill came up again, national uniformity of taxation was again an issue. To reinforce the argument, a letter from Secretary of the Treasury Chase was read into the record.'° Senator Sherman supported a tax of 2 percent on circulation, 1 percent on deposits and 2 percent on capital in excess of circulation, whereas the Committee on Finance had proposed 1 percent on circulation and ~ of 1 percent on deposits and then reserved the stock of the shareholders for taxation for State and municipal purposes. The amendment to the amendment was lost.5' The question then was on the amendment by the Finance Commit- tee. Senator Collamer moved to strike the words "in lieu of other taxes" in order "to save to the States the right of taxation." Senator Sherman thought the statute should say "existing taxes." Senator Collamer agreed and the amendment was so modified. This was accepted by the Senate.'2 5° Ibid., p. 2142 (May 6. 1864). This letter was as follows: "Treasury Department, May 2. 1864 "SIR: Nothing hut my deep sense of the importance of sustaining by every possible means the public credit, upon which the sole dependence of the 9overnment for means to suppress the insurrection must rest, would induce me to address you this letter upon a subject which has already received so much con- sideration. "The bill in relation to the national banking system now under debate is in the nature of an amendment to the act of last session. Though a complete bill in itself, it contains few provisions not substantially em- braced in that act, among which that in relation to the measure and distribution of taxation may be regarded as perhaps the most important. "Under ordinary circumstances there might he no insuperable objection to leaving the property organized under the national banking law subject, as are almost all descriptions of property, to general taxation, State, national, and municipal. But in the present condition of the country, I respectfully submit that this par- ticular description of property should be placed in the same category with imported goods before entry into general consumption, and be subjected to exclusive national taxation. "At the present moment, the duties on imports form the sole reliance of the Government for means to pay the interest on the public debt. If to these means the taxes to be paid by the national banks shall be added, a most important addition will be made to those resources. The mere fact that these taxes are made payable to the national Government. and so available for the payment of interest on the public debt and for the reduction of its principal, will greatly strenghen the public credit and facilitate the negotiations of the necessary loans at moderate rates of interest. I have no doubt that such a disposition of these taxes would be worth more to the Government during the present struggle In practical results than three times the actual value of the taxes themselves. "I do not at all suggest that this description of property should not be taxed as heavily as any other de- scription. On th~' contrary, I think it only just that it should bear its full proportion of the public burdens. I am only anxious that the taxation upm it shall be made to contribute as largely as possible to the general welfare; and it is the conviction, deeply impressed on my mind, that it will contribute more when aggre- gated in one mass and made to tell upon the general public credit than when distributed between the nation and the States and numerous municipal corporations, that prompts me to address these views to you. "Under any plan of partition that may be adopted, the amounts of taxation distributable to the several States and municipalities will be comparatively small and unimportant, and it is quite possible that the total taxation of banking property for all purposes will be less than it will be if taxed exclusively for national purposes. The advantages of partition to States and municipalities will therefore be small, and the banks may not lose by it. The nation alone will be injured. "It wifi not be understood of course that the foregoing suggestions are intended to apply to real estate held by any banking association. That description of property must necessarily be held by titles under State laws, and should properly be subjected exclusively to State taxation, except in the event of a direct tax by Congress. The case is otherwise with the personal property and credits of the banking associations. These receive their organization from national law and for great national purposes, and may therefore with great propriety, and as I have endeavored to show, at the present time with great public advantage, be subjected to exclusive national taxation. "Very respectfully yours, "S. P. CHASE, ~`Secretary of the Treasury. "Hon. William Pitt Pessenden, Chairman. of Committee on Finance, Senate Chamber." 51 Ibid. 52 Ibid. PAGENO="0377" 357 The national currency bill was finally passed in the Senate on May 10, 1864-30 yeas; 9 nays. The House disagreed with some of the Senate amendments and asked for a conference which was held.53 On June 1, 1864, Senator Sherman reported the results of the actions of the Conference Committee, the major disagreements to be ironed out being those relating to State and local taxation of national banks.54 The Committee report on this matter is as follows: "The House recede from their disagreement to the forty-first amendment of the Senate and agree to the same with the following amendment: strike out all after the word `provided,' in line forty- seven of said Senate amendment down to and including the word `located,' in line sixty-six, and insert in lieu thereof the following: "`That nothing in this act shall be construed to prevent all the shares in any of the said associations held by any person or body- corporate from being included in the valuation of the personal prop- erty of such person or corporation in the assessment of taxes imposed by or under State authority, at the place where such bank is located, and not elsewhere; but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State: Provided further, That the tax so imposed under the laws of any State upon the shares of any of the associations authorized by this act shall not exceed the rate imposed upon the shares in any of the banks organized under the authority of the State where such associa- tion is located,' and the Senate agree to the same." Senator Sherman explained the report. This is what he said about the State taxation problem: "The last amendment, which was the only material one upon which there was disagreement, and the only one upon which there was much trouble, was the forty-first amendment, reserving to the States the power of taxation. We have slightly modified the Senate amend- ment, but the legal effect is very much the same as the Senate amend- ment, in my judgment. The slight difference between the Senate amendment and the amendment proposed by the committee of con- ference will be very readily seen. These were the only points of dis- agreement." "Mr. HALE. Will the Senator be kind enough to inform me how the matter of taxing the State banks and national banks relatively is left by the bill. "Mr. SHERMAN. This bill says nothing about taxing the State banks. It provides for a tax of one per cent on the circulation of the national banks, one half of one per cent on their deposits, and one per cent on their capital above the amount invested in United States bonds. It reserves to the States the right to levy a tax on national banks not exceeding the rate that they assess upon their own banks, and it is to be levied at the place where the bank is located." The report was concurred in. The President signed the bill on June 3, 1864. The long and historic struggle had ended. The Congress had continued the national banking system; it had a national currency; the right of the States to tax the banks had been assured.56 "Ibid., p. 2207 (May 10, 1864), p. 2458 (May 25, 1864). The House Committee was composed of Messrs. Hooper, Washburne, and Mallory; the Senate Committee was Sherman, Foster, and Johnson. ~ Ibid., p. 2621 (June 1, 1864). 55 Ibid., p. 2622. "Ibid., p. 2651 (June 2, 1864), p. 2727 (June 4, 1864). PAGENO="0378" 358 Just what rights had been given the States? They were (1) the right to tax the shares at the place where the bank was located, "but not at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State," nor should the tax on shares exceed the rate imposed upon the shares in any of the banks organized under the authority of the State where such association is located; and (2) bank real estate was to be taxed for State, county or municipal purposes "to the same exter~t, according to its value, as other real estate is taxed." These provisions-as to real estate and personal property (bank shares)-conformed to the property taxes in vogue in most of the States at the time (1864). Current practices were reflected in the permissions extended to the States and their subdivisions. In spite of a few contradictory statements, it would seem that Congress meant exactly what it said: States shall not tax national banks at a greater rate than is assessed "upon other moneyed capital in the hands of individual citizens of such State." They did not say, nor intend to say, "at a greater rate than State banks." So indicates the preponderance of evidence. C. State taxes in 1922 Between 1864 when the National Currency Act was amended to permit State taxation of national banks on their real estate and shares and 1922, profound changes took place in the basis of life and in all facets of society in the United States. The economy of the country shifted from primarily agricultural to an expanding industrial civiliza- tion. In the 1860s corporations were small and few, most of them created by special acts of legislatures, whereas in 1922 they were numerous, organized under general laws, and stimulated by growing opportunities for profit. Their financing by issuance of stocks and bends multiplied greatly the volume of intangible personal property which tax collectors were desperately trying to reach. Great networks of railways had replaced the few trunk lines of the earlier period. Goods and materials moved freely and cheaply from sources to factories to markets. The automobile, now coming into its own, had made obsolete the toll roads, turnpikes, and macadam trails of earlier years. An ever-expanding network of interstate high-speed highways was under construction, financed largely by user-service charges in the form of gasoline taxes (first adopted in 1919 but spreading rapidly) and annual vehicle licenses, supplemented by ton-mile and other levies on motor trucks and carriers. Grants-in-aid for road construction had begun. Higher education, stimulated by the Morrill Act of 1862, had been expanded with the founding of many new institutions and the further development of others. State aid to common schools had grown. Hospitals, charities, and correctional institutions had been improved. The functions and the cost of government as a consequence had greatly increased. The interferences of World War I with normal activities of State and local governments were followed by increased demands for service and capital outlays when the war was over. Methods for raising governmental revenue likewise had greatly improved in this period. PAGENO="0379" 359 TABLE 5.-STATE AND LOCAL GOVERNMENT TAXES, BY TYPE OF GOVERNMENT AND TAX, 1922 [In millions of dollars] Taxes collected Total States Counties Incorporated places Specified civil divisions Total General property taxes Special taxes: Inheritance Income 4, 221 868 745 1, 628 981. 0 3,321 68 62 348 66 29 687 (1) 1 1,345 (1. 4) 30 941.0 (.1) Other2 126 101 2 21 1.5 Poll taxes 29 8 9 7 4. 0 Licenses and permits Special assessments 408 205 305 9 25 19 73 149 4.0 27. 0 `$492,000. 2 Includes receipts from taxes on stocks of banks and other corporations, on the valuation of life insurance policies, on mortgages at time of registry, on vessels at a specified amount per registered tonnage, and on grain at a specified amount per bushel. (Source cited below, p. 10.) Source: U.S. Bureau of the Census, "Wealth, Debt, and Taxation: 1922, Taxes Collected," pp. 12, 146. Nevertheless the general property tax still was the principal source of State and local revenue. This may be seen from table 5, which shows taxes collected by various types of government. About three- fourths of all State and local collections came from the general prop- erty tax, but the smaller the unit of government the greater its de- pendence on the property tax.' The growth in national wealth since the 1860s, of course, was reflected in assessments and in the estimated true value of property, as compiled by the Census Bureau. This increase can be seen from table 6. From the beginning, assessments seldom reflected the true value of property. The assessed value of all property subject to the general property tax in 1922 was $124,617,000,000. This was com- posed of $92,369,000,000 in real estate and improvements; $27,400,- 000,000 of personal property; and $4,847,000,000 of other property.2 The relative amount of personal property assessed compared with total assessments had been declining over the years as had been pointed out over and over again.3 I This is clearly shown by the following table: General property tax burden; 1902, 1912, 1922 Year Aggre Per capita gate Percent of total b Sta Per capita tes Percent of total b Cit Per capita ies Percent of total b Cou Per capita nties Percent of total 1922 1912 $30. 55 11.20 78.7 79.4 $3.22 1.44 40. 1 45.9 $20.30 14.47 82..8 77.5 $7.07 3.29 92. 1 91.1 1902 8. 35 82. 1 1. 02 51. 0 12. 21 86. 7 1. 85 91. 1 a Includes also minor civil divisions not shown in this table. b Percent of total taxes and special assessments. Source: ITS. Bureau of the Census, Wealth, Debt, and Taxation, 1907, 1913, 1922; Leland, op. cit., p. 11. 2 Wealth, 1)ebt, and Taxation: 1922, Assessed Valuation and Tax Levies, p. 34. 3 Cf. Ely, op. cit., pp. 165-16, 180-81; Seligman, op. cit., pp. 22-26. PAGENO="0380" 360 TABLE 6--ESTIMATED TRUE VALUE OF ALL TAXABLE PROPERTY, 1850-1922 Amount Year (in millions) 1850 $7, 136 1860 16,160 1870 2 30, 068 1880 43, 642 1890 65, 037 1900 88, 517 1904 107, 104 1912 187, 739 1922_ 320, 804 1 Data for 18,50-1870 are for taxable property only. Thereafter total includes exempt property of the follow- ing amounts (in millions): 1890, $3,833; 1900, $6,213; 1904, $6,831; 1912, $12,314; 1922, $20,506. 2 Currency basis. Gold basis, $24,055 million. Source: U.S. Bureau of the Census, Wealth, Debt and Taxation: 1913, vol. 1, pp. 24-25; ibid., 1922, Esti- mated National Wealth, p. 18. The property tax of this period was a locally-administered centrally- shared tax. Assessments were made by local officials practically without supervision or instruction. Collections were made by county and other officials, usually locally elected. They remitted the proper portion of the taxes collected to the various units, including the State. This was the opposite arrangement from what is now customary for other types of taxes-State-administered taxes with revenues shared with locali- ties. As property tax levies began to rise during and after the Civil War, there were increasing incentives to competitive local undervalu- ation as a means of reducing the weight of State taxes, just as similar competition among townships and districts was used in efforts to reduce local shares of county taxes. County boards of equalization were first created to reduce inequalities in assessments within counties. Later State boards of equalization, first ex officio, then appointed or elected, were created to provide greater assessment equality among counties with respect to State levies. These measures had little success. Seldom could defective local assessments be. made equitable by the equalization process so generally applied, nor could the boards over- come tendencies for individual members to try to favor their own localities at the expense of others.4 In due time the State equalization boards were replaced by State tax commissions, full-time officers (some of professional calibre) whose duty it was to supervise original assessments, make equalizations, and assess for all purposes intercounty properties, railroads, public utilities, and other corporations-duties local assessors had not been able to perform satisfactorily. They also were made responsible for the direction and improvement of State tax systems. They helped lead the States away from the general property tax and sponsored the develop- ment of new taxes, such as gross receipts taxes on public utilities, low-rate taxes on intangibles, personal and corporate income taxes, the sales tax, and the like.5 They also spearheaded the movement of State officials to amend section 5219, as has been related. 4 See Lutz, The State Tax Commission, Harvard University Press, 1918, chs. II and III. Leland, op. cit. pp. 19ff, 34. 5 Lutz, op. cit., ch. IV and following. PAGENO="0381" 361 During 1864-1922 many special taxes on corporations were devel- oped. The franchise tax, at first an organization fee, was converted into an annual money raiser.6 Special property ti~xes also were im- posed. Some of those in force in 1922 are indicated in table 7 which shows the receipts of State governments from these taxes. Cor- responding detail for local government taxes is not available. Over half of the special property taxes were paid by corporations generally. Of the $81 million aggregate of special property tax receipts of State governments, $62 million, or three-fourths, was reported for six States-Pennsylvania, California, New York, Massachusetts, Ohio, and Michigan. The category designated "bank stock" taxes comprised one-sixth of the total for all States, although it was reported in only the 10 States named in the table. Of the bank stock taxes, 98 percent were received in five States-New York, California, Massachusetts, Pennsylvania, and Connecticut. TABLE 7.-STATE RECEIPTS FROM SPECIAL PROPERTY TAXES, 1922 [In thousand s of dollarsi State 1 Special property taxes Total Bank Street stock Corporation railway All other Total, all States 2 81, 003 13, 999 49, 833 10 17, 161 Maine Massachusetts Connecticut New York Pennsylvania Delaware Mississippi Texas Nevada California 500 6, 513 2,617 7,604 28, 313 918 433 1,280 4 7, 770 214 284 1 2, 827 2, 691 4 991 1,216 150 1,250 4, 621 2,983 1, 362 20, 494 6, 457 33 138 747 43 390 5 1,275 4 3, 674 4, 096 1 This table enumerates only those States for which a category of "bank stock" taxes is reported separately in the census compilation. 2 Includes receipts of allStates, including those not named. Source: U.S. Bureau of the Census, Financial Statistics of States, 1922, p. 12. The general property tax was the important tax upon banks. In 1921, banks were taxed by this method in 38 States with 52.6 percent of the banking capital of the nation. Ten states reached bank stock through low-rate taxes, applicable to 38.3 percent of bank capital. Only the District of Columbia taxed banks on the basis of gross receipts. In all the general property tax States except New Hampshire and Vermont, the tax was levied at the location of the bank. In these two States, the law provided for taxing bank stock at the residence of the owner. Under the low- or special-rate taxes in California, Delaware, New Jersey, New York, Pennsylvania, and Virginia, the location of the bank was made the situs for taxation. In Maryland and Rhode Island the situs of shares owned by residents was at the residence of the In general these taxes were based on capital stock, authorized and paid in. Seldom did they include earned surplus. When made applicable to banks, among other corporations, they did not include national banks. Special license taxes Were imposed on banks only in Florida (capital), Louisiana (capital, surplus, and undivided profits), Nevada (capital). Authorized capital was the base of franchise taxes in Colorado, Idaho, Oregon, Rhode Island, Utah, and West Virginia. Other bases were used in Alabama (paid up cap- ital), Arkansas (capital subscribed, issued, and outstanding), Cxeorgia (capital), Michigan (paid up capital and surplus), Missouri (par value capital and surplus), Ohio (subscribed, issued or outstanding), Texas (authorized or paid-tn capital, surplus, and undivided profits whichever is higher), Vermont (capital stock or deposits), Washington ($15 each corporation). See Kimmel, op. cit., pp. 10-11, where further details are given. PAGENO="0382" 362 owner. In conformity to Section 5219, bank shares owned by non- residents were taxable at the location of the bank. In Connecticut and Maine, the situs for taxing all shares was the location of the bank, but the taxes derived from shares owned by residents of the State were distributed to local jurisdictions where these shareholders resided.7 TABLE 8.-LOW-RATE TAXES ON INTANGIBLES: 1927 State Date of Type of adoption Rate in force evaluation California Connecticut District of Columbia 1925 1.45 percent Annual.' 1889 4 mills Registration. 1916 5 mills Annual. Do. Iowa Kansas~_. 1911 6 mills 1925 5 mills2 Do.' Kentucky Maryland Minnesota Montana Nebraska Oklahoma Pennsylvania Rhode Island South Dakota 1917 do.' 1896 434 mills Do. 1911 3 mills Do.' 1919 Assessed at 7 percent of true value Do. 1921 5 mills 3 Do. 1917 Registration at 2 percent of face value for Registration.' 5 years.' 1879 4 mills Annual. 1912 do Do. 1919 do Do.' Do. Vermont Virginia 1925 do.7 1915 6 classes of intangibles. Rates vary from Do.' 2 mills to 11.0+ mills. 1 7 percent assessment law repealed 1927. 2 Bonds of other States and foreign governments taxable at 1 mill. 2 Also has a mortgage recording tax. 4 Bank deposits 1 mill. 3 Money in bank and elsewhere, 234 mills; bank stock, 70 percent of local tangible property rate. - Money and credit tax of 14o of 1 percent adopted 1925; intangibles subjected to special levy of 36 of 1 percent in 1927. 7 Intangibles assessed at 1 percent of value; taxed at 40 cents on the dollar. Bank stock and competing capital taxed at 2 percent. Source: Leland, op. cit., p. 180. 1. Low-rate taxes ort intartgibles.-Low-rate taxes on intangibles were employed in 15 States and the District of Columbia, as is shown in table 8. It was the use of such a tax and the fact that the low rates were not applied to shares of bank stock which led to the Richmond decision and to the amendment of Section 5219 in 1923 and 1926.8 Failures to apply these and similar rates to shares of national banks left ad valorem share taxes in jeopardy until the passage of P.L. 91-156 in 1969. It has been said that the Richmond decision and the ensuing controversy over national bank taxation took the steam out of the classification movement and retarded both its extension and more intensive development. There is no doubt that the movement was given a severe setback. Nevertheless, even though many States collected more revenue under their low-rate taxes than they had previously collected under high-rate general property taxes, the rev- enue potential from these taxes was so low that they could not for long have satisfied the needs of State and local governments. Atten- tion was turned to more productive sources administered by the State and often shared with locnf governments. Some special taxes on intangibles also were adopted. Chief among these were the taxes on mortgages and bank deposits. The motive for these taxes was principally justice, since the high general property tax rates when and if applied to this property were confiscatory or almost 7Kimmel, op. cIt., pp. 4-7. - 8 Cf. supra, pp. 265-291 in this appendix. PAGENO="0383" 363 so. Some States preferred to exempt intangibles from taxation. Other States adopted recording or registry taxes, since the occasion for recording documents not only made collection easy but made possible the use of revenue stamps. Any attempt to apply high annual rates to these taxes added to the costs to be met by borrowers. Moreover, the mortgages were completely representative of property already taxed. Justice and expendiency both favored the adoption of the mortgage registry taxes. Those in force in 1926 are shown in table 9~9 The amount collected from State mortgage taxes in 1922 was $29,329,000, of which $2,785,000 was in New York and $1,052,000 in Michigan.1° TABLE 9-MORTGAGE REGISTRY TAXES: 1927 State Date of adoption Rate Alabama Kansas Kentucky Michigan Minnesota New York Oklahoma Tennessee Virginia 1903 `1925 2 1917 1911 1907 1906 1913 1917 1910 $0.15 on each $100. $0.25 on each $100. $0.20 on each $100. $0.50 on each $100. $0.15 on each $100 when mortgage runs for 5 years or less; $0.25 when mortgage runs for over 5 years. $0.50 on each $100. $0.10 on each $100 on mortgages running 5 years or more; tax decreases with decrease in period to $0.02 per $100 if mortgage is for less than 2 years. $0.10 on each $100 on loans in excess of $1,000. $0.10 on each $100. In 1927 an alternative stamp tax on secured debts registered with the State treasurer was adopted; rate, 3~e of 1 percent. 2 Declared unconstitutional. Source: Leland, op. cit., p. 195. Although justice was the early motivation for mortgage recording taxes, several States have since adopted such taxes as a means of collecting information useful in improving the quality of local assess- ments, particularly real estate. County equalization ratios computed in Illinois and used to equalize assessments are derived from such data.1' Mortgage recording taxes have thus become a useful tool for State use in improving the operation of the property tax. At the time low-rate taxes on intangibles were putting national bank taxes in jeopardy, as in Virginia, some students of the problem wondered if the mortgage recording taxes would not produce the same consequences. Though long delayed, the answer came in 1969 when the Supreme Court decided the appeal in Dickinson v. First National Bank of Homestead.'2 2. Ban/c deposit taxes.-Bank deposit taxes were another phase of the classification movement, although the early special taxes on savings deposits can hardly be attributed to that movement. A court decision in Mississippi in 1876 holding that national bank notes were obligations of the United States and therefore exempt from taxation led to passage of the Act of August 13, 1894. This act permitted taxation by States of bank notes, U.S. legal tender notes, and other notes and certificates payable on demand, circulating or intended to circulate, and gold, silver, and other coins as money on hand or on 9 Leland, op. cit., pp. 187-95. On the present use of stamps, for real estate transfer taxes, see infra, table 16, 7th column. 10 U.S. Bureau of the Census, Financial Statistics of States: 1922, p. 13. 11 Cf. Illinois Department of Revenue, Illinois Property Tax StatIstics, 1966, Springfield, Ill., pp. 13.5ff. 12 291 F. Supp. 855 (1968), affirmed 89 S. Ct. 685 (1969). PAGENO="0384" 364 deposit, provided that they were taxed in the same manner and at the same rate as other money or currency circulating in the State. This would seem to be an overall permission for States to tax money on hand or on deposit. Of course, discrimination between deposits in State and national banks would not be permitted.13 Taxes on savings deposits in Connecticut, Maine, Massachusetts, New Hampshire, and Vermont were of early origin. Deposits taxes in other States came as part of general classification programs and in general applied to all money on deposit. These taxes are listed in table 10. Other States either included deposits among intangibles subject to general property tax rates or to low-rate taxes or exempted them entirely.14 In some States, individuals were required to list their deposits for taxation; in others collection at the source was employed; in still others, the taxes were levied on the banks to be borne by the banks or collected from depositors as competitive conditions dictated. Often as an inducement to increase deposits, many banks assumed the burden of deposits taxes. This constituted an added tax on shareholders if it affected the amount of bank dividends, otherwise only profits (perhaps undeclared profits) were reduced. Since these taxes were at low rates, the burdens were nominal.15 In the history of national bank taxation, taxes on bank deposits did not have much impact. TABLE 10.-LOW~RATE TAXATION OF BANK DEPOSITS: 1927 State Whether special tax Date of or part of classifi- law cation plan Deposits taxed Rate per $100 Assessable to bank or to inilvidual taxpayer Connecticut District of Columbia Iowa Kansas Kentucky Maine Maryland Massachusetts Minnesota Montana Nebraska New Hampshire Newiersey Oklahoma Pennsylvania Rhode Island South Dakota Vermont Virginia 1852 Special Savings 1916 Classification Savings over $500_ - 1911 do All money 1925 do do 1917 do All bank deposits-_-_ 1872 Special Savings' 1888 do do 1862 do do~ 1910 Classification All money 1919 do do 1921 do do 1864 Special Savings 1888 do do° 1925 Classification All money 1879 - do do 1860 do do3 1919 do do 1878 Special Depositsand accumulations. 1914 Classification All money $0.25 .50 .60 .50 .10 .50 .25 .50 .30 (3) .25 4 . 50 .50 . 10 .40 .40 .40 .70 .20 Bank. Individual. Do. Do. Bank. Do. Do. Do. Individual. Do. Do. Bank. Do. Individual. Do. Depositstobankall other to taxpayers. Individual. Bank. Individual. 1 Average deposits, reserve funds and undivided profits less certain deductions. 3 Less certain deductions. Assessed at 7 percent. 4 Law of 1925 provided for gradual reduction of rate. Rate to be 50 cents after 1931. 3 At first applied to deposits and reserves (K. M. Williamson, `State taxes on savings deposits in New England," American Economic Review, vol. xviii, No. 1 (March, 1928), p. 48); later to savings depnsits, Acts and Resolves, Rhode Island, 1893, ch. 37. Since 1912, 4-mill rate has applied to all money. Cf. General Laws, 1923, ch. 59, sec. II, p. 307. Source: Leland, op. cit., p.217. 13 J. R. Home, Tax Collector v. 3. & T. Green, 52 Miss. 452. Cf. Welch, op. cit. ch. v; Clement National Bank v. Vermont, 231 U.S. 120, 135 (1913). For the text of the 1894 law, see supra, p. 8, appendix I-F, 31 U.S.C. 425, 426. 14 Money and deposits were exempt from taxation in the following states: Alabama, money on deposit in banks, and solvent credits; Delaware, ready money; Louisiana, cash on hand and on deposit; Massachusetts, savings deposits in hands of individual; Mississippi, money on deposit; New York, savings deposits; North Dakota, money; Washington, money; Wisconsin, money; Ohio, "Dunker's money." U.S. Bureau of the Census, Digest of State Laws Relating to Taxation and Revenue, 1922. `5 These taxes are fully discussed in Welch, op. cit., cli. v. PAGENO="0385" 365 3. Comprehensive classifieation.-In this period comprehensive systems of classification for property tax purposes were adopted in Minnesota (1913), Virginia (1916), Kentucky (1917), North Dakota (1917), and Montana (1919).16 More recent applications are found, for example, in Arizona. Since it is only the intangible taxes in these systems that affected section 5219, comprehensive classification is not discussed here. 4. State income taxes.-The search for additional revenue soon turned attention away from the property tax, general and classified. Tax burdens on property had grown heavy, and the defects of the tax were such as to create increasing resistance to further dependence upon it. Interest and attention shifted to the income tax. During the Civil War and Reconstruction period, income taxes were adopted in Missouri, North Carolina, and South Carolina in 1861; Alabama and Virginia in 1862; Texas, Georgia, and West Virginia in 1863; Louisiana in 1864; Kentucky (1867), Delaware (1869), and Tennessee (1883) ~ The revenue results were disappointing and most of these taxes were soon dropped. It remained for Wisconsm in 1911 to demonstrate that a State income tax could be administered successfully and could produce substantial revenues. The success of Wisconsin preceded adoption of the present Federal income tax (1913) and influenced its administration. By 1922 individual income taxes were in use in Delaware, Mississippi, Missouri, New York, North Carolina, North Dakota, Oklahoma, and Wisconsin. In Massachusetts a selective income tax had been adopted under which individuals were taxed at different rates on income from selected intangibles. These personal taxes replaced in considerable part the previously-used taxes on intangible personal property. But the exemption did not apply to bank shares. These continued to be taxed at local property tax rates until 1923 when national banks were given the option of the share tax or a net income tax of 12j~/~ percent.18 In Delaware, bank shares were taxed at a flat rate of ~ of 1 percent of value. In New York, where personal property generally had been exempted, bank shares were taxed at 1 percent. The difficulties this differentiaiion caused in taxing national banks have been described.19 In North Dakota, bank shares were assessed at 50 percent after de- ducting the assessed value of bank real estate. Other intangibles were taxable at 3 mills on their assessed values.20 In Massachusetts, Missouri, North Carolina, Oklahoma, and Wisconsin banks were subjected to the same taxation as real estate.2' These differences- taxation of incomes in one way and banks in another-caused litiga- tion in which the taxes of several States were declared unconstitutional by the Supreme Court.22 In 1922 State income taxes produced revenues totaling $62,447,000. The yield in the several States is shown in table 11. Distributions to governmental units within States also are indicated. 16 See Leland, op. cit., pp. 225ff. 17 E.R.A. Seligman, The Income Tax, New York, Macmillan, 2d ed, rev., pp. 405-14. 18 Kimmel, op. cit., p. 47. 19 See supra, p. 202 In this appendix. Bank taxes were invalidated by People ex rd. Hanover National Bank v. Goldfogle, 234 N.Y. 345, 137 N.E. 611 (1922); the U.S. Supreme Court refused to review the case, 261 U.S. 620 (1923). 20 Bank tax declared invalid. Eddy v. First National Bank of Fargo, 275 U.S. 550 (1921). Cf. Welch, op. cit., p. 37. 21 Report of the Committee on the Taxation of the Shares of National Banks, Proceedings of the National Tax Association, 1922, pp. 344-46. 22 The bank share taxes in Wisconsin from 1921-26 were held void in First National Bank of Hartford, Wisconsin v. City of Hartford, 273 U.S. 548 (1927). Cf. Welch, op. cit., pp. 36-38. 79-421 0 - 72 - 25 PAGENO="0386" 366 TABLE 11-STATE INCOME TAXES COLLECTED, 1922 Amount (in thousands) Total $62,447 Delaware 295 Massachusetts 13,262 State 1,316 Incorporated places 11,936 Other Mississippi Missouri 2,568 New York 29,930 State 14,900 Incorporated places 13,434 Other 1,596 North Carolina 2,636 North Dakota j61 Oklahoma. 396 South Carolina Virginia 2,240 Wisconsin 9,736 State Counties 1,315 Incorporated places 4,318 Other 509 Source: t.J.S. Bureau of the Census, "Wealth, Debt, and Taxation, 1922, Taxes Collectad," pp. 146-47. 5. Impact on Section 5219.-The foregoing account is only a sketchy portrayal of the public revenue system of the period. Numerous taxes and related sources of revenue have not even been mentioned, but enough has been said to provide a basis for judging whether the State revenue pattern of the early 1920s had any impact on the 1923 amendment to section 5219. Since real estate taxation was common to every State the provision in 1923, and again in 1926, repeated word for word the provision originating in 1864. Bank real estate was, and is, taxed "as other real estate is taxed." The share tax option in the 1923 amendment was changed in the hope that low rates of taxation on individually-owned- intangibles would not invalidate taxes on national banks.23 In the Richmond case "other moneyed capital in the hands of individual citizens" taxed at substantially lower rates than national bank stock had made void the taxes on national banks in Virginia.24 Fears that other low-rate taxes might be similarly affected brought pressure from States for amend- ment of section 5219. In the writer's opinion, the effective force that induced Congress to act was a concern that States might suffer serious revenue losses and be compelled to refund taxes, rather than dire3t congressional interest in encouraging States to adopt and retain classified property taxes. Perhaps this is a distinction without a real difference. In any event, pressures from State officials were countered by bank organizations and attorneys who sought to yield as little as possible in descriptive words and phrases that would permit differential taxation of individual investments without invalidating taxes on national banks. The amendment of 1923, according to a subsequent 23 Congress intended to preserve classification: cf. Woosley, op. cit., pp. 55ff; Welch, op. cit., p. 43. 24 Discussed above at pp. 265-272 in this appendix. PAGENO="0387" 367 decision,. effected no substantive change-the decision in the Richmond case was simply written into the statute.25 The success of States that used classified property taxes, both in according greater justice to taxpayers and in providing substantially greater revenues from intangibles (although not enough to help solve emerging fiscal problems), was noted in the congressional discussions, but this had little to do with the 1923 amendment. The income tax option incorporated into the 1923 amendment was in recognition of the fact that several States, following the lead of Wisconsin, had become interested in adopting, so far as they could constitutionally, personal and corporate income taxes. The property tax was falling further into disrepute and was unable to reach directly the taxable capacity of many citizens. Individual income taxes were favored on the ability-to-pay principle; corporate income taxes alienated few voters. Both types of taxes had won substantial support. They combined much justice with high revenue potentials. Little was said about the income tax option on the floors of Congress during consideration of the amendments. The share tax held the center of the stage. Nor was much said about income taxes in the 1923 hearings. They came to attention in debates on the 1926 amend- ment. However, the committee bill provided for the income tax option and it took hold even without much express support from the States. The amendment did recognize what was going on in a growing number of important States. The limiting provision in the case of a net Income tax applied to national banking associations-that they shall not be taxed "higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon the net income of mercantile, manufacturing, and business corporations doing business within its limits"-corresponded with what States were attempting to do. They were trying to develop net income taxes applicable to corporations generally. Extension of net income taxes to banks would mean also-as later results demonstrated-that taxes based on net income were less than share taxes for national banks. There was no reason for banks to oppose this option or to slow the development of either personal taxes (which included bank dividends in the taxable income of shareholders) or corporate net income taxation. Unfortunately, the permission to include dividends in individual taxable income was vague, unsatisfactory, and unworkable. The amendment of 1923 provided that "In case dividends derived from the said shares are taxed, the tax shall not be at a greater rate than is assessed upon net income from other moneyed capital." This is about as unclear as the share tax proviso from which it was drawn. The consent that Congress may have tried to extend in granting the dividend option was cut back by this proviso. It remained for the 1926 amendment to clear this up. 25 First National Bank of Guthrie center v. Anderson, 269 13.5. 341 (1926), review above at pp. 286-287 in this appendix. The 1923 proviso which 5tate officials honed would overcome the Richmond decision read: "Provided, that bonds, notes, or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or investment business and representing merely personal invest- ments not made in competitition with such business shall not be deemed moneyed capital within the meaning of shis section." For complete text of 1923 amendment, see appendix i-c, above, p. 4. PAGENO="0388" 368 Nevertheless, it is believed that the, income tax option in the 1923 amendment of section 5219 was a response to the growing use of such taxes by the States. 6. Impact of State prw~tices on 1926 amendment.-What impact, if any, did'State tax practices have on the form or substance of the 1926 amendment? That amendment, as has been indicated,26 added a fourth option-a tax according to or measured by net income-under which States could tax national banks. In the three years between the 1923 and 1926 amendments, New Hampshire shifted from the general property tax method to a special-rate tax (1923), South Dakota adopted a low-rate tax (1923), and Kansas did likewise (1925). Kentucky adopted a special rate in 1924, and Vermont in 1925. Massachusetts pioneered in 1925 by adopting a privilege tax measured by net income, including income from Federal securities.27 This was the first time the privilege tax idea had been applied to national banks since the indirect method of reaching income from tax-exempt securities had been upheld in a case that involved the use of a tax base "measured by" net income from all sources under the Federal corporate income tax act of 1909.28 In 1926, New York adopted an income tax. The limited productivity of the direct net income tax, which could not reach income from tax-exempt securities, caused it to have little appeal to New York State officials. They much preferred to stick to the higher-yield share taxes which they thought could be continued under the 1923 amend- ment. However, New York wanted to expand the income approach applying the Massachusetts tactic, so under pressure from these two States and with leadership from them, an agreed amendment to section 5219 was adopted in 1926.~~ Other States sought to clarify the share tax provision in the 1923 amendment but were unable to overcome opposition from the national banks and their representa- tives.30 The excise tax option which was adopted constituted a far- reaching and attractive alternative for the States; also, it was a cheaper one than the share tax for the banks. Even though the 1926 amendment was an agreed proposal sponsored by committees from the National Tax Association and the American Bankers Association, it is believed that its form was influenced by the law in Massachusetts and the income tax plans of New York. Again State tax programs had influenced the authoriz~ttions in section 5219. D. State taxes in 1 968-1 969 In the fifty years following 1920, tremendous changes took place not only in the finances of governments and their functions but in the national economy and in the lives of citizens. Five major changes in the revenue systems of State and local governments are clear: (1) the introduction and expansion of sales and consumption taxation; 26 See above, this appendix. 27 Cf. Kimmel, op. cit., pp. 17, 45. 28 PUnt v. Stone Tracy Co.. 220 U.s. 107 (1911). 29 More fully discussed above at pp. 283-291 in this appendix. 30 Supra, pp. 284-303. PAGENO="0389" 369 (2) the extension and development of income taxes; (3) the increased reliance on intergovernmental revenue transfers; (4) the assumption of new functions or their financing (mainly public assistance and other relief measures) by State and Federal Governments; and (5) relegation of the property tax by States to local governments, followed by deterioration oI~ this tax as the primary source of revenue in urban areas. The first two changes directly affected State taxation of banks; at least two of the others affected the size of bank tax burdens. All these changes are part and parcel of the increased burdens of taxation on everyone, a development characteristic of the last 50 years. The background out of which these changes came is worth noting. The short post-war depression of 1920 was followed by a feverish period of speculation and prosperity. The productive capacity so important in World War I was again turned on for production of civilian goods and services. The nation was no longer primarily agricultural in its endeavors; it had become one of the industrial giants of the world. High production and profits helped feed the speculation of the late 1920s. In 1926, the Florida real-estate-specula- tion bubble burst, followed soon by the stock market collapse of 1929 and the depression of the 1930s. Bankruptcy, unemployment, and misery necessitated relief, welfare, public works (P.W.A.), works projects (W.P.A.), Reconstruction Finance Corporation, and other Federal programs, and finally brought about the Federal-State public assistance and Federal social security programs. Aid to the poor and the indigent, which had been almost exclusively a county or township function, had to be taken over by States with support and guidance from the Federal Government. Vast highway programs also were undertaken to stimulate business and provide employment, as well as to meet current needs of automotive travel. A new and higher level of intergovernmental transfer payments was the result. Hardly had these steps been taken or economic recovery begun, when World War II engulfed the nation. Armed conflict followed armed conflict into the Korean War and the Viet Nam engagement. Once it was "guns or butter," then followed an attempt to have both. Rising costs, inflation, and social discontent ensued. Governmental deficits to provide increased purchasing power during the 1930 de- pression were followed by deficits during war and postwar readjust- ments. The immense productivity of Federal income taxes led all levels of government to look to Washington for financial assistance in an ever-widening array of projects. PAGENO="0390" 370 TABLE 12.-TAX REVENUE, 1966-67 Amount . (millions of dollars) Percent All Federal State Local All Federal State Local Item govern- ments Govern- govern, ment ments govern- ments govern- ments Govern- ment govern- ments govern- ments Total taxes 176,362 115,121 31,926 29,315 100.0 100.0 100.0 100.0 Income 103, 559 95, 497 7, 136 926 58. 7 83. 0 22. 4 3. 2 Individual 67, 361 61, 526 4, 909 926 38. 2 53. 4 15. 4 3. 2 Corporation 36, 198 33, 971 2, 227 20. 5 29. 5 7. 0 Property 26,280 862 25,418 14.9 2.7 86.7 Sales, gross receipts, and customs 36, 360 15,806 18, 575 1,979 20. 6 13. 7 58. 2 6. 8 Customs duties 1, 901 1, 901 1. 1 1. 7 General sales and gross receipts 10, 143 8, 923 1, 220 5 8 27. 9 4. 2 Selective sales and gross receipts 24, 316 13,905 9, 652 759 13. 8 12. 1 30.2 2. 6 All other 10, 163 3, 818 5, 354 992 5. 8 3. 3 16. 8 3 4 Note: Because of rounding, detail may not add to totals. Leaders represent zero or rounds to zero. Source: U.S. Department of Commerce, Bureau of Census, "Governmental Finances in 1966-67," series GF 67, No. 3 (Washington, D.C., 1968), p. 5. Major tax sources of the several levels of governments are shown in table 12 for the year 1966-67. Whereas the property tax had once been the main support for American governments, that distinction now belonged to income taxes, with the individual income tax producing twice the yield of corporate income taxes. The aggregate of consump- tion taxes (grouped as sales, gross receipts, and customs) also exceeded the yield of property taxes. When revenues are examined separately for each level of government, it is seen that 83 percent of Federal revenues came from income taxes and 17 percent from other sources, of which sales taxes far outstripped the yield of customs duties. In the States, the property tax provided only negligible support for State governments. These depended on sales taxes for over 58 percent of all tax revenues in 1966-67. Income taxes provided more than a fifth of State revenues. Local governments, however, still drew almost 87 percent of their revenues from the property tax, with sales taxes the next largest contributor. All the revenues of the various governments, as has been indicated, did not come from their own sources, except for the Federal Govern- ment. As can be seen from table 13, States received more than $14 billion, or 23.4 precent, of their revenues through intergovernmental transfers, a large part of which were passed on to local governments. The States added some of their own revenues, so that transfers to local governments amounted to over $20 billion, or 32.2 percent, of their aggregate revenues from all sources. The primary functional beneficiaries of transfer payments between levels of government have been education, highways, and public welfare. Interesting and important as transfer payments have been, they have not directly affected the State and local taxation of banks, except as demands for funds have increased all tax contributions to public treasuries. PAGENO="0391" 371 TABLE 13--GOVERNMENTAL REVENUE, 1966-67 - Amount (millions of dollars) Percent All Federal State Local All Federal State govern- Govern- govern- govern- govern- Govern- govern- Item ments ment ments ments ments ment ments Local govern- ments Revenue from all sourceo 1253,125 161,351 61,082 65,377 100.0 100.0 100.0 Intergovernmental revenue. (1) 14,289 20,396 23.4 Revenue from own sources - - 253, 125 161, 351 46, 793 44,981 100. 0 100. 0 76. 6 General revenue f-ram own sources 206, 990 130, 869 37, 782 38, 340 81. 8 81. 1 61.9 Taxes 176,362 115,121 31,926 29,315 69.7 71.3 52.3 Charges and miscel- laneous general revenue 30,629 15,748 5,856 9,025 12.1 9.8 9.6 Currentcharges 21,117 10,602 4,197 6,318 8.3 6.6 6.9 All other 9, 512 5, 146 1, 659 2, 707 3. 8 3. 2 2. 7 Utility revenue 5,505 5,505 2.2 Liquorstores revenue.. 1,675 1,470 205 .7 2.4 Insurance trust revenue. 38, 955 30, 482 7, 541 932 15.4 18.9 12. 3 100.0 31.2 68.8 58. 6 44.8 13.8 9.7 4. 1 8.4 .3 1.4 1 Net of duplicative intergovernmental transactions. Note: Because of rounding, detail may not add to totals. Leaders represent zero or rounding to zero. Source: U.S. Department of Commerce, Bureau of Census, "Governmental Finances in 1966-67," series GF 67, No. 3 (Washington, D.C., 1968), p. 4. 1. Sales taxes-State general sales taxes were introduced in the depression of the 1930s. They provided many States with quick reve- nues to hell) pay costs of relief and public welfare. Property taxes proceed through a time-consuming process of assessment, levy and collection. Income taxes have to be estimated, declared, and collected, a process that consumes some weeks or months. By contrast, sales taxes can go into collection almost as soon as they are enacted with remittances beginning as early as the following month, if this is desired. In some States, too, the sales taxes were among the few types of new taxes which could be enacted without change in the State constitution. In general, these imposts applied to sales of tangible personal property at retail. In some instances, the tax applied legally to vendors, in others, to vendees. Regardless of the legal theories upon which they were enacted, the sales taxes immediately demonstrated their capacity to produce needed funds. The first State general sales tax was enacted in Mississippi in 1932. Thirteen states adopted similar taxes in 1933, and by 1938 the number had risen to 24. No other tax except the gasoline sales tax had spread as rapidly. In the decade from 1941 to 1950 five additional States adopted general sales taxes; and from 1951 through 1969, sixteen more were dcled to the list. In 1970, sales taxes were in force in 45 states, not counting the Delaware use tax on lessees of tangible personal prop- erty other than household furniture, fixtures, or furnishings which went into effect July 1, 1969. Such use taxes generally accompanied the general sales tax in order to l)revent loss of yields from out-of-state purchases. The spread of sales taxes through the nation is shown in table 14. PAGENO="0392" 372 TABLE 14.-YEAR OF ADOPTION OF STATE GENERAL SALES TAXES IN STATES THAT USED THE TAX JAN. 1, 1970 1931-40: Mississippi, 1932; Arizona, 1933; California, 1933; Illinois, 1933 Indiana, 11933; Iowa, 1933~ Michigan, 1933; New Mexico, 1933; North Carolina, 1933; Oklahoma, 1933; ~outh Dakota, 1933; Utah, 1~33; Washington, 1933; West Virginia, 1933; Missouri, 1934; Ohio, 1934; Arkansas, 1935; Colorado, 1935; Hawaii, 1935; North Dakota, 1935; Wyoming, 1935; Alabama, 1936; Kansas, 1937; Louisiana, 1938; total 24 1941-50: Connecticut, 1947; Maryland, 1947; Rhode Island, 1947; Tennessee, 1947; Florida, 1949; total 5 Since 1951: Georgia, 1951; Maine, 1951; South Carolina, 1951; Pennsylvania, 1953; Nevada, 1955; Kentucky, 1960; Texas, 1961; Wisconsin, 1961; Idaho, 1965 New York, 1965; Massachusetts, 1966; New Jersey, 1966; Virginia, 1966; Minnesota, 1967; Nebraska, 1967; Vermont, 1969; total 16 Grand total 2 45 1 Gross income tax; in 1963 Indiana enacted a 2 percent retail and use tax. 2 Excludes the Delaware use tax (effective July 1, 1969), on lessees of tangible personal property other than household furniture, fixtures, or furnishings. Source: Advisory Commission on Intergovernmental Relations, State and Local Finances: Significant Features: 1967 to 1970, Information report M-50, Washington, D.C., November, 1969, p. 60. Since these taxes applied to the sale (or purchase) of tangible personal property, they reached not only the transactions of individ- uals but those o~ corporations as well. It was natural, therefore, that the States would try to apply them to national banks. Banks were consumers of paper products, printing, ink, typewriter ribbons, office furniture, and the like. If individuals and others had to pay sales taxes, why not national banks? The answer was in section 5219. Sales taxes were not among the permitted taxes, nor were gasoline taxes, cigarette taxes, or liquor taxes, to name a few others. Massachusetts, among other States, applied its sales tax to national banks only to find from the Supreme Court decision in the case of First Agricultural National Bank of Berkshire County v. State Tax Commission that this could not be done.' The logic of extending retail sales taxes to national as well as other banks was so unassailable that many banks prior to 1968 paid the tax in many States without protest. The items covered were seldom large, so the tax oi dinarily was not a substantial burden. Nevertheless, it remained for P.L. 91-156 in 1969 to legalize sales and use taxes on national banks. 1 392 U.5. 3~9 (1968) ; see above, p. 333 in this appendix. PAGENO="0393" 10 Grand total_~ I Income from stocks and bonds only. 2 In effect applies only to New York residents who derive income from New Jersey sources. 3 Investment income only. 4 Exclusive of South Dakota tax applicable to financial institutions only. Source: Advisory Commission on Intergovernmental Relations, "State and Local Finances: Significant Features, 1967- 70," informatioa report M-50, Washington, D.C., November 1969, p. 59. 2. Extension of State income taxes.-Prior to 1922 ten states, ex- cluding Hawaii which had not yet been admitted to the Union, had individual and corporate income taxes. The two groups, however, were not identical, as may be seen from table 15. From 1922 through 1930, South Carolina, New Hampshire, Arkansas, Georgia, and Oregon adopted personal income taxes. During the same years cor- porate income taxes were enacted in South Carolina, Tennessee, Arkansas, California, Georgia, and Oregon. In the next 10 years, 16 States adopted individual income taxes, and 15 adopted corporate income taxes (with 13 States enacting both forms). In th~ next 10 years, from 1941 to 1950, Alaska with its personal and corporate income tax of 1949 and Rhode Island with its corporate tax joined the income tax group. In the 1950s, Delaware and New Jersey enacted co!porate income taxes; no States adopted the individual income tax. Pressure for funds in the 1960s brought personal income taxes to eight more States and corporate net income levies to six more States. Thus by 1970, personal income taxes were found in 41 States and cor- porate income taxes in 42. One reason the adoptions were slowed in later years was the application of uniformity provisions in State coPstitutions. Some State courts had held income to be property, thus outlawing all progressive income tax rates.2 Others would not permit specific flat rates because other property was not similarly taxed. However, by 1970 the State income taxes had become almost universal with hold-out States gradually coming in line as constitutions were changed or courts became convinced of their legality. 2 For example, Bachrach v. Nelson, 349111. 579, 182 N.E. 909 (1932). 373 TABLE 15.-DATES OF ADOPTION OFSTATE INCOME TAXES IN STATES THAT USED THE TAX JAN. 1,1970 INDIVIDUAL INCOME TAX Before 1911: Hawaii, 1901, total 1 1911-20: Wisconsin, 1911; Mississippi, 1912; Oklahoma, 1915; Massachusetts, 1916; Virginia, 1916; Delaware, 1917; Missouri, 1917; New York, 1919; North Dakota 1919 total 9 1921-30: North Carolina, 1921; South Carolina, 1922; New Hampshire,1 1923; Arkansas, 1929; Georgia, 1929; Oregon, 1930; total 6 1931-40: Idaho, 1931; Tennessee,1 1931; Utah, 1931; Vermont, 1931; Alabama, 1933; Arizona, 1933; Kansas, 1933; Minnesota, 1933; Montana, 1933; New Mexico, 1933; Iowa, 1934; Louisiana, 1934; California, 1935; Kentucky, 1936; Colorado, 1937; Maryland, 1937; total 16 Since 1941: Alaska, 1949; New Jersey,2 1961; West Virginia, 1961; Indiana, 1963; Michigan, 1967; Nebraska, 1967; Illinois, 1969; Maine, 1969; Rhode Island, 3 1969; total 9 Grand total 41 CORPORATION INCOME TAX4 Before 1911: Hawaii, 1901; total 1 1911-20: Wisconsin, 1911; Connecticut, 1915; Virginia, 1915; Missouri, 1917; Montana, 1917; New York, 1917; Massachu- setts, 1919; North Dakota, 1919; total 8 1921-30: Mississippi, 1921; North Carolina, 1921; South Carolina, 1922; Tennessee, 1923; Arkansas, 1929; California, 1929; Georgia, 1929; Oregon, 1929; total 8 1931-40: Idaho, 1931; Oklahoma, 1931; Utah, 1931; Vermont, 1931; Alabama, 1933; Arizona, 1933; Kansas, 1933; Minnesota, 1933; New Mexico, 1933; Iowa, 1934; Louisiana, 1934; Pennsylvania, 1935; Kentucky, 1936; Colorado, 1937; Maryland, 1937; total 15 Since 1941: Rhode Island, 1947; Alaska, 1949; Delaware, 1957; New Jersey, 1958; Indiana, 1963; Michigan, 1967; Nebraska, 1967; West Virginia, 1967; Illinois, 1969; Maine, 1969; total PAGENO="0394" 374 No matter how fast States worked to adopt new taxes, the demand for additional funds in the late 1960s outran their efforts. States with income taxes adopted sales taxes to supply needed revenues; States with only sales taxes adopted income taxes-and all asked for greater financial assistance from the Federal Government. By 1970, the dual use of income and sales taxes seemed to cover three-fourths of the country.3 3. Mortgage recording and transfer taxes.-Mortgage recording taxes, or real estate transfer taxes with broader coverage, received a great impetus for State adoption when the Federal transfer tax was abolished. No longer could States depend upon Federal revenue stamps for data with which to compute sales ratios for use in assessment and equalization of property taxes. If they were to secure such data con- veniently they had to enact their own taxes. On January 1, 1970, 37 States and the District of Columbia had such levies. Fourteen States enacted real estate transfer taxes in 1967; six States adopted them in 1968 and 1969. Kansas was the only State that had a mortgage record- lug tax in 1926 but did not have it, or its equivalent, in 1970. Most of the States which had this tax in 1926 have since reenacted it with wider coverage and changes in rates. Details of the real estate transfer taxes are shown in table 16. Although the primary objective was not neces~arily revenue, collections under the Florida documentary tax were substantial-over $35,256,000. In Pennsylvania the yield was $27,432,000; in Virginia, $7,469,000; and these taxes in Massachusetts, Minnesota, and South Carolina each produced over $2,000,000 per annum. In twenty-eight States the tax was collected by means of revenue stamps which indi- cated the true value of the property transferred. On most transfers the amount of the tax, or of stamps purchased, was not burdensome. 3 For maps showing (1) the extent of use of broad-based personal income taxes and (2) the use of both personal income and general sales taxes by States (December 31, 1969), see Advisory Commission on Inter- governmental Relations, State and Local Finances: Significant Features: 1967-1970, Information report M-50, Washington, D.C., Nov., 1969, p. ii. PAGENO="0395" TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970 State and government imposing et~'a~~d Alabama (State) 1935 Arizona (State) 1968 Arkansas (State) 1969 Ca(ifornia ()oca)(6 1967 Co)orado (State) 1967 Connecticut (State) 1967 De)aware (State and )oca)(8 1965 District of Co)umbia ))ocal( 1962 F)orida (State) 1931 Surtax on transfer of real estate, . 1967 Georgia (State) 1967 Hawaii (State) 1966 Illinois (State) 1967 Indiana (State)'1 1961 Iowa (State) 1965 Kentucky (State) 1968 Maine (State) 1967 Maryland (State and local)'2 1937 Additional State tax 1969 Massachusetts (State) 1951 Michigan (State) 1966 Minnesota (State) 1961 Nebraska (State) 1965 Nevada (State) 1967 New Hampshire (State) 1967 New Jersey (State) 1968 f.v. New York (State and local): State 1968 x.m. Local 19Su tm. North Carolina (State) 1967 x.m. f.v. . full State value; x. Rate Distribution collections Provision for m. exclusive 1/1/70 of receipts 19681 Use of recording full of assumed ($0001 stamps sales price2 mortages x.m. 50~/$5O0 State 2/3 1,607~ $2/document local fe. $150/$Soo' na. x.m. 55d/$500' local f.v. ld/$1007 local em. lOd/$1009 0 f.v. 5d/$1005 State f.v. 50d/$500' State 1/2 x.m. 2% State x.m. 55~/$500 State 50d/$500 local 55~/$500 State 9/10 --- X 55d/$500 local'3 774 0.5% State $1/$50O~ 14 State 2,638 X 55~/$500 local --- X $1.10/$5O0'~ State 2,093~ X 55d/$500 State 247 X 5Su/$500' State 95% --- X 10~/$100~ State 96 X 50d/$500' local --- X 55~/$500' State --- X 16 local 50d/$500 local --- X Provision for automatically transmitting sales price information3 X S X L X S X S,L Base Administrative features f.v. 55~/$500' local f.v. 1% State° f.v. 0.5% local x.m. 30d/$100 State x.m. 55d/$500 State X S,L X X X L X 1,910 X 1,523 35,256~ X X 266 X 1,166 X na. X na. X f.v. f.v. f.v. f.v. f.v. f.v. X X L S,'L L X See footnotes at end of table. PAGENO="0396" TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970 (Cont'd) . State and government imposing Year enacted Base tv.- full value; x. . m. - exclusive of assumed mortages Rate 1/1/70 . Distribution . of receipts State . collections I 1968 ($000) Administrative features Use of stamps . . Provision for . recording full 2 sales price . Provision for . automatically . transmitting * sales price . . 3 information Ohio local) 1967 f.v. iø~/$i0O'~ local --- --- --- --- Oklahoma (State) 1967 x.m. 55d/$5005 State 95% 354 X --- --- Pennsylvania (State and local)'t, . . 1951 f.v. 1% State'8 27,432 X X --- Rhode Island (State( 1967'° f.v. 55~/$5OO State --- X X --- South Carolina (State and local): . State 1923 f.v. $1/$5O0~ State 2,484k X X County 1967 tv. 55~/$5OO' local --- X --- --- South Dakota (State) 1968 x.m. 5O~/$500 local --- X --- --- Tennessee State) 1937 f.v. 26d/$100 State --- --- Vermont (State) 1967 f.v, 1/2 of 1% State --- --- X 5, L Virginia (State and local) State and local20 1922 f.v. 15~/$100 State2° 7,469k --.- State 1968 x.m. 50d/$500' State 1/2 --- --- --- -- Washington State and local)21. ,., 1935 f.v. 50i//$500 State2' 1,186 X X L West Virginia (State and local( State 1959 f,v. $1.10/$500 State 744 X X --~ County 1967 f.v. 5W/$500 local --- --- X --- Wisconsin (State) 1969 f,v, 1D~/$100' State 1/2 --- --- X S na. - Data not avaiiabie. Eociudes amounts collected and retained by locai governments. denotes Yes"; --- denotes "No." 3~ . "State agency"; L. "local assessor or simiiar local olliciai." 4lncludes documentary taxes other than reai estate transfer taoes. tTrensfers under $200 are eoempt. 6Counties, or a city and a county are authorized to impose a tao on reai estate transfers. Cities within a county which has aiready imposed the tan may ievy a tax of `A the rate with a credit being given against the county tax for the city tao. 7rranseers of $500 or less are exempt. CThe city of Wilmington else ievies a 1% realty transfer tao. PAGENO="0397" TABLE 16- STATE AND LOCAL REAL ESTATE TRANSFER TAXES, JANUARY 1, 1970 (Cont'd) 9Rate is SOd for the first $500. Transfers of $100 or less are exempt. 10D,stribuned in the same proportion that revenues derived from the tao imposed by the Act providing for the levy of naves on certain classes 0f intangible personal property approved December 27. 1937 (Ga L. 1937.3g, P. 1561 as now or may hereafter be amended, are divided. 1Tha tax is applicable only to corporations subject no gross income tax. t2The city of Baltimore and specified counties are authorized to supplement the State tao, at rates ranging from $1.1O/$500 no ii', percent of the actual consideration paid. `3Except that tax on recordation of instruments granting encumbrances os property situated in two or mom counties as security for corporate bonds of public utilities, are peid to the State. t4Plus an additional 14% surtax. ttRate is $2.20 on first $1,000. t6New York City imposes a tax of 0.5% on transfers of real property where the consideration exceeds $25,000. `7me rate shown is the statewide county rate. The minimum tax is $1, unith transfers under $100 exempt. An additional tax, not to exceed 30d on each $100 of value of real property, may also be levied by any county. t0Local governments are authorized to impose a real estate traesfer tax up to 1% and about 1,850, including mare than 1,000 school districts, have done so. 9Repealed and reenacted is 1968. 20Counties and cities levy a tax of 1/3 the State recordation tax 15d/$100l. 2tCounties are authorized to levy a 1% real estate sales tax; all 39 counties have done so. SOUCCE: Advisory Commission on Intergovernmental ReIations~ State and Local Finances: Significant Features, 1 967 to 1 970: On Information Report, No. M-50 (Washington, D.C., Nov., 1969)z pp. 135137. PAGENO="0398" 378 When such a tax was required of national banks in Florida, one bank contested the charge and succeeded in having the tax declared in- applicable because a mortgage registry or real estate transfer tax was not permitted under section 5219.~ One cannot help but wonder what would have happened if, instead of calling it a tax, the law had designated the charge as a "fee" -for "fees" are not taxes. But if the "fee" depended on the full value of the property transferred instead of the cost of service rendered, on the ground that it may cost more to record a transaction involving $1 million than $1 ,000, legal diffi- culties might still have ensued. Of course, if the transfer tax had been levied for the privilege of recorJing the deed or mortgage "measured by or according to the value of the property transferred," the courts would have faced other problems in legal classification. P.L. 91-156 cut through such uncertainties; the Federal statute no longer jeopar- dizes such taxes when imposed upon national banks. E. State bank tax legislation After adoption of the 1926 amendment of section 5219, Wisconsin the following year extended its income tax to banks, taxing them at the same rates as other corporations. Oregon followed the excise concept in 1929 adopting a privilege tax on or measured by net income. Utah also took this course in 1931. That same year Florida and Ohio adopted low-rate taxes on intangibles to which banks were subject, Oklahoma adopted a net income tax applicable to banks, and Vermont enacted a tax on dividends. In 1932, Alabama passed an excise tax on or measured by net income, while Washington selected the net income approach. In 1933, Idaho and Oklahoma adopted the excise "measured by" net income, Indiana and Iowa adopted low-rate taxes, Arizona a special rate, and Washington, a gross income tax. This shows what a number of States did in the years immediately following adoption of the 1926 amendment.5 A further recital of changes in bank taxes in subsequent years would serve no significant purpose; comparison of bank tax methods in each of three years is sufficient to show trends in legislation. These trends may be seen from table 17. The abandonment of general property taxes on shares has continued. Some States that continue to use the property tax have not been able constitutionally to abandon that system, but year-by-year more legislatures are being given authority to do so. The use of low-rate taxes, or specific taxes, as a means of taxing banks also has decreased. Their use, forced mainly by judicial decision, has provided the States with less than the desired revenue yields. 4 Dickinson v. First National Bank of Homestea~i, 393U.S. 409 (1069) .See above, p. 3361n this appendix. `This discussion of legislation during 1927-1933 is based on Kimmel op. cit., p.17 if. PAGENO="0399" 379 TABLE 17.-METHODS OF TAXING BANKS, 1934, 1958, 1969-70 Year- Method of taxation 1934 1 19582 1969-70~ Share taxes at general property rates 19 Low- and special-rate taxes on shares 18 13 14 4 9 10 Excise measured by net income 9 Netincome 19 1 15 11. Dividends taxed to shareholders 1 Gross income 1 Franchise tax based on gross income (District of Columbia) 1 1 (5) 1 1 Taken from Kimmel, op. cit., p. 22. 2 Helmberger, op. cit., pp. 33-36, 41-42. From tables infra in sec. Ill of this appendix. 4 Includes Montana, where banks are assessed at 30 percent. Pennsylvania applies tax of 1 percent of gross receipts to private bankers. The movement to adopt excise taxes also has continued. The numbers shown in the table for excises measured by net income and taxes on net income separately may be erroneous, but when added together they indicate a clear trend.6 The gross income method has continued to be the choice of Congress, unfettered by its own limitations in section 5219, for taxing banks in the District of Columbia. The simplicity of the method and its easy administration have not been disturbed since its adoption. Pennsylvania has employed gross income as a method for taxing private bankers, who also are not subject to section 5219. F. impact of State taxes on 1969 amendment What influence did the practices of the States in taxing national banks have upon Congress in the drafting of P.L. 91-156, the 1969 amendment of section 5219? The immediate cause of this amendment was the two decisions of theSupreme Court in 1968 and 1969-the first prohibiting appli- cation of State sales taxes to national banks, the other prohibiting a registry tax on a mortgage recorded by a national bank, both discussed earlier.7 In the interim amendment in P.L. 91-156, Congress added to section 5219 a provision permitting the application of such taxes to national banks on a nondiscriminatory basis. Details of the amendment are summarized in earlier pages.8 The temporary authorizations allowed States to use the sales and other taxes that they had been applying to their own banks and other taxpayers. They were also permitted to do something that had been prohibited since 1864, namely, to tax the tangible personal property of national banks, if State banks were so taxed. Most States had applied tangible property taxes to taxpayers since Colonial days. Some States, however, had refrained from taxing the personal property of State banks since they could not apply such taxes to national banks.° Congress had also withheld permission to tax bank-owned intangibles of national banks. For purposes of table 17, the test used to distinguish an "excise" from a direct net income tax ix whether the tax applies to income from all sources, even though the "direct net income tax" may be called in the State law an "excise" or a "privilege tax on or measured by net income." Regardless of title, if the State Tax Guide did not specifically state that the definition of taxable net income included income from Federal tax-exempt securities, or that such tax-exempt income was excluded from deductions from gross income, the tax is classified here as a net income tax rather than an excise tax. If time permitted a further search of the laws, some of the classifications in table 17 might be changed. 7 First Agricultural National Bank of Berkshire county v. State Tax Commission, 392 U.S. 339 (1968), and Dickinson v. First National Bank of Homestead, 393 U.S. 409 (1969). Cf. supra, p.336 in this appendix. 8 Cf. supra, pp. 337-339 in this appendix. Cf. First National Bank of Shreveport et iii. v. Louisiana Tax Commission et al, 289 U.S. 60 (1933). PAGENO="0400" 380 Finally, to follow the expiration of this temporary or interim period, December 31, 1971, Congress gave States full power to tax a national bank "as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." Congress had now come full circle, adopting a position that had been urged by a minority in Congress in 1864 and repeated often by State officials and some members of Congress ever since. III. THE IMPACT OF SECTION 5219 ON THE TAXATION OF NATIONAL BANKS A. The background From 1864 through 1971 the methods by which national banks could be taxed were limited by section 5219 of the Revised Statutes. The terms of the statute were vague and uncertain; their meaning was clarified only by continuous litigation. "One national bank after another has challenged every type of State tax utilized." Even so, doubts about the legality of many State taxes on national banks persisted until the amendment of 1969. 2 Whether that amendment has completely clarified the rights of States to tax national banks the future alone can tell. What constitutes discrimination against them may continue for some time to be a legal issue Nevertheless over the last century section 5219 has been moved, by successive amendments, from a narrow restriction on States to a wide- open grant in the "permanent amendment" for nondiscriminatory taxation based on equality of treatment between national and State banks. The rivalry and jealousy that once existed and called for Federal protection of national banking associations from the wrath of State legislatures no longer prevails; it was not a strong influence even when the regard for banks was at its lowest ebb during times of financial crisis and severe depression, or when interest rates were at their highest points. The whole issue of State taxation of these institutions must be viewed with a long hLstorical perspective. It is generally agreed that in 1864 national banks probably needed the protection from discriminatory taxation provided by section 5219. That need soon passed. It was completely removed with the creation of the Federal Reserve System. Though State banks were not com- pelled to join the System, as were national banks, they could join easily and quickly whenever they desired to take that step. At that time, too, the national banks lost their note-issue monopoly and save for a few minor differences in powers and supervision, it became difficult to tell the two classes of banks apart. State taxes upon State and national banks, however, often differ. Those differences usually are attributable to section 5219. ~ Over the years that section of the statutes has had very little effect on the general contours of State tax systems. These developed inde- I Helmberger, op. cit., p. 9. 2 Cf. ibid., p. 10. Woosley remarked in 1935, "The undisguised fact is that national banks cannot now be taxed with certainty and adequacy. They are, and for several years have been, a favored group in the tax system, actually in many States, potentially in other States." Woodey, op. cit., p. 127. 3 Cf. Welch, op. cit., p. .210; Gary, in Proceedings of the National Tax Association, 1921, P. 400. W. H. Blodgett, tax commissioner of Connecticut, remarked: "Time was when section 5219 was found to be neces- sary. It was necessary because of political conditions. Can we now with any assurance say that those political conditions will not recur ...?" Ibid., 1923, pp. 388-9. Welch, bc. cit., said: "The doubtful claim of national banks to the status of federal instrumentalities has led to criticisms of section 5219 as a serious infringement of States' rights. It Is contended that Congress is forcing upon the States constitutional amendments and radical revisions of tax systems simply by way of protecting a small minority of taxpayers who have neither the need for nor the right to such protection." PAGENO="0401" 381 pendently and tended to influence the enlargement of State tax powers over national banks as section 5219 came to be amended. What did happen was that in the taxation of national banks States had to conform to section 5219 and adapt their bank tax practices to it. This often meant that the terms of the Federal law controlled State policies toward their own chartered banks as well. Many States regarded it as unfair not to tax their own banks as they did national banks. Yet some States thought it unfair to other classes of other taxpayers to deal with State banks as they were forced to treat the national associations. So it was that the influence of section 5219 extended to the protection of banks other than those nationally organized. For better or worse, too, the impact of section 5219 was far heavier on ad valorem property taxes than on other forms of State bank taxation. During most years since 1864, only that type of State or local taxation was permitted. It was the prevailing State tax system not only in 1864 but even into the twentieth century. Reforms in the property tax, with the adoption of classification and low-rate taxes on intangibles, made it easy to allege that there was discrimination against national banks. The resulting court decisions forced States either to reduce bank taxes to the level of the low taxes on individually- owned intangibles or give up their classified property taxes. Litiga- tion and the amendment of section 5219 both followed. Coincident therewith came the development of other types of State taxes to meet the growing needs for revenues, some of them inapplicable to national banks because of section 5219. Some writers have concluded that this situation was tantamount to Federal control over State tax systems and programs. For example, Woosley, in 1935 came to this conclusion: ~ "TJntil the status of national bank taxation can be more definitely determined, the States cannot safely adopt schemes of classification without openly endangering the legality of their taxes on bank shares. Nor can they adopt the taxation of income from intangibles in lieu of ad valorem taxation without invalidating their share taxes on national banks. "Moreover, the employment of the income or franchise tax methods on national banks, as now authorized by Federal law, is so restricted as to compel the States to readjust their tax systems in essential respects in order to validate the franchise taxes on national banks. Thus, Congress, in its effort to protect the national banking system from potentially inimical taxation, has so circumscribed the methods of taxing these institutions that the States are in fact subj ect to a considerable degree of coercion in the construction of their entire tax structures." A more moderate view is at least equally plausible. It hardly seems that being forced to lower bank share taxes to the level of taxes on personal intangibles involves coercion as to the form of the entire tax structure even though reduction of national bank taxes constitutes a price few like to pay. Loss of revenues through reduced bank taxes is 4 Woosley, op. cit., pp. 7-8. Cf., also, F. B. Thomas of Vermont in Proceedings of the National Tax Asso- ciation, 1923, p. 377: "Now what is the effect of this law [section 5219 as amended in 1923] as it stands at this moment? A. State must adopt a system of taxation which conforms to the requirements of the Federal Coy- ment and must discri ninate against its own subjects of taxation and in favor of national banks. There is no other choice for It. Its system of taxation must be controlled by the Federal Government, and I think that is a very obnoxious feature of the present law,..." 79-421 0 - 72 - 26 PAGENO="0402" 382 painful, but it seems to the writer that the productivity of the rest of the tax system was not much affected. An observation by Helmberger appears more realistic if less dra- matic: ~ "Most State tax officials, many (if not most) State legislators, and many students of public finance consider these Federal restrictions on State and local taxation of national banks to be an infringement of the State's taxing powers and favor removal of such restrictions." He thought section 5219 should be revised to reduce its complexity and confusion.6 This, of course, is an aim of the "permanent amend- ment" in P. L. 9 1-156 of 1969. Even though the application of personal property taxes, especially taxes on intangibles, required special treatment for national banks, the successive amendments did gradually extend the methods by which States could tax these banks. The wait between extensions was long but the trend was clear. With the aborted amendment of 1923 and the further amendments of 1926 and 1969, Congress moved to enlarge the outer boundaries which it prescribed for State taxation of national banks. B. Evointion of per nission~s and restrictions. From the historical account in part I of this appendix, it is evident that the powers given States to tax national banks were extended and the restrictive conditions were elaborated in successive amendments until finally in 1969, all explicit restrictions were removed as of Jan- uary 1, 1972, save for a non-discrimination requirement. The provision for real estate taxation continued without substantive change from 1864 until 1969, when it was supplemented (though not significantly enlarged) by a provision of the "temporary amendment" relating to taxes on real property or its occupancy that might be ap- plicable to a national bank with its principal office outside the taxing State. The "permanent amendment" drops the specific reference to taxes on real property or other types of taxation. The share tax also continued from the beginning but became one of several exclusive options beginning with the 1923 amendment. The net income tax option which excluded income from tax-exempt securities from the tax base remained almost unchanged from the time of its introduction in 1923. The exclusion of tax-exempt income from the base of a direct tax on net income was incorporated into the law in 1926 and was not affected by the "temporary amendment" of 1969. But until 1926 a State could not tax the income of a national bank and also include dividends from such stock in the taxable income of individual owners. Under the 1923 amendment the taxation of net income to national banks precluded the taxation of such dividends to individual owners; so did the use of the share tax. After 1926 na- tional bank dividends could be included in the taxable income of individual owners if the State, in addition to personal income taxes, also imposed a general net income tax "on or according to or measured by" net income on financial and other corporations. The "temporary amendment" of 1969 did not change these provisions. Nor was there a change in the excise "according to or measured by" net income from all sources, which had been adopted in 1926. `Heimberger, op. cit., p. 5. Ibid., p. 137. PAGENO="0403" 383 The 1969 amendment contains three sets of provisions: (1) those permitting additional taxes on national banks having their principal offices in the taxing State; (2) those pertaining to national banks having their principal offices outside of the taxing State; and (3) the completely new section 5219 scheduled to take effect after January 1, 1972. The first two sections of these sets of provisions are of an interim character effective only until December 31, 1971, and subject to conditions specified in a "saving provision" in section 3 of P.L. 9 1-156. As to national banks with a principal office in the taxing State, the States are allowed a fifth alternative-they may tax national banks on a nondiscriminatory basis in the same manner and to the same extent as they tax State banks. This resembles the general provision that is to become effective in 1972. The 1969 provision relating to the taxation of national banks having their principal offices outside the jurisdiction of the State imposing the tax is a purely temporary arrangement. It is designed to permit the imposition of sales, use, and documentary (stamp) taxes. It carries permission also to tax tangible property, excluding cash or currency. The act of 1864 was silent on the taxation of shares owned by non- resident stockholders, save that it specified that nothing in the act should prevent "all the shares" of a national bank "held by any person or body corporate" from being included in the assessment of personal property "of such person or corporation. . . at the place where such bank is located, and not elsewhere..." The act of 1868 affirmed that the words, "place where the bank is located, and not elsewhere," in the 1864 act, meant "the State within which the bank is located," and that shares owned by non-residents of the State could be taxed only in the city or town where the bank is located, "and not elsewhere." 1 The amendment of 1923 specified that the legislature of each State "may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits." It directed that if a State taxed the shares or the net income of any national bank owned by nonresidents of the State, the situs of taxation was to be in the taxing district where th~bank was located and not elsewhere. The bank was required to report the income and pay the tax thereon as agent of the nonresident shareholders. The 1926 amendment separated the pro- visions relating to income tax from those relating to shares, so that the condition governing shares of nonresident owners was expressed as follows: "The shares of any national banking association owned by non- residents of any State shall be taxed by the taxing district or by the State where the association is located and not elsewhere; and such association shall make return of such shares and pay the tax thereon as agent of such nonresident shareholders".2 This provision was not affected by the "temporary amendment" of 1969. In the following paragraphs, the impacts of the major provisions of section 5219 during 1864-1969 will be considered. 1 For the full texts, cf. supra, appendix i-C, at p.4. 2 Paragraph 2 in section 5219 (12 USC 548); cf. supra, appendix 1-A, at p. 1. PAGENO="0404" 384 C. Taxation of national bank real estate The act of 1864 made it clear that nothing in that act exempted real estate owned by a national bank from taxation "to the same ex- tent, according to its value, as other real estate is taxed." From Colonial times real estate taxes had been the backbone of State and local revenues. Most governments had little else to tax and ~it was the one thing that was always visible to local assessors. That States and local governments had the right to tax real estate belonging to national banks never has been questioned. Even Justice Marshall in his opin- ion in McCulloch v. Maryland emphasized that the Court's judgment holding the Maryland tax on the Bank of the United States uncon- stitutional did not extend to a tax "paid by the real property of the bank, in common with the other real property in the State . . ." In any event, congressional consent to real estate taxation was ex- plicit in the act of 1864; whether it was necessary may be debated. Of course, under uniformity provisions in State Constitutions as- sessors could .no more put unequal and discriminatory assessments against national bank real estate than they could against any other class of property. But discrimination had tobe proved, and it had to be substantial. Mere differences of opinion over values would not suffice, nor would random sampling conducted by banks be adequate to prove discrimination if the data were not sufficient to convince non-statistical judges. At first mere allegations of discrimination were often accepted in lieu of proof, but after a time the judges began to call for adequate evidence of actual discrimination. Whether bank real estate was over- or underassessed relative to other property was a question of fact in each case that came up for trial. Sometimes bank real estate was over-assessed just because it was commercial property or because it was located in a central busi- ness district, as in Chicago, where it was valued at a higher percentage of sale value than outlying properties or than homes in areas where large numbers of voters lived. On the other hand, assessors might tend to curry favors with bankers or might have doubts about the value of bank property and therefore tend to assign relatively low values. There were many instances in which the true value of bank real estate was debatable. Sales to establish market values were not frequent. Some structures were designed only as bank premises with costly vaults and underground storage chambers. It was often argued that such premises were one-use structures of dubious market value. If a bank did not occupy them, no one else would put them to efficient use. Other bank-owned structures were multiple-use buildings in which bank floors generally occupied only a small portion of the usable or rentable space. Alternative uses for such premises were numerous, so whether bank buildings tended to be overassessed depended on the facts of particular cases. The requirement that national bank real estate was to be taxed as other real estate was taxed did not in itself assure uniformity of tax- ation. Many States could classify property for tax purposes. In these States, uniformity of treatment had to prevail only within classes of property, not between classes. In such States, apart from specific constitutional differentials or prohibitions, legislatures could adopt such classifications as were logical and reasonable but not arbitrary. 34 Wheat. 316 (1819), at p. 436, quoted more fully supra, at p. 346. PAGENO="0405" 385 Could the real estate of national banks be taxed as a separate class? Probably not, but treatment of property of financial institutions and associations as a class would be as logical as groupings of commercial, mercantile, manufacturing, or agricultural properties as classes to which different effective tax rates would be applied. The laws of Min- nesota, Kentucky, Montana, North Dakota, and Arizona contain such classifications, but none of these set out bank real estate (as distinct from bank shares) for discriminatory or differential taxation. This was not done in compliance with section 5219; it simply was not the policy of the States to classify along those lines. All States and the District of Columbia tax national banks on real estate. For many years, the State of Washington, because of con- stitutional prohibitions; could tax national banks only upon their real estate but taxed State banks on both real estate and tangible personal property.4 D. The optional taxes 1. The share tax.-Prior to 1923 the only taxes States could levy on national banks were those on "all the shares" and on bank real estate. Consent to levy these taxes was granted by the act of 1864, a year after enactment of the initial law establishing the system of national banking associations. By this time a number of States had begun to tax capital stock of banks and other corporations.5 in the early years, conforming to general property tax practices, national bank and other shares were taxable as personal property of the in- dividual owners. This meant that for a considerable period the only tax paid by the bank as a corporate entity was the tax upon its real estate1 usually only the bank premises.6 Even when the taxes on shares were returned and paid by the banks, the payments so made were regarded as a lien upon the stock and were deductible from future dividend payments. Neither the States nor Congress were ever very clear whether the share tax was a tax upon the bank or a tax upon individuals as shareholders. Even where the tax was assessed upon and paid by the bank, the shares were often assessed in the names of the shareholders. Regardless of the legal theory upon which the tax was levied, the share tax gradually became a tax upon the bank, and the payments were allowed as deductions from bank income in de- termining Federal income taxes.7 Where the banks paid the tax on the shares, individual owners did not have to list them with other items of property subject to taxation. Securities owned in many other corporations were supposed to be listed by and taxed to resident shareholders. These corporations generally did not pay such taxes for the shareholders, even as a condition to domg busmess m a State. And, until the adoption of requirements for giving mformation-at-the-source under income tax laws, corporations did not mform assessors or income tax officials of dividend payments made to shareholders. Thus, in the general property tax States, bank shares were m effect tax-exempt securities in the hands of the owners. Some States accorded similar exemptions to resident stockholders of domestic 4 Excise tax declared unconstitutional. Cf. Helmberger, op. cit., p. 30. `CI. Seligman, Essays in Taxation, 9th ed., pp. 151ff; Welch, op. cit., pp. 12ff. e Helmberger, op. cit., p. 20. `In 1870, Kentucky's law requiring the bank to pay the tax on shares was upheld by the U.S. Supreme Court. Soon other States adopted this practice. Helmberger, on. cit., p. 22. Cf. Welch, op. cit., p. 81. Assess- ment in the names of the shareholders is still the rule in Illinois and some other States. In 1934, practically all banks were paying the share tax (Welch, op. cit., pp. 21, 81). PAGENO="0406" 386 corporations, and a few, such as illinois, exempted resident owners of shares in foreign corporations from personal property taxes on shares if the foreign corporations paid property taxes in the State. in the case of national banks, section 5219 provided a further advantage to owners of national bank stock. If the State elected to tax national bank shares it could not concurrently tax shareholders on their bank dividends. Un- der the 1926 amendment, dividends could be included in the taxable in- come of the shareholder if the State had a general income tax applicable also to financial and other corporations and included dividends on their shares also in the taxable income of shareholders. To the extent that national banks charged share taxes against stockholders, this left national banks with only real estate taxes to pay during the years from 1864 until 1926, assuming that after 1923 the State did not select the direct tax on net income as an alternative to the share tax. But if the State did adopt the direct tax on net income, this reduced the level of taxes on national banks below what they had been paying under the share tax option. Since only a few States ever used the direct income tax alternative, the foregoing qualifications had little effect on the general situation. Even though the national banks had a lien upon their stocks or dividends for taxes paid on behalf of stockholders, explicit charging of the share tax to the stockholder was the exception rather than the rule. Assumption of the tax by the banks made national bank stock an investment preferred to other corporate securities in situations where profits and dividends might be assumed to be ap- proximately equal. Collection of share taxes from the bank was adopted in the early years to lessen tax avoidance and delinquency. The bank could always be found, whereas stockholders often could not be located or did not pay, or even resided in a taxing district other than the one in which the bank was located. Some shares might be the property of tax- exempt institutions. Efficiency in assessment and collection dictated levying the tax on the bank and collecting the tax from the bank. But even as late as 1934, Florida, Rhode Island, and Texas had not adopted this policy. A further step in improving the assessment of bank stock was to have it valued by the central tax administration of the State. In 1934 at least 10 States were doing this.8 The number of States using the share tax to tax national banks has declined over the years. Prior to 1923, 48 States had share taxes; in 1934 the number had declined to 37 States; in 1958, share taxes were used in 27 States, 14 of which employed flat rates rather than rates applying to general property. On January 1, 1970, 21 States still were imposing share taxes on national banks.'° Twelve States were using specific rates; four States required fractional assessments. These and other details are shown in table 18. 8 Cf. ibid., p. 105-106 and table IV, p. 83 (insert). Florida and Rhode Island assessed the tax in the district where the shareholder resided. At that time Delaware, Indiana, Michigan, and North Dakota provided for collection of the tax either from the bank or the shareholder. `Kimmel, op. cit., pp. 22; Heimberger. op. cit., no. 33-36. 10 counting Michigan where the share tax applied only to building and loan associations. PAGENO="0407" 387 TABLE 18.-BANK SHARE TAXES: 1969-70 State Description of law Arkansas Based on market value; assessed value of real estate deducted; general property tax rate. Applied to National, State banks, and trust companies. Delaware Based on true value; determined by total of capital, surplus undivided profits and reserves. Rate i~t of 1 percent of value. Appliod to National and State banks and trust companies. Florida Bank stock taxed at just value under intangible personal property tax, class B-rate 1 mill per dollar. Georgia Shares taxed at full market value, determined by total of capital, surplus and undivided profits, less assessed value of real estate; rate on national banks and computitors not to exceed 5 mills per dollar. Illinois Based on market value, equalized with other property, less assessed value of real estate within county. Rate, general property tax rate. Applies to all incorporated banks, National and State, and building and loan associations. Indiana Based ofl value of shares determined by total of capital, surplus and undivided profits, less assessed value of real estate. Rate 23/b mills per dollar. Applies to every bank, trust com- pany and industrial loan and investment company where located. Building and loan associations also pay annual franchise excise tax. Kentucky1 Based on financial value. Building and loan associations can deduct shares of borrowing members where borrowings exceed or equal amount paid in. Rates: State rate on banks and trust companies, 4.75 mills per dollar; county, city, and district may add 1.9 mills; school districts may add 3.8 mills. Savings and loan associations and production credit associations pay 10 cents per $100. Applies to State, National banks and trust companies, savings and loan and production credit comoanies. Louisiana Basis: Declared capital stock, surplus, undivided profits and capital reserves less (1) value of preferred stock owned by United States or agency thereof; (2) assessed value of real estate wherever located: (3) assessed value of real estate wherever located of wholly-owned subsidiary and all, or substantially all of real estate acquired for debt, or buildings in which are located the main or branch building of bank, or land on which situated. etc. Shares assessed at 50 percent reduced by 2 percent per taxable year beginning with 1967 until a 30 percent assessment ratio is reached for 1976 and there- after, except shares of Federal joint-stock land banks, organized under Farm Loan Act sf1916, which are assessed at 10 percent. Tax rate is general property levy. Applies to State and National banks and corporations engaged in banking business. Maine Basis: Assessed value of shares less proportionate part of assessed value of real estate, vaults and safety deposit plant. Rate 15 mills per dollar. Applies to domestic trust companies and banking institutions formed under laws of United States doing business in Maine. Michigan2 Applies only to savings and loan associations (banks subject to excise measured by net income). Basis: Savings liability or capital, legal reserve and any other loss reserves. Rate 1% mill per dollar. Mississippi Basis: Banks estimate net worth, deduct amount of capital invested in real estate, par value of preferred stock and debentures owned by RFC or other Government agencies and "earned surplus" to eetent allowed by bank equalization statute. Rate: General property tax rate. Applicable to banks and banking associations, and banks not corpo- rations or stock company. National banks pay tax as agants of stockholders. Montana Basis: True value of shares less real estate. State banks deduct value of real estate, moneyed capital and other property assessed and taxed. Value of building and loan association shares based on moneyed capital less (1) amount of bonds, notes and other evidences of debt (including those secured by mortgages), and (2) the amount of credit to members on books and debts for money borrowed for use as moneyed capital. Moneyed capital so ascertained shall be taxed at the same rate and take same classification as national bank shares or moneyed capital coming into substantial competition with national banks. Banks assessed at 30 percent of value. Rate: General property tax rate. Nebraska Basis: Actual value of capital stock, less real estate and other tangible property separately assessed. Assessed where principal place of business is located. Rate: 8 mills per dollar. Applies to banks, industrial loan and investment companies and trust companies. Nevada Basis: Full cash value or proportionate part of aggregate taxable capital. Aggregate taxable capital found by averaging amount of cash demand deposits, time deposits and total deposits for preceding year and subtracting appropriate cash reserve and excess cash. Capital equivalent of deposits determined by multiplying the difference by 9 percent. Aggregate capital then obtained by subtracting full cash value of real estate assessed to bank. Branch banks, having branches in more than one taxing district, are assessed proportionate parts of shares in such districts, determined by the ratio which total depos- its in each district buar to total deposits of such branch on last day of precedingye ar. Assessed at 35 percent of value (same as other property). Rate-general property tax rate. Applies to State and National banks. New Hampshire Basis: Par value of capital stock. Assessed at 1 percent. Rate: General property tax rate. Applies to capital stock of eational banks, except preferred stock issued under Fed- eral Emergency Banking Act of Mar. 9, 1933. Paid by bank for and on behalf of stock- holders. Tax is in lieu of all other taxes against national banks, their stockholders and depositors. National banks having savings departments. are taxed as to such depart- ments by excise tax. (All other banks and financial institutions taxed by excise tax.) New Jersey 3 Basis: Value of capital stock determined by adding amount of capital. surplus and undi- vided prolts and deducting therefrom assessed value of real estate equaiized for se- lected years, including assessed value of real estate of a wholly'owned corporation and aggregate par at retirement value of all classes of preferred stock and dividing result by number of shares of common stock outstanding. Preferred stock valued and taxed by classes. Rate: ~ percent of true value of stock. Applies to capital stock of State and National banks and domestic trust companies whose principal place of business is in New Jersey. See footnotes at end of table, p. 388. PAGENO="0408" 388 TABLE 18.-BANK SHARE TAXES: 1969-70-Continued State Description of law Ohio Basis: Book value of capital employed. Rate: 2 mills on dollar. Applies to all financial institutions, whether incorporated or not, and whether State or National banks, having a place of business in Ohio and engaged in the business of receiving deposits, lending money, buying or selling bullion, bills of exchange, notes, bonds, stock or other evidences of indebtedness with a view to profit. Pennsylvania Basis: Actual value of capital stock, Jan. 1 preceding year, determined by adding capital stock paid in, surplus and undivided profits and dividing amount by number of shares. Banks and trust companies, national banks, savings associations, mutual savings banks and building and loan associations may take annual credit of 50 percent of amounts invested in approved neighborhood assistance programs but not to exceed $175,000 a year. Rate: 13 mills per dollar share valuation of National and State banks or savings institutions and title insurance or trust companies. Share tax applicable to National and State banks, savings institutions, title insurance and trust companies. (Private bankers taxed at 1 percent of gross receipts. Mutual thrift institutions," building and loan as- sociations, savings and loan associations, and Federal savings and loan associations located in Pennsylvania taxed at 113~ percent of net earnings or income.) Tennessee Basis: Actual cash value of shares, Jan. 10, considering the rate and valuation of real and personal property made by same taxing authority, less the assessed value of real estate and personal property otherwise assessed. Where capital is not divided into shares, each $100 of invested capital is held to be 1 share and assessed as such. Rate: General property tax rate. Applies to stock of any bank, banking association, savings bank, loan company; investment company, cemetery company, or company or corporation doing business in Tennessee other than certain quasi-public, manufacturing and other corporations whose stock is taxed as personal property to stockholders. Texas Basis: Each share istaxed onlyfor difference between itsactual cash value and proportionate amount per share at which real estate is assessed. Rate: General property tax rate. Ap- plicable to shareholders in every State and National banking corporation doing business in Texas. Bank and shareholders required to report to assessor annually. Tax is lien on shares and bank cannot pay dividends to shareholders in default. Virginia Basis: Value of shares determined by adding capital, surplus and undivided profits less (1) assessed value of real estate owned by ban4c, or if used or occupied by bank, which is held in name of a bank holding company owning a majority of the capital stock of the bank and (2) proportionate sum of real estate taxes assessed against a subsidiary. Allocations to branch banks based on proportions of deposits in branch to total deposits of bank. Allocations method applies to banks in cities and branches in country outside city or town. Shares owned by tax exempt institutions not taxed. Rate 10 mills per dollar for State. Any city where bank is located, or town where branch of city bank is located may impose a tax of not to exceed 10 percent of State rate. Any town in which a bank is located, or town in which a branch of a country bank is located may impose a tax not to exceed 80 per- cent of State rate. The municipal tax may be credited against State tax. Assessments made by State commissioner of revenue. Applies to stockholders in any incorporated bank, banking association or trust company organized under laws of Virginia or United States doing business or having an office in Virginia or having a charter which designates its principal place of business in Virginia. West Virginia Basis: True or actual value of shares, less proportion of value attributable to real property upon which property taxes are paid. Rate: General property tax rate. Applicable to banking institutions, national banking associations and industrial loan companies. I Production credit associations included with savings and loan associations; shares made taxable at State rate of $1 per $1,000 of paid in capital. Effective July 18, 1970. 2 See excise tax, pp. 403-411, especially table 20. `New Jersey also imposes an excise tax based on net worth of all businesses which are in substantial competition with national banks and employ moneyed capital with object of profit. Tax is 13/i percent of allocated net worth, less deduc- tions, but not less than $25. Is in lieu of any franchise or local tax upon or measured by personal property entering into determination of net worth. Applies generally to industrial banks, dealers in commercial paper and acceptances, sales, finance, persona! finance, small loan and mortgage finance businesses. Does not apply to State and National banks, in- surance companies, security dealers and investment companies not employing moneyed capital in competition with national banks,credit unions, savings banks, building and loan associations, pawnbrokers, trust companies, production credit associations. Source: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov. 1, 1970). a. Value detern-tirtatjon.-Jjow has the value of bank shares been determined for assessment purposes? In 10 States the basis of valua- tion is actual, true, or market value of the shares, all of which seem to mean the same thing.1' Share values are stated to mean the value determined by the amount of capital, surplus, and undivided profits of banks in Indiana, Louisiana, New Jersey, and Virginia, although a few States that specify other standards, such as true value, use these accounts to determine the worth of shares. Ohio specifies "book value," which should mean the same thing. "Fair cash value" is the Kentucky standard; "full cash value" arrived at by an averaging process is 11 True or market value: Arkansas, Delaware, Georgia, Illinois, Montana, and West Virginia. Actual value: Nebraska, Pennsylvania, Tennessee, and Texas. PAGENO="0409" 389 required in Nevada. A "just value" is the Florida requirement. "Par value" is employed in New Hampshire, and assessed value in Maine. In arriving at the value to be used for assessment purposes, stated deductions from true values are allowed in certain States. These are considered below. Inasmuch as national banks have been required to publish periodic statements of assets, liabilities, and capital accounts, basic informa- tion has always been available to the local assessor who cared to use it.12 These were the basis for book values used in Ohio and for values determined in other States which took into account the aggregate of capital, surplus, and undivided profits. Delaware and Louisiana added reserves. Such assessments were fairly automatic, since the assessor had data for national banks that were neither furnished by most other taxpayers nor available as to their stocks or other prop- erty. The result was that assessments of national bank stock were complete and generally nearer the true value of property to be assessed than other property, tangible or intangible.13 Welch found that in 1930 bank and trust company stock seemed to be assessed at approximately full book value or more in 18 of 32 States.14 He pointed out that the shares were subject to central assessment in six of the 18 States and to low tax rates which were conducive to full listing in 10 of the 18 States. Assessments above 100 per cent were found in Connecticut, Iowa, Kentucky, Maryland, Nebraska, New Hampshire, North Dakota, South Dakota, and Virginia. This also meant that banks were probably paying more than their proper share of property taxes. Opinion is general that bank shares were assessed at more nearly true value than real estate and most personal property. While the property tax carried no dis- criminatory rates against banks or bank shares, all property being supposed to be assessed uniformly, the property tax in actual opera- tion apparently did discriminate against them in at least some juris- dictions. Whether this was so, and the degree of the discrimination, if any, could only be determined by exhaustive statistical analysis which has never been done. Presumptively the case seems conclusive. Of course, discrimination was not universal. In 6 States the ratio of assessments of shares to book values less the value of real estate was less than 50 percent in 1930.15 But under-assessment of all prop- erty was notorious, so that this did not necessarily mean the exten- sion of favors to banks. That could only be determined on the basis of an investigation such as the one mentioned above. 12 Welch made this interesting observation: "As for determining book values, disclosing hidden reserves, and the like, it is only necessary to reflect upon the fact that many bank directors are unable to read the balance sheet of their own bank to see the folly of expecting proper assessment from the underpaid, poorly equipped, politically-minded incumbents of so many assessors' offices." Op. cit., p. 104. 13 Woosley, op. cit., pp. 94, 105. During the debates on the 1923 amendment, Mr. Stevenson pointed this out and said real estate was assessed in some States and counties at 50 percent of value. 64 CR, p. H4790. Overassessment of bank stock was reported in an article from New York Evening Mail by Henry Hazlett, reprinted In 64 CR, p. H4789-90. 14 Welch, op. cit., pp. 102-03. 15 The ratios of assessments of bank share3 to book value of bank shares less value of real estate in 32 States in 1930 were as follows: Ratios: Number of State8 Over 100 percent 10 90-99.9 8 80-89.9 2 70-79.9 4 60-69.9 0 50-59.9 2 Under 50 percent 6 Welch op. cit., p. 102. PAGENO="0410" 390 There were also inequalities in assessments of individual banks, just as there were in assessments of all other types of property. Such results were characteristic of the general property tax.'6 Inclusion of surplus and undivided profits in the base for fixing the value of bank shares was often objected to because it might retard these accumulations so desired to increase the financial strength of individual banks. A bank with a large earned surplus or undivided profits account would be taxed more heavily than a bank without them. If they were not included in the tax base, stockholders would prefer that their banks earn a sizeable surplus instead of calling on them for larger capital contributions. At one time New Hampshire exempted both surplus and undivided profits; prior to 1927 Wyoming exempted 50 percent of surplus, and after that date all surplus. In 1932 the Tax Commission of North Dakota complained that some banks were reorganized to transfer capital to surplus so as to take advantage of the~ exemption of surplus, thereby reducing their tax burden.17 Such exemptions meant that the entire capital of the bank was not reached by the share tax and only part of the worth of shares was considered in determining the assessments.18 At present, none of the share taxes in force provides for deduction of surplus and undivided profits. b. Decluctions.-In the determination of assessed values for national bank shares, the laws of the States and decisions of the courts required certain deductions to be made in arriving at assessments. No deduc- tions, however, were required by section 5219 in the original act or any subsequent amendment.'9 In 1970, no deductions from the value of shares are allowed in five States-Delaware, Florida, Kentucky, New Hampshire and Ohio. The assessed value of real estate is de- ductible in Arkansas, Georgia, Indiana, and Texas.2° In New Jersey the assessed value of real estate equalized for selected years is deduct- ible. Illinois limits its deduction to the assessed value of real estate in the county in which the bank is situated.2' Proportionate parts are the rule for deductions in three States. Maine itemizes real estate, vaults, and safety deposit plant. Virginia allows a deduction of the assessed value of real estate and prorated portions of real estate assessments of bank holding companies or subsidiaries. West Virginia allows a deduction of proportionate values attributable to taxed real property. Louisiana includes in its deductions for assessment purposes the value of preferred stock owned by an agency of the Government, real estate wherever located, all or substantially all the real estate acquired for debt, and the main office and branch buildings with land occupied by these buildings. Mississippi deducts the value of preferred stock issued to the R.F.C. or other Government agencies and earned surplus to the extent allowed by the State's bank equaliz~ttion statute, as well as real estate. The value of real estate is deductible by national banks in Moutana; State banks get additional deductions. Nebraska and Tennessee deduct separately assessed personal property as well as real estate; the personal property deductions apply to other financial 1~ See 3en'en, op. cit; especially ch. XII; Leland, op. cit., ch I; Seligman, op. cit., pp. 45 if. and bibliog- raphy, pp. 63-65. 17 Welch, op. cit., pp. 89-90. 18 The inclusion of deposits is discussed below at p. 394. 19 Cf. Eleimberger, op. cit., p. 20. 25 Texas statement amounts to this: each share Is taxed only for the difference between its actual cash value and proportionate amount per share at which real estate is assessed. The text discussion is based on table 18. 21 Branch banks are prohibited in Illinois. PAGENO="0411" 391 institutions, since such property of national banks could not be taxed prior to the 1969 amendment. After arriving at the aggregate capital of each bank by an averaging process, Nevada allows a deduction of the cash value of real estate assessed to the bank. Pennsylvania, seeking to stimulate neighborhood assistance programs, allows a credit of half of the amount invested in such programs but not more than $175,000 a year. Permission to deduct the assessed value of real estate could easily mean that such assessments might completely wipe out the assess- ment upon bank shares. To prevent this the Arizona Tax Commission recommended in 1928 that the deduction be limited to the banking house. The Minnesota Tax Commission complained in the same year that over 100 banks in the State would pay no share tax because of these deductions and that half of the banks would pay only $250 or less.22 Where book values are used, the writing up of real estate on the books of the bank made a corresponding increase in the book value of bank capital, surplus, or undivided profits. Deductions had the oppo- site effect. For many years it was the practice of banks to carry their real estate at negligible amounts. However, during severe economic depressions when security losses were large, real estate accounts were often written up. The effects of such "write up" practices do not lend themselves to generalization because their effect depends on the facts of each case, the State law, the level of assessments of both real estate and stock, and the capital structure of the bank. Manipulation of these values might be profitable to some banks, of little value to others. Another tendency to be noted is where different tax rates prevail, one for real estate, another for bank shares. Usually the property tax rates on real estate were high; some States applied lower rates to shares. Where that was true it was to the advantage of the bank to keep its real estate assessments as low as possible so as to transfer as much of the aggiegate value as could be arranged to the shares.23 The extent to which this may have been done is unknown. Not all theoreti- cal possibilities are utilized, even by profit-conscious taxpayers. The reason for deducting the value of real estate and, in some in- stances, other assets in the process of valuing bank shares is by no means clear. It has been said that the purpose was to avoid double taxation or the indirect taxation of tax-exempt assets of the bank.24 To be sure, bank premises are taxed, and, depending on how they are carried on the balance sheet, are included in book values of stock whether these are arrived at by adding capital, surplus, undivided profits, and certain reserves or by substracting liabilities from assets. Certainly the market value of stock will include the value of real estate owned by the bank. The purchaser of all the stock of a bank would assuredly own the bank's real estate. Each share would include its ahquot part. The taxation of bank shares, however, is legally different from and does not rest on the taxation of bank assets.25 Even so, much bank property either is taxed (the real estate) or is representative of other property already taxed to another owner (as in the case of most intangibles). This argues for exemptions or 22 Welch, op. cit., pp. 94-5. 23 IbId., p. 93. 24 IbId., pp.90-91. 25 Cf. First National Bank of Gulfport, Miss., v. Adams, 255 U.S. 362 (1922). PAGENO="0412" 392 low preferential rates on shares.26 Section 5219 has not permitted taxa- tion of intangibles owned by national banks. Prior to 1864 when some States taxed banks on their capital, tax- exempt securities of the United States had to be deducted. A New York law denying such a deduction was declared unc jnstitutional about the time Congress was passing the act of 1864.27 That act, how- ever, did not require deduction of the value of tax-exempt securities from the value of bank shares, and section 5219 never has required deductions iii the determination of the value of "all of the shares." However, some States, such as North Carolina (1913), South Carolma (1922, 1931) and Michigan did permit such deductions from the value of shares.28 Most tax-exempt securities have been purchased with deposits rather than with capital, so that more than a proportionate deduction, if apy, was hardly logical. Full deduction, if allowed, would leave little in the way of stock values to tax. This was reported to have been the situation in New Jersey in 1922.29 This deduction has caused difficulty in some States. Heimberger reported that most States in practice allowed tax-exempt holdings to be deducted ~ Whatever the general practice, no such deductions are specified in the laws and regulations as reflected in the current digest of State bank tax laws in the Commerce Clearing House State Tax Guide. To the extent that the financial statements of banks are used in finding the value of shares, a figure determined by the deduction of selected liabilities from assets would seem appropriate for a proper determination. A further deduction of tax-exempt securities (one of the assets) from capital is not only illogical but incomprehensible.3' Too liberal deductions can easily wipe out share taxes.32 c. Tax rates on shares.-In the early years of section 5219, the States taxed bank shares at general property tax rates prevailing in the locality where the bank was situated. That practice still prevails in Arkansas, Illinois, Mississippi, Tennessee, Texas and West Virginia. Fractional assessments are required in Louisiana (to be 30% by 1976), Montana (30%), Nevada (35%), and New Hampshire (1%), but the property tax rate in the locality where the bank is situated is then applied. The effective rates in all these cases can only be determined after long and careful research as to true values and applicable local tax rates. This is also true where specific rates, most of them low, are used. These rates range from 1 miii in Florida to 15 mills (1 3~2%) in Maine and New Jersey; Delaware and Ohio tax banks at 2 mills on the dollar; Indiana at 23'~ mills; Georgia at 5; Nebraska at 8; and Pennsylvania at 13 mills. In Kentucky, the State rate is 4.75 mills 26 Cf. Welch, op. cit., p. 91, quoting a Senate report and a comment by Harley Lutz that distinguished bank shares from other intangibles on the ground that the other intangibles as a rule represent property which is already subject to substantial taxation, whereas a national bank share does not represent such fully taxed property. Welch commented: "The fallacy in this contention lies lathe assumption that the assets ought to be taxed. . . . We are forced to the conclusion that the taxation of bank stocks leads to a certain amount of double taxation and that the contention of the advocates of full valuation without deduction for any other asset than real estate is devoid of logic." 27 People ex rel. Bank of Commerce v. New York City, 2 Black 620 (1863). See also People ex rel. Bank of Commonwealth v. Commissioner, 2 Wall. 200 (1865). 2sWoosley, op. cit., p. 100. 20 Leser in Proceedings of the National Tax Association, 1922, p. 377. 0O Cf. Helmberger, op. cit., p. 101. Z1 This was Heimberger's characterization of such a computation. Ibid. Woosley (op. cit., p. 100) said, "Such deductions can hardly be defended on grounds of equitable taxation." 32 Welch, op. cit., p. 93. He observed that, despite this result, consistency seemed to require deductions for stocks, bonds, mortgages, and similar instruments in States where such property was exempt or taxed at low rates to other owners. "Even if deduction were limited to the stockholders' equity in such assets, exemp- tion would be practically complete. Yet logic would seem to require this course of any State which looks upon the tax on bank stock as a property tax." PAGENO="0413" 393 but county, city, and certain districts may add 1.9 mills and school districts may add 3.8 mills. In Virginia the State rate on bank shares is 10 mills, to which cities may add 1 mill; towns may add a tax of not to exceed 8 mills which may be credited against the State tax. Low rates seem to prevail but what is a "low rate" is open to -differences of opinion. However, as has been indicated, the adoption of low-rate taxes on individually owned intangibles, under Supreme Court decisions, required the application or extension of such rates to national banks. The impact of section 5219 in the field of share taxes was undoubted and far-reaching. Low or fiat rates on shares were advocated by the American Bankers Association and a few experts.33 They helped alleviate some of the woes of assessment practices; besides, such rates reduced bank taxes. The use of specific rates did raise the question whether one class of *corporations should be assessed at fiat (or low) rates while others were taxed at the higher variable local property tax rates.34 Did national banks deserve such favored tax treatment? Only because section 5219, as interpreted, required the same rate as other moneyed capital in competition with national banks. The force of the law, as has been indicated heretofore, caused States to lower their stated tax rates on national banks or otherwise to reduce their effective rates. The courts had to say in specific cases what the rate should be.35 d. Burden of share taxes.-So far as banks were concerned, they were more interested in the tax burdens imposed by share taxes than in other details of the State tax laws. They likewise were concerned with the tax burdens imposed on other competing moneyed capital. Under section 5219 that competition fixed the maximum rate that -could be applied to national bank shares, even if they had to go to court to secure their rights. Most of the low rates indicated above and in table 18 were forced upon reluctant States by the Richmond case and similar decisions. To protect themselves from such consequences, many States applied the bank tax rate to all corporations or individuals or to moneyed capital coming into competition with national banks.36 The share taxes at general property tax rates raised larger revenues for States and imposed higher taxes on banks than any of the altern~ atives permitted by section 5219. Even the reduced flat-rate taxes were not far behind. These conclusions rest upon comparisons based on net incomes, a base used by many but not preferred by all.3 Welch came to this conclusion: 38 this analysis [on the basis of net incomesj offers little, if any *proof of excessive taxation of national banks the country over. It is true, of course, that higher ratios in some States are offset by lower ratios in others, and it would be surprising indeed if the ratios of other corporations within such States varied in the same direction and degree. It is, nevertheless, difficult to escape the conclusion that the -share tax, which was almost universal in 1926 and is still far the most prevalent tax, has succeeded fairly well in imposing a proper tax burden upon banks, if we accept the premise that tax burdens are 33 Cf. Welch, op. cit., p. 97 and his note 51. 34 Ibid., p. 98. Welch preferred central assessment: 35 California adopted a flat rate of 1% in 1910, changed it to 1.2% (1915), 1.16 (1917), 1.45 (1921) and finally .abandoned share taxes in 1929. Welch, op. cit., p. 97. Cl. supra pp. 271-272, 284, in this appendix. 36 See, e.g., Montana, New Jersey, and Oflioin table 18, supra, pp. 387-388. 37 Heimberger, op. cit., pp. 70-71. 38 Welch, op. cit., p. 215, italics in original. PAGENO="0414" 394 properly measured by total net income. But this the writer is unable to do." Welch, however, did not construct an alternative comparative measure. He thought the share tax could be improved and should be completely dissociated from the general property tax out of which it grew and that it Should be recognized "as solely a business tax'0 with maximum rates of say 10 to 12 mills, related to but not to exceed the~ rates assessed against shares of other financial corporations.39 e. Inclusion of deposits.-Welch, like many other students of taxation, saw no reason why, if shares are taxed, deposits should not also be taxed on the same basis.4° Bank earnings, as a matter of fact, can be `attribtited more to the investment of deposits than to the investment of capital, surplus, and undivided profits. This can be seen on almost any bank balance sheet by comparing capital accounts with earning assets and investments. Historically, in individual banks the initial capital subscriptions usually w ere invested first m bank premises and the remamder m other assets The earning pow er of coimnercial banks comes essentially from the* profitable investment of deposits, even those created by loans. There is no more reason for not considering a substantial portion of deposits (total depOsits minus cash, for example) as capital of a ban-k than for not considering bonds in valuing railroads or other public utilities for taxation. Stock and bond valuations, as one, of several alternatives, `are in common use in the taxation of railroads in the United States. Here it was early recognized that proceeds of bonds were used to build and extend railroad properties. The con- tribution~ of bondholders was to capital just as surely as money raised from the sale of stock. To lithit railroad valuations to the total worth of shares of stock outstanding would have produced only a partial valuation of these companies. The parallel with bank deposits not only fits, but the argument is even more cogent for bank deposits. Railroad bonds represented savings or wealth (sometimes loans) transferred for reinvestment in railroad company assets. Bank deposits not only represent the savings and transfers of other people to the bank but also credit created by the bank for the use of borrowers which generally is deposited with the bank until withdrawn for other uses (consumption or investment). So long as banks can manufacture deposits and can invest deposits that exceed reserves necessary for required payments, only a part of a bank's real capital is taxed unless deposits also are taxed. In its amendments to section 5219~ Congress has paid little attention to this. Of course, when bank income is taxed, earnings from investments financed by deposits are taxed along with taxable income from other sources. f. Effects of share taxes.-It has already been indicated that the primary effect of share taxes on national- banks was to cause them to pay higher taxes than would have been paid had the States used the other options permitted by section 5219. These other options, how- ever, only became.available in 1923, whereas from 1864 to 1923 only share taxes were permitted, in addition to real property taxes. The rates of share taxes in comparison with other moneyed capital often were higher than section 5219 permitted but the bases utilized, de- ductions considered, were often less than section 5219 allowed.4' Nor ~ Ibid., p. 221. 40 Ibid., p. 217. 41 "The courts seem to overlook the latter, to say nothing of overlooking the comparison of a net worth tax with an assets tax in the first place," Heimberger, op. cit., p. 111. PAGENO="0415" 395 did the Federal law prohibit States from discriminating against national banks if they were willing also to discriminate against other moneyed capital.42 This price the States seldom were willing to pay~ Actually when they tried, but generally failed, to assess other in- tangibles in the hand of individuals (competitive with banks or not),. their national bank taxes often were invalidated.43 The result was- that they often were forced to discriminate in favor of banks, relative- to other businesses, if they wanted to collect the share taxes.44 Th~ uncertainty surrounding the meaning of "other moneyed capital in the hands *of individual citizens" and later of capital "coming into competition with the business of national banks" contributed to this. Banks had a built-in incentive to litigate; chances were good they could have present taxes declared void and future taxes reduced. They could also force the States to adopt lower rates, accept com- promises or, after 1923, adopt other permitted alternatives. Recently the volume of share tax litigation has declined. Many legal principles had been established, yet they could always be applied to new facts. Other alternative taxes had been provided and these promised lower taxes than the share tax. The banks over a consider- able part of the period could gain more by attending to the banking business than by contesting taxes.45 From the standpoint of banking operations, other than the weight of the tax relative to alternative tax methods, the share tax tended to produce adverse effects upon the capital structure of banks. Kimmel's statistical analysis, published in 1934, suggested that where shares were taxed at high rates, this was a factor-though. not a major factor-contributing to undercapitalization, and that small under- capitalized banks were more prone to failure than other banks. Woosley (1935) expressed doubts that taxes on national banks were of sufficient moment to reduce seriously the ratio of invested capital to deposits. Welch (1934) also doubted that State and local taxation was an important factor in determining dividend policies; he thought the abandonment of ad valorem taxes on bank surplus would ease the banking situation in some States, but only slightly.46 The States liked share taxes because of their relatively high yields, because they fitted into conventional patterns of taxation, and because often no other alternatives were permitted by section 5219 or their own constitutions. Prior to 1926, use of the share tax option prevented. the inclusion of national bank .dividends in taxable income of the shareholders, and after 1926 it prevented use of the net income tax against the banks-a restriction that was criticized by State officials and many tax scholars. The share tax, however, seems to be on its way out. Gradually it has been displaced by other options. 2. Net income taxes.-The first alternatives to the share tax were provided in the 1923 amendment of section 5219. They took two forms:: (1) inclusion of national bank dividends in the income of the several. stockholders, subject to the usual deductions in determining the tax- able net income of these individuals or companies; or (2) direct. taxa- tion of the net income of the bank. The act of 1923 said, "The several States may tax said shares, or include dividends derived therefrom in. 42 Ibid., p. 117. ~ Cf. Welch, op. cit., pp. 47-8. Failure to assess intangible property under the general property tax in- validated an Oregon tax; Brotherhood Cooperative National Bank v. Hurlburt, 21 Fed. 2d 85 (1927). ~ Heimberger, op. cit., pp. 146-7. 4~ Cf. ibid., pp. 111-12. 4' Kimmel, op. cit., pp. 109-32 (ch. vi); Woosley, op. cit., p. 108; Welch, op. cit., pp. 88-90. PAGENO="0416" 396 the taxable income of an owner or holder thereof, or tax the net income of such associations." But it made the imposition~of any one of these three forms of taxation "in lieu of all the others." This is why it is said that the 1923 amendment gave the States three options in taxing national banks. Since dividends were mentioned first, such taxes will be considered first. a. Dividends taxed to shareholders.-Wisconsiri in its income tax of 1911 and New York in 1919-the oneby statutory references, the other by a ruling of the Attorney General-had included bank dividends in the taxable income of shareholders. The Massachusetts selective income tax of 1919 had included them in its enumeration. This was also the practice in Missouri and Virginia. Legal difficulties immedi.. ately ensued, since dividends were not mentioned in section 5219 as it then stood.47 Then came the 1923 amendment giving States the right to tax dividends to recipients, but only if no other permitted alternative was utilized. But dividends so taxed could not be taxed "at a greater rate than is assessed upon net income from other moneyed capital." This effectively nullified the dividends tax. No State adopted the method between 1923 and 1926. It did not fit into any rational pattern for taxing net income. If a State, such as Wisconsin, desired to tax individuals on their total income, taxable capacity could be measured only if income of the individual from all sources was included in his taxable income. To earnings from labor would be added all income from corporations (dividends from stocks and interest from bonds). Only income from United States tax-exempt securities, by Court decision, had to be excluded. The State could include income from its own securities and those of its subdivisions and income from securities issued by other States and their municipalities. But the 1923 amendment decreed that even if a State income tax included dividends from other cor- porations in the taxable income of individuals, national bank dividends could not be similarly included if the bank itself was subject to income tax-though this might be the only tax on the national bank other than the tax on its real estate. Thus, where a State taxed national banks on net income, individu~als could invest in national bank stock to the point that if substantially all their income came from this source they would not have to pay a cent of individual income tax to the State. Smaller proportionate investments would be treated the same way. Yet an individual who owned stock in other corporations had to include dividends from those corporations in his taxable income regardless of whether or how the corporations were taxed. If perchance a State taxed national bank shares it could not include national bank dividends in the taxable income of those individuals to whom its income tax applied, even though the bank paid the share tax and did not collect it from shareholders. This prohibition lends support to the view that Congress did not know whether to regard the share tax as a tax on the bank or on the shareholder. Wisconsin made the mistake when it adopted its income tax of including national 47 01. Welch op. cit., pp. 39-40, 177. People ex rel Hanover National Bank v. Goldfogle, 118 Misc. Rep. 79 (1922), 202 App. Div. 712 (1922), 137 NE 611 (1922); and Goldfogle v. Hanover National Bank, 261 U.S. 620 (1923), denying review. PAGENO="0417" 397 bank dividends in the taxable income of the individual at the time it applied a share tax to the banks. This invalidated the share tax.48 The section 5219 dividend tax option of 1923 was not equitable, reasonable, or logical. It did not fit the tax pattern of the States or of the nation at the time. It is believed that this portion of the Federal law definitely dampened the enthusiasm of States for extension of State income taxes. The 1926 amendment of section 5219 greatly improved the position of the dividend tax. A State could then tax dividends to individual shareholders concurrently with a tax "on or according to or measured by" the net income of the national bank, provided the State also had a general corporation tax and also taxed individuals on their other corporate dividends.49 This applied to dividends paid by both domestic and foreign national banks and by other corporations, both domestic and foreign. However, if a State continued to tax national bank shares, whether for State constitutional reasons or by preference, it could not also tax national bank dividends to individuals stockholders. Of course, it could tax dividends to shareholders if the share tax was repealed. This policy was adopted because national banks opposed the share tax and hoped to induce the States either to adopt other options in section 5219 or to lower the share-tax rates. The only State to adopt the dividend tax in addition to a net in- come tax was Vermont in 1931. "But," said Welch, "no other State has been content with the meager revenues which it has promised." The restrictions in the Federal law did not apply to State banks. Many States taxed dividends paid by State banks.5° As a part of a personal net income tax, the 1926 dividend option in section 5219 has a place in every State income tax law. Bank dividends are personal income and should be included with all other taxable mcome. The provision is also simple to operate and easy to include within an income tax, provided the State's corporate income tax meets the requirements of section. 5219. It tends to encourage increases in surplus accounts; hence it needs to be supplemented by a tax on undistributed earnings. Indirectly and in modest fashion, it reaches income from tax-exempt securities as portions of such income find their way into bank dividends. But since only a portion of net income is paid out in dividends, the tax takes a much smaller portion of earnings than a net income tax-although highly progressive personal income tax rates may offset some of this difference. And since only a part of net earnings of any year are ordinarily distributed in dividends, the yield of a tax on dividends will fluctuate less widely than taxes directly on the net income of the bank.51 Section 5219 did nothing to promote adoption of taxes on dividends or make them attractive to the States. The practices and needs of the States, on the contrary, created pressures for bringing the dividend provision in section 5219 into line with sound income tax practices. The States, particularly New York and Massachusetts, won these changes in section 5219 in 1926. b. Direct net income tax on ban/cs-Taxes on the net income of national banks located in each State were permitted by the 1923 amendment of section 5219. The rate could "not be higher than the 48 First National Bank of Hartford, Wisc. v. City of Hartford, 273 tT.S. 548 (1927). 49 The requisite conditions are discussed in connection with these taxes in the pages that follow. For the text of the 1923 and 1926 amendments, see supra, appendix 1-A and 1-B at pp. 1 and 4. 9° Welch, op. cit., p. 177, and cf. his table XXI at pp. 178-9. 91 Cf. ibid., pp. 180-1. 79-421 0 - 72 - 27 PAGENO="0418" 398 rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon the net income of mercantile, manufacturing, and business corporations doing busi- ness" withm the State. Thus, the income tax on national banks was tied to rates upon financial and other corporations. The tax on national banks had to conform with rate policies applicable to general corpora- tions, not simply with rates on other financial institutions. National bank income, moreover, must be taxed in the jurisdiction where the bank is located "and not elsewhere". Wisconsin, the first and principal State having a net income tax applicable to persons and corporations generally, continued to tax national banks on a share-tax basis until the tax was invalidated in 1927. It then placed banks under the ~corporate net income tax. During the period 1911-26, Virginia, New York and Missouri also at times taxed national bank shareholders ~extra-legally on their dividends.52 The 1926 amendment made no substantive changes with respect to the direct net income tax on banks. The words and phrases were arranged differently but the requirements that rates be measured by those on financial, mercantile, manufacturing, and business corpora- tions were retained. The addition of variants in which the tax could be "according to or measured by the net income" did not affect the net income option except to reaffirm the exclusion of income from tax-exempt securities from the base for the tax "on" net income. Only a tax "according to or measured by" the net income of the bank could include "the entire net income received from all sources." This is the clue to the low revenue yields of direct net income taxes on national banks, to their lack of attractiveness to States, and to their slow rate of adoption. In 1928 and 1929 the income tax on banks in Wisconsin produced less than a half million dollars per annum, about one-fifth as much as the share taxes imposed in 1926.~ As discouraging as were the low yields of the tax as applied to banks, and as attractive as it was when applied tO corporations generally, m~tny States could not adopt income taxes because of State constitu- tional prohibitions. The main objection to direct net income taxes on national banks was that income from tax-exempt Federal securities could not be taxed. Such income was often a substantial portion of national bank receipts, particularly during war time when the banks underwrote the financing of wars. Some banks, however, often had little income left after the exclusion of income from tax-exempt Federal securities. Such exemptions were estimated in 1923 to reduce the tax liabilities of 652 New York banks and trust companies by 40 to 45 percent.54 Any bank that wanted to reduce its income tax could do so by investing in tax-exempt securities. States were not required to exempt income from their own securities or those of their subdivisions or the securities of other States, but most of them did. Where tax-exempt income greatly reduced national bank taxes, about all that was left for the States to tax was real estate.55 52 Woosley, op. cit., p. 80. Laws of Wisconsin, 1927, ch. 396; Wisconsin share tax invalidated in FirstNational Bank of Hartford v. Hartford, 273 U.S. 548 (1927). Helmberger, op. cit., p. 27. 53 Woosley, op. cit., p. 81. ~ This estimate, by the New York Tax Commission, covered obilgatlons of the United States and its possessions and securities issued under the Farm Loan Act. Exclusion of all Federal non-taxable income would have reduced the New York taxes by 60 to 65 percent. Welch, op. cit., p. 156. 551n spite of the effect on State tax revenues, an implied restriction in the Wisconsin constitution prevented that State from adopting an excise under which the tax WoUld be based on income from all soutces. Helm- berger, op. cit., p. 148. PAGENO="0419" 399 The status of State net income taxes on banks in 1969-70 is shown in table 19. Some States listed as having taxes "on" net income may be in- correctly included in table 19. Unless it was clear from the description *of the law in the Commerce Clearing House State Tax Guide that income from all sources was included in the tax base, the tax was considered to be a direct net income tax. The dividing line between (1) the direct tax and (2) an excise, franchise, or privilege tax "ac- cording to or measured by" net income is whether income from all sources might be included in the tax base. If it is included, the tax is listed in table 20, State taxes according to or measured by net income. If all income could not be taxed, the State is listed in table 19.56 Flat rates are found in all except two of the 12 States listed in table 19. In Arizona and Wisconsin progressive tax rates based on the amount of taxable income are, in effect. Alabama, to make sure that its tax does not violate section 5219, applies the tax to any other institutions or persons coming into competition with banks.57 The theory behind the general income taxes, such as the one in Wis- ~onsin, is that in addition to property taxes, individuals and businesses should contribute to the support of government on the basis of their net incomes. This assures a higher effective total tax on those with funded incomes (returns from property) than on recipient~ of unfunded (labor) incomes, thus conforming roughly to notions of ability to pay. Progressive rates, according to some, add further conformity to this theory although there is considerable difference of opihion as to what is a proper base for progression as applied to corporate income and business taxes. Or even whether progression is proper, except for individuals. 56 [Editor's vote. See also at pp. 406-408, below, table 20A, a supplemental table showing the treatment of Interest received on governmental obligations in State or local taxes measured by net or gross income of - ~sommercial banks.] ~ The income tax in Arizona, Colorado, Hawaii, Tennessee, and Wisconsin applies to all corporations doing business in the State. Maryland applies the tax to all banks and financial corporations; South Carolina law applies to all financial corporations except credit unions and new associations in the first three years of operation; Vermont applies the tax to banks, savings banks and institutions, trust companies, savings and loan and building and loan associations that have a business location in vermont. The Connecticut law applied only to savings banks. PAGENO="0420" 400 TABLE 19.---STATE NET INCOME TAXES ON BANKS: 1969-70 State Description of law Alabama Basis: Net income. Rate 6 percent of net income. Applies to national banking associations, banking associations, trust companies, industrial and other loan companies, building and loan associations, and any other institutions or persons coming into competition with banks. Arizona 1 Basis: Net income. Rate: Progressive on taxable income, 2 percent to 8 percent, as all domestic and foreign corporations. All banks, investment companies and savings and loan associations, including Federal savings and loan associations subject to all taxes: levied on a nondiscriminatory basis throughout State or any political subdivision to same extent as other corporations. Applies to all corporations. Colorado Basis: Net income. Includes interest income on State obligatians other than those of Colo- rado. Deductions include income from U.S. obligations and those of U.S. instrumentalities: to extent included in Federal adjusted gross income but exempt from State income taxes under U.S. law. Rate: 5 percent. Applies to all corporations. Connecticut Basis: Amount of interest or dividends credited to savings accounts of depositors or shareholders. Rate: 8 percent, Jan. 1, 1969 and prior to Jan. 1, 1971 or 4 mills (Jan. 1, 1969 to Jan. 1,1971) per dollar of average parorface value of indebtedness olus average value of issued and outstanding stock plus average value of surplus reserves and undivided profits less average value of deficits on private stockholdings, whichever is larger. Minimum tax $45 on and after Jan. 1, 1969 and prior to Jan. 1, 1971, except for State banks and trust companies, national banks, mutual savings, savings and loan associations and building and loan associations on which minimum tax is 3.2 percent of interest or dividends credited to accounts of depositors or shareholders. Applies to all savings banks and associations. HawaiL_...-_ Basis: Entire net income as defined under corporate income tax law. Includes income from State securities other than Hawaii. No mention of inclusion of income from United States or instrumentality securities. Rate: 1.7 percent. Applies to all banks, State and National, building and loan associations, industrial loan companies, and financial: corporations and all corporations doing business in Hawaii. Mar land..~~ ~._.. ~ Basis: Allocable net earnings, including taxes paid to Maryland and other States. Rate: 7 percent of allocable earnings of commercial banks, safe deposit and trust companies~ and finance corporations. Rate on savings banks and associations is 3% of 1 percent of annual earnings in excess of $100,000. Credit is rllowed against basic corporation net income tax rate for State personal property taxes payable after July 1, 1968. Applies to commercial banks, safe deposit and trust companies, and finance corporations. South Carolina .._ Basis: Net income in State, or from sales or rentals of property within State. Rate: 43~2 percent of net income. (Income of building and loan and savings and loan associations, 8 percent). In lieu of all other taxes on banks except taxes on real property. Applies to every bank, including State and National, engaged in business in State. Also covers building and loan associations, savings and loan associations, Federal savings and loan associations located or doing business I n State, except credit unions and new associa- tions in first 3 years of operations. Tennessee Basis: Net allocable income with no allowance for Federal income or excess profits taxes. Income from bonds or other such obligations of State, its instrumentalities and political subdivisions not included in net income. Appears not to include income from Federat securities though called an "excise tax." Rate: 5 percent of net earnings. (No in-lieu statement.) Applies to State and National banks, organized or doing business in State, and other corporations and cooperatives conducted for profit, joint stock associations, and business trusts (Laws 1970, ch. 446). Utah Basis: Net income allocable to State. Rate: On national banks, 6 percent net income or 1/20 of 1 percent of fair value of taxpayer's tangible property in Utah, whichever is greater, but not less than $25. (Alternative on fair value of propetty began Jan. 1, 1969. Minimum tax increased then from $10 to $25.) On State banks (called franchise tax), 6 percent with minimum of $25. (Laws of 1969, ch. 183). Vermont Basis: Net allocable income earned or received by taxable corporations, as determined under Federal law reduced by amount of direct corporate income tax payable by the banking or loan corporation or loan association under laws 1969 §15832, 5836. Rate: 6 percent (Laws 1969 §5832). Applies to banks, savings banks, savings institutions, trust companies and savings and loan and building and loan associations that have a business location in Vermont. Wisconsin Basis: Net income i.e. gross income less allowable deductions. Rates: 1st $10002 percent; 2d $1,000, 23~ percent; 3d $1,000, 3 percent; 4th $1,000, 4 percent; 5th $1,000, 5 percent; 6th $1,000, 6 percent; excesa over $6,000, 7 percent. Applies to all foreign and domestic corporations doing business in Wisconsin. 1 Excise tax repealed, May 18, 1970, effective Jan. 1, 1970. 2 Excise tax repealed as of Mar. 16, 1970. Source: Compiled from Commerce Clearing House, Inc., State Tax Guide( Nov. 1, 1970). Ability to pay relates to persons, not corporations. Except under selective income taxes, such as in Massachusetts, distinctions ordinar-. ily are not made among the various types or classes of taxpayers subject to a given income tax law. Thus, no differences of tax treat- ment are accorded to State or national banks or to mercantile, manu- facturing, or business corporations. Uniformity is the rule. PAGENO="0421" 401 Although various other businesses are not homogeneous, State and national banks at the present time are so nearly alike it is hard to distinguish between them. Since the currency issuance function of national banks was taken over by the Federal Reserve System, the maj or feature distinguishing them over the years has disappeared. The slight differences in powers have been gradually eroded, and variations in supervision appear to be minimal, particularly since State banks have become members of the Federal Reserve System in large numbers and nearly all have embraced the protection of the Federal Deposit Insurance Corporation. The remaining differences do not furnish a basis for differential tax treatment. State and national banks are usually taxed the same under the various State net income tax laws. Savings banks, building and loan associations, credit unions and the like are often distinguished from other financial corporations and accorded different tax treatment. They have seldom been considered "other moneyed capital" competing with national banks. The requirement that national banks shall be taxed no higher than mercantile, manufacturing, and business corporations pays little heed to the generic differences between banks and these corporations. Only banks can crea te deposits out of which they earn income. Tax-exempt income plays a larger role in bank income than in other corporations, so that its exclusion from taxable income gives banks a great advantage over other corporations. Some students of bank taxation think banks, because of differences from other corporations, need to be taxed at higher nominal rates if equality is to be attained.58 The direct net income tax option under section 5219 never has been popular with State. officials. The exclusion of income from Federal securities, which reduced the yield of the tax, was the primary diffi- culty. The excise tax which could reach exempt income has gradually replaced the net income tax. 3. Tax measured by all income (Excise tax) .-Permission for States to impose upon national banks a tax "according to or measured by" their net income was granted in the 1926 amendment. They were authorized specifically to "include the entire net income received from all sources." As in the case of the direct tax "on" net income, "the rate shall not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corpora- tions doing business" within the limits of the taxing State. This provided the widest possible base for the tax-income from all sources-and limited the applicable rate to that used on other finan- cial and general corporations. The same conditions applied to inclu- sion of national bank dividends in the taxable income of individual stockholders. The States using the formula of "according to or measured by" net income generally enacted the tax as a privilege or franchise tax for the privilege of doing business in the State. It was also called an "excise" for the same purpose. Thus, the tax in legal contemplation was not a tax on income directly but upon one of the vague privileges conferred by the State, the value of which could be measured by something else. In this case it was measured by total income from all sources including income from Federal tax-exempt securities.59 5S Heimberger, op. cit., pp. 155, 160-61; Woosley, op. cit., pp. 85-90; and cf. Welch, op. cit., pp. 61-2, 218-20. `9 For the earlier history of this tax, cf, supra, pp. 285-291 an~1 325-332 in this appendix. PAGENO="0422" 402 Following the lead of Massachusetts in 1925, other States adopted this approach: New York (1926), California (1929), Washington (1929), Oregon (1929), Utah (1931), Alabama (1933), Idaho (1933), Oklahoma (1933) ~60 By 1970 the excise "measured by" net income was in effect in 15 States, as is shown in table 20. Two States, New York and Kansas, allow supplementary local levies of the type used by the State. New York City can impose its own supplement or excise; Kansas permits city and county supplemental taxes a dministered by the State Department of Revenue. The tax rates specified in the laws range from 2 percent in Alaska and the counties and cities in Kansas to 13.09 percent in Minnesota.. California and Massachusetts have the rate determined by State- boards so that the rates can take account of the various taxes that apply to corporations other than banks. These "equivalent" rates are determined annually and may be fixed without endangering the constitutionality of the whole law and without violating section 5219. New York has an alternate minimum tax; Rhode Island has a choice of taxes. Six states and New York City specify minimum taxes ranging from $100 to $10. Permissible deductions vary from State to State and so does the coverage of the laws. in Alaska and Minnesota, only State and national banks are covered by the excise. North Dakota. adds trust companies, Oklahoma adds credit unions, North Carolina adds business development companies, Oregon adds financial and other corporations. The Michigan and New Mexico laws. cover financial institutions, with a fairly complete enumeration. California omits no business; its law covers all corporations doing business in the State. Other variations are shown in table 20. The in-lieu features vary. The most common provision is that the excise shall be in lieu of all taxes except those on real estate. This is the law in California, North Dakota, Oregon, and South Dakota. Sales and use taxes are included in Michigan. Minnesota's in-lieu provision includes all taxes on capital, surplus, assets, and shares except real estate. Missouri's tax is in lieu of taxes on bank shares. and personal property, neither of which could be taxed under section 5219, the one because the excise option was being utilized, the other because it was not permitted. Of like character is the in-lieu provision in North Carolina, which includes tangible and intangible personal property, franchise, income and share taxes. ~` Woosley op. cIt., pp. 74-75; Kimmel, op. cit., pp. 45-56. PAGENO="0423" 403 TABLE 20--STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES): 1969-70 State Description of law Alaska Basis: Net income means taxable income before deduction of net operating loss and official deductions but including income from Federal, State, or municipal obligations. Rate: 2 percent. Applies to national and State banks and trust companies. Does not apply to building and loan associations. California Basis: According to or measured by net income allocable to California for previous year. Income from sources within State includes income from tangible and intangible property within State or having situs within State and income from any activities carried on in State regardless of whether carried on in intrastate, interstate, or foreign commerce. Doing business means actively engaging in any transaction for purpose of finsncial or pecuniary gain or profit. Rate: maximum rate is 11' percent; 7 percent computed for first installment. Final rate determined annually by franchise tax board. Final payment is difference between this rate and 7 percent. Financial corporations, other than banks, allowed to offset personal property taxes, license fees, and excise taxes so long as offsets do not reduce tax below 7 percent or minimum tax of $100. Offsets can by carried over up to 4 years. State banks and financial corporations competing with banks pay for privilege of exercising corporate franchises within State. National banks pay excise above described. These taxes are in lieu of all other taxes except real estate for StatO and national banks. Applies to all corporations doing business in State. Hawaii (See table 19. Often called an excise tax) Kansas `(State) Basis: Net income including income from U.S. Government and municipal securities to extent deducted in arriving at Kansas taxable income, less interest paid on withdrawable shares of savings and loan associations to extent not deducted in arrivisg at Kansas taxable income. Rate: 5 percent. Applies to national banks, other banks, trust companies, and savings and loan associations located or doing business in Kansas. (City and county Any city or county imposing an earnings tax on corporate or individual incomes must rn- taxes). pose a 2-percent privilege tax according to or measured by net income, as defined in State tax, above, of banks, trust companies and savings and loan associations. Adminis- tered by State department of revenue. Expires Dec. 31, 1972. (As of May 26, 1970, no county or city privilege taxes had been imposed.) Massachusetts 2 Basis: On banks, gross income from all sources less deductions allowed by Federal Re'nnu e Act for the year, other than losses in other fiscal years and other than dividends. Tax on savings banks measured by net operating income, i.e., gross income from all sources less (1) operating expenses, (2) Federal and State taxes, (3) net losses on assets and (4) minimum additions to guaranty fund or surplus required by law. Ratss: Tax rate on net income of banks determined annually by State commissioner of taxation and corporations. Maximum rate is 11.4 percent (Laws 1969, ch. 546). Rate on savings banks is 1 percent annually. In lieu of corporate excise (income) tax. Applies to banks, banking associations and trust companies, including cooperative banks organized under Farm Credit Act of 1933 doing business in Massachusetts. Tax on savings banks applies to all including cooperative banks, Massachusetts Hospital Life Insurance Co., and State and Federal savings and loan associations. Michigan Basis: Federal taxable income, as defined in §63 Internal Revenue Code, except no add back for losses from sale or exchange of Federal obligations and no deduction for income from Federal securities or their sale or exchange. Rate: 7 percent of taxable income. In lieu of all State and local taxes except realty, sales, use and similar excises, examination and credit fees and taxes on certain savings and loan associations. Applies to financial I nstitutions, i.e., banks, trust companies, building and loan or savings and loan associa- tions, or industrialbanks. Minnesota Basis: Gross income less deductions excluding property consisting of bonds, stock, notes, mortgages, debentures, certificates or any evidence of indebtedness or property held for investment or sale which shall not be deemed to be capital assets. Additional deduc- tion allowed for dividends paid to United States or instrumentalities exempt from Fed- eral income tax on preferred stock owned by them. Rate: 10.5 percent (Dec. 31, 1966 to Jan. 1, 1972) plus additional rate of 1.9 percent (Dec. 31, 1958 to Jan. 1, 1972). Primary and additional rate increased 10 percent (Dec. 31, 1960 to Jan. 1, 1972). Total rots until Jan. 1, 1972 equals 13.09 percent. In lieu of all taxes on capital, surplus, assets and shares except taxes on real property. Applies to State and national banks. Missouri Basis Net income from sources in Missouri Specific deductions are listed for ban so In dude usual costs but exclude income from State and Federal securities. Rate: 7 percent per annum. Is in lieu of bank share taxes and personal property tax (on tangibles and intangibles). Applies to State banks and trust companies, national banks, and credit i nstitutions. New Mexico Basis: Net income, defined as Federal taxable income plus income from Federal, State and municipal securities. Net income does not include amounts taxed as income to another member of an affiliated group of corporations. Rate: 6 percent on every bank and financial corporation located in New Mexico. Minimum tax, $100 per year. (For calendar 1969 rate reduced 20 percent. Laws 1970, ch. 3; Laws 1969, ch. 151.) Applies to State and National associations, trust companies, State banks or bank holding companies, savings and loan associations, incorporated savings and loans, mortgage banking com- panies, consumer finance companies, and other finance companies. See footnotes at end of table, p. 405. PAGENO="0424" 404 TABLE 20.-STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES): 1969-70-Continued State Description of law New York 3 Basis: Net income from business of whatever kind and in whatever form received less (1) ordinary and necessary business expenses, (2) interest, (3) taxes other than on income or profit but including net income taxes of New York City, (4) uninsured losses, (5) bad debts,(6) depreciation and obsolescence,(7)amortizable bond premiums,(8) reasonable contributions to nontaxable employees' trust. If business is carried on within and without New York allocations are made under rules prescribed by Tax Commission. Savings banks may deduct interest credited to depositors, repayments of loans or advances from mutual savings bank fund, and interest subject to minimum tax. Deduction on tangible depreciable business property situated in New York allowed at twice rate of Federal income tax, for property acquired iiew and first used after Dec. 31, 1963, or which is constructed, reconstructed or erected after that date. Taxpayers owning and operating eligible facilities in low-income urban areas allowed specified credit but not to reduce minimum tax. Financial institutions servicing mortgages acquired by State of New York Mortgage Agency entitled to annual credit against tax of ~ of 1 percent of principal due on 1- or 2-family dwellings and of ~`Io sf1 percent on multiple dwellings. Rate: 6 perceet since passage of U.S. Public Law 91-156, due to permission for States to impose sales and use taxes on national banks if State banks were similarly taxed. (Prior to Public Law 91-156 rate was 7 percent.) Minimum tax of $50 and not less than 13~ mills per dollar of allocated capital for domestic and foreign corporations doing business in New York, except savings and loan associations which pay minimum tax of $50 and not less than 2 percent of interest credited to depositors in preceeding year. Applies to State banks, savings and loan associations, trust companies (other than a trust company owned by not less than 20 savings banks), domestic trust companies organized under special or general laws of New York, and other domestic financial corporations, national banks and production credit corporations after stock held by Federal credit corporations is retired. New York City 3 Basis: Net income as determined for State tax, above, except no deductions are allowed in re new buildings, permanent improvements, or restorations. Double deduction, as in State tax, applies only to depreciable tangible property situated in New York City constructed, reconstructed or erected after Dec. 31, 1965. Allocations for business carried on within and without State prescribed by finance administrator. Rate: 43'2 percent allocable net income of banks, production credit corporations and finoncial corporations, or, if higher, 1 mill per dollar of apportioned issued capital stock. Minimum tax $10. 4j/~ percent of allocated net income of savings banks, savings and loan associ- ations or, if higher, 2 percent of interest or dividends credited to depositors or share- holders but not in excess of interest or dividends at rate of 2 percent per year, or $10. Applies to same groups as State tax alone, including foreign financial corporations doing business in city. Corporations subject to New York City corporate income tax excluded. North Carolina Basis: Entire net income including income from all sources during preceding year, in- cluding all income from Government securities, except obligations of State and political subdivisions thereof. Excise tax on building and loan associations (in addition to a capital stock tax) is based on net taxable income of preceding year less all dividends paid on outstanding shares. Rate: 6 percent of net income of banks; 43/i percent on building development corporations, with minimum tax of $10; 73'~ percent of net income of building and loan associations. Applies to National and State banks and banking associa- tions, and business development companies. In lieu of intangible personal property tax, franchise tax, income tax, taxes levied on shares of stock of banks and taxeslevied upon tangible personal property by local jurisdictions. Excise tax also covers building and loan and savings and loan associations doing business in State. This tax and capital stock tax on such associations in lieu of all taxes and fees except those in subchapter I, ch. 54, Gesl. Stat., ad valorem taxes, sales and use taxes, and taxes levied on intangible personal property. North Dakota Basis: Net income for preceding year, including amounts from tax-exempt securities. Rate: 5 percent with minimum of $50. Additional tax on banks and trust companies based on and measured by net income of preceding year and is computed at 2 percent in lieu of all other taxes, State, county, and local except on real property. Applies to national banks, State banks and trust companies, Oklahoma Basis: Net income, with no allowance for bad debts unless charged off within taxable year. Gross incnme from which specified expense deductions are allowed includes income from any source whatever, except life insurance, return premiums thereon and en- dowment contracts, and property acquired by gift, bequest, devise or descent. Rate: 4 percent. Applies to national and State banks and credit unions. Oregon Basis: Net income, including income from property in State and activities carried on in State regardless of whether carried on in intrastate, interstate or foreign commerce, except income subject to corporation excise tax (on mercantile, manufacturing, and business corporations and others.) Rate: 8 percent. (Rate on mercantile, manufacturing and business corporations, 6 percent.) In lieu of all State, county and municipal taxes except real property. Applies to national banks and production credit corporations not exempt by Federal law, State banks, financial corporations, building and loan associa- tions, savings and loan associations and mutual savings banks. Rhode Island Basis: Net income, including income from all sources. Exciaded from net income are dividends received from stock of any corporation owning over 50 percent of its business in State or of any utility if over 50 percent of its earnings was apportioned to State or of any banking institution liable for this tax. Rates: on State banks, 8 percent of net income, or tax of $2.50 per $10,000 of authorized capital stock on last day of calendar year. On national banks 8 percent of net income. Minimum tax on State and national banks, $50. Intangible property and shares of stock in any banking association liable for this tax are exempt from other taxation. Applies to State banks, trust companies, na- tional banks, loan and investment companies and national banking associations located in State. See footnotes at end of table, p. 405. PAGENO="0425" 405 TABLE 20.-STATE TAXES ON BANKS ACCORDING TO OR MEASURED BY NET INCOME (EXCISE TAXES): 1969-70-Continued State Description of law South Dakota Basis: Net income. Income from Government securities not excluded from gross incomet Rate: 53/i percent with minimum tax of $24. In lieu of all other taxes except real estate. Applies to every State and National bank, savings bank or trust company, and financial~ institutions doing business in South Dakota. 1 Rate of State tax increased from 5 to 51/2 percent with surtax of 214 percent; rate on trust companies and savings and loan associations not changed but same surtax applied. Provision effective July 1, 1970. See also text comments at p. 402. 2 Does not include deposit tax on savings banks. See also text comments, infra at pp. 402, 409, 410. Source: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov. 1, 1970). PAGENO="0426" TABLE 2OA.-TR~ATMENT OF INrEREST RECEIVED ON GOVERNMENTAL OBLIGATIONS AS AN ELEMENT IN STATE AND LOCAL TAXES MEASURED BY NET OR GROSS 1r~coME OF COMMERCIAL BANKS, JAN. 1, 1971 [CB-Commercial banks, State and national banks, OF-Other financial institutions, G-Corporations, generally, NB-National banks, SB-State banksl State State and local obligations of the taxing State State and local obligations of other States U.S. Government obligations Differences from treatment of similar re- ceipts of corporations Reference to State revenue laws (1) (2) (3) (4) (5) (6) Alabama Included (CB, OF) Included (CB, OF) Included (CB, OF) Interest from Alabama State and local Sec. 425(b), title 51, Code. obligations and U.S. Government obliga- tions is exempt from taxation under the corporate tax law. Alaska' do do do Under the corporate tax law, interest from Sec. 43.70.030. all 3 categories is exempi. Arizona Excluded (G) Excluded (G) Excluded (G) None Sec. 43-112. Arkansas Excluded (NB, OF, G) Included (NB, OF, G) Excluded (NB, OF, G) do Sec. 84-2008. California Included (G) Included (G) Included (G) do Sec. 24271. Colorado Excluded (G)2 do Excluded (G) do Sec. 138-1-10. Connecticut Included (G) do Included (G) do Sec. 12-217. Delaware Exlcuded (SB, OF, G) Included (SB, OF, G) Excluded (SB, OF, G) do Sec. 1903, title 30. District of Columbia._ Included (CB, OF) Included (CB, OF) Included (CB, OF) Cols. 2, 3, 4, are excluded from the cur- Secs. 47-1701, 47-1703. porate income tax. Florida No income tax Georgia Banks pay no income tax in Georgia. Hawaii Included (CB, OF) Included (CB, OF) Included (CB, OF) Corporations do not have to pay tax on the Sec. 241-4. interest on U.S. Government and State and local obligations. Idaho Included (G)3 Included (G) Included G) None Sec. 63-3022. Illinois Included (G,SB) Included (G,SB) Excluded (G,SB) do Iowa Excluded (CD, OF) Included (CB, OF) Included (CB, OF) Corporations must include interest from Sec. 422.73. Iowa State and local obligations and may exclude interest from Federal obligations. Kansas Included (CB, OF) 4 Included (CB, OF) do Interest from Federal obligations is ex- Sec. 79-1109, 79-32, 117. cluded from corporate tax. Kentucky Banks are not taxed on their income in Kentucky. Louisiana There is no tax on the net income of banks. Maine a (a) Excluded (SB,G) Excluded (SB,G) Excluded (SB,G) None Sec. 5102 (b) Excluded (SB,OF) Excluded (SB,OF) Included (SB,OF) Interest from Federal obligations is ex- Sec. 206.34. cluded. Maryland Included (CB,OF) Included (CB,OF) Included (CB,OF) Corporate taxable income does not include Sec. 128A. interest from Federal obligations. PAGENO="0427" Massachusetts - Included (CB) Included ~CB,G)~ Included ~CB~G>~ ~omecorporatkinsdo notpaytaxon nierest, - from Massachusetts State and local obligations~ Michigan Excluded (CB,OF) Included (GB,OF) Included (CB,OF) Interest from Federal obligations is ex- Sec. 206.34. cluded from corporate tax. Minnesota Included (GB) Included (GB) Included (CB) None Sec. 290.08. Mississippi Banks are exempt from the Mississippi income tax. Missouri 0 (a) Included (GB) Included (CB) Included (GB) Interest from Missouri State and local Sec. 148.040. obligations and U.S. obligations is exempt from taxation under corporate law. (b) Excluded (SB, G) - - Included (SB, G) Excluded (SB, 0) None Sec. 143.040. Montana Banks are exempt from the - income tax. Nebraska Excluded (OF, GB) Excluded (OF, GB) Included (OF, GB) None Sec. 77-2716. Nevada There are no income taxes on banks. New Hampshire Excluded (G SB) Excluded (G SB) Excluded (G SB) None Sec 77-A 4 New Jersey Banks are exempt from the cor porate franchise tax on incomee New Mexico Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations do not pay taxes on the Secs. 72-15A-1 to 72-15A-15. interest of any government obligations, United States, State, or local. New York Included (G) Included (G) Included (G) None Tax law, arts. 9A, 9B, 9G. North Garolina Excluded (GB, OF) Included (GB, OF) Included (GB, OF) Interest on Federal obligations is excluded Secs. 105-228. 15, 105-228.16. ...~j from the taxable income of corporations. North Dakota lncluded(GB, OF) do do Gorporations do not include North Dakota Sec. 57-35-02. State and local obligations nor U.S. Government obligations in their taxable income. Ohio Thereare no State income taxes.7 Oklahoma Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations are exempt from paying taxes Sec. 2316, title 68, OS. on U.S. Government obligations. Oregon Included (G) Included (G) Included (0) None ORS 317.015. Pennsylvania Banks are not taxed on their income. Rhode Island Included (GB, OF) Included (GB, OF) Included (GB, OF) Gorporations do not pay taxes on United Secs. 44-14-13, 44-14-14. States and Rhode Island State and local government obligations. South Garolina do do do Gorporations are not taxed on United Rule BA-R--1. States and South Garolina State and local government obligations. South Dakota don do do Gorporations are not taxed on income Art 2602-15. Tennessee Excluded (GB, OF) do do None Sec. 67-2701. Texas There is no income tax in Texas. See footnotes at end of table. PAGENO="0428" TABLE 20A.-TREATMENT OF INTEREST RECEIVED ON GOVERNMENTAL OBLIGATIONS AS AN ELEMENT IN STATE AND LOCAL TAXES MEASURED BY NET OR GROSS INCOME OF COMMERCIAL BANKS, JAN. 1, 1971-Continued LCB-Commercial banks, State and national banks, OF-Other financial institutions, G-~-Corporations, generally, NB-National banks, SB-State banksl State State and local obligations of the taxing State State and local obligations of other States U.S. Government obligations Differences from treatment of similar re- ceipts of corporations Reference to State revenue laws (1) (2) (3) (4) (5) (6) Utah Included (CB, G) Included (CB, G) Included (CB, G) None Sec. 59-13-7. Vermont 10 (a) Excluded (G) Excluded (G) Excluded (G) do Sec. 5811. (b) Excluded (CB, OF) Excluded (CB, OF) Included (CB, OF) U.S. Government obligations not included Sec. 5836. in corporate income tax. Virginia Banks are exempt from income taxes. Washington Excluded (G) Included (G) Included (G) None RCW 82.04.080, 82.04.432. West Virginia Banks are exempt from income taxes. Wisconsin Included (G) Included (G) Included (G) None Secs. 71.01, 71.03. Wyoming There is no income tax on banks or corporations. - 1 This entry reports the treatment of interest under the license tax on gross receipts. 8 There are I or 2 exceptions where the interest from these obligations is exempt. 2 Included in the income base unless such interest has been specifically excluded by Colorado 9 Cols. 2, 3, and 4 are a composite of a franchise tax on corporations on their net income and a statutes. privilege tax on national banks. National banks pay only the privilege tax and State banks pay only 3 Only municipal revenue bonds are exempt. the franchise tax. 4 Certain State and local obligations are exempt from income tax under the l.:i~ of Kansas authoriz- 1~ In Vermont, banks are subject to both a corporate net income tax(a) and a franchise tax on bank- ing their issuance. ng corporations (b). The amount the bank pays under the franchise tax is reduced by the amount it 5 If a State bank pays the frai~chise tax instead of the corporate income tax, the interest from pays under the corporate income tax. obligations would follow (b) instead of (a). . . . . . . 6 State banks pay both tax (a)the bank tax and (b) the corporate income tax. Source; Table compiled by Mrs. Arlene Lustig, Division of Research and Statistics, Federal Reserve In Ohio local governments impose income taxes but provisions pertaining to banks vary. Board, April 1971, from Commerce Clearing House, Inc., State tax reports for the several States. PAGENO="0429" 409 The thing that distinguishes the excise "measured by" from a direct tax on net income is not just the use of a State-granted "priv- ilege" as a basis for the tax but, more especially, the definition of income. By design, the excise tax was framed to include in the tax base income derived from Federal tax-exempt securities-a concept to which some objected,6' and one which gave Massachusetts trouble when that State adopted it overtly 62 but was sanctioned by the Supreme Court when used by New York and California.63 The im- portance to the States of including income from Federal securities in the tax base is clear. In 1954, for example, national banks in the 18 States with excise taxes had net income before taxes of $602 million, of which $283 million, 47 percent, came from interest on Federal obligations.53 The Federal securities deductions arise because of the character of our federation with its dual sovereignty for the national government and the States. No similar impediments prevent one State from taxing the obligations of another State held by its own residents or income therefrom.65 The usual deductions from gross income include the appropriate costs of doing business. Some States tie these deductions to those permitted under the Federal income tax. This is done in Massachu- setts, Michigan, and New Mexico. Other States add deductions of their own. Minnesota allows deductions for dividends paid to the United States or to instrumentalities exempt from Federal income tax on preferred stock owned by them-probably an obsolete provision. New Mexico excludes income taxed to another member of an affiliated group of corporations. New York excludes specifically among enum- erated deductions reasonable contributions to non-taxable employees' trusts. Bad debt charges in Oklahoma cannot be deducted unless charged off in the taxable year. Rhode Island allows the deduction of dividends received from stock of any corporation owning over 50 percent of its business in the State, or of any public utility if over 50 percent of its earnings are apportioned to the State, or of any banking institutions liable for this tax. How burdensome upon the national banks are the taxes "according to or measured by" net income? At least in the early years, they were less burdensome than the share taxes which they generally replaced.66 They also produced less than the 3, 4, or 5 mill taxes on invested capital would have produced.67 Like the direct tax on net income, the excise tax is not paid unless net income is realized. When there is 110 61 Cf. Welch, op, cit., p. 160n, citing Professor C. G. Plehn to this effect in the California Law Review, vol. 17 (1928-29), pp. 364-69. 62 Macallen Co. v. Massachusetts, 279 U.s. 620 (1929). ~` International Films Corp. of America v. Ward, 282 U.S. 379 (1931); Fox Film Corp. v. Doyal, 286 U.S. 123 (1932); Pacific Co. Ltd. v. Johnson, 285 U.S. 480 (1932). See especially Thomas Reed Powell, "The Macal- len Case-and Before" and "The Macallen Case-and Beyond," In National Income Tax Magazine, vol. 8, / pp. 47ff, 118ff (1930). Also Welch, op. cit., pp. 50-53. The Massachusetts tax law was later amended to con- form to the decision (Acts 1930, ch. .214; Acts 1933, ch. 327); ibid., p. 53. 64 Uelmberger, op. cit., p. 120. Refunds required in Massachusetts as a result of the Macallen decision amounted to 31.8 percent of taxes originally assessed for 1928. Welch, ibid., pp. 156-57. 65 Cf. table 20A. 66 Cf. Welch, op. cit., p. 165. The last year the share tax was in effect in California (1928) it produced $4,- 767,000; the revenue from the excise tax in the next year was $555,000 and in 1930, $906,000. In Massachusetts the share tax produced in its final year $4,038,000 (1922); the excise in its first year, $1,086,000. In N~w York the comparison was $13,908,000 (1926) to $6,501,000. In Oregon it was $411,000 (1929) to $140,000. In Utah the last year of the share tax produced $281,000 (1930);the excise yield in 1932 was $28,000. The Wisconsin share tax yielded $1,935,000 in 1926; the income tax yield in 1928 was $406,000. Ibid., table XIX, p. 166. Revenue from personal income taxes on dividends paid to shareholders is not included. For year-to-year changes in Massachusetts, cf. Kimmel, op. cit., p. 47. Additional data appear in Woosley, op. cit. p. 83. 67 Woosley, op. cit., p. 90. PAGENO="0430" 410 taxable net income, States and localities can tax national banks only upon real property. And since real property taxes are deductible in measuring taxable net income, the weight of the excise tax is reduced. The excise tax does, however, impose heavier taxes on banks than would a direct net income tax with a similar rate, since the excise npplies to total income from all sources.68 The excise tax rate may not exceed "the rate assessed upon other financial coporations" and may not be "higher than the highest of the rates assessed * * * upon mercantile, manufacturing and business corporations doing business" within the State. This ties the excise to rates employed in taxing these enumerated corporations which pay taxes which cannot be imposed on national banks because of section ~5219. If the same actual tax rates are specified in the law as to national banks and these other corporations, the result is a lower effective total tax upon national banks. Up until the 1969 amendment, national banks were not taxed on personal property, nor were they subject to fran- chise, sales, use and certain other taxes imposed upon other corpo- rations. This meant relative overtaxation of mercantile, nianufactur- ing, and business corporations compared to national banks. How could this be corrected? Adjustment by means of tax rates meant that the nominal rates would have tobe higher on national banks than on other corporations- if "rates" literally meant actual tax rates as stated in the law. This approach might violate section 5219. Some States, however, decided that "rates" really meant "burdens" and that if there was an equiva- lence of total tax burdens the limitation of section 5219 was met.69 Minnesota in 1941 adopted a differential of 2 percentage points to establish this equality. It taxed national banks at 8 percent, other corporations at 6 percent. This 2 .percent was the estimate of what personal property taxes would have cost the banks .had section 5219 permitted suchlevies. In 1959 when Minnesota established a rate of 11.4 percent on banks, it retained the earlier differential by fixing the rate on other corporations at 9.4 percent.7° Oregon follows the same policy. Its bank rate is 8 percent; mercantile, manufacturing, and business corporations are taxed at 6 percent. A similar change was made in New York after the 1969 amendment of section 5219. In consequence of the permission to apply sales and use taxes to national banks, the excise tax rate was reduced to 6 percent (from 7 percent).7' The attempt to adjust excise tax rates on banks to compensate for the additional taxes other corporations pay is referred to as "building up" the rates. In 1960, seven states were using "built-up" excise taxes on banks. This approach to the problem of equality-a far better one than uniform nominal tax rates-has been opposed by bankers and others. Congress, however, did not adopt an amend- ment proposed in the 1940s in a joint report of committees of the National Tax Association and the American Bankers Association under which the comparison of rates applicable to banks, other 6 8"*~ it is difficult to state definitely the full extent of the fiscal advantage of the tax `measured by' net income." Welch, op. cit., p. 157. Under reasonable assumptions it "amounts in prosperous years to at least 15 percent and more probably 25 to 30 percent." Ibid. 69 Cf. Tradesmens National Bank v. Oklahoma Tax Commission, 309 U.S. 560 (1940). 75 Helmberger, op. cit., p. 126-7. 71 Cf. table 20, supra. PAGENO="0431" 411 financial institutions, and other corporations would have been limited explicitly to rates of net income, excise, or franchise tax, and the more comprehensive "built-up" rates would have been forbidden. Sub- sequently, the "built-up" rates were sanctioned by the courts.72 Another approach to the problem was for a State to give mercan- tile, manufacturing, and business corporations a credit on their excise tax for taxes levied on them but not on national banks. The credit given was not always complete nor fair to the State. Its effect thus applied was to extend the protection of section 5219 beyond national banks to other corporations. California and Oregon both used this device for a short time but dropped itY3 rfhe best approach, taken by Massachusetts and California, proved to be one that leaves the determination of the excise tax rate to State administrative authorities: the Franchise Tax Board in California and the Commissioner of Taxation and Corporations in Massachusetts. These officials estimate the tax burdens of each set of corporations and fix the rate on banks accordingly. Instead of estimating what per- sonal property taxes might have cost banks, they estimate what the other taxes cost non-bank corporations, on the average, as a percentage of net income. The maximum permissible rate in California is 11 per- cent, in Massachusetts, 11.4 percent. As States impose additional taxes under P.L. 9 1-156, such as sales and use taxes, it is expected that excise rates in these two States will be reduced administratively in recognition of the new additional taxes. Of the four options given States in 1926, the excise "according to or measured by" net income is by far the best.74 It has been preferred by State officials over the direct net income tax for its greater yield, al- though many have lamented that it is not as productive as the share tax.75 Income as a base is easier to determine than capital or market values, and this approach has presented fewer legal snarls than ad valorem share taxes. The prospects under the "permanent amend- ment" that banks may be required to pay taxes on their real estate, their personal property, and "according to or measured by" their net income opens the way for taxation of national banks and other corpo- rations by like methods and with substantial equality.76 The excise on banks fits best into such a program so long as some income is other- wise tax-exempt. The excise and the net income tax both have less deleterious influence on banking policies than do share taxes, a fact which should commend them to both bank operators and regulatory agencies. The excise also has the advantage that it is approved and often actually sponsored by baukers. The opening of the fourth option in 1926 profoundly influenced State taxes on national banks, as evi- denced by the growing list of adoptions.77 72 Cf. "Joint report of Committees of the National Tax Association and the American Bankers Associa- tion upon proposed changes in T5.S.R.S. section 5219," submitted by Franklin S. Edmonds of Pennsylvania, in Proceedings of the National Tax Association, 1942, pp. 199-210, esp. pp. 204-7; and supra, p. 330 in this appendix. 73 Cf. Helrnberger, op. cit., pp. 124-5. ~ Cf. Welch, op. cit., p. 62: ". . . this will doubtless prove the most attractive alternative as the States are one by one forced to abandon the farce of attempting to tax competing moneyed capital at general property tax rates." ~` Cf. ibid., p. 49; Woosley, p. cit., p. 83; and comparisons of revenue yields, supra at p. 339. 76 The excise measured by net income fits well into the Model Plan of State and local taxation of the Na- tional Tax Association, proposed in 1919 and modified in 1933. Cf. Welch, op. cit., pp. 218-21; Helmberger, op. cit., pp. 148-49. ~ Cf. Kimmel, op. cit., pp. 126-31, 137-41, 143-44; Welch, op. cit., p. 49; Woosley, op. cit., p. 83. PAGENO="0432" 412 4. The fifth option: (a) As to domiciliary ban/es.-The 1969 amend-- ment to section 5219-P.L. 9 1-156, section 1-added a fifth option to the four prevailing after 1926. It is a temporary permission, effective from December 24, 1969, when it was adopted, until the "permanent amendment" in section 2 takes effect. Without delineating the limita- tions in the amendment, all of which have been pointed out earlier,78 it may be noted here that a State or political subdivision "may impose any tax which is imposed generally on a nondiscriminatory basis. throughout the jurisdiction of such State or political subdivision (other than a tax on intangible personal property) on a national bank having its principal office within such State in the same manner and to the same extent as such tax is imposed on a bank organized and existing under the laws of such State." That is, States may tax domi-- ciliary national banks exactly as they tax their own State banks- lighter perhaps, if they so desire, but not heavier. In other words, if a State taxes State banks on their real estate, tangible personal property, or "according to or measured by" net- income from all sources, it may tax national banks in the same ways so long as the rates do not discriminate against national banks. If sales of tangible property (not for resale) a-re taxed to State banks, such transactions may be taxable for national banks. If out-of-state sales to State banks (or purchases by them) are taxed through a use tax, like, transactions may be taxed to national banks. If mortgage recording or registry taxes on transfers are collected from State banks, they may also be collected from national banks. The same ru'e applies to documentary stamp taxes. In short, members of the dual banking systems of the United States are to be taxed alike. For the first four options, however, the rule continues under the "temporary amendment," that the imposition of any one of the speci- fied forms of taxation is in lieu of the others-apart from the previously permitted combination of taxes on shareholders' dividends concur- rently with taxes on, according to, or measured by the net income of the bank. The application of such taxes as sales, use, transfer, recording or documentary taxes probably required in many States no specific legislation to make them applicable to national banks. These laws usually provided, for example, that all sales of tangible property at retail shall be subject to a tax of "X" percent. Licensed vendors were required to collect proper taxes on each such sale and remit periodically to the State. The most that might be needed would be a ruling by the administrative agency that such taxes were to be collected from national banks, as had previously been done for sales to or purchases by State banks. It is believed that this is what has happened in the case of sales, use, documentary, gasoline, automobile, and similar taxes already in operation. The imposition of such taxes was contemplated in P.L. 91-156. Other taxes not previously permitted under section 5219 could be applied to national banks under the 1969 amendment, save taxes on intangible persona-i property. A gross income tax, such as the one in 78 Cf. supra, pp. 337-338 in this appendix. PAGENO="0433" 413 effect in the District of Columbia, would now be permissible if State banks were similarly taxed. Some States, like Illinois, have imposed annual franchise taxes upon domestic and foreign corporations doing business in the State. These taxes are generally based upon amounts *of paid-in capital, actual capital, stated surplus, earned surplus or some combination of these accounts. In a number of States these taxes are in addition to corporate income and property taxes. Sometimes the corporate income tax is substituted for the franchise tax which generally has been. the older device. Whether one tax should be in lieu of another often involves considerations of administrative convenience as well as the rates of taxation employed in the other taxes. So far as is known, the franchise tax has been applied to business corporations and not to banks and other financial associations. The prohibition in .section 5219 may have prevented such applications even to State banks where States sought to preserve neutrality between State and national banks. But under P.L. 91-156 a State may now impose a franchise tax on national banks if it also imposes a franchise tax on its own banks. Whether States would be inclined to do so is another question. Since corporate income taxes, particularly the excise, are better and more equitable tax devices, as well as more productive, it may well be doubted if many States will extend the corporate franchise tax to banks. The legal theory behind this tax is that it is exacted for the privilege of exercising a corporate franchise granted by the State or in the case of foreign corporations for the privilege of doing business in the State. The same legal theory underlies the tax "according to or measured by" net income. It is doubtful that the Supreme Court would countenance two distinct taxes for the same privilege. b. As to nondomiciliary ban/cs.-P.L. 9 1-156 also made a separate interim provision for the imposition of State taxes "on a national bank not having its principal office located within the jurisdiction" of the taxing State. This consent, like the one for taxes on domiciliary national banks, is limited to taxes that are "imposed generally through- out such jurisdiction on a nondiscriminatory basis." This rules out (1) special taxes applying only to national banks or perhaps to banks generally and (2) taxes which apply discriminatory rates or burdens on national banks. Subject to these and other specified limitations during the interval from December 24, 1969, until the "permanent amendment" takes effect, each State legislature may impose and may authorize political subdivisions to impose the following taxes on nondomiciliary national banks: (1) Sales and use taxes, on purchases, sales, and use within the taxing jurisdiction. (2) Taxes on real property or occupancy of real property in the jurisdiction. (3) Taxes on the execution, delivery, or recording of docu- ments, including documentary stamp taxes (a collection device). (4) Taxes on tangible personal property, excluding cash or cur- rency, located within the jurisdiction. (5) License, registration, transfer, excise, or other fees or taxes imposed on the ownership, use, or transfer of tangible personal property located within the jurisdiction. 79-421 0 - 72 - 28 PAGENO="0434" 414 Until the "permanent amendment" becomes effective, taxes not enumerated as applicable to nondomiciliary banks may not be em- ployed by the States and their subdivisions by virtue of the longstand- mg rule as to section 5219: that (apart from real property taxes) only those taxes to which Congress has given its express sanction in options enumerated in the statute may be imposed on.national banks. E. Taxes prohibited prior to the 1969 amendments As a preface to a review of the legislative actions of the States in 1970, a recapitulation of taxes prohibited under section 5219 from 1926 to 1969 may illuminate what the States have done. From 1864 to 1923, only real estate and share taxes could be ap- plied to national banks. From 1923 to 1926, States could tax, besides bank-owned real property, only the shares owned or dividends re- ceived by shareholders or the net income of the bank. From 1926 through 1969, States could tax national banks only on their real property and one of the following: (a) shares (on an ad valorem basis), (b) net income, or (c) "according to or measured by net income." If the tax was on the net income of the bank or "according to or meas- ured by" its net income, dividends could also be taxed in the incomes of individual shareholders. At all times, discriminatory taxes on na- tional banks were outlawed. All other taxes on national banks were prohibited. Within this narrow framework, States had to develop their systems of bank taxation. State taxes which were prohibited by section 5219 were as follows: 1. Taxes on tangible personal property.-Never from 1864 until after 1969 could States tax the tangible personal property of national banks. Few States exempted the tangible personal property of other businesses and individuals from State or local levies. New York substituted in- come taxes for personal property taxes, but few States followed this lead. Selective items of personal property, such as machinery or business inventories were exempted in some States, but the usual rule was to tax all real property, personal property, and incomes-the latter in the States that had been able to adopt income taxes. Tangible personal property was not a large element in the assets of national banks in any case, but its preferential treatment was guaranteed by the exclusion from section 5219. 2. Taxes on bank intangibles.-State taxation of national bank in- tangibles was never permitted from 1864 through 1969. Shares of stock could be taxed from the beginning but intangible property owned by the banks, such as cash on hand, cash due from banks, notes receivable, State and municipal securities, and mortgages, never was included in any of the options granted under section 5219. Moreover, the ban on taxes on intangible personal property was specifically continued in option 5 governing the interim imposition of taxes on domiciliary banks during 1970-72. Taxes on intangibles of nondomiciliary banks also are not permitted in this same period, because they are excluded from the enumerated taxes States are allowed to impose. In addition, State taxes on cash and currency are specifically excluded from permitted taxes on tangible personal property. This exclusion undoubtedly prevents States from taxing cash on hand and due from other banks. 3. Taxes on bank deposits.-States have never been able to tax na- tional banks upon their deposits. No amendment of section 5219 has PAGENO="0435" 415 ever enumerated deposits among the permitted taxes. And although P.L. 91-156 does not give States specific authority to tax them, it. may be inferred that States might be able to tax national bank de- posits if State bank deposits were taxed-unless the exclusion of "taxes on intangible property" were to be interpreted by the courts to include bank deposits. This would mean, however, that deposits,. which are a liability of the banks, would be treated as though they were an asset. But what if States having ad valorem share taxes decided to add deposits to the capital accounts of national banks? Certainly deposits, less reserves for paying out cash, are used to provide earnings for all commercial banks. They are invested in earning assets-commercial paper, loans, stocks, bonds, and other securities-to a far greater extent and volume than capital paid in or earned surpluses. Prior to 1969, since deposits were not traditionally treated as capital, it is be- lieved that a special amendment to section 5219 would have been re- quired to permit States to tax them to the bank. Deposits taxes that might be levied upon the banks are not to be confused with taxes on individual owners of bank deposits, even though the banks frequently are made the collection agents for such taxes or have been forced by competition with other institutions to absorb deposits taxes as a cost of doing business. Taxes of this type are per- sonal property taxes of the depositors and remain so. Section 5219 does not and never did apply to them. 4. Gross receipts taxes.-Gross receipts taxes on national banks were not permitted prior to the 1969 amendment of section 5219. Pennsyl- vania, however, has used a tax on gross receipts of private bankers. Although States could not impose a gross receipts tax on national banks, there was no such impediment on Congress. For many years, Congress has prescribed gross receipts taxes for banks in the District of Columbia. The rates vary among classes of financial institutions doing business in the District. Details of the Pennsylvania and District of Columbia taxes are shown in table 21. `After. the passage of P.L. 9 1-156, States could tax domiciliary national banks on the basis of gross receipts if State banks are also taxed on their gross receipts on a nondiscriminatory basis. The gross receipts tax, however, may not be imposed on nondomiciliary national banks in the interim period before the "permanent amendment" takes effect. 5. Sales and use taxes.-S ales, use and documentary taxes could not be imposed on national banks prior to the 1969 amendment. They are included explicitly in the interim amendment. Under the "permanent amendment," these and other taxes may be applied to national banks provided State banks are likewise taxed. F. 1970 bank tax legislation P.L. 91-156 was effective on December 24, 1969. Soon thereafter State legislatures were enacting new legislation or amending existing laws to take advantage of the new freedom given them by Congress.79 7' The Information that follows regarding State tax legislation during 1970 is drawn from Commerce Clearing House, Inc., State Tax GuIde, pp. 1991-95. PAGENO="0436" 416 TABLE 21.-GROSS INCOME TAXES ON BANKS State Description of tax District of Columbia Basis: Gross earnings. Rates: Classified by types of institutions as follows: 1. National banks and other incorporated banks and trust companies 4 percent (law specifies 6 percent but Hamilton National Bank v. D.C., 176 Fed. 2d 624 held. 6-percent rate to be discriminatory as to national banks, which pay 4 percent. Law imposing 6 percent tax has not been repe~led. State Tax Guide p. 1827 n.) 2. Bonding, guaranty, title abstract and title insurance company, 13o percent of gross receipts in District. 3. Savings banks having no capital stock and paying interest to depositors on surplus and undivided profits, 134 percent. 4. Incorporated svaings banks, 4 percent on gross earnings less interest paid to depositors. 5. Building associations, 2 percent of entire gross earnings. 6. Private banks or unincorporated bankers, $500 annually. 7. Washington Stock Exchange, $500 per annum in lieu of tax on members. Applied to: See above rates. Pennsylvania Basis: Gross receipts of private bankers. Rate: 1 percent. Applies to private bankers. Note: Compiled from Commerce Clearing House, Inc., State Tax Guide (Nov 1, 1970). Arizona repealed its 5 percent income excise on banks, building and loan associations, and investment companies to make them taxable under the corporate income tax at the same rates. These financial institutions were made subject to all taxes imposed generally on a nondiscriminatory basis on other corporations. The law also provided that all tangible personal property of banks and other corporations not previously assessed was to be assessed ~nd. taxed on ~aii~El after January 1, 1970. Colorado repealed its 6 percent excise tax on national banks, State banks and certain other financial corporations but included them in the general corporate income tax at 5 percent of net income from Colorado sources. It also subjected personal property of banks and corporations to taxation. These provisions became effective March 16, 1970. Iowa repealed its tax on the shares of national and State banks, savings banks, loan and trust companies, etc., on May 1, 1970. These taxes were assessed to the shareholders. The rate on bank shares was 5 mills and on building and loan association shareholders, 1 mill. The law also repealed a provision which taxed personal property, money and credits of branch banks. This law makes bank stock and personal property of banks subject to property taxes in the jurisdiction where situated. Kansas increased the rate of its income tax on banks and develop- ment credit corporations from 5 to 53/~ percent with a surtax of 23~ percent on net income in excess of $25,000. Trust companies and savings and loan associations were made subject to a like surtax but the normal rate of 5 percent on net income was not changed. These provisions became effective on July 1, 1970. The rate of the privilege tax imposed by cities or counties was not changed; this rate still must be 2 percent if such a tax is adopted. The expiration date of the existing tax was removed so that this tax becomes a permanent feature of the Kansas law. * Kentucky in 1970 made production credit corporations subject to its share tax applicable to savings and loan associations, at the rate of $1 per $1000 of paid-in capital stock. This tax is payable directly to the State treasury. The law became effective June 18, 1970. PAGENO="0437" 417 New Jersey increased the rate of its share tax from 3% to 1~ percent beginning in 1970. The tax also applied to preferred stock which formerly was not assessed or taxed, but any such stock held by the United States or its agencies is not taxable. The law was approved and effective February 9, 1969. New York adopted a law which provides that any bank, trust company, savings bank, etc., located in the State which enters into a contract with the State mortgage agency (created by the law) to service mortgages acquired by the agency is entitled to an annual credit applied to or in lieu of the payment of the franchise, or excise, tax. The credit is equal to 34 of 1 percent of the average unpaid principal balance on mortgages secured by liens on one- or two-family residences which. the bank shall have serviced during the fiscal year. On mortgages upon multiple dwellings, the credit is ~o of 1 percent. No credit is allowed in excess of franchise tax due. For service of less than a year on mortgages, the tax may be apportioned. The act became effective, May 12, 1970. In connection with the supplementary excise tax on banks in New York City, a law which became effective on August 10, 1970, rede- fined retroactively to May 26, 1969, the term "financial corporation" to include any corporation of which 80 percent of the voting stock was owned by a national bank or a corporation engaged in the banking business and subject to Act 3 or 3a of the Banking Law. The law also made provision for consolidated retiiI~qis. Changes in Federal or State taxable incomes have to be filed withià90 days and may no longer be reported with the next return. In Pennsylvania, 1969 legislation increased the excise tax on mutual thrift institutions from 73/~ to 1 13/i perceilt of net earnings on income and made provision for payment of a large~r initial amount of the tax due on the ffling of the return. The increased rates are applicable to 1969 and thereafter. The rate on the "actual value" of shares of stock of * national and State banks and savings institutions that have capital stock was increased from 10 to 13 mills beginning January 1, 1969. The 10 mill rate had been effective during 1967 and 1968. In a law that was approved and effective December 31, 1969, but probably was passed before P.L. 91-156 was adopted by Congress, the tax rate of 13 mills, increased also from 10 mills, was applied to shares of stock of title insurance and trust companies. The initial or tentative tax pay- ments of financial institutions, including banks, were also increased.80 Rhode Island in 1970 increased the rate of its excise tax on State and. national banks from 7 to 8 percent. The minimum tax was in- creased from $10 to $50. The date for ffling returns was moved from April 1 to March 15. Changes were made also in the estimated amount of tax to be paid. Virginia changed the definition* of "banking holding company" under its share tax to mean any corporation organized under Virginia laws and doing business in the State which is a holding company under Federal law or which owns all the capital stock of one bank, except qualifying shares, where at least 2% of the assets of the holding com- pany, computed on a consolidated basis, consist of assets held by the $0 Pennsylvania Laws, 1969, Acts 69, 179, and 183. PAGENO="0438" 418 bank and controlled by its subsidiaries. Formerly, the definition in- cluded only corporations organized under Virginia laws which were holding companies under Federal law. The law was effective June 26, 1970 but applicable from January 1, 1970. In summary, legislation of 1969-1970 resulted in the repeal, of the excise tax in two States (Arizona and Colorado) and an increase in the rate in two other States (Kansas and Rhode Island). Share taxes were increased in three States (Iowa, New Jersey, and Pennsylvania). Two States acted aflirmatively to subject the tangible property of -national banks to general property taxes (Arizona and Colorado). In `these same States, national banks became taxable on net income under the general corporate income taxes there in effect. One State (Virginia) reflected recent developments in banking organization by changing its definition of holding companies. (This review does not include legislation that may have been enacted with reference to sales, use, *transfer, and some other categories of taxes.) G. Possibilities for the future Does the legislation of 1970 presage the action State legislatures will take when the "permanent amendment" of section 5219 goes into effect? This survey, probably incomplete, indicates what to expect after 1972: no uniformity of action; some States will do one thing, some another, and others will do nothing at all or will act very slowly. On the basis of past actions it seems very likely that States will change the laws to make national bank taxes conform to their methods and levels of taxing State banks. Since 1864 the conformity has had to be the other way around: Some States have imposed taxes on their own banks which they could not apply to national banks because of section .5219, but the differences have not been great because major differences might impel State banks to transfer to the national bank system. Charter transfers have not been difficult, but differences in taxation seem not to have been a motivating factor in such transfers in the past and are even less likely to be a factor in the future. Of course, State banks have always had some protection under State constitutions, if no more than `the requirements for uniform treatment under tax laws; and they have had the protection of the Fourteenth Amendment of the U.S. Constitution. Undoubtedly, national banks will have to pay State sales and use taxes on their purchases the same as other consumers. Only section 5219 previously protected national banks from having to make such payments. State taxation of transfers of tangible property at retail was not contemplated in 1864 or even as late as 1923'or 1926 when section 5219 was previously amended. But the terms of the section were sufficiently broad to exempt national banks from these taxes. Most of the sales, use, transaction, and transfer taxes are broadly drafted and require little or no modification to apply them to national banks. Their almost universal application in the States, save on food and drugs, does not permit much avoidance. Administrative devices used to make sales taxes effective may apply to the collection of other taxes, especially taxes on net income. They revolve around what constitutes "doing business" within a State. Some fact has to transpire to give the State a basis on which to predicate its PAGENO="0439" 419 *~laim of jurisdiction to tax. If a foreign corporation establishes a branch within a State from which business is transacted or from which sales- men leave to solicit orders and then return, a State can assert juris- diction to tax the activities that take place from that site. If a firm sends solicitors into a State regularly to take orders for goods to be shipped there, it is also in the State for the purpose of doing business. ~Sales which take place in such fashion may be taxed by the State, as may income earned thereby. The relationship to the State may be such, moreover, as to give the State the right to tax a portion of the total business or income of the company. HOW much may a bank or other business concern do and still not be "doing business" in a State? Sales by mail, by telephone, or telegraph might not give taxable jurisdiction, depending on details of the sales contract. If salesmen or bank solicitors ~are sent into the State periodically, the bank or corporation may be held to be "doing business" within the State. Banks, State and national, probably will find that correspondent relationships, loan- ~generating solicitations, deposit agreements, establishment of credit lines, and even loan underwritings for fees or interest payments may provide a factual basis for State assertions of tax liability. Precedents from other lines of business suggest that States will attempt to apply their taxes on the basis of various kinds of activities or incidents and that the courts will be called upon to determine whether these activities and incidents constitute "doing. business" to a degree that permits or warrants taxation. It is likely also that national banks will be required to pay the cus- tomary property taxes on their tangible personal property. Such tax- ation is widespread and longstanding. It has applied to individuals and most businesses in most States .for many years. In most States, only section 5219 has prevented its extensiOn to national banks, whereas State banks in many cases have been taxed on similar prop- erty. The volume of bank-owned tangibles has generally been small or moderate, but it may increase substantially with the spread of equipment-leasing arrangements in which banks hold title to the equipment. The superiority of the excise or franchise tax "according to or meas- ured. by" net income over a direct net income tax suggests that this tax might be adopted more widely. Two States, however, have repealed their excises, placing national banks under general corporate income taxes. This may be only a short-run movement or an indication of local Situations, including the activities of interested bankers. With taxation of 1)ersonal property of banks, excise rates on national banks, where previously "built up" in an effort to equalize tax burdens, may be adjusted downward to reflect the other taxes. Although low-rate ad valorem taxes on bank shares may be raised in some States, there is also a likelihood that other States will give up this mode of taxation in favor of net income taxes of either type. The tendency seems to be to tax all corporations on the basis of net income. Share taxes may give way to this trend. Taxation of intangibles owned by national banks has been prohibited since 1864. Until 1969, this was because that form of tax was not mentioned in any of the permitted options. In the fifth option added in the "temporary amendment" of section 5219 in 1969, a tax on in- PAGENO="0440" 420 tangible personal property is specifically banned. When the "perma- nent amendment" becomes effective, unless it is changed by Congress, section 5219 no longer will prevent taxation of intangible personal property owned by banks. However, not many States are likely to attempt to tax their own or national banks on bank-owned intangibles. This property never has been taxed to national banks and most State banks, an~I this may be considered a good reason for not beginning. Both State and n.ational banks will oppose such taxes. Most States have been dropping in- tangible personal property from their systems of ad valorem taxation. Even where il~ is still in the law, it frequently is not enforced or is only haphazardly applied against individuals and many businesses. In the case of banks, it should be comparatively easy to assess their intangibles. Their value is clearly shown on every bank statement. But in few States would there be strong support for applying to banks a form of tax that cannot be applied to other property-owners. The banks might gain some protection from such treatment under the Fourteenth Amendment. Their greatest protection, however, probably would come from the historical fact that heretofore no State has been able to tax national banks on their intangibles; and most States have not taxed State banks on this basis even when they could legally do so. Custom and usage seem to be against such taxation, along with reason and justice. These are not easily upset. A few States may under- take to tax bank-owned intangibles under the "permanent amend- ment" but probably not many and not for long. Other methods are likely to win support as fairer and more productive. Many scholars oppose taxation of bank-owned intangibles (or intangibles generally) and will give little support to proposals for such taxation if they appear. Their principal concerns are with the im- possibility of achieving equitable application of this kind of tax and its heavy element of double or multiple taxation of the same under- lying properties. Some bank-owned intangibles are in the nature of reserves required by law or held to meet claims upon the banks for cash. As such, they earn no income directly (although, of course, they are necessary if other assets are to yield income). Other intangibles, such as notes secured by loans, represent property already taxed or presumably taxed. The security behind such loans may be merchants' inventories, machinery or other producers' goods, automobiles, trucks, railroad equipment, airplanes, and other tangibles on which property taxes have been paid. Federal Government securities, held in large amounts by banks, represent munitions, other defense goods, public buildings, hospitals, post offices, roads, waterways, parks, and other public properties which States are not free to tax directly. State and munici- pal securities, likewise held in large amounts by banks, represent tax-exempt public properties also. There is an abhorrence of multiple taxation which reinforces the representative-property argument against taxing intangibles. But if the bank which holds a certificate, bond, or stock is in one State and the underlying tangible wealth is in another State, the State where the bank is located will get no revenue under its property tax if it exempts bank-held intangibles. It cannot be said, either, that PAGENO="0441" 421 interstate comity in such exemptions will be of equal benefit to all States, balancing losses against gains. Some States need and use outside capital to build factories, stores, homes, and public improve- ments more than do others. They draw from other States and money- market centers. As the real wealth of the one is enlarged, the volume of intangibles held by banks in the other States also expands. Then why not tax the latter? An argument against such taxation is that it will increase the barriers to economic development, the cost of living, or the cost of borrowing, and will tend to divert or hamper the free flow of funds in the nationwide economy. This may retard develop- ment of the nation as a whole. Taxes on bank-owned intangibles may operate as hindrances to free trade. If banks earn profits from invest- ments, it is the profits that should be taxed rather than the nssets themselves. Finally, tradition, as has been suggested, is an important factor in- fluencing tax systems. Trends that have developed over the years may be expected to continue in the long run. Outside of taxes on real estate, property taxes seldom have been satisfactory. Productive thngibles, such as machinery and fixtures may differ only slightly from real prop- erty, yet they have always been difficult to assess uniformly and completely. Tangible consumers' goods seldom indicate the taxable capacity of the owners. Intangibles never have been satisfactorily taxed with the mass of general property. Special low rates have been most helpful in augmenting property tax revenues. But the owner's capacity to pay, save perhaps at death, can best and more completely be reached through annual personal income taxes. Thus, the decline of the property tax should carry with it ad valorem taxes on bank shares and discourage taxation of bank-owned intangibles. Coinciding with this is the expansion of State income taxation for both personal and corporate incomes. Bank share taxes doubtless will be absorbed in this change. Taxes on bank real estate, however, will surely continue so long as other real estate is taxed. H. Uniformity in bank taxation? It has often been said that section 5219 produced a high degree of uniformity among the States in their taxation of national banks, which in turn influenced the patterns for the taxation of State banks. Some writers qualify this tendency by indicating that the uniformity pre- vailed up until 1921, 1923, or even 1926.81 Of course, from 1864 to 1923 States could tax national banks only on their real estate and shares. After 1923, two other courses were open but neither had much appeal. The 1926 amendment added a fourth option. There is no doubt that section 5219 did restrict the States. But even the share tax was not applied uniformly; variations in deductions, credits, and methods of valuation were substantial. The stated options created an illusion of uniformity. Nationwide uniformity of national bank taxation as a goal had great appeal to bankers.82 It was supported also in Congressional debates in 81 Cf. Woosley, op. cit., p. 120. Kimmel based his comparisons on 1921; Helmherger op. cit., p. 19, used the period from 1864 to 1923. Kimmel said, "In 1921 there was a high degree of upiformity in the principal methods of taxing commercial banks for State and local purposes. The basic reason for this uniformity was the nature of the restrictions imposed by the Federal permissive statute." Op. cit., p. 12. But since the 1923 alternatives were unacceptable to States, the date 1926 may well be substituted for 1923. 62 Woosley, ibid. PAGENO="0442" 422 1864 and in 1923. By then, bankers believed that aside from a modifica-. tion of the income tax to permit States to tax total bank income, the latitude given the States was wide enough, and they were able to hold. the States to four options until 1969. As to the effect of section 5219 on State taxation of State-chartered banks, there is a degree of uncertainty. States always were free in point of law to tax their own banks as they chose, subject only to limitations in their own constitutions and the Bill of Rights of the Federal Constitution. But competition between the two sets of banks. and notions of fairness on the part of legislators and communities. would not permit too much disparity of treatment. In fact, identical treatment was provided in the laws of many States. In others,. sup- plementary taxes often were imposed on State banks. 83 The burden of such taxes varied from light to heavy, but, as Kimmel pointed out:8~ "The difference in burden may be considerable when the sup~Ie- mentary tax is equal to 6 percent of net income, as in North Carolina, or when banks other than national are subject to two supplementary taxes, as in Arkansas, Missouri, and West Virginia." The reasons for these supplementary taxes Were stated by Woosley :85 "The reasons are patent for the heavier taxation by certain States of banks of their own creation. Prominent among them is the inflexi- bility of section 5219. Under the Federal statute, national banks.can- not be taxed both on property and on income. Since .several States resort to both property and income taxation on other corporations,. section 5219 unduly circumscribes them in the taxation of national banks. The State is faced with the alternatives of taxing State banks. at a higher rate through multiple levies thaii it may legally impose on national banks, or the .taxation of other corporations at a higher rate than is imposed on State banks. Under such conditions fiscal necessity may be the deciding issue, in which case the State bank is generally brought within the scope of the income tax." He added the following comment: 86 "The preceding pages bear persuasive testimony to the contention. that section 5219 has in the past modified the tax structures of several States with respect to other tax subjects. Whether its circumscribing influence constitutes an abridgment of the taxing power of the State, obviously the court alone can determine. The layman can only salute the position taken in the Alabama case and hope for an interpretation of the restrictive provision of the Federal statute which, within the limits of that law, will allow the State the maximum freedom." I. Comparative tax burdens Perhaps more important than substantial uniformity of taxing methods and tax .rates is the achievement of comparative equality in the tax burdens of different classes of banks and in the burdens borne by banks in comparison with other enterprises. 83 See tabulations of supplementary taxes on State banks in Woosley, op. cit., pp. 121-22; Kimmel, op.. cit., pp. 40, 42. [For differences in types of tax payments reported in 1969, see above, appendix 3 of this report-Ed.] 84 Kimmel, op. cit., p. 41. Cf. Woosley, op. cit.; p. 120. 85 Ibid., pp. 122-23. 86 Ibid., p. 123. The Alabama case referred to in the quotation is Union Bank and Trust Co. v. Phelps~ 288 U.S. 181 (1933), in which the Supreme Court upheld the authority of States to tax State-chartered banks by methods which could not he applied to national banks under section 5219. PAGENO="0443" 423 Tax burden comparisons are difficult to make and often inconclusive. Data presented in several studies suggest that on thewhole and over a long period national banks have enjoyed a preferential position in State and local taxation.87 `Without reviewing the assumptions and details of those studies, it may be remarked that any such preferences probably were beyond the expectations or intentions of Congress in enacting and amending sec- tion 5219. In the initial provisions, in 1864, Congress sought to put national banks on an equality with individuals and businesses under thc property tax system which prevailed throughout the nation. In the 1923 amendment, Congress intended to prevent the use of low-rate taxes on individually-owned intangibles (taxes that had been adopted to overcome deficiencies of the general property tax) from causing the taxes on national banks to be declared invalid. Likewise, in the 1926 amendment, Congress relaxed to some extent the restraints that had grown more pressing upon the States as tax systems developed and diversified. It may well be asked, does national policy call for preferential tax treatment of national banks by the States? Time was when it was generally believed that this was necessary. That was during the Civil War, when the national banks were created not only to help finance the Union Government but also to provide the nation with a stable circu- lating currency. To accomplish the latter objective, currency issues of State banks were taxed out of existence. Fear of reprisal by the States was advanced as a reason for preventing discriminatory action by the States in their taxation of national banks. The terms of section 5219, however, were adopted prior to the enactment of the prohibitive tax on State bank notes in 1865. Such prevention as was said to be needed was, therefore, retroactive. What the Act of 1864 attempted was equality of taxation as then practiced, not tax preferences for national banks. Over the years that intended equality turned out to be a pref- erential status. In the light of this history, it has even been suggested at times that national banks, or commercial banks generally, might reasonably be expected to carry tax burdens additional to those imposed on other business corporations. The national banks once performed profitable currency-issuing functions of which State banks were deprived. But that function has now been taken over by the Federal Reserve System, so that neither State nor national banks have an advantage here. The national banks also had the use of government funds serving as depository and fiscal agents of the U.S. Treasury. This, too, has changed for national as well as State member banks, both classes being able to receive govern- ment deposits and assist in fiscal operations. It is now difficult to distinguish between State and national banks in functions and opera- tions, perhaps even in prestige, in many communities. Differences between banks and other businesses are great. Only commercial banks create money, through loans and deposits. Mainly for this reason, banks have high ratios of intangible property to total assets, especially when compared with corporations engaged in mer- cantile, manufacturing, or general business. These other enterprises 87 Cf. Woosley, op. cIt., pp. 125-26; Welch, op. cit., pp. 209-15; Heimberger, op. cit., pp. 44-98, ch. III. PAGENO="0444" 424 require inventories of goods and raw materials, machinery, and other tangible property to carry on their business, whereas banks are pre- dominantly personal-service enterprises with inventories of intangibles. Whatever might be an equitable relationship between the tax burdens of banks and those of other business generally, it cannot be argued today that taxes on national banks should differ from those on State banks. Equality of burdens is the only appropriate policy, and it is this policy of nondiscrimination between State and national banks that is enunciated in the "permanent amendment" of section 5219. This has long been a goal of State taxing officials and others who have been concerned with the question. It seems a reasonable standard of taxation. EVANSTON, ILLINOIS, June 10, 1971. PAGENO="0445" APPENDIX 7 Economic Impacts of Particular State and Local Taxes on Banks With Special Reference to Neutrality CARL S. SHOTJP Professor of Economics, Columbia University 1. SUBJECT AND SCOPE OF THE PRESENT STUDY (a) Tax Impact: Neutral or Unneiitral, for Banks? The present study examines the economic impact on banks of each major tax imposed by state and local governments in the United States. The impact is analyzed to answer two questions. First, is the tax neutral or unneutral (and if unneutral, in which direction), with respect to (a) banks as compared with other businesses, (b) interstate as compared with intrastate flows of funds, especially from banks, (c) techniques of producing banking services, for example, mechanization, and ratio of equity capital to loan capital? Second, if unneutrality is found, how important in practice does it appear to be at the present time, and how important may it become if states are given the powers to tax national banks that are found in the "permanent" part, the post-1971 part, of Public Law 91-156? As just suggested, three aspects of economic neutrality are of par- ticular importance for bank taxation. The first is labe'ed here, indus- trial neutrality: does the tax induce a flow of labor and capital from or to the banking industry, to or from other industries? The second aspect is geographical neutrality, especially as between interstate and intrastate banking activities: does the tax impede the flow of banking capital and services across state lines, or possibly, stimulate such flows, relative to what would occur without the tax? The third aspect is technical neutrality: does the tax tend to affect the financial structure and operating methods of a bank? For example, the tax may affect the proportion of profits retained in the firm, the bank's method of obtaining capital, or the degree of mechanization of banking op- erations. A tax is economically neutral if the taxpayer does not change his conduct in order to reduce his tax bill. Thus a retail sales tax would be neutral as between banking and other lines of business if it induced no migration of capital or labor from the banking industry into other industries, or, conversely, from other industries into banking in order to save tax. This would be industrial neutrality. A bank tax is geo- graphically neutral if it does not induce a bank to expand or contract its geographic sphere. of activity in order thereby to save tax. An analogous test defines technical neutrality: A bank tax is technically neutral if the bank's capital structure and its mechanics of operation are the same as they would be if the bank bad to pay a lump-sum tax of the same amount, i.e., a kind of tax that could not be reduced by (425) PAGENO="0446" 426 changing the capital structure or mode of operation of the bank. Here, "same" means the same tax liability, under the tax being studied-say, a sales tax-as that liability would have been if the bank had not made those tax-induced changes. Of course no tax is completely neutral, either industrially, geographically, or technically. But some taxes are much more unneutral than others in one or more of these aspects.1 (b) How to Distinguish the Effects of a Tax from the Effects of the Use Made of Its Revenue The effects of a tax must be distinguished from the effects of gov- ernment services made possible by the tax revenue, and, similarly, from the effects of debt retirement, increase in the government's cash balance, or reduction in some other tax. To separate out the effects of the use of its revenue requires that we concentrate on the pressures exerted by the tax itself. We shall not thereby obtain a complete answer to a question like "What will happen to banks if we repeal (say) the retail sales tax?" for then some other tax would be raised, or introduced, or other changes would be forced in the public finance sector, and the banks would feel the impact of the combination of these measures. But it is still useful to ask, what pressure to do this or to do that does the tax itself put on the tax- payer, i.e., to change his conduct in an endeavor to reduce his tax bill? 2 (c) The Three Aspects of Unneutrality Important to Ban/cs Industrial unneutrality is usually less if a certain bank tax is im- posed by only one or a few states. Capital and labor can then flow to other states without leaving the banking industry. But of course this flow is an instance of geographical unneutrality. The outflow will never be complete. As banking capital and labor in the taxing state are reduced, the capital and labor reniaining will be able to obtain a somewhat higher price for their services in that state; supply will have been restricted, and demand is presumably unchanged. Moreover, some of the capital and labor hitherto in banking will accept a somewhat lower reward than before, rather than move to another state. To be, sure, some capital and labor will move out of the banking industry into other industries, perhaps in that same state. At some point the supply of banking service in the state will have become so restricted that the remaining banks can raise their charges by enough to give them what they need to remain in the banking industry there. This new level of charges may not be enough to re- coup the tax (see section (d) below). If a tax were unneutral in favor of banking, the same arguments would apply, in reverse, as capital and labor would flow from other industries into banking, until a new equilibrium was reached. "Banking service" may include cer- tain operations that can be conducted by a separate legal entity, owned by the bank, yet not subject to a tax on banks as such: e.g., a bank might separately incorporate its real estate loan department. In this event the "migration" is, in one sense, only nominal. `There are additional aspects of economic neutrality. A tax may be unneutral as between work and leisure, and so affect the supply of labor. It may be unneutral as between con- sumption and saving, and so affect the supply of capital. But the three aspects of unneu- trality described in this paragraph appear to be the ones of chief concern to banking. 2 The point of view of the present writer on this issue is presented in Carl S. Shoup, Public Finance (Chicago: Aldine, l~)69), i 7-15. The results of the pressure may be thought of, in the language of the calculus, as the instantaneous rate of change, plus or minus, in the amount of assets that the taxpayer keeps in the banking Industry-or the instantaneous rate of chenge in some other relevant economic quantity. PAGENO="0447" 427 Migration of bank capital and labor to another state is somewhat hampered by the fact that commercial banks are restricted to their state of domicile, and sometimes even to their city of domicile. On the other hand, banking capital is relatively liquid and therefore relatively mobile, at least over the years. Moreover, the question is not usually one of existing capital's moving or not moving. In a growing country capital is continually being accumulated, and the total labor force is increasing, so that the tax usually influences simply the directions taken by these increments of capital and labor. Under a tax unneutral against banking, less of the new flow of capital and labor will go into the banking industry than would otherwise. Geogr-aphical tax neutrality has not been as important for banks as in some other industries, in view of the governmental restrictions on the geographical expansion of any one bank, noted above. But these restrintions are not as severe as they were formerly. Charles Conlon, executive secretary of the National Association of Tax Admini- strators, notes that "More recently, national banks have been ac- corded a greater scope of* operations outside the domiciliary state by virtue of the loan production office rulings. This extension of na- tional bank operations geographically has been accompanied by an even greater expansion in the kinds of activities conducted by na- tional banks. These include data processing services; leasing of per- sonal property; ownership of subsidiary corporations performing mortgage servicing, factoring, warehousing and similar functions; credit cards; collective investment accounts; the sale of insurance and travel agency functions."3 The geographical issues to which these activities, as well as traditional lending, give rise are considered under the several taxes below; some of the most perplexing of them involve allocation of income among states for purposes of the income tax. Technical unneutrality has not been the subject of so much dis- cussion as industrial unneutrahity or geographical unneutrality. To the economist it is equally serious, since it implies, prima facie, a waste of resources. For example, if a business firm uses more labor and less machinery because in that way it can reduce its tax bill, there is a presumption that this new pattern of inputs is less efficient than the initial one, else the firm would have been using it in the first place.4 Total product could be increased if a technically neutral tax were substituted so that firms would be free to use the most effi- cient techniques of production, without tax penalty. This question is particularly important under a retail sales tax that taxes purchases of capital equipment. Moreover, technical unneutrality always causes a certain amount of industrial unneutrality. Some industries necessarily use capital- intensive methods of production, and a sales tax that taxes machinery will be unneutral against such industries. (d) Relation Between Tax Shifting and Tax Neutrality complete shifting of a tax sometimes does not, and sometimes does, imply industrial neutrality of the tax. Let us consider a clearly dis- 3 Letter from Charles F. Conlon to Hon. Wright Patman, reproduced in Testimony Received in Con- sideration of H.R. 7491 and Related Bills, Hearing before the Coniinittee on Banking and Currency, House of Representatives, Ninety-First Congress, May 26, 1969 (Washington: U.S. Government Printing Office,) p. 31. These remarks apply, to a somewhat similar degree, to state banks. 4 If the initial pattern of inputs were sOcially inefficient, perhaps because it was Imposing costs on others for which the firm did not have to pay ("negative externalities"), a tax might be devised especially for the purpose of inducing the firm to change that pattern. None of the taxes this paper is concerned with are of that type, and it would be pure coincidence if any of them reduced negative externalities. PAGENO="0448" 428 criminatory tax, one imposed only on the industry in question. It might be thought at first that this discriminatory tax could escape the charge of unneutrality if it ~ere shown to be fully shifted to buyers of the industry's products. If the industry can recoup the entire tax, how can the tax be labelled unneutral with respect to that industry? Yet it will be unneutral, by the definition given in section (a) above for that term, if the shifting is accomplished only by driving some capital and labor out of the industry. Such emigration reduces the industry's output. Customers, bidding against one another for the reduced supply, push the price up. If the supply in this taxed industry is so reduced that the price rises by the full amount of the tax, com- plete forward shifting has occurred. Capital and labor remain in the industry in this extreme case, only because the price does rise by enough to recoup the tax. This case is a combination of a perfectly elastic supply with a demand that is neither perfectly elastic nor per- fectly inelastic. On the other hand, it is theoretically possible for complete shifting to denote industrial neutrality. Let us consider the same discrimina- tory tax as above, but let us suppose that the taxed industry's cus- tomers can find no substitute whatever for the product of that indus- try. They are willing to take a fixed amount of that product at any price within a range that covers the old price plus the tax. The price rises by the full amount of the tax, but now no capital or labor leaves the industry. This combination is one of a perfectly inelastic demand coupled with a supply that is not perfectly inelastic. Similarly, a discriminatory tax that is not shifted may nevertheless be neutral as among industries. It will be so if inability to shift the tax is explained by an extreme specialization of labor and capital to the taxed industry. In this case, labor and capital in the taxed indus- try have nowhere else to go; they are able to produce nothing but the taxed product. They must therefore accept whatever is left to them after tax. Here we have perfectly inelastic supply, while demand is not perfectly inelastic. The result, no shifting at all, may well be deemed inequitable, but it does represent complete industrial neu- trality; there is no flow of labor or capital out of the industry. But if inability to shift the tax is explained by an unwillingness of all customers to pay a cent more for the product than they were paymg before the tax was imposed, industrial unneutrality exists. The cus- tomers can turn to some untaxed good or service that they consider to be a perfect substitute for the taxed one. In this rare case, there must occur some migration of capital and labor from the industry. Migration continues until only very low cost producers are left. This is the combination of a perfectly elastic demand with a supply that is neither perfectly elastic nor perfectly inelastic. (e) Supply and Demand in the Banking Industry Commercial banking does not exemplify any of the four extreme cases just discussed. Commercial banking services form a hetero- geneous group of products. Let the main products be considered the lending function and the demand deposit and time deposit handling functions. As to the demand for these products, although the commercial banks' customers may have no good substitute for the handling of their demand deposits, they can turn elsewhere for the handling of time and savings deposits and for loans. On the supply side, neither labor nor capital in banking is so ir- PAGENO="0449" 429 revocably specialized to that industry that they will not move out of it under substantial tax pressure. Indeed, as suggested in section. 1(c) above, banking capital, and presumably banking labor, are more likely than most other capital and labor to move into other industries, if their earnings in the banking industry become relatively depressed. Neither banking demand nor banking supply, therefore, is likely to correspond with any of the extremes given in section (d) above, except that the supply of banking services may be not far from perfectly elastic over the long run, chiefly because the ratio of fixed assets to total assets is fairly low in the banking industry. A tax discriminating against banking is therefore likely to prove substan- tially unneutral against banking over the long run, and perceptibly so in the short run. Again, in a growing economy, the long run may not be very long. Actual emigration of capital and labor from the banking industry may not occur; perhaps all that will be needed to shift some of the unneutral tax is a slowing down of the rate of entry of capital and labor into the banking industry, relative to their rates of entry into other industries. Accordingly, if complete shifting of a discriminatory tax on banking does occur, it will reflect, not a rigid (perfectly inelastic) demand for ba.nking services but, rather, an almost perfectly elastic supply of capital and labor to the banking industry over the long run. Complete shifting in this fashion implies, we have seen, industrial unneutrality on the part of the tax, since it can be achieved only by tax-induced migration of capital and labor from the industry or, in a growing econ- omy, by a tax-induced relative decline in the rate of growth of the banking industry. The same reasoning applies of course to a tax that is unneutral in favor of banking. Banking then grows faster, relative to other in- dustries, than it would under a neutral tax, and consumers' choices among the various goods and services of the economy as a whole are correspondingly distorted. (1) Taxes Included in the Present Study ~ The sections to follow, Numbers 2 to 9, consider each major state and local tax as it would affect banks if imposed under the "per- manent" (post-1971) section of Public Law 91-156, which requires only that national banks be treated for tax purposes the same as state banks. Sections 2, 3, and 4 deal with taxes directly affecting equity capital or the return from equity capital: the corporation income tax, the tax treatment of dividends, and the franchise taxes on capital employed in the taxing state. Section 5 covers retail sales taxes and gross re- ceil)ts taxes. Section 6 analyzes taxes on bank assets, and Sections 7 and 8 deal with the other side of the balance sheet by considering taxes on bank shares and on bank deposits. Unemployment com- 1)ensation taxes are noted briefly in Section 9. `The classic study ~f bank taxation In the United States is that by Ronald B. Welch, State and Local Taxation of Banks, Special Report of the FNew York State] Tax Commission, No. 7 (Albany: New York State Tax Commission, 1934). Other studies include: John B. Woosley, State Taxation of Banks (Chapel lull, N.C.: University of North Carolina Press, 1935); Lewis H. Kimmel, The Taxation of Banks (New York: National Industria] Conference Board, 1934); John D. Helmberger, State and Local Taxation of Banks (Minneapolis: University of Wisconsin, unpublished doctoral dissertation, 1960). See also Simeon Leland, The Classified Property Tax in the United States (Boston: Houghton Muffin, 1928), pp. 203-221 and 277-78, and Dick Netzer, The Economies of Property Taxation (Washington, D.C.: Brookings, 1966), pp. 140-43. 79-421 0 - 72 - 29 PAGENO="0450" 430 Other taxes of interest to banks are summarized in Section 10, and Section 11 describes in-lieu taxation and built-up rates. Some con- cluding remarks are offered in Section 12. 2. CORPORATION INCOME TAX The state corporation income taxes analyzed here include of course both those corporation income taxes that are applied directly to bank income either through ordinary or built-up rates (a concept that is discussed briefly in Section 10 below) and corporation franchise or excise taxes "measured by" net income, which allow the states to include in the tax base interest on federal obligations. (a) Industrial Neutrality An increase in the rate of ~a state or local corporation income tax, or of a tax measured by corporate net income seems likely to affect banks somewhat less than industrial and mercantile corporations, but more than most other financial institutions. In this sense the corporation income tax is unneutral in favor of financial institutions, including banks, but unneutral against banks vis-a-vis other financial institutions.6 This conclusion is based chiefly on the facts that (a) in most states banks commonly hold a considerable part of their assets in the form of securities that are exempt from the State tax,7 but (b) certain other financial institutions, notably insurance companies, often benefit from the difficulties of defining their net income (though, to be sure, insurance companies commonly pay a tax on their pre- miums). The tax-exempt securities are not likely to rise in price by enough fully to offset exemption from the tax, since the total volume of such securities is so large that part of it must be absorbed by holders who receive less benefit from the exemption than do the banks and hence require a higher interest yield than the banks might accept. As of 1968, twenty-six states imposed an income tax on commercial banks. The rates ranged from 2 per cent in Nebraska to 13.64 per cent in Miimesota, but the true tax burden imposed by the state tax is much less than those statutory rates, and to a degree that differs among the several states. This is because the federal income tax allows deduction of the state tax in computing the base for the federal tax, and some of the state income tax laws similarly allow deduction for the federal income tax in computing the base for the state income tax. This latter group of states, where both deductions are allowed, is 6 The corporation income tax, viewed in isolation from the personal income tax, of course tends to drive capital and labor from fields in which incorporation is necessary (including commercial banks) into real estate activities, fanning, services, some branches of trade, and other industries where partnerships and proprietorships flourish. But taxation to the proprietors of all the current profit of the enterprise may, for high-income entrepreneurs, be more burdensome than the corporate tax rate plus subsequent taxation of whatever part of the profits is distributed. In any event the corporation income tax cannot be appraised with respect to the economy as a whole without taking account of the manner in which the individual income tax applies. Interrelationships of the two taxes may be further complicated to the extent that states follow the Internal Revenue Code, subchapter 5, in permitting a limited class of corporations to elect to be treated as if they were partnerships, so that corporate income, whether distrihuted or not, is taxed as ordinary income to the shareholders in these companies. See Table 2 below for data as of November 1, 1963. From various sources, including the Commerce Clearing House State Tax Guide (the single-volume summary service), it appears that the tax provisions as of 1970 differ from those in Table 2 in that there is now no exclusion of either federal, home-state, or other-state interest payments on securities with respect to taxes "measured by" bank income in Alaska, Hawaii, Kansas, Missouri, New Mexico, North Dakota, South Carolina, South Dakota, and Wisconsin. Also, income taxes on banks have been imposed since 1968 in Iowa, Montana (1971), New Mexico, and Tennessee and, for State banks only at present, in Illinois, Maine, and New Hampshire. [See also table 20A in app. 6 at pp. 406-408, above-EdT PAGENO="0451" 431 referred to hereafter as "double deduction states." To be sure, the federal government also allows consumers to deduct the state and local sales taxes in computing their,taxable income, and similarly for real estate taxes, but there is no double deduction feature, since the federal government does not impose such taxes. (The information On double deductibility does not bear directly on the issue of unneutrality, since the double deductibility, where it exists at all, is not limited to banks; but this information is helpful to an understanding of the absolute amount of the cumulated burden.) Eleven of the states imposing a corporation income tax on banks in 1968 were double deduction states (in Wisconsin, however, de- ductibility is limited). Given a federal corporation income tax with a marginal rate of 48 per cent for large corporations, the double deduction feature reduces the burden of the state tax considerably from what the statutory rate indicates. Thus Alabama's 6 per cent tax adds to the bank's total federal and state tax bill an amount equal to only 1.7 per cent of income before federal or state tax (hereafter termed "pre-tax income"). The Alabama tax is itself not really 6 per cent of the pre-total-tax profit, since it applies only to profit after federal tax, and, in addition, the federal tax is not really 48 per cent of pre-total-tax profit, since it applies only to profit after the Alabama tax. Arizona's 5 per cent tax is really but a tax of 1.4 percent on pre- tax income-and so on. Table 1 shows the statutory rates in column (2), and the net additional burden imposed by the state tax, expres- sed as a percentage of pre-tax income, in column (3) ~8 TABLE 1.-NET ADDITIONAL BURDEN FROM STATE TAX ON NET INCOME OF COMMERCIAL BANKS Net additional Net additional burden as per- burden as per- centage of pretax centage of pretax income, given a income, given a Federal corpora- Federal corpora- Statutory tion tax of 48 Statutory tion tax of 48 State rate 1 percent 1 State rate 1 percent 1 (1) (2) (3) (1) (2) (3) Alabama 2 6 1. 7 Nebraska 2 1. 0 Alaska (3) 0. 5 New York 6 3. 1 Arizona' 5 1.4 North Carolina 4. 5 2.3 California 4 7 to 11 1967. 4. 9 North Dakota 2 5 1. 4 Colorado 6 3. 1 Oklahoma 2 4 1. 1 Connecticut 5.25 2.7 Oregon 8 4.2 Hawaii2 11.7 3.4 Rhode Island 7 3.6 Idaho 6 3.1 South Carolina 4.5 2.3 Kansas2 5 1.4 South Dakota 2 4.5 1.2 Maryland (1968) 7 3. 6 Utah 2 6 1. 7 Massachusetts ~11 35*7 Vermont 5 2.6 Michigan 7 3.6 Wisconsin 2 n 2 to 7 1. 6 to 5. 7 Minnesota 2 13.64 3.9 District of Columbia~.. `4.0 82.1 Missouri' 7 2.0 1 Significance of rate depends largely on treatment of government obligations; see table 2. 2 Indicates a double-deduction State: see text. 16 percent of Federal tax plus license tax, 2 percent of net income. 4 Rate computed annually; in 1967, 9.5. 3 Maximum. 6 Deductibility of Federal taxes in limited to 10 percent of net income before Federal taxes. Tax is 4 percent of gross earnings less earnings paid to depositors. SIt the tax base is assumed to equal net income. Source: Federation of Tax Administrators, State Taxes on the Income, Dividends, and Shares of NatIonal Banks (RM-411 Nov. 1968), and supplementary note for sec. 2, below. 8 The formula for this net additional burden is, when the state does not allow deduction of the federal tax, s-Is, where s is the rate of the state tax and I is the rate of the federal tax. In the double deduction states the net additional burden of the state tax is given by: (s~_.2fs+f2s)/(l_fs). See Supplementary note to this section, below at pp.436-437. PAGENO="0452" 432 Some of these state rates are "built-up" rates, that is, they include additions to the general corporation income tax rate to allow for the fact that corporations'in general, in the state in question, pay cer- tain taxes that banks do not, primarily because of the inhibitions of Section 5219. The true net burden of thestate tax also depends on its treatment of interest on government bonds (see Table 2 below), but there is no practicable way of allowing for this in Table 1. Interest on state and local obligations is exempt under the federal income tax. Such interest is taxable in some states, exempt in others, or is exempt as to obligations of the domiciliary state or its subdivisions, but taxable as to obligations of other states or their subdivisions. Interest on federal obligations is taxable in some states, exempt in others. The state income tax laws on this point, for corporations in general, as of November 1, 1963, are given in columns 2, 3, and 4 of Table 2. When a bank increases its holdings of state or municipal obligations that are taxable by the domiciliary state but not by the federal govern- ment, it does not increase its federal tax bill at all, and deductibility of the federal tax, in computing the base for the state tax, has no TABLE 2.-INTEREST ON GOVERNMENT OBLIGATIONS AND INTERCOI~PORATE DIVIDENDS- TREATMENT UNDER STATE CORPORATION INCOME TAXES AS OF NOV. 1, 1963 (WITHOUT SPECIAL REFERENCE TO BANKS) Federal obligations Obligations of this State and its subdivisions Obligations of other States and their subdivisions I ntercorporate dividends (1) (2) (3) (4) (5) Federal Taxable with exceptions Exempt 15 percent taxable. Alabama Exempt Exempt Taxable Taxable status uncer- tain or unclear. Alaska Taxable with excep- do 1 Exempt 1 15 percent taxable.' tions.' Arizona Exemot Exempt Taxable Exempt.' Arkansas do do Taxable status uncer- Taxable 3. fain or unclear. California Exempt-Direct in- Taxable Taxable Exempt 4. come tax; Taxable- franchise or excise measured by net income. Colorado Exempt do do 15 percent taxable.' Connecticut Taxable do do Do.' Delaware Exempt' Exempt' Exempt' Exempt. District of Columbia Exempt Exempt Exempt Taxable status un- certain or unclear. Georgia do do Taxable Exempt.' Hawaii do do do 15 percent taxable.' Idaho Exempt-Direct Taxable do Do.' income tax; Taxable-Franchise or excise tax measured by net income. Indiana Exempt Exempt Exempt Do.' Iowa do Taxable Taxable Do.' Kansas do do do Exempt." Kentucky do Exempt do Taxable." Louisiana do Taxable-Exempt lx do Exempt." Maryland do Exempt Exempt'4 Exempt. Massachusetts Taxable Taxable Taxable Taxable. Minnesota Taxable-Direct Exempt-Direct do 15 percent taxable." income tax; 5 income tax; Taxable-Franchise Taxable-Franchise or excise tax or excise tax measured by net measured by net income, income. Mississippi Exempt Exempt do Taxable." Missouri do do do Exempt.'~ Montana Taxable Taxable do Taxable. See footnotes at end of table. PAGENO="0453" 433 TABLE 2.-INTEREST ON GOVERNMENT OBLIGATIONS AND INTERCORPORATE DIVIDENDS- TREATMENT UNDER STATE CORPORATION INCOME TAXES AS OF NOV. 1, 1963 (WITHOUT SPECIAL REFERENCE TO BANKS)-Continued Federal obligations Obligations of this State and its subdivisions Obligations of other States and their subdivisions Intercorporate dividends (1) (2) (3) (4) (5) New Jersey do do do 50 percent taxable. New Mexico Exempt Exempt Exempt 15 percent taxable.' New York Taxable Taxable Taxable Exempt.'6 North Carolina Exempt Exempt do Do.20 North Dakota do do do Do.2i Oklahoma do Taxable do Do.22 Oregon Exempt-Direct do do Do.23 income tax; Taxable-Franchise or excise tax measured by net income. Pennsylvania Exempt Exempt Exempt Exempt. Rhode Island do do Taxable 15 percent taxable.' 24 South Carolina do do do Taxable. Tennessee Taxable Taxable do Exempt 25 Utah Exempt-Direct do do Taxable 26, income tax: Taxable-Franchise or excise tax measured by net in- come. Vermont Taxable with excep- Exempt I Exempt I 15 percent taxable.' tions.' Virginia Exempt do Taxable Exempt.27 Wisconsin do Taxable do Dow Follows Federal provision. 2 If received from corporations taxed upon at least 50 percent of their income in Arizona for the year preceding payment. 3 Dividends from State banks and truxt companies and national banking associations are exempt. 4 Only to extent declared from income which has been taxed in California. ° Except interest earned in connection with the corporation's regular and usual course of operations on obligations not traded on an exchange or over the counter. 6 Exempt only if corporate recipient is engaged in business in Georgia and subject to Georgia income tax. Dividends from Georgia and Federal banko and trust companies are exempt. 7 If received from a (1) corporation subject to income tax of another State and of which 95 percent of stock is owned by corporations doing business in Hawaii; (2) bank or insurance company organized and doing business in Hawaii; (3) corporation with at least 15 percent of income for taxable year preceding dividend payment attributed to and taxable by Hawaii. Dividends from a national banking association are completely exempt. 8 Except that interest on certain bonds issued by Idaho municipalities is exempt. - If received from corporation taxable by Idaho on more than 50 percent of its taxable income for year preceding dlvi. dend declaration. Otherwise, fully taxable. 10 That portion of dividends representing earnings of the payer corporation on which Kansas income tax has been paid is exempt if payer corporation derives at least 15 percent of its net income from Kansas sources. Dividends from banks and trust companies are totally exempt. 11 Dividends on stock of Kentucky banks and trust companies are fully exempt. 12 Louisiana exempts interest on certain obligations of Louisiana and its subdivisions issued under statutes specifically exempting the interest on the obligations. 13 To the extent earned in Louisiana and to the extent that the income from which they are paid has been taxed under Louisiana law. 14 Exempt as "investment income." - 15 Taxable under the direct income tax to the extent permitted by Federal law. 16 In proportion to income assigned to Minnesota if recipient Owns at least 80 percent of voting stock. Fully taxable if stock is being held as inventory. 17 Exemot if dividends have already borne a Mississippi tax as dividend income; this relief provision is for stockholders of holding companies. Dividends received from certain national banks are exempt IS If received from a corporation that has paid Missouri tax on that part of income subject to Missouri tax. Case law indicates, perhaps, exemption of dividends from foreign corporation deriving no income from Missouri. 19 Only 50 percent of dividends from nonsubsidiaries is exempt. xs To extent of percentage of issuing corporation's income taxed by North Carolina. 29 To extent of percentage of declaring corporation's income taxed by North Dakota. 25 If received from a corporation that was taxable in Oklahoma on 5 percent or more of its entire gross income for im- mediately preceding taxable year. Otherwise, fully taxable. 23 On!y if both received by corporation not a holding company, and taxpayer holds 50 percent or more of issuing cor- poration's stock. - Si Completely exempt if received from banks subject to the Rhode Island bank tax, corporations liable to the business corporation tax, or public service corporations liable to the public utility tax. 23 Only if received from wholly owned subsidiary corporations that pay an income tax to Tennessee; otherwise, fully taxable. - 26 But "corporations subject to the direct income tax are isot taxed on dividends [paid?] from earnings prior to Jan. 1, 1959," and ` Corporations subject to the franchise tax are not taxed on dividends [paid?] from earnings prior to Jan. 1, 1931." See source cited below, p. 428. . 27 Dividends from national banks and Virginia banks and trust companies; and other dividends, to the extent of the percentage of the issuing corporation's income that is taxed by Virginia. 24 Only if from a corporation taxed on over 50 percent of its total net income by Wisconsin in year preceding payment Otherwise, taxable in full. Source: 88th Cong., 2d sess., House report No. 1480, State taxation of interstate commerce, Report of the Special Sub- committee on State Taxation of Interstate Commerce of the Committee of the Judiciary, vol. 2 (Washington, D.C.: Gov- ernment Printing Office, June 15, 1964), app. L, pp. 367-434-. PAGENO="0454" 434 significance with respect to that increment of investment by the bank. In this case, then, double deductibility is no different from deductibil- ity for the federal tax alone, and the net additional burden caused by the state tax on this increment of investment income is understated in Table 1, column 3, for the double deductibility states. Again, double deductibility is not limited to the banking industry. Certain other increments of income to a bank may incur a federal tax, if not of zero as in the case above, at least of less than 48 per cent. Certain types of capital gain and loss give rise to this I)henom- enon, and by and large such gains and losses have probably been of more consequence for banks than for other industries, at least non- financial industries. This lower effective federal tax rate causes the figure in column 3 of Table 1 to be an understatement for the double- deductibility states. If a. bank incurs a certain incremental expense, rather than ex- periencing an incremental gain as in the examples above, the reasoning above applies in reverse. The net cost, after all income taxes, is greater in the double deductibility states than in the others. (b) Geographical Neutrality Under the restraints of Section 5219, income taxation of national banks has been geographically neutral in one respect, namely, in the sense that no double taxation of income and no zero taxation of income could occur through differences in states' formulas for allocat- ing a portion of a bank's income to the taxing state, or through dif- ferences in states' laws regarding deductibility of outlays or other differences in definition of taxable net income. The income, wherever earned, could be taxed by, and only by, the bank's home state. V\Tith recent growth of banks' interstate activities the potentiality for impairing that aspect of geographical neutrality has increased, and if no restrictions are placed on the states, i.e., the post-1971 provisions of Section 5219 are retained, we may expect them to differ among themselves in formulas for geographical allocation and in definitions of net income for banks, just as they have done, and continue to do, with respect to non-bank firms. If the permanent part of the new bank tax legislation stands as passed in 1969, a certain amount of duplicate taxation of bank income among the states will doubtless develop. No doubt, also, some gaps will open up where a part of a bank's income escapes state tax entirely or is given, in- advertently, preferential treatment. Activities for which allocation-of-income problems probably will arise are numerous, but the following are illustrative: loans by a bank in State A to a borrower in State B, where the closing takes place in State C, the funds to be spent in State D; purchase of consumer merchandise in A by a resident of B through use of a credit card issued by a bank in C; a working capital loan by a bank in A to a corporation in B, the funds to be spent by the corporation in C, D participation and overline loans in which a bank in A acts as the lead bank for, or cedes portions of loans to, banks in B, C, . . . reserve loans by a money-market bank to a correspondent bank to satisfy state reserve requirements for the latter bank; leasing of PAGENO="0455" 435 equipment by a money-market bank to a correspondent bank; partner- ship operation with a correspondent bank in leasing equipment to others or in factoring.9 In the leasing-factoring instances it has been argued that states other than the domiciliary state of the money- market bank might claim that that bank is doing business in those other states through an agency relationship with the correspondent bank. It has also been argued that certain other activities by the money-market bank might attract taxation of the correspondent bank by the home State of the money-market bank: securities handling and safekeeping service, transit service, collections, foreign drawing and remittance service, broker loan participations, factoring and accounts receivable~ financing, issuance and redemption of commercial paper, and provision of bank facilities and services.10 Duplicate state taxation and gaps in state taxation are of course geographically unneutral; a bank that channels its activities in a certain geographical pattern will minimize its effective combined rate of state income taxes. That pattern may or may not be one of restrict- ing all activity to the home state; a bank may continue to operate outside its home state because of low state tax rates elsewhere, in the face of a certain amount of duplicate taxation on some of its out-of- state income. Moreover, it may not be easy for a bank to discern accurately the alternative tax patterns, in a complex world of changing tax regulations, court decisions, and other uncertainties. On balance, then, given the almost certain emergence of duplicate taxation and possible tax gaps under the permanent features of the present bank tax legislation, and given the continuance of the rather low levels of net additional burden imposed by any one state's income tax (see Table 1), the problem may be not so much one of distortion of flow of funds as one of nuisance and social waste of manpower and equipment devoted to the task of complying with, and attempting to minimize tax liabilities under, a number of somewhat differing state income tax laws. To be sure, state tax rates will almost surely rise further, so the distortion problem will become more important. On the other hand, because banks are so closely supervised, the compliance problem is also more important to them than to firms in many other industries. (c) Technical Neutrality The technical unneutralities of the corporation income tax are probably not very significant for banks, which, for various reasons, including regulatory restrictions and the nature of their business a~s a deposit-holding mechanism, cannot respond readily to the pres- sures that that tax exerts to increase the ratio of borrowed capital to equity capital, or to disincorporate. Or perhaps we should say that since banks are, from one point of view, in the business of borrowing capital (to lend it out), the pressure exerted by the income tax is of relatively secondary consequence. `These examples are paraphrased from a memorandum by Mayer, Brown, & Platt, Chicago, accompany- ing a letter from John E. Allen, of this firm, to the Continental Bank, Chicago, November 18, 1970, and from First National City Bank, New York, Report on the National Bank Tax Act as Directed by Congress in Public Law 91-156 [no date], pp. 18-15. (Both source documents are in the Federal Reserve Board file for the bank tax study.) 10 First National City Bank, icc. cit., pp. 16-17. PAGENO="0456" 436 (d) Supplementary note to Section 2: Derivation of Formula for Net Additional Burden of State Income Tax." Letf=federal statutory rate of corporate income tax. Let s=state statutory rate of corporate income tax. Let y=corporate net income before either federal or state tax. Let t1= amount of federal corporation income tax, in dollars, payable by corporation. Let t~= amount of state corporation income tax, in dollars, payable by corporation. If the state does not allow the federal income tax as a deduction, we have: t3=sy; t1=f(y-t5) =f(y-sy) =fy-fsy t~ +t~= sy+fy-fsy (t5 +t1)/y= s +f-fs= rate of two taxes together (`s +ffs) -f excess of combined rate over federal statutory rate=~s-fs If the state does allow deduction of the federal corporation income tax,.we have: t5(ytf)S (1) tf=(y-tS)f (2) expand (1) t~= sy- Stf (3) expand (2) tf=fy-ftS (4) substitute from (4) in (3) t5=sy-s(fy-ft5) (5) from (5) t8=~"~~~ (6) 1-fs t~ s-fs (7) divide (6) by ~ ~=1-fs substitute from (6) in (4) tf=fy-~~----~-~ (8) f fy(l-fs)-f(sy-fsy) (9) rom (8) t1- ~ 1-fs d~ ~d (9'~ b tff(1-fs)-f(s--fs)_f-fS (10) ivi e ~ y y~ 1 -fs - 1-fs add (7) and (10) t+t1f±s2fs (11) "In practice, taxpayers commonly avoid the use of algebra by subtracting last year's tax from this year's Income. The results are not quite the same as with instantaneous deduction, but are not capable of being generalized as simply in algebraic formulae. PAGENO="0457" 437 The excess of (11), combined effective rate of federal tax and state tax, over federal rate alone, is given by: (11~_~_L+82f8 ~_j+s-2fsj(1-fs) " ~` - 1 -fs ~` - 1 -fs 1 -fs - s- 2fs +f2s - 1-Js (12) 3. TAXATION OF BANK DIVIDENDS (a) Under individual income Taxes As of 1968, of 26 states that taxed the income of national banks, 17 also required inclusion of national bank dividends in shareholders' individual income tax returns for the state, along with other divi- dends.12 Eight states did not require such inclusion, most or all of them because they did not impose an individual income tax. A ninth state, Rhode Island, now (1970) has a personal tax on dividends, interest, and capital gains. Before 1970, no state, apparently, taxed national bank dividends without also taxing national bank income. Of the eleven "double deduction" states that taxed the income of national banks (including Wisconsin in this number), five were among those states that did not impose an individual income tax. Four of the double deduction states did tax bank dividends to stock- holders (on two states there is no information available as this is written). On the other hand, of those states that did not allow double deduction, all but one did impose an individual income tax that included dividends. In none of these states, of course, do the facts imply discrimination against or in favor of banks as such, as distinct from corporations in general. - State "taxation of dividends" to shareholders, like state taxation of corporate income, is softened by the federal income tax deduc- tibility of state income tax in computing the federal tax base for the dividend recipient. The degree of softening depends on the re- cipient's marginal bracket rate (and lower rates, too, if the dividend is large relative to his total income). Lacking data on ownership of national bank shares by income class, we can only say that the soft- ening is sometimes more, sometimes less, than the softening of the corporation tax rate. If the state allows double deduction to the individual taxpayer, that is, deduction of the federal personal in- come tax in computing the base for the state personal income tax, the softening is increased, as shown by the analysis above for the corporate income tax. * Taxation of dividends to individual shareholders in banks adds to the industrial unneutrality of the income tax system, since certain industries are largely corporate (including commercial banks) and others not. Such taxation probably does not contribute much to geographical unneutrality, but does exert pressure on the bank to expand its undivided profits in place of raising new equity capital 12 Federation of Tax Administrators, "State Taxes on the Income, Dividends, and Shares of National Banks," RM-411, November 1968. In Mississippi, where State and national banks were exempt from corporate net income tax, dividends from Mississippi national banks became taxable to shareholders January 1, 1970. PAGENO="0458" 438 or perhaps in place of accepting a ]ower ratio of equity to debt (tech- nical unneutrality). The fact that some states give preferential treatment to dividends received from domestic corporations does tend to inhibit interstate flows of capital, and thus makes for geographical unneutrality. In general, then, the taxation of dividends creates unneutrality, not against banks as such, but, when coupled with corporate income taxation, against the corporate sector, in which commercial banks, as a rule, find themselves. (b) Under Corporation Income Taxes If state income taxes apply to dividends received by corporations from subsidiaries, the corporate form of organization is further penalized relative to unincorporated business. This would have an unfavorable, but presumably rather weak, effect on the flow of capital and labor into the banking sector, which with rare exceptions is incorporated and has recently experienced a rapi4 expansion in the creation of holding companies. The facts on this score for corporations in general, as of November 1963, are given in column 5 of Table 2 above, and in the footnotes to that table. For the most part, intercorporate dividends paid by United States (domestic) corporations are exempted or included only as to 15 per cent (the federal provision), but most of these instances are coupled with a requirement that the paying corporation be subject to the state's corporation income tax to some degree. Only seven states follow the federal provision without exception. A few states specify an exemption for banks that is not entirely available to oth corporations (see footnotes 7 and 24 to Table 2). The parent corporation pays federal income tax on only 15 per cent of dividends. Hence the impact of a state or local income tax on dividends received from a subsidiary is cushioned much less by de- ductibility of that tax than is the impact of a tax on profits. In other words, for a given increment of state revenue, a state tax on inter- corporate, dividends is relatively damaging, and is correspondingly more likely to check the formation of holding companies. 4. FRANCHISE TAXES ON CAPITAL EMPLOYED IN TAXING STATES A low-rate annual franchise tax on capital, or capital stock, employed in the state is imposed by some 35 states, as Table 3 indicates. In a few of these states the maximum tax is so low that it might almost be lumped with the mostly flat-rate license fees charged for the same privilege, not shown in Table 3. These taxes seem to pose no threat of unneutrality against banks under the permanent provisions of Public Law 9 1-156. Where the tax applies only to capital stock, banks would be favored, since they commonly have a low ratio of capital stock, or even total equity, to total assets. On the other hand, these taxes are unneutral against industries that turn their capital over slowly (such industries must raise the prices of their products by a larger percentage than the fast-turnover industries to recover the tax), and if bank assets turn over relatively slowly, a matter on which the present writer is not well informed, there is `unneutrality against banks. PAGENO="0459" 439 The franchise tax on out of state ("foreign") corporations generally applies to that part of the capital stock that is employed in the state, as measured by selected~apportionment factors. This has significant implications for post-1971 taxation under P.L. 91-156, insofar as banks qualify in "foreign" states. TABLE 3,-FRANCHISE TAXES BASED ON CAPITAL EMPLOYED INTHE TAXING STATE, AS OF OCTOBER 1, 1970 [Numbers in parentheses refer to pages of source: Commerce Clearing House, State Tax Handbook, as of October 1, 1970 (New York)] Alabama.-Franchise tax: (Prorated on a half-yearly basis.) Domes-. tic-$2.50 per $1,000 of capital stock. Foreign-$2.50 per $1,000, measured by actual amount of capital employed in the state less loans secured by real estate mortgages on which Alabama recording tax has been paid. No par stock valued at $100 per share unless a different value is shown. (461) Arkansas.-Corporatioii franchise tax: Domestic-i 1/100 of 1% of proportion of subscribed capital stock employed in the state. Doing no business in state, $5. Foreign-ii/iOO of 1% of proportion of capital stock representing property owned and used in business transacted in the state. No par stock valued at $25 per share. Min- imum, $11. Colorado.-Franchise tax: Domestic corporations-less than $50,000 of authorized capital stock, $10; $50,000 but not exceeding $150,000, $20; $150,001 but not exceeding $250,000, $40; $250,001 but not exceeding $500,000, $65; $500,001 but not exceeding $1,000,000, $100; $1,000,000 or more, $250. Foreign corporations-$i00 annual license fee in lieu of franchise tax. (480) Delaware.-Franchise tax: Up to. and including 1,000 authorized shares, $20; 1,001-3,000, $24.20; 3,001-5,000, $30.25; 5,001-10,000, $60.50; over 10,000, $60.50 plus $30.25 per each additional 10,000 shares or fraction. Alternative rate, $121 per $1,000,000 of assumed par value capital based on average asset value, but not less than par 50% reduction for inactive corporations. Maximum-$i 10,000 ($55,000 for regulated investment companies). Minimum-$20. (486) Ftorida.-Corporation franchise tax: Graduated from $20 for $10,000 or less, on domestic issued capital stock not including treasury stock, and on foreign outstanding capital stock representing capital allocated for use in Florida, to $2,000 for over $2,000,000. No-par stock valued at $100 per share unless a different, value is shown. Financial corporations, if qualified, may elect to pay a $1,000 annual franchise tax in lieu of intangibles taxes. (492) Georgia.-Corporation' franchise tax: Graduated from $10 for $10,000 or less, based on net worth, including capital stock and paid in and earned surplus of domestic corporations, and on the proportion of issued capital stock and surplus employed in the state of foreign. corporations, to $5,000 for over $22,000,000. (496) Idaho.-Corporation franchise tax: $20 for $5,000 stock or less based on domestic and foreign authorized capital stock, to~ $300 for stock over $2,000,000. No par stock valued at $100 per share. (501) PAGENO="0460" 440 Illinois.-Corporation franchise tax: Initial domestic and foreign corporation franchise tax is 1/12 of 1/10 of 1% per month, or fraction, between date of issuance of certificate of incorporation or filing application for certificate of authority, respectively, and July 1 following; minimum, $25; maximum, $1,000,000. Additional franchise tax of 1i12 of 1/10 of 1% per month between date of each respective increase in sum of stated capital and paid-in surplus and July 1 following. Annual franchise tax payable by domestic and foreign corporations is 1/20 of 1% for 12 months beginning July 1 of year in which payable, plus supplemental annual franchise tax of 1/20 of 1% for 12 months beginning July 1 of year in which payable. Minimum combined annual and supplemental annual tax, $25; maximum, $1,000,000. Minimum annual franchise tax for domestic corporations ranges from $10 if stated capital and paid-in surplus is $50,000 or less to $500 if over $10,000,000. (504) Iowa.-Franchise tax: Domestic-from $5 for less than $20,000 of stated capital to $3,000 for over $500 million of stated capital. Foreign-Same as domestic based on stated capital in state or total stated capital. (510) Kansa&-Corporation franchise tax: Graduated from $10 for $10,000 or less based on domestic paid-up capital stock, and on foreign issued capital stock representing property and business in Kansas, to $2,500 for over $5,000,000. (513) Kentuclcy.-Corporation franchise (license) tax: 70~ per $1,000 of total capital employed in the business within and without the state. Minimum, $10. (516) Louisiana.-Corporation franchise tax: $1.50 per $1,000 based on issued and outstanding capital stock, surplus, undivided profits, and borrowed capital. Minimum, $10. Value of stock with or `without par value is the value reflected by the corporation's books. (519) Maine.-Dom estic corporation franchise tax; foreign corporations license fees: Domestic-par value stocks: graduated from $10 for $50,000 or less to $100 for $1,000,000 plus $50per additional $1,000,000;, no par stock: from $10 for 250 shares or less to $100 for 10,000 shares plus $50 per additional 10,000 shares. Foreign-s 10 flat annual rate. (523) Maryland.-Corporation franchise tax: Domestic-graduated from $10 for $10,000 or less to $480 for $10,000,000 plus $30 per $2,000,000 or fraction thereof over $10,000,000. Foreign-$25. Credit unions- $10. Real estate investment trusts-$25. (527) Michigan.-Annual license tax on business corporations: 5 mills per $1 based on the proportion of domestic and foreign paid-up capital and surplus representing property in Michigan. Minimum, $10. Value of no par stock is book value, market value, or $1 per share, whichever is highest. (535) Mississippi.-Corporation franchise tax: $2.50 per $1,000 of domes- tic and foreign book value of capital, consisting of capital stock, surplus and undivided profits, employed in state. Minimum, $10. (543) M'issouri.-Corporation franchise tax: 1/20 of 1% of domestic and foreign-proportion of par value of outstanding shares and surplus representing property and assets in Missouri. No par stock valued at $5 per share or at actual value whichever is greater. (547) PAGENO="0461" 441 Nebraska.-Corporation franchise tax: Graduated from $10 for $10,000 or less based on domestic paid-up capital stock, and foreign capital employed in Nebraska, to $8,250 for over $100,000,000. Foreign corDorations pay double; maximum, $9,000. (553) New Hampshire.-Domestic corporation franchise tax: ~ of initial fee plus 1,/2 of fee paid for increases in authorized capital stock. Maxi- mum, $1,000; minimum, $30. Initial fee: Domestic-$60 for $15,000 or less to $1,500 when in excess of $500,000, but not in excess of $1,000,000; and $100 for each $100,000 in excess. Same rates for increase of capital stock. Minimum, $30. No par value stock valued at $50 per share for the first 20,000 shares and $1 per share for any additional shares. Foreign-$100 flat fee upon qualifying plus annual maintenance fee of $70. (558) New Jersey.-Corporation franchise net worth tax: The following tax based on allocated net worth: 2 mills per $1 on first $100 million; 4/10 mill per $1 on second $100 million: 3/10 mill per $1 on third $100 million; and 2/10 mill per $1 on all over $300 million. Minimum tax- greater of (1) 5/10 mill per $1 on first $100 million and 2/10 mill per $1 on excess over $100 million of the average of allocated real and per- sonal property, or (2) $25 for domestic corporations, $50 for foreign corporations, or (3) in the case of domestic corporations the least of the amounts provided in (a), (b), or (c) below: (a) 5,000 shares of authorized capital stock or less, $25; over 5,000, but not over 10,000 shares, $55; over 10,000 shares, $55 for the first 10,000 shares and $27.50 per additional 10,000 shares; (b) 11/100 of a mill per $1 on the total assets of the corporation; or (c) $100,000. The total mini- mum for investment companies and regulated investment companies is $250. (561) New Mexieo.-Franchise tax: 55$ per $1,000, or fraction thereof, of book value of the proportion of authorized and issued capital stock represented by property and business in the state; minimum, $10. (565) New York.-Franchise taxes: Business corporations-(A) principal tax: (1) allocated net income, 7%; or (2) business or investment capital allocated to New York, 1 ~ mills per dollar (~ of 1 mill for cooperative housing corporations and limited-profit housing companies); or (3) 7% of 30% of allocated net income plus certain salaries; or (4) minimum flat rate of $100, whichever is greater. (B) Additional tax on allocated subsidiary capital: 5,/s mill per $1. Additional tax on omnibus cor- porations having New York gross receipts of $500,000 and over, 5~% of business income. Real estate corporations, 2% of dividends paid and net worth in excess of paid-in capital assets. (569-70) North Garolina.-Corporation franchise tax: Domestic and foreign- $1.50 per $1,000 issued and outstanding capital stock, surplus and un- divided profits allocable to state. Minimum, $10. (574) Ohio.-Corporation franchise tax: Domestic and foreign (including non-profit corporations)-Y2 of 1% (investment companies and state- chartered banks, 1/10 of 1%; public utility holding companies, from 4/100 of 1% on first $10 million of taxable value to 1/200 of 1% on taxable value over $100 million) of value of issued and outstanding stock based on total value, as shown on the books, of capital, surplus, undivided profits and reserves (less certain reserves and expenses) allocable to Ohio. i\'Iinimum, $50. (582) PAGENO="0462" 442 Olclahoma.-Corporation franchise tax: $1.25 per $1,000 or fraction thereof used, invested or employed in Oklahoma. Maximum, $20,000; minimum, $10. (586) Oregon.-Corporation franchise tax: Domestic-giadua ted from $10 for $5,000 or less par value of authorized capital stock to $200 in excess of $1,000,000. No par stock valued at $10 per share. Foreign- $200 flat rate. (589) Pennsylvania.-Foreign corporations excise tax: 3'~ of 1 % increase of capital employed in the state. Foreign corporations franchise tax: 7 mills per dollar of taxable value of whole capital stock apportioned to the state on the basis of tire ratio that (A) tangible property situated within Pennsylvania, (B) wages, salaries, and commissions paid in Pennsylvania, and (C) gross receipts from business in Pennsylvania bear to the total of each wherever located. (592) Rhode Island.-Domestic corporation franchise tax: $2.50 per $10,000 authorized capital stock. Minimtim, $50. Corporations not engaged in business in state during year-capital stock of $200,000 or less, $50; $200,000 to $1,000,000, $62.50; $12.50 per additional $1,000,000 or part. No par stock valued at $100 per share. Domestic corporations subject to the business corl)oration tax pay only the amount by which the capital stock tax exceeds the bu.~~ness corpora- tion tax. (596) South Garolina.-Corporation franchise tax: 1 mill per $1 paid to capital stock and surplus. Allocated for interstate corporation. Min- imum, $10. An annual report and $5 filing fee must be submitted by corporations not filing the annual franchise tax report. (599) Tennessee.-Annual corporation franchise tax: i5~ rer $100 worth of issued and outstanding capital stock J)IUS surplus and undivided profits (or minus deficit), apportioned to state, but not less than the value of real and tangible personal property; minimum, $10. Value of stock in other corporations paying the tax is deductible. Annual corporation report and tax: 3~2 of 1 % of gross receil)ts from intrastate business during the preceding fiscal year with a minimum of $25, or a fee graduated from $5 on actual capital stock of $25,001) or less to $150 on $1,000,000 or more. (607) Texas.-Corporation franchise tax: $2.75 per $1,000 stated capital, surplus, and undivided profits pius outstanding bonds, notes, and debentures allocated according to gross receipts from intra~tate busi- ness; minimum, $35. An additional tax is levied per $1,000 on debt allocable to Texas as follows: from May 1, 1969, to April 30, 1970, $2; from May 1, 1970, to April 30, 1971, $1.50; from May 1, 1971, to April 30, 1972, $1; and from May 1, 1972, to April 30, )973, 50~. Plus additional tax of 18.18% of tax due for tax periods until April 30, 1973; 9.09% thereafter. (611) Virginia.-Domestic corporations franchise tax: No par stock valued at $100 per share. $10 on $25,000 or less maximum authorized capital stock to $15,100 on $300,000,000; plus $10 p~r $1,000,000, in excess thereof. (621) Washington.-Corporation franchise tax: $30 on $50,000 or less; decreasing from 1/20 of 1 % to 1/100 of 1 % on additional amounts of domestic authorized capital stock, and foreign stock in proportion of issued and outstanding capital stock representing property and busi- ness in Washington. Maximum, $2,500. No par stock valued at the actual value of assets represented by such stock. (626) PAGENO="0463" 443 West Virginia.-Corporation franchise tax: Domestic-graduated from $20 on $5,000 or less authorized capital stock to $2,500 on $15,000,000 or more. Foreign-75% higher than above rates. Mini- mum, $250. No par stock valued at amount for which stock was issued but not less than $25 per share. (630) Wyoming.-Corporation franchise tax: Domestic and foreign- graduated from $5 on $50,000 or less to $50 on more than $500,000 and not more than $1,000,000, plus $50 on each additional $1,- 000,000 portion of corporate property and assets located and em- ployed in Wyoming. (638) 5. RETAIL SALES TAXES AND GROSS RECEIPTS TAXES The present section analyzes first the effects of the so-called re- tail sales taxes, the sales taxes that are limited to taxing the "final sale" to the consumer or other "final" user. The word "final" is put in quotation marks here because there is nothing economically final about machine tools, paper used in an office, and the like. The fact that the article does not go physically into the firm's product does not in an economic sense make it a final good, except in the limited sense in which investment goods are sometimes said to be final. Following this analysis, the broader-based gross receipts tax that a few states employ will be briefly considered. Only three states use neither a retail sales tax nor a gross receipts tax: Oregon, Montana, and New Hampshire. (a) Retail Sales Taxes The discussion to follow will refer to the effects of imposing sales and use taxes, assuming full advantage to be taken by the states of the provisions of Public Law 9 1-156, relative to the effects that would occur if Section 5219 were continued as it was prior to that Public Law. It is here assumed that in this latter instance (i.e., the old law) banks would pay higher prices for taxable goods or services under those types of vendor sales taxes the laws for which do not evidence a legislative intent to have the tax rest on the vendee, and hence can be collected on sales to banks, under the latest Supreme Court decisions. Economic forces, it is here assumed, would over- power implied legislative intent. Under vendor sales taxes that do imply such an intent, the old law evidently did not permit taxation on sales to national banks.'3 Sales to state banks have of course always been taxable, at least so far as Section 5219 is concerned, and in some instances national banks have acceded to such taxes even when in fact they were exempt. Accordingly, the comparison is not quite one between full sales taxation of banks and no sales taxation of them at all, directly or indirectly. (i) Industrial Neutrality.-A retail sales tax probably exerts some pressures on capital and labor to flow into the banking industry, from certain other industries. The effect may not be pronounced, but it is almost surely in the direction just indicated, for two reasons. `3 See Charles F. Conlon, "Repeal of National BankTax Immunity," L\ational Tax Journal, June 1970, note 24, p. 227; the Massachusetts sales tax is a vendor tax, but the United States Supreme Court, in the Agricultural 1',ational Bank-case, said the statute clearly showed intent that the tax be passed on to the purchaser. PAGENO="0464" 444 First, much of what appears as a sale in most ordinary businesses is never shown as such in the banking business, and so would not be subject to retail sales tax. This would be so, even if that tax were defined to cover retail sales of all services. Check handling services 14 and savings deposit services are examples. In general, banks commonly supply services like these either free of charge or below cost, and more than cover the loss by the excess of the interest, dividends, and rentals they receive from the investment of moneys left with them on deposit over the interest they pay on time deposits. Second, retail sales taxes in fact cover only services specified in the law, and in the United States these lists of taxable services apparently have thus far never included banking charges for use of checking accounts. They similarly appear always to have excluded fees for many other banking services: Managing trust funds, servicing mort- gages, and like activities. Of course the taxes can be changed, under P.L. 91-156, to include such services. Iowa, for example, imposed sales tax on bank service charges, effective in 1970. Banking services may not be very good substitutes for taxed services and goods, so the consequent industrial unneutrality may not be very significant, but there exists some degree of competition for the consumer's dollar among virtually all products. An offsetting factor is that banks, by virtue of not being taxed on what they sell, are cornmcnly regarded as "final buyers" of much of what they purchase.15 Accordingly, the retail sales tax could commonly apply under P.L. 91-156 to banks' purchases of tangible goods, ranging from the checkbooks that they supply to their cus- tomers to materials going into buildings. This was, to be sure, already the case under the pre-1969 version of section 5219 in all or most of the states that imposed vendor sales taxes that imply no intent of forward shifting. On or since December 24, 1969, some 29 or 30 states have made their sales and use taxes (or sales or use taxes) applicable to banks by repeal of previous exemptions or by revision of administra- tive interpretations. On balance, it seems likely that a quantitative study would show that a retail sales tax places a lighter burden on the banking business than on business in general, and would do so even under P.L. 91-156, although certain heavily taxed activities, leasing for example, may become more important for banks. The taxation of materials going into buildings, and of equipment, and tangible personal property would not place the banking business at a relative disadvantage, since such sales to other industries are, in general similarly taxed. As to banks relative to other financial institutions, the answer with respect to the burden of a retail sales tax is not a priori evident. It would take an intensive quantitative study to ascertain whether an increase in a retail sales tax rate would tend to induce capital and labor to move from banking into these other financial fields, or vice 14 "* . the servicing of . . [demand] deposits con~titutes the largest portion of a commercial bank's operating expense. . . . At the present time, the cost of servicing the demand deposit function in commer- cial banks is approximately 4% of the net demand deposits available for investment." Bland W. Worley, President, North Carolina Bankers Association, in American Banker, July 24, 1970. Service charges col- lected by insured commercial banks for checiring account services in 1960 amounted to only $1.1 million, accounting for only a little over 33~% of total operating income in that year. 1969 Report of Income; Assets and Liabilities; Commercial and Mutual Savings Banks: December 31, 1969, published by Federal Deposit Insurance Corporation (1970), p. 114. 15 Still, "bank purchases subject to sales tax as a proportion of total expenses are substantially less than those of other industries." Worley, bc. cit. PAGENO="0465" 445 versa. General observation suggests that there might well be little tendency either way. It has been asserted that banks are less able to shift taxes to their customers than are business firms in general because they are heavily regulated, especially with regard to "the amount that they may charge for their services, particularly their principal service, loans."16 But a sales tax is clearly not intended by the legislator to be absorbed by the profit of either the seller or the buyer. To be sure, the tax seems un- likely to come in full out of wages, or out of rates paid on time and savings deposits or borrowings. To this extent, therefore, a sales tax may be somewhat more significant for banks relative to other enter- prises than the analysis above would indicate. A mitigating factor is that the sales tax is deductible in computing federal taxable income, hence the net burden imposed by an unshifted sales tax is not much more than half the amount of that tax, at least for a profitable bank. But of course other industries benefit from this deductibility, too. (ii) Geographical Neutrality.-Siiles and use taxation is relatively neutral geographically in the sense that the states are not permitted to discriminate against interstate commerce. Differences in sales tax rates and definition of tax base could create some pressure for migration of banking capital and labor, including decisions on where to engage in leasing (unless the higher taxing jurisdiction rendered correspondingly more governmental service). But the existing tax-rate differentials would exert only a mild pressure, if any, apart from the compliance problems always encountered by multistate firms.'7 (iii) Technical Neutral ity.-T he retail sales taxes, as currently imposed by the states and their subdivisions, penalize capital-intensive methods of production. Banking is perhaps not a capital-intensive industry. Still, insofar as the value added at the banking stage comes from the use of capital equipment that the bank has purchased or leased, that value commonly would bear retail sales tax. It has done so, under the old Section 5219, through certain vendor sales tax laws; and, as of 1971, under Public Law 91-156, "both the vendor and the vendee states are for the most part taxing capital equipment the banks purchase."8 Accordingly, a bank's purchase of a computer, for example, or of a bank building with respect to its materials components (not the on-site labor) can bear a sales tax in most states, under P.L. 91-156. Indirectly, then, the sales tax would reach part of the value added in the process of using up the computer or the building in the rendering of banking services over the years following the year of purchase. In some states which exempt equipment and machinery used * directly in "manufacturing" or "industrial processing," the exemption might be held not applicable to purchases by banks of computers and the like. 16 Worley, bc. cit. However, State usury laws generally do not apply on loans to incorporated businesses or, in most States, to loans guaranteed by the Veterans Administration or insured by the Federal Housing Administration. 17 The sales tax rate is 6 percent in one state (Pennsylvania), 5 percent in six states, 4/~ percent in one state, 4 percent in fourteen states and the District of Columbia, 31% percent in one state, 3 percent in eighteen states, 23'~ percent in one state, and 2 percent in two states (Indiana and Oklahoma). Local sales taxes raise these percentages in some states. The maximum state-local rate is apparently 6 percent. These data are as of October 1, 1970. Tax Administrators 1~ews, October 1970. 18 Communication from John F. Due. 79-421 0 72 - 30 PAGENO="0466" 446 On occasion, the sales tax charge could be substantial. The Depart- ment of Revenues of the State of Arkansas mentions two banks in Little Rock that "have new buildings under construction, each of which is to cost approximately $15,000,000. At least half of this would be taxable for materials and furnishings and equipment that would go into such new buildings." iS The Division of Banking in the State of Washington refers to "capital projects such as a new fifty-one s.tory building being built by the Seattle-First National Bank on which they are expected to pay $1 .7-$2 million in sales taxes." 20 Taxes on gross receipts from rentals of producers goods, for example those in some of the southern states, have the same tendency to penalize capital-intensive methods of production as do taxes on sales of such goods. Taxes on safety deposit rentals are inherently somewhat discriminatory against banks. In summary, if states and their local units increase their sales tax rates considerably, the net effect would probably be to favor banking relative to non-financial industries, though not necessarily relative to other financial institutions. (b) Gross Receipts Taxes Several states 21 impose broad-based taxes on gross receipts at rates commonly less than 1 percent. These taxes differ so much in the particular rates they carry and in the ground they cover that no generalization is very useful. Yet to study each one in detail would be tedious. Contrast the Alaska and West Virginia rate structures. In Alaska, the tax on business generally is $25 plus 3/~ of 1 percent of gross receipts in excess of $20,000 and 3~ of 1 percent of the excess over $100,000; but the rate applicable to banks is 2 percent of net income (with specified adjustments of net income). The West Virginia law divides business taxpayers generally into 18 categories, subject to rates ranging from ~ of 1 percent to 5.2 percent (all in addition to a 3 percent retail sales tax). As far as can be known from the brief summaries at hand as this is written, the only gross receipts or turnover taxes that apply to sales by banks under P.L. 9 1-156 (apart from the retail sales tax element in the Arizona and Mississippi taxes) are those of Alaska, Indian a (where financial institutions and insurance companies pay 2 per cent on gross earnings, not on gross income), and Washington. The gross receipts, or turnover, taxes seem less unneutral in favor of banks than the retail sales taxes. They may even be unneutral against the banking industry, since so much can be included under "gross receipts", but the more likely result appears to be a mild degree of unneutrality in favor of banks, as things now stand~. "Hearing, bc. cit., p. 6. 20 Hearing, bc. cit.. p. 8. 21 Alaska and Delaware and, together with a retail sales tax, Washington and West Virginia. Arizona, New Jersey and Mississippi use the term "gross receipts", but their taxes are retail sales taxes that include some services and a few other items in addition to tangible goods. Indiana's gross income tax is an alterna- tive to the corporation income tax, and is for most firms the effective alternative, since the firms must pay the higher of the two taxes. Hawaii combines a retail sales tax of universal coverage of services and retail sales of tangible goods with a 0.5 percentage turnover tax on non-retail business. Information on these taxes has been drawn primarily from Commerce Clearing House, State Tax Handbook as of October 1, 1970. [Editorial note: West Virginia has extended its business and occupation tax to banking and financial busi- nesses i11 the state, at a rate of 1.15 percent of gross income, effective April 1, 1971.] PAGENO="0467" 447 6. TAXATION OF BANK ASSETS (a) Real Estate Bank real estate has always been taxable by states and localities. Only from 3 to 5 per cent of banks' assets consisted of real estate in 1934,22 and probably not more than 2 per cent in 1970.23 An increase in a real estate tax rate seems unlikely to put any pressure on capital and labor to move out of the banking industry, and might even induce a slight reverse flow from industries that are heavy users of real estate. The true tax rate of banks' real estate, as with that for other business firms, is likely in many cities to be higher than on dwellings, by delib- erate misassessment. But there seem to be no studies on over- or underassessment of bank real estate relative to real estate of other industries. Geographical unneutrality is caused by differences in rates of the real estate tax, at least, insofar as these differences do not represent differences in level of governmental services, and insofar as they have not been capitalized in the price of land or long-lived improvements. Again, this unneutrality must be a minor factor in a decision where to open a bank, in most cases. Technical unneutrality is a decided feature of the real estate tax, no matter what the industry, but here, too, the impact on banking must be relatively small. (b) Tangible Personal Property As to taxation of tangible personal property, geographical differences are much greater than under the real estate tax. Some states do not tax personal property at all, and some of the others limit taxation of tangible personal property to categories that are of little or no concern to banks. Also, capitalization of this tax is rare. Otherwise, the con- clusions reached above on the relative importance of taxation of banks' real estate apply also to the tangible personal property tax. (c) Intangibles An intangibles tax that reached banks' holdings of currency, mort- gages, notes, and other claims was the oldest of bank taxes, but it had virtually disappeared, at least for incorporated banks, by 1934.24 Under the permanent provisions of P.L. 91-156, such taxation could readily reappear, but it would do so in a geographical pattern even more mixed than that of taxation of tangible personalty (see Table 4, on taxation of intangibles). Eighteen States 25 and the District of 25 Welch, op. cit., p. 74. 23 Worley, bc. cit., states that "banks would rarely have more than 5% of their resources invested in real estate and tangible personal property and would probably average only 2% to 2Y2%." Worley notes that banks commonly lease office space and data processing equipment. To this degree, the importance of the real estate tax and personal property tax for banks is understated in data dealing with taxes paid directly by banks. An increase in the rates of those taxes will sooner or later push up the lease charges. See also Fed- eral Deposit Insurance Corporation, et. al., 1969 Report of Income, Assets and Liabilities, Commercial and Mutual Savings Banks, December 31, 1969, p. 12: for all insured commercial banks-Total assets, $530,715 million; Real estate owned other than bank premises, $651 million; Bank premises, furniture and fixtures, and other assets representing bank premises, $8,070 million. 24 Welch, op. cit., p. 72. 25 California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Nebraska. New Mexico, New York, North Dakota, Oklahoma, Oregon, South Carolina, Utah, Vermont, Washington, and Wisconsin. See also table 5 in section 8 below on taxation of bank deposits. Entries iii table 4 indicate that Arizona and Iowa might belong in this group for all practical purposes; these two States are, however, counted among the classified property-tax States named in the next footnote. In a few other States, intan- gibles are legally subject to taxation but exempt in practice. Information on the treatment of intangibles in the several States seems to differ, depending on the source one uses. The 1970 Census of Goveraments, vol. 2, Taxable Property Values, indicated in the introduction, p. 6, that in 1966 theme were 15 States with "no property taxation which applies to intangibles." (Editorial note: See also the staff report accompanying the report of the Board of Governors of the Federal Reserve System in part II, p. 12, footnotes 5 and 6.) (Committee Print, May 1961), part II, p. 12, footnotes 5 and 6.) PAGENO="0468" 448 Columbia now exempt from their property taxes for either state or local purposes all personal property or all intangibles. It seems unlikely that they would resort to such taxation either generally or in a discriminatory manner on banks, so unpopular has general.. property taxation of intangibles become, because of grossly uneven enforcement and the economic consequences that would attend full enforcement at general property tax rates. Each of 21 states 26 classi- fies some or all types of intangibles for special treatment, normally preferential treatment, under one or more specified rates. Under the post-1971 provisions of P.L. 91-156, some of these states could subject banks' intangible assets to these special rates. As to the remaining Ii States: these purportedly tax some or all intangibles uniformly with other property,27 but in those States which include all intangibles in the general property tax there are in fact varying degrees of non- enforcement of this part of the tax. Banks would offer a tempting target for a unique degree of enforce- ment. They would even be a source of embarrassment to assessors who desired to implement a policy of undertaxation, so easy is it to list and establish a money value for bank-held intangibles. On the other hand, legislators would find it embarrassing to exclude banks from the general property tax on the grounds that administration and compliance would here be exceptionally good. Information on current treatment of non-bank financial institutions, not available as this is written, would help in predicting what would happen to banks. TABLE 4.-TAX RATES ON INTANGIBLES IN STATES EMPLOYING CLASSIFIED PROPERTY TAXES [Numbers in parentheses denote page of source of data: Commerce Clearing House, State Tax Handbook as of October 1, 1970, unless another source is specified.~ Arizona.-Property is assessed at 60 percent, 40 percent, 25 percent, or 18 percent, depending on classification. But intangibles are appar- ently not taxed, at least not in practice, according to various sources of information. (470) Florida.-Money, bank deposits, certificates of deposit, cashier's and certified checks, bills of exchange, and drafts-1~o of 1 miii per $1. Stocks, bonds, and lien instruments dated prior to January 1, 1942- 1 miii per $1. Notes, bonds, and other obligations dated after Decem- ber 31, 1941, securing liens upon realty in or outside of Florida- 2 mills per $1, payable before recordation or within 30 days after acquisition in lieu of annual tax. All other intangibles-i mill per $1. (492) Georgia.-State maximum on bank shares is 5 mills. Intangibles- fair market value of intangible personal property. Amount of debt of 26Arizona, Delaware, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Missouri, Montana, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Virginia, and West Virginia. As to Arizona and Iowa, see the prcceding footnote. 27 Intangibles are included in the general property tax in Alabama, Alaska, Arkansas, Idaho, Illinois, Tennessee, Texas, and Wyoming. Selected categories of intangibles are taxable at regular property tax rates in Louisiana, Mississippi, and Nevada. In Illinois, the voters approved in 1970 a constitutional amend- ment exempting all personal property of individuals and a new constitution that provides for exempting all personal property, individual and corporate, after 1979. PAGENO="0469" 449 long term notes. Rates per $1,000: intangibles not otherwise provided for-10~; long-term secured obligations, $1.50 per $500. Maximum, $10,000. Loans held by brokers, 25~. Accounts receivable and notes- 10~. Bonds and debentures and foreign corporation shares, $1. (497) Indiana.-Intangibles-current intangibles-5~ per $20 based on face or actual value of all intangible property except 25~ per $100 in shares and deposits of banks and trust companies and shares of building and loan associations. Intangibles not maturing within 1 year-5ç~ per annum o~n each $20. Financial institutions-25~ per $100 measured by the value of capital, surplus, undivided profits and deposits, less assessed value of real estate. Public utility-all utility property, real and personal, including rights, franchises, and privileges of communications, transportation, electricity, gas, steam, light, heat, or power, and water distributing companies, by "unit method of valuation." Railroad car companies- current average state levy. (507-508) Iowa.-Intangibles generally are exempt as a result of 1970 legisla- tion, but a 5-mill tax on moneys and credits continues to apply to capital employed in Iowa by foreign corporations doing business as loan agencies and to certain reserves of credit unions. (CCII Iowa State Tax Reporter, 1971, par. 20-340) Kansas.-3 percent of gross earnings (514) Kentucky.-Intangibles-Bank deposits, 1/1000 of 1% of the amount of the deposit; broker's accounts receivable, 10ç~ on $100; rights to receive future income, 5~ per $100; 1 3/~ per $100 on the following intangibles when a taxable situs outside Kentucky has not* been acquired: (a) accounts receivable, notes, bonds, credits, etc.; (b) patents, trademarks, copyrights and licensing or royalty agi eements; and (c) shares of capital stock of affiliated companies and inter- company intangibles; bank and financial institutions' stock, state 473/i, county and city 19~, school 38~; public utility franchises are apportioned to local taxing districts for taxation; freight car companies on franchise and rolling stock, $1 per $100; domestic life insurers, 40~ per $100 of taxable capital and 1/10 of 1ç~ per $100 of taxable reserves. Retirement plans and credit unions savings accounts, 1/10 of 1~ per $100. (517) M'ichigan.-Intangibles-income producing property-33'~% of income hut not less than 1/10 of 1% of face or par value. A credit (deduction from tax) of $100 is allowed (maximum of $200 for a married couple filing jointly). This credit does not apply to tax on moneys. Non-income producing property-i/b of 1 %. Moneys *on hand, in transit, or on deposit in a bank, and stock in building and loan associations-50~ per $1,000. (536) Mississippi.-Most intangibles are exempt. Bank shares are assessed on the basis of net worth, subject to specified deductions ("earned surplus" is exempt), and taxable at general property tax rates. (CCII IViiss. State Tax Reporter, 1971) Missouri.-Intangibles-4% of aggregate proceeds from the follow- ing intangibles having a taxable situs in Missouri: money on deposit, bonds, certificates of indebtedness, notes, debentures, accounts receivable, conditional sales contracts, and real estate and chattel PAGENO="0470" 450 mortgages. Building and loan associations, farmers' cooperative credit associations and credit union dividends-2%. (548) Montana.-Moneys and credits assessed at 7% of value; bank shares and moneyed capital, at 30%. Taxed at general property tax rate (aggregate of State and local levies; State rate for 1971 and 1972, 3.6 mills). (CCII N'iont. State Tax Reporter, 1971, pars. 20-329, 20-335) North Oarolina.-Intangibles tax-Rates per $100: (a) money on deposit including funds on deposit with insurance companies, 10~; (b) money on hand, accounts receivable, bonds, notes and other evidence of debt, shares of stock and beneficial or equitable interests in foreign trusts having a situs in the state, 25~. (575) Ohio .-Intangibles-produc tive investments, 5% of annual income yield; unproductive investments, deposits, and shares in and capital employed by financial institutions, 2 mills; shares in and capital em- ployed by dealers in intangibles, 5 mills; money, credits, and other taxable intangibles, 3 mills. Sleeping car, freight line or equipment compames-3.5% of capital stock representing capital and property owned and used within the state. (583) Pennsylvania.-Intangibles tax-4 mills per $1 value of intangible personal property in hands of individuals. This is a county tax. Corporate loans tax-4 mills per $1 state tax on the nominal value of all scrip, bonds, certificates and other evidences of indebtedness held by residents of Pennsylvania, on which interest is paid by a domestic private corporation or by a foreign private corporation doing business and having a resident treasurer iii Pennsylvania. * Capital stock tax (domestic corporations)-7 mills per $1 of actual value of whole capital stock represented by taxable property and assets within the state. Domestic corj)orations, except regulated investment companies, may elect to use the property, payroll and sales apportionment formula provided for foreign corporation fran- chise tax purposes. Financial institutions tax-national and state banks, savings insti- tutions having capital stock, title insurance and trust companies, 13 mills per $1 actual value of shares ascertained by adding together paid-in capital stock, surplus, and undivided profits. Mutual thrift institutions, e.g., savings banks without capital stock, building and loan associations and federal and state savings and loan associations, 1 1~% of net earnings or income. Private bankers, 1% of gross receipts. (593) Rhode Island.-Financial institutions tax-40~ per $100 of deposits after exclusions. Rates on banking institutions, maximum, 17~; minimum, 13~ per $100 of savings deposits which bear interest or are entitled to dividends; building and loan and savings and loan asso- ciations, maximum, 14~, minimum, 10~ per $100 of outstanding shares and dividend earnings applicable to such stock; credit unions, maxi- mum, 7~, minimum, 5~ per $100 stock and interest-bearing or divi- dend-bearing deposits less exemption of $100,000. Other intangibles are taxed under the general property tax. (597) South Dalcota.-Money and credits: 4 mills per $1 of true and full cash value in excess of $15,000. Other intangibles are taxed under the general pioperty tax. (604) PAGENO="0471" 451 Virginia.-Moneyed capital in competition with national banks, $1 per $100; capital used in trade or business, 30~ per $100; bank stock, $1 per $100. Intangible personal property of utilities, 50~ per $100; money of utilities, 200 per $100. (622) West Virginia.-General property tax is applied, with four maximum. rates. Lowest maximum [presumably, for intangibles] is Class 1, 50ç~ per $100 actual value. (631) (i) industrial Neutrality.-A general tax imposed by a state on all business firms' holdings of intangibles would of course affect chiefly banks and other financial institutions. Banks might recoup a small part of this tax by increasing their service charges. As to interest rates charged on loans or earned on investments, the problem is more complex. If the intangibles tax were imposed in only one or a few states, the taxed banks' power to recoup the tax by obtaining higher interest rates on their security holdings would be severely limited. They would be encouraged to invest in Federal obligations and other tax-exempt securities in preference to taxable assets. If obligations of other states and their localities were subject to the tax, banks in the taxing states might be discouraged from holding these securities. Their partial with- drawal from the market might not be important enough to affect the rate of interest on these obligations. But if the obligations of a bank's domiciliary state also were taxed, the effect might be more pronounced. Reluctance of banks to continue to purchase their domiciliary state's obligations at prevailing prices might well cause some softening in those prices. Thus the banks of a taxing state might recoup part of the state's tax from the state itself, in higher interest rates. As banks raised charges on deposit accounts, and raised interest rates on loans, increased compensating-balance requirements, and took other similar actions, while withdrawing somewhat from the market for securities, all in order to counter their liabilities under the intangibles tax, many would-be bank borrowers would presumably seek other creditors. The search would be fruitless if the intangibles tax were quite comprehensive geographically and over all types of creditors and equity owners, and everywhere equally well enforced. These conditions, how- ever, would almost surely not exist, at least as between financial insti- tutions and individual creditors. Individuals, then, might be expected to increase their lending somewhat, by activating relatively idle deposit accounts, or, if the Federal Reserve adopted an accommodating policy, by converting some of their holdings of government bonds into bank deposits. It is assumed, in this analysis (perhaps unwarrantedly), that the intangibles tax as applied to banks would not reach the banks' reserves. with the Federal Reserve Banks. If it applied to banks' uncollected funds-checks drawn on other banks and in process of collection-it would be reaching a form of non-income earning asset. In any event, taxation of intangibles in the hands of banks or other financial institutions would pose a substantial burden on these firms. Can intangibles taxation be condemned in general, quite apart from whatever discriminatory effect it may have on banks? Intangibles are only representative wealth, apart from patents, copyrights, good will, franchises, and the like-and even these are PAGENO="0472" 452 oniy a capitalization of future flows of monopoly income. Creation of an intangible, at least a representative intangible, creates no new wealth in real terms. It either (a) puts in certificate form a title that already existed, as when a partnership incorporates and the partners thereupon receive stock certificates, or (b) creates an offset to itself in the form of some one else's debt, as when a loan is made. To tax both the under- lying property and the title to it (stock certificate) is therefore to tax the same thing twice. To tax the debt instrument to the creditor without allowing the debtor a corresponding reduction is to tax a zero increment to real wealth. But, if the corporate property lies in one jurisdiction while the owner of the stock certificate resides in another, or if the creditor's jurisdiction cannot grant the debtor a deduction because he resides elsewhere, there is some excuse for taxing representative intangibles, despite the resultant double taxation or the taxation of a zero wealth increment. The stockholder's state, or the creditor's state, has a right to ask the stockholder or the creditor to help support the government that renders him services. The state can do so, aside from consumption taxes, only by a tax levied directly or indirectly on his intangible wealth (he may be receiving no salary or wages, and may even be using little real estate). Such a tax may take the form of an income tax on investment income rather than an intangibles tax, but the principle is the same. The state wherein the corporation operates may reasonably require the corporation to contribute, perhaps through a corporate income tax or a tax on property held by the corporation, to the support of the services it enjoys. The state of residence of the debtor is certainly under no obligation to reduce its revenues, and hence its ability to render governmental services, merely because the debtor has opted to borrow from someone whose creditor interest the state cannot reach, owing to jurisdictional limitations. Accordingly, taxation of intangible wealth cannot be ruled out completely just on the grounds that it is repre- sentative wealth, if ownership interests and creditor-debtor relation- ships cross jurisdictional lines. But this accommodation to legitimate jurisdictional interests is purchased at the cost of some decrease in economic efficiency as follows: The representative intangibles do still represent no net accretion to the economic base of the economy as a whole. Taxing them therefore puts unusual pressure on the private sector to find ways, relatively in- efficient ones presumably, of doing without these non-wealth creating instruments. And an industry like the banking industry that deals almost entirely in intangibles is especially vulnerable to the efforts of firms and households to minimize the use of intangibles in order to reduce the impact, direct or indirect, of intangibles taxation. If states were planning to rely heavily on taxation of intangibles, a weighing of their jurisdictional interests against economic efficiency might lead to a conclusion that the federal law should not prohibit or specifically restrict taxation of intangibles held by national banks. But in fact no marked departure from the present uneven and generally weak taxation of intangibles in general is to be expected, and some states might well decide to apply their intangibles tax laws quite effectively against banks, which are especially vulnerable with respect to full value assessment, for reasons given above. These facts have two PAGENO="0473" 453 implications, with respect to unrestricted taxation of banks' intangibles. First, such taxation of banks' intangibles in some but not all states would give rise to wasteful interstate flows of funds as banking capital would seek out non-taxing states or low-rate states. Second, restriction of taxation of banks' intangibles would not noticeably affect present or prospective levels of state or local revenues. (ii) Geographical Neutrality.-In principle, taxation of banks' intan- gibles would probably prove geographically unneutral under the permanent provisions of P.L. 91-156, because of the marked differ- ences among states, indicated in the preceding paragraphs. In practice, the effective tax rates might be so low, and the difficulties of borrowing out-of-state so severe for most firms or individuals, that the tax- induced flow of existing funds across state lines, or tax-induced dis- placement of new funds, to low-rate or nil-rate states, might prove minor. But this result is by no means assured. If certain states did indeed apply their intangibles taxes quite effectively against banks, banking would almost surely grow appreciably more slowly in these states than it would have done otherwise. (iii) Technical Neutrality.-Insofar as certain types of assets are taxable and others non-taxable (reserves with a Federal Reserve Bank, float, federal securities, the home state's securities) under a bank assets tax, there is some tax-induced pressure to change the relative amounts of such assets; the marginal opportunity cost of holding the non-taxable assets would be correspondingly less. 7. BANK SHARES TAX (a) Industrial Neutrality An increase in the rate of a tax on bank shares will of course put some pressure on capital, and with it, labor, to flow out of the banking business. But the share tax, being in principle but one part of a tax on property, will normally not be raised without an increase in the rates of at least some other parts of the property tax. Indeed, in those states where bank shares are taxed at a special mill rate fixed by stat- ute, it is possible that general property tax rates will increase over time, without a corresponding increase in the mill rate. On the other hand, discriminatory increases directed at bank shares will doubtless occur here and' there. Insofar as all forms of investment are almost equally taxed by the rate increases, there will probably be little tend- ency therefrom for capital and labor to flow into or out of the banking business. In practice, it seems that the intangibles part of the property tax is likely to be whittled down further in the years ahead. In part this will occur legally, as with the six states that in the past few years have replaced their bank-share taxes with income taxation of banks (Iowa {1970], and Kansas, Maryland, Michigan, Nebraska, and New Mexico {1969}) 27 27 Federation of Tax Administrators, "State Taxes on the Income, Dividends, and Shares of National Banks," RM-411, November 1968. Changes in 1969 and 1970, from Commerce Clearing House, State Tax Guide. PAGENO="0474" 454 In part it will reflect continued illegal deterioration of assessment or compliance. The danger to banking may lie more in the possibility that the bank share tax will not be reduced, or will not deteriorate administratively, pan passu with the other parts of the intangibles tax. But the rates of the share taxes are in most jurisdictions so low than even if the rates on other intangibles sank to zero, l)roba.bly not much capital and labor would move out of the banking industry, with the exception of some three or four states. As. of November 1970, 13 states imposed classified 1)rOl)erty taxes that, as applied to bank shares, carried the following rates: 28 1 mill (Florida.); 2 mills (Delaware and Ohio); 2~ mills (Indiana); 4 mills (South Dakota); 5 mills (Georgia); 5 mills plus taxes for debt service (West Virginia.); 10 mills (New Hampshire); 10.45 mills (Kentucky); 13 mills (Pennsylvania); 15 mills (New Jersey and Maine) 29; and 10 mills plus up to 4 mills city or 8 mills county bank tax (\irginia). A 10 mill tax on book value is equivalent to an income tax of 20 per cent if the bank is earning 5 per cent on book value, and to a 10 per cent inconie tax if the bank is earning 10 percent on book value. In 9 other States in which bank shares were taxable in November, 1970, 3 (Louisiana, Mississippi, and Nevada) imposed a selective property tax under which bank shares were taxed at the same rate as other taxable property. In the other 6 States,3° bank shares were taxable under the general property tax. Deductibility of part or all of certain types of bank assets, notably domestically ta.xed real estate, and obligations of the state or its localities, seems to be the chief statutory method of reducing the burden from the level that the tax rate alone would inthcate. The effect of using book value rather than market value in assessing the shares, in the jurisdictions where that technique is followed, may be rather small in the aggTegate, if in most cahes the (Iffereflces are small, or if minuses in some cases are partly offset by piuses in other cases, although the effect could be sizable in 1)articular instances.31 Conceivably, the bank-share taxing states could place the banks in a difficult position by raising the tax rate on uch shares while reducing the rates on other financial institutions and on intangibles generally. Such action, however, seems quite unlikely, and at some point, of course, the courts would declare such a procetlure iiivalid. (b) Geographical Neutrality After 1971, under P.L. 91-156, a state will no longer be restricted. to taxing the shares only of national banks located in. that state. Hence shares in a bank located in State A that are held by residents of StateB may come to.be taxed twice, i.e., not only by State A but also by State B, if none of the Section 5219 restraints remain. Banks in certain states would thereupon be under some pressure, perhaps slight, to draw new equity capital only from residents of the bank's home state. In this sense, interstate flows of capital would be impeded. 2SFor 1968, Federation of Tax Administrators. ibid. 29 Writing in 1934, Welch, op. cit., p. 99, remarked that "The highest flat tax rate now in existence is the 1.5 percent rate in Maine, though this rate is tempered by underassessment." `~ These States are Alaska (where national hank shares presumably are exempt because of section 5219 but State bank shares are not expressly exempted), Arkansas (where the shares tax is paid on a voluntary basis), Illinois (where shares owned by corporations remain taxable although individually owned shares are now exempt), Tennessee, Texas, and Wyoniing. Thus, 22 States in all were taxing shares in 1970. In 1934, the number was 37 (Welchop. cit., table 1, \`, opposite p. 82). ~` This was the case in 1934, when Welch wrote; ibid., pp. 83-7. PAGENO="0475" 455 If, on the other hand, bank shares came to be taxed only in the state of residence of the owner, they might on the average pay higher or lower rates of tax than at present; a priori, there seems no reason to think one or the other outcome the more probable. (c) Technical Neutrality Bank earnings that are added to surplus or undivided profits rather than being distributed in dividends are included in the base for the share tax unless that tax is applied only to par value, an unusual provision. The share tax thus puts some pressure, perhaps only mild, on a bank to do business with a somewhat smaller capital and surplus and undivided profits than it would under no tax. Accordingly, the tax may induce a mOre liberal dividend policy. Given the generally low rates of the tax, the reduction in this effect that could be obtained by excluding surplus and undivided profits in valuing the bank shares is probably as unimportant today as Welch estimated it to be in 1934.32 8. TAXATION O~ BANK DEPOSITS Bank deposits are taxable in some states as intangible property of the depositors. Welch, in 1934, listed 16 states that subjected bank deposits to their general property taxes (two of them only partially) and 21 states and the District of Columbia that classified deposits for preferential tax rates (six of the states, and the District of Columbia, only partially). The rates in these 38 taxing jurisdictions ranged from ~ mill to 6 mills.33 Eleven states completely exempted deposits from property taxa- tion.34 In the 16 general-property taxing states, certain deposits were exempt, and some states allowed deduction of debts, while as to the taxable deposits WTelch estimated that not more than 10 per cent, in many states, were in fact taxed.35 Those states applying a classified property tax to bank deposits apparently did not in fact reach a much larger proportion of taxable deposits in many if not most cases than those that employed the general property tax, unless they collected the tax from the banks, not the depositors. As of 1970 this legal state of affairs seems to be much the same. Table 5 has been constructed by the present writer from information in Commerce Clearing House's latest State Tax Handbook. Signifi- cantly, the Hearings and other recent material giving banks' views on the reform of Section 5219 have not, apparently, mentioned taxation of bank deposits. If this apparent lack of concern is based on the legal distinction between a tax on a bank and a tax on its depositors with respect to their deposits, it is ill-founded, since the economic conse- quences will be much the same. It is an accepted theorem in tax analysis that the incidence, the final resting place of the tax burden, does not depend on which side of the market the tax is legal]y imposed upon-aside from friction and imponderable psychological factors. More likely, the lack of expressed concern reflects a widespread failure of enforcement and compliance with respect to taxation of 32 Welch, op. cit., pp~ 83-90. `3 Ibid., pp. 125-126. 3~ Rid., pp. 117-20. "Ibid., p. 124. PAGENO="0476" 456 bank deposits. The following analysis therefore has a certain unreal air about it, necessarily. (a) Industrial Neutrality A tax on deposits tends to drive capital and labor out of banking, but the causal chain is a little more complex than under the share tax. First, a tax on non-interest bearing deposits in any one state will presumably induce the deposit holders either to purchase non-taxable United States Treasury obligations 36 or to move some of their de- posits into other states, at least for the assessment dates. Permanent removal of deposits may be checked by the banks' assuming part of the burden of the tax. For non-interest bearing depcsits the banks can do so by remitting service charges or by rendering special services free of charge. Alternatively, in states where the banks are required to pay the deposits tax on behalf of their depositors, they may refrain from recouping part or all of the tax, as they might do by increasing service charges, reducing the amount of free services rendered, or charging the tax against depositors. TABLE 5.-STATUS OF STATE-LOCAL TAXATION OF BANK DEPOSITS, AS OF OCTOBER 1, 1970 [Numbers in parentheses are page numbers in State Tax Handbook (Commerce Clearing House, New York) as of October 1, 1970] States not included in this list are general-property-t ~c st~ttes, and no information is available from CCII book on how bank deposits are in fact taxed in those states. Arizona-See Table 4. California-Intangibles exempt. (478) Colorado-Intangibles exempt. (480) Delaware-Personalty exempt, except for bank shares. (487) District of Colurnbia-Intangibles exempt. (490) Florida-Money, bank deposits, certificates of deposits, etc.: 1/10 of 1 mill per $1. (492) Georgia-Apparently 10 cents per $1,000. (497) Hawaii-Personalty exempt. (499) Indiana-25 cents per $100. (507) Kansas-3 percent of gross earnings (1971 if.). (514) Kentucky-1/1,000th of 1 percent [sic]. (517) Maryland-Intangibles exempt. (528) Michigan-SO cents per $1,000. (536) Minnesota-Intangibles exempt. (540) Miss'ouri-4 percent of aggregate proceeds. (548) Nevada-Intangibles exempt (but not bank shares). (556) New Hampshire-Intangibles exempt, with exceptions; bank deposits apparently not taxable in general. Interest paid or credited on deposits is taxable in part, under excise tax on financial institutions.' (559) New York-Personalty exempt. (571) North Carolina-lO cents per $100. (575) 1 Communications from bankers. `~ Dick Netzer, Economics of the Property Tax, p. 141. PAGENO="0477" 457 Ohio-2 mills. (583) Oregon-Intangibles exempt. (590) Pennsylvania-4 mills per $1. (593) Rhode Island-40 cents per $100 after exclusions; 13 cents-17 cents on income-earning savings deposits; tax collected from bank. (597) South Dakota-4 mills per $1 over $15,000 of money and credits; deposits that do not bear interest are exempt. (604) Utah-Intangibles exempt. (616) Virginia-Deposits apparently exempt. (622) Washington-Intangibles exempt. (627) West Virginia-Apparently 50 cents per $100. (631) Wisconsin-Intangibles exempt. (635) General property tax states, not in above list: Alabama, Alaska, Arkansas, Connecticut, Idaho, Illinois, Iowa, Louisiana, Maine, Massachusetts, Mississippi, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Oklahoma, South Carolina, Tennessee, Texas, Vermont, and Wyoming. Of these States, the following do not tax intangibles: Connecticut, Massachusetts, Nebraska, New Mexico, North Dakota, Oklahoma, South Carolina, and Vermont. Bank deposits are not taxable in Alabama, Idaho, Louisiana, Maine, and Mississippi. With respect to a tax on savings and time deposits that bear interest, the banks can react by attempting to change the rate of interest paid. But there must be limits to what the banks can do to absorb part. or all of a deposits tax, since banks in the taxing states will be com- peting for loans and investments with banks in other states and with other types of financial institutions.37 If the state to which a depositor would move his deposit increases its own tax on deposits, the depositor's only mode of escape, short of sending his money abroad, is to convert the deposit into cash, or to reduce the deposit by paying off some or all of a loan he may have obtained from the bank or by using it to purchase some non-taxable intangible. Although all of these escape devices are more or less inconvenient, they would surely be employed to some degree. If the intangibles tax could be imposed on all competing intangibles, including cash, various forms of business paper, or long term debt, then bank deposits would shrink by less. If the taxing state allows a deposit holder to deduct indebtedness, he gains nothing by paying off his bank loan. If it does not, a substantial discriminatory tax on bank deposits would induce depositors to reduce their debts to banks, with a consequent tendency for interest rates to fall. In this manner the tax on deposits would rest in part on banks, that is, on their shareholders. To be sure, the Federal Reserve System could counter this tendency to deposit shrinkage by its open market operations. If it did so, interest rates would fall still further. They would have to fall so low that borrowers from banks would decide not to pay off debt to banks, 371f the bank assumes a deposits tax that is legally on the depositor, it deducts this tax it pays when it computes its taxable income. The depositor is treated as receiving income in the amount of the tax thus assumed by the bank, but is allowed a deduction of the same amount. Tax Administrators News, January, 1970, p. 6 (Rhode Island deposits tax). PAGENO="0478" 458 despite the deposits tax, in view of the profits to be made with low-cost bank loans. If deposits did shrink, banks might find that they had to maintain about the same labor force and capital equipment as before, since the reduced volume of deposits would doubtless exhibit an increased velocity of circulation. This fact, together. with the decline in interest rates, and the reduced volume of earning assets, would reduce banks' profits considerably, and would lead ultimately to some exodus of capital and labor from banking to other fields. Some of the capital and labor flow would be into other financial sectors, say insurance, unless taxation were made effective against claims on those financial institutions too, e.g., cash surrender values, or more broadly, reserves. Even so, there would be some shrinkage in total bank deposits unless the central bank intervened to drive interest rates down. All in all, taxation of intangibles that includes bank deposits may well offer a greater threat, in principle if not in practice, to banks than does any other tax. Admittedly, this statement is largely conjecture,. based on a supposition by the present writer that the community could, and would, do without a more sizable proportion of its bank deposits than of its cash or non-deposit evidences of indebtedness. Further study might show that this supposition is unwarranted. Demand deposits and currency held by households has been esti- mated, as of the end of 1963, to account for $75 billion out of an esti- mated $1,208 billion total holdings of intangibles by households. Savings accounts held by households (including personal trusts and nonprofit organizations) were estimated at $229 billion. Thus, if deposits taxation were limited to households' intangibles (to avoid still further double taxation), savings accounts would constitute 75 percent of the nation-wide tax base (as of 1963), of total household deposits. Of households' total holdings of intangibles, savings de- posits, demand deposits, and currency made up an estimated 25 per cent.38 (b) Geographical Neutrality As to interstate flows of funds, they should not, in principle, be influenced by a tax on depositors levied on all residents of the state regardless of where the deposits were held. In practice, deposit taxes may both induce and impede such flows, since that residence principle is not universally applied. Some states tax deposits at the source, that is, collect the tax from the banks, regardless of domicile 58 John 0. Blackburn, "Intangibles Taxes: A Neglected Revenue Source for States," National Tax Journal, June 1965, p. 217. Professor Blackburn's three alternative plans for taxing intangibles all keep the rate on currency and demand deposits at 1 mill (highest rate on 9thers: 3 mills). All three plans exempt U.S. Government securities ($75 billion held by households) and pension fund reserves ($122 billion). The other intangibles categories, held by households, were: life insurance reserves ($103 billion), State and local government securities ($33 billion), corporate and foreign bonds ($6 billion), corporate stocks ($514 billion), mortgages ($44 billion), and "others" ($8 billion). For objections to Blackburn's proposal, see J. Richard Aronson, "Intangibles Taxes: A Wisely Neglected Revenue Source for States," National Tax Journal, June 1966, especially p. 184, on taxation of bank deposits and currency. [Editorial note: At the end of 1970, total financial assets of the sector designated "households, personal trusts, and nonprofit organizations" were estimated at $1,883 billion, of which $529 billion, or 28 percent, was in demand and savings deposits and currency. If deposits taxation were lkmited to intangibles of this sector, savings accounts would constitute 77 percent of the nationwide tax base of total household deposits in 1970. The total of $1,883 billion offinancial assets of this sector comprised (in billions): Demand deposits and currency, $122; savings accounts at commercial banks, $175, and at savings institutions, $232; U.S Government s~curitics, $96; pension fund reserves, $231; life Insurance reterves, $130; State and local govern- ment securities, $38; corporate and investment company shares, $748; mortgages, $43; other assets, $68. (Data are from the Federal Reserve Bulletin, March, 1971, p. A71.15, table 8.)] PAGENO="0479" 45~ of depositor, and at the same time make no effort to reach their residents on their out-of state deposits. If the bank passes the tax on to its depositor by reducing interest paid to him or increasing service charges, he will be inclined to escape the tax by moving his deposit to some state that does not collect the tax at the source. Interstate flow of funds will to this degree tend to be artificially stimulated by the tax system, although of course other factors, notably differences in interest rates, may overwhelm the tax differentials. The reverse effect is found with regard to a resident of State B who would ordinar- ily, let us assume, keep his deposits in A. Such residents of B, no doubt not large in number, would be under pressure to open accounts in their home state, to escape double taxation. Interstate flows of funds would to this degree be artificially impeded. On balance, there would no doubt be much more money represented in the first case than in the second, so the net effect would be an artificial stimulation of interstate flows of funds. But these are probably no more than unimportant tendencies, given the generally weak state of deposit taxation in the United States. (c) Technical Neutrality If heavy enough, taxation of bank deposits would presumably lead to some changes in banks' methods of doing business, but in no state does such taxation, as suggested above, appear to have reached a level that would induce changes of this kind. Again, this conclusion is based largely on the absence of any reference to such changes in the literature on bank taxation. The changes would presumably reduce the efficiency of the payments systems (an example of excess burden.) 9. UNEMPLOYMENT COMPENSATION PAYROLL TAXES The payroll taxes imposed on employers to finance unemployment compensation reserves are mentioned here simply because they amount to a considerable sum of money. In a sense they do not belong in this paper, since they are basically a federal tax: the federal government levies a tax and gives credit for similar state taxes paid, offsetting a considerable part of the federal tax. Complete uniformity has not ex- isted among states, however, in view of the experience rating plans whereby the tax rate has been lowered for industries with good em- ployment records. Banks are probably fairly labor-intensive compared with most other industries, but they also, it may be conjectured, show a better record of steady employment than most other industries. In any event, there seems to be nothing in the permanent provisions of Public Law 9 1-156 that would lead to more, or different, taxation of banks' payrolls for the unemployment compensation funds. 10. OTHER TAXES The remaining state and local taxes can be mentioned briefly, for, excepting the user taxes, their rates are almost always so low that their lack of neutrality is of little practical importance. Taxes on execution or recordation of documents, for example the Florida tax that was declared invalid as to banks in the Homestead PAGENO="0480" 460 case, seem to pose no threat to banks if levied on them at the same rate as on others. Motor vehicle taxes and fees are commonly user taxes, and banks benefit along with the rest of highw~y and street users. An occupancy tax, for example that of New York City, is unneutral in certain respects, but probably not against banks as such. A stamp tax on checks, on the other hand, would be decidedly Un- neutral against banks, unless it were at so low a rate that this dis- criminatory tax did not in fact reduce the use of checking accounts at all. 11. IN-LIEU TAXES AND BUILT-UP RATES If, upon removal of Section 5219 restrictions on national bank tax- ation, states repealed the "in lieu" part of their corporation income tax rates and of their bank share taxation, which they presumably would do, there would probably be a gain in terms of economic neu- trality. These in-lieu taxes differ markedly from the taxes they sub- stitute for, with respect to the kinds of economic pressures they exert. Thus the banks are set off from the rest of the business com- munity and are correspondingly advantaged or disadvantaged, as the case may be. Admittedly, an increase in the rate of a uniform tax does not have uniform repercussions over all industries, but an increase in the rates of a non-uniform tax regime is rather more certain to cause movements of capital and labor among industries, as well as to cause a more random distribution of final incidence. At any rate, it is surely true that, whatever may have been the reasons that led to adoption of, say, a sales tax, they are not likely to be implemented by an increase in an income tax that is being applied to a certain in- dustrial sector as a second-best substitute for the sales tax. 12. CONCLUDING REMARKS Will state taxation of banks turn out to be more nearly neutral, economically, under the post-1971 provisions of Public Law 91-156 than under the old Section 5219? The answer to this question is a compound of intuition, judgment, and prediction of what the states and local units would do under the post-1971 provisions of P.L. 9 1-156, and, above all, a rough weighting of the importance of the several taxes and the degrees of their nfl- neutralities. The chief factors appear to be the following. State corporation income tax laws would very likely be amended to reach in-state activity of out-of-state banks, with a possible impairment of geographic neutrality and perhaps some discrimination against the banking industry. Dividends taxation would probably remain about as it has been. If the new tax freedom offered the states led them to reduce or eliminate the in-lieu elements in their corporation income tax rates (and their share taxes, too), economic unneutrality might thereby be reduced. Putting banks under the retail sales tax would be a step toward industrial neutrality but a step away from technical neutrality, owing to the inclusion of capital goods in the sales tax base. A maj or threat of unneutrality against banks is the possibility that some states would tax intangibles owned by banks, which they cannot do at all under the old Section 5219. PAGENO="0481" 461 Taxation of bank deposits would probably not change much, and the damage that could be done under the post-1971 provisions of P.L. 91-156 could be done anyway under the old Section 5219. Imposition of motor vehicle taxes, documentary taxes, and the like, upon banks, would tend to reduce industrial unneutrality. An intuitive weighing of these various outcomes leads, in the piesent writer's opinion, to the conclusion that the post-1971 regime provided by P.L. 91-156 would create a more nearly neutral treatment of banks than did the old Section 5219, which was somewhat unneutral in favor of banks. This conclusion is subject to the caveat that taxation of intangibles in the hands of banks might throw the balance the other way, and that taxation of interstate activities under the corpora- tion income tax could prove at least a nuisance and, if substantial, a further impairment of neutrality. Finally, although the 1969 Act calls only for a study of the economic effects of the changes made by its post-1971 provisions (and then only with respect to "income taxes, intangible property taxes, so- called doing business taxes, and any other similar taxes which are or may be imposed on banks," (Sec. 4(a) of P.L. 91-156)), it seems appropriate here to ask whether the temporary provisions of that Act allow a tax system that is more nearly neutral, for banks against the rest of the economy, than does the permanent provision. Again, the answer involves a subjective weighing of the un- neutralities of the several taxes. If the temporary provisions had prohibited only intangible personal property taxation, the answer to the question above might well have been yes. But those provisions also, by implication, prohibit a state from applying to a bank "not having its principal office located within the jurisdiction of such State" an income tax~ or a tax on capital used within the state (capital- stock, franchise, or doing-business tax). This limitation, in the present writer's view, probably throws the tax system, on balance, back to appreciable unneutrality in favor of banking, though of course not to the extent found under the old section 5219. Admittedly, these conclusions on over-all, or average, degree and direction of unneutrality of the entire state-local tax system are con- jectural or at least reflect a high degree of personal weighting. It is hoped, however, that the tax-by-tax analysis in the body of this paper may assist the reader to make up his own mind on this difficult problem with respect to th~ state-local tax system as a whole. NEW YORK, February 16, 1971. 79-421 0 - 72 - 31 PAGENO="0482" PAGENO="0483" APPENDIX 8 Treatment of Intangible Personalty in the State-Local Taxation of Banks 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.' (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 ban/c a&sets.-The balance sheets of commercial banks are routinely published in such readily accessible media as news- papers of general circulation in the banks' service areas. Although the I Set aside as not within the scope of this statement is the prob~ein of double taxation arising out of conflict- ing or overlapping claims by separate governments to tax a given base, as when both the domiciliary State and nondomiciliary States assert the right to tax corporate net income, sales, or assets. (463) PAGENO="0484" 464 detail provided by this source would not always suffice to enable a tax assessor to compile a definitive listing of a bank's taxable intangibles- e.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 in- formation 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 non- financial 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-com- monly the standard in ad valorem taxation-they will reflect adher- ence to a consistent method of asset appraisal prescribed by an official regulatory agency, one that probably generates valuations above mar- ket 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 exemp- tion 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 a.nd 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 consider- ably more effective, heavier taxation of these holdings than of intangi- bles 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 PAGENO="0485" 465 services and therefore should be expected to make tax contributions toward their support. In this view, it obviously is irrelevant if claims to underlying physical property are divided between ostensible equity owners and the suppliers of credit used to acquire and hold such property. Thus, if one of two identical houses is mortgaged to the fullest extent while the other is held debt free by its owner, the liability of the two properties for support of local government services "benefit- ing" the two properties should be roughly equal. It would be inappro- priate, under these circumstances, to allow any deduction of the debt in assessing the value of the mortgaged house. Still within the framework of the traditional rationale of property taxation, the mortgage loan on the house in the example constitutes part of another stock of property benefiting by governmental activity and therefore also under obligation to make a tax contribution. That the house `itself has already been fully listed for assessment and taxation without regard for the existence of the mortgage debt is irrelevant. The mortgage loan is an item of property on all fours with tangible personalty or real estate and deserves to be included among the assets of its holder that are exposed to property taxation. The "ability-to-pay" doctrine, which is sometimes invoked as a justification for property taxation, appears to offer some support for the exemption of representative intangibles. The possession of prop- erty is regarded as conferring taxpaying ability. Property, in this view, is essentially a form of individual wealth, closely related to the present and prospective ability of the holder to enjoy income. Ob- viously, any claims of "outsiders" to property in the hands of the nominal owner must be regarded as impairing the taxpaying capacity associated with the property in question. In short, it is "net" property *or the net equity in property that is associated with taxpaying capa- city. The totality of interests in a given underlying property must necessarily sum to neither more nor less than the value of the property underlying those claims that are layered upon it. Under the ability theory, therefore, a case can be made for exclusion of representative intangibles from the tax base. Yet, the relevance of all this to the question of taxing intangibles held by banks or other businesses is not clear. Ability-to-pay seems most appropriately an attribute of individuals, rather than of business units. To regard business firms as possessing or lacking the ability to pay taxes in anything like the sense in which individuals may be so regarded seems clearly contrived. If, then, the ability doctrine, which affords support for exclusion of representative intangibles from taxation, is really not applicable to business taxation, this doctrine cannot be cited to support the case for exemption of business intangibles. On balance, the double-taxation case for exemption of representa- tive intangibles lacks persuasiveness, whereas a good case can be made for inclusion in the ad valorem tax base of representative intangibles in the hands of any holder-whether an individual, a bank or a nonbanking business. This conclusion, however, rests upon the prop- osition that ad valorem taxation of such property m ay be justified on benefit grounds. Large holdings of intangibles.-The objection to taxing bank-held intangibles on the ground that the banks' holdings are relatively PAGENO="0486" 466 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 discrimina- tion. Because tangible property is generally subject to ad valorem tax- ation, while intangible property is not, being taxed only in certain jurisdictions-and then commonly at effective rates that are prefer- entially low either by law or by administrative practice-the indif- ference of holders as between the two classes of property finds expres- sion 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 presump- tion 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 wind- falls 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 prop- erty 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 there- fore 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 ad- herence 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 pos- sibilities 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 oftangible 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 PAGENO="0487" 467 embedded in the business structure, as by the process of tax capital- ization, registering subtly in the existing pattern of investment alloca- tion among firms and industries, as well as among taxing jurisdictions. Now to expose the (national) banking system to an essentially new form of taxation that came to apply only selectively and even then at widely varying effective rates would almost inevitably have a host of arbitrary equity and allocational impacts. This argument may be put in another way. Suppose that the ques- tion under consideration were the desirability of imposing a uniform ad valorem tax nationwide on all those classes of intangible personalty not enjoying inherent immunity from such taxation, and that this tax were to be in lieu~ of any local or State taxes presently imposed on int~ngible personalty. There appears a strong presumption that yields on intangible assets, including the implicit yields on cash, demand de- posits, and other intangib]es not bearing explicit yields, would tend in time to adjust to the presence of the tax. One.result no doubt would be some discouragement of the process of intangibles creation, or of the layering of claims to physical assets. The wisdom of such a move is beside the point in this context. Because the universality of such a levy would tend to minimize differential effects it is not clear that such a tax measure would prove noticeably discriminatory in impact. In this hypothetical circumstance it would be difficult to envision any special problem that would confront the banking system in rBspect to the application of such a uniform nationwide tax to intan- gibles that they held. But, the most significant aspect of the now scheduled withdrawal of the tax immunity presently held by bank intangible personalty is the strong probability that the new authority to tax would come to be exercised on no more than a selective basis, and then at varying effective tax rates. Moreover, without explicit guidelines relating to the range of admissible effective rates, the banking community could be exposed to troublesome uncertainty with respect to its current and prospective status under the taxing statutes. It may be judged quite unlikely that any but a minority of the States would elect now to impose taxes on intangible personalty held by banks, in light of the general drift away from the taxation of intangibles in recent years. Yet, the accessibility of information on the banks' holdings, the existence in certain communities of hostility toward banking and finance, and the inability of banks to manage the deployment of their assets among the States in order to minimize tax liabilities all could be factors serving to enhance the appeal of this form of taxation. To the banking community as a whole, the removal of barriers to State and local taxation of bank-held intangibles could well mean an extended term of uncertainty concerning the profitability and value of intangible assets of a wide variety. It is this possibility that argues most persuasively for preservation of the tax immunity now enjoyed by the banks' intangibles. Summary and conclusions.-Authorizing the State and local govern- ments to tax bank-owned intangibles could have disturbing alloca- tional and equity effects. The difficulty that banks, which "do busi- ness" within individual States only, would encounter in attempting to avoid tax liability in the manner open to multistate nonfinancial PAGENO="0488" 468 firms could be Prejudicial to the 1)OsitiOfl of banks as intermediaries holding intangible assets. The double-taxation argument against the taxation of intangibles is found to have little merit, given that prop- erty taxation is rationalized on benefit grounds. Because withdrawal of the present immunity possessed by bank-held intangibles could open the door to a wide variety of possible responses by the States- with some electing not to tax intangibles, some electing to tax at preferentially low rates and others choosing to tax at relatively high general property levels-the resulting uncertainty could have pro- foundly unsettling effects on the banking community and on the process of financial intermediation, it is this last argument that probably is most persuasive in supporting the case for continuation of the present immunity. CHICAGO, March 22, 1971. PAGENO="0489" APPENDIX 9 Comparing State anti Local Taxation of Banks and Other Business Enterprises HARVEY E. BRAZER Chairman, Department of Economics, University of Michigan, and MARJORIE C. BRAZER INTRODuCTION Inter-industry, inter-corporate, and inter-personal comparisons of state and local taxes paid have long been the subject of much interest. They have taken on rather special significance in the case of the bank- ing industry, however, because of the restrictions that the Congress has placed upon the states and their local subdivisions in the taxation of National banks. Section 5219 of the Revised Statutes (12 U.S.C. 548) and judicial interpretations of it, in fact, frequently have re- quired comparisons, in order to ascertain whether or not the banks have been taxed more heavily relative to "other moneyed capital" and non-financial corporations than the federal statutes permitted. Comparisons have been inspired as well by interest in the question as to how much revenue, if any, is being lost by taxing jurisdictions and saved by banks as a consequence of the constraints imposed by Section 5219 and the extension by the states of similar treatment to state-chartered banks. Moreover, many of the states employ tax rates under income taxes, or taxes measured by net income, that are designed to be sufficiently higher for banks than for other corpora- tions to "equalize tax burdens." At first glance it would appear that tax burden 1 comparisons for banks present no real problems other than those involved in obtain- ing the desired data, even when it is recognized that they must be seen in the context of the issues involved in comparing tax burdens generally. The slightest reflection, however, soon reveals the exist- ence of some very serious difficulties. These difficulties may be illu- minated more readily if, at the outset, we avoid the complexities introduced by the corporate entity and examine the case of inter- personal tax burden comparisons. Furthermore, recognition of the role of individuals or households as taxpayers should sharpen under- standing of and give meaning to the notion of business or corporate tax burden. INTERPERSONAL COMPARISONS We are interested, say, in comparing taxes paid by rich people with taxes paid by poor people, or taxes paid by residents of State A with those paid by residents of State B, or large families versus small 1 The word "burden" Is used in this pa~per for convenience in expression merely as a synonymfor "amount paid" or "liability"; it is not meant to be read as Implying that taxes are necessarily any more (or less) "burdensome" than other charges or prices paid by the individual or corporate taxpayer. (469) PAGENO="0490" 470 families. Clearly the possibilities for drawing comparisons are abun- dant. What is not so clear is how we ought to go about developing the necessary commensurable numbers. Bases for Comparison Commensurability requires that we relate taxes paid by each of our units of observation to something that will serve, to our satisfaction (even if not to everyone's satisfaction), as a standard of comparison. That is, we are not interested merely in knowing how much in taxes is paid by each of any given set of individuals. Rather, our comparison, to be meaningful, must relate taxes paid to income, wealth, expendi- ture, perceived value of public goods "consumed," or whatever we choose to designate as the relevant (perhaps "appropriate") base or "norm." Thus if income is selected this implies that we believe that, or at any rate accept the idea that, income defines the individual's role as taxpayer. We should wish, then, to express taxes paid as a per- centage of income, and equal, more than, and less than are defined in terms of this ratio. But which of the alternative bases or norms of taxation are we to select? None is self-evidently better than any other until we specify the criterion or criteria by which we are to evaluate the tax system,2 and even then doubts may reasonably be entertained. If we select income as our base we may do so because we believe that taxes should be apportioned among individuals, families, or households according to - ability to pay and that this ability is some function of income.3 But one may also assert, quite plausibly, that ability to pay is more accurately a function of expenditure or of net worth. Irrespective of this choice, however, the notion of ability to pay is entirely subjective in nature and its use implies interpersonal comparisons of utility. One can only, therefore, select income or wealth or expenditure, or some such measure, as an objective proxy for ability to pay and hope that it is a good proxy. What have we then accomplished? As a criterion for tax distribution ability to pay appears to involve nothing more than the use of a high- sounding phrase having some persuasive moral force to support one's position with respect to that distribution. Far more straightforward, meaningful, and therefore useful, is the approach that simply states a given objective to be achieved through allocation of tax shares and then selects the tax base best suited to the attainment of that objec- tive. Thus, if it is our objective to use the tax system as an instrument for redistributing income toward greater equality, it follows that whatever the nature of the actual taxes levied, interpersonal tax comparisons must relate taxes paid to income~ Then, when we compare taxes as percentage of income among individuals or groups of individ- uals wre may draw conclusions about relative tax levels and about the gap between our oblectives and accomplishments. The same exercise might be carried out with respect to other tax bases and policy obj ectives. 2For extensive discussions of the issues surrounding the choice of tax base see Richard Goode, The Individual Income Tax (Washington, D.C.: The Brookings Institution, 1964), chs. II and III, and the refer ences cited therein. 3 It may also be argued that demand for public goods and services is a function of income and that the income base for taxation is appropriate to a benefit as well as an ability basis for apportioning tax contribu- tions. The two functions may be expected, of course, to be very different. PAGENO="0491" 471 To this point we have simply opted for the use of an objectively measurable base for interpersonal tax comparisons. Unfortunately, however, "objective" and "measurable" can only be used as relative terms. We cannot, for example, find agreement among economists, attorneys, and accountants as to how properly to define income, let alone measure it once defined. The definitional questions may differ somewhat in substance but they are not avoided by shifting to bases other than income, and the shift will, of course, raise new questions: Measuring Taxes Paid Moreover, the difficulties encountered in defining and measuring the base for use in tax comparisons are joined by truly formidable ones involved in measuring the taxes paid by the individual, family, or household. What is meant by the term "paid by"? Surely this cannot mean simply the tax payments made directly to the various taxing jurisdictions. Quite obviously what we really want to measure is the dollar amount of taxes "borne." By "borne" we mean paid in the sense that the tax incidence is such as to reduce that individual's or unit's income. Thus, of course, taxes an individual actually pays to a governmental jurisdiction may be shifted elsewhere and not "really paid" by him at all, and taxes of which the individual may be quite unaware may, in fact, be borne by him. We are therefore confronted with the thorny subject of tax inci- dence. Taxes get shifted from those who are initially responsible for paying them to those on whom their incidence falls through the complex process by which the imposition of taxes gives rise to changes in the prices of factors, products, and assets. Our knowledge of the way in which the relevant interactions occur and how individuals and families are affected as suppliers of labor and capital, as consumers, and as asset holders is, at best, sufficient to permit only rough approxi- mations of the answer to the question as to how much in taxes is borne by them.4 Another difficult, but quantitatively less important, problem relates to the definition of "taxes" to be included. `Where the charge or tax is in the nature of a price paid in exchange for a specified good, service, or present or future claim, value is received for the amount paid and there is no more reason to count it among "taxes" paid than there is for counting other prices, public or private, paid for goods, services, or claims of whatever kind. Social security taxes, for example, are "contributions" for social insurance, and there is a rough correspond- ence between the amount paid by and on behalf of a given individual and the value of the benefits he may realize. But the correspondence is only rough and, in greater or lesser degree, all taxes may be said to bear some relation to public service benefits of one kind or another. There is no clean line between taxes "pure and simple" and other governmentally imposed charges. At most we can visualize a con- tinuum along which we may move from one extreme, at which there is a close relation between the amount paid and benefits realized, as in the case of a charge for water service or admission to a public swimming pool, through social security taxes, user taxes or charges like motor fuel For extensive discussion of incidence theory see Richard A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill Book Co., 1959), chs. 10, 15, and 16. PAGENO="0492" 472 taxes, to general sales and income taxes. For purposes of comparing tax burdens we can only select rather arbitrarily a point on the con- tinuum at which we draw the line between taxes and other charges; there is no demonstrably "correct" location for it. In short, we recognize the obstacles in the way of developing inter- personal comparisons of tax burdens, yet acknowledge that such com- parisons serve useful and highly relevant public policy purposes. Just as it makes sense as an economic-political choice to tax people accord- ing to income, or wealth, or expenditures, so it makes at least as good sense to attempt to measure the relationship between taxes borne by people under a diversified tax system and the base or criterion selected. INTERCORPORATE COMPARISONS Can we, now, extend this conclusion with respect to individuals or families or "people" to banks and, more generally, corporate enter- prises and corporations grouped by industrial classification? At one level of response the answer is "no." for all taxes, whether initially paid by individuals or corporate enterprises, have been assigned, through incidence analysis, to individuals. There is, in consequence, nothing left~ to assign to corporations and hence no intercorporate tax comparisons are possible. Taxes paid by corporations are borne by individuals in their capacities as suppliers of capital, labor, or other inputs, or as consumers of corporate products. Thus it does not make sense to speak of corporate measures or indices of "ability to pay;" the analogy with individuals simply does not hold. Ronald B. Welch put it well many years ago when he said, ". . . ability is an attribute of animate beings, and with all the sovereignty of the State it cannot be injected into the fictitious personality of a corporation." Corporate Tax Incidence and Tax Burdens It must be quickly pointed out, however, that it does not follow that taxes imposed on corporations "do not matter" because they are borne by individuals. They do indeed matter for, as we have noted, in the process of tax shifting relative prices change and the allocation of economic resources is, therefore, different from what it would have been under alternative tax schemes. Thus one may expect that when taxes imposed on industry A are raised relative to those imposed on industry B resources will flow from the more heavily to the less heavily taxed industry, relative prices will follow the direction of tax change, and the new consumption mix will favor the output of the more lightly taxed industry.6 The nature and extent of the consequences of relative tax changes will depend, of course, on the structure of factor and product markets, on technology, and on the kinds of taxes in- volved. The main point to be made here is that relative tax loads and changes in them induce important consequences which may be re- garded as the intermediate steps or effects giving rise to ultimate incidence changes among individuals. 6 Ronald B. Welch, State and Local Taxation of Banks in the United States (Albany, N.Y.: State of New York, Special Report of the State Tax Commission, 1934), p. 146. 6 This is not the place to develop in detail and with analytical rigor the analysis underlying these assump- tions or assertions. See Arnold C. Harberger, "The Incidence of the Corporation Income Tax," Journal of Political Economy, June, 1962. PAGENO="0493" 473 By and large the literature on the incidence and effects of taxes imposed on corporate enterprises tends to be rather abstract. It tells us that taxing industry A more heavily than industry B will shift capital and labor from A to B, but this is typically pictured as a smooth, cost- less kind of transfer of resources that should not hurt anyone, except insofar as the prices paid for the use of his capital, or for his labor, or which he pays in markets for products, change to his disadvantage. This hardly explains corporate management's very obvious concern about the level and kind of taxes imposed on the firm or its industry. Is that concern genuine, rationally based, and warranted, or does it stem from a misguided view of the "truth"? Bankers, for example, and at their behest or perhaps even independently, some legislators, appear to worry deeply about the level of taxes paid by such direct competitors as mutual savings banks and savings and loan associations relative to taxes paid by commercial banking corporations. We believe that this concern is indeed real and that it is warranted, thus calling forth quite legitimately the need to develop meaningful measures of relative corporate tax "burdens." Analysis of the incidence of corporate taxes is commonly conducted in a world quite alien to the corporate executive. It is a world of perfect com])etit~Ofl, with its many sellers and many buyers of homogeneous products and factor input, perfect knowledge, and perfect mobility of' capital and labor. And the solution described, the outcome of differential tax changes, is one arrived at under conditions of long run equilibrium in this perfectly competitive world. Unfortunately, however, corporate management must endure the painful short run steps on the way to the long run, neither labor nor capital i~ "perfectly" mobile, and both owners of capital and workers, including manage- ment, are likely to suffer windfall losses in the process of adjustment to unfavorable tax changes. Contraction in the volume of activities of a given firm is hardly a matter of indifference to workers laid off, or stockholders whose dividends are cut, or management forced to "retire early," even when they are assured that employment of labor and capital and the returhs to each of them will, in the aggregate, and in the long run, be more or less as before. At the same time the industry or industries experiencing relatively favorable tax treatment and thus expansion will offer unexpected gains, in the short run, to labor, management, and capital. But unlike offsetting statistical * changes, where gains cancel losses, different sets of people are in- volved, and the gains of one set offer slight comfort to those who lose. Intercorporate tax comparisons have significance as well for the efficiency with which resources are allocated within the economy as a whole. Departures from tax neutrality give rise to excess burdens.7 That is, they result in economic costs that are greater than the tax liability by an amount equal to the loss in output due to the in- efficiency in resource allocation induced by the tax. Practically speaking, all taxes are unneutral in this broad sense. But in a narrower sense we may observe more or less neutrality in the application of a `For an extensive discussion of tax neutrality, partiaularly as it relates to the taxation of banks, see Appendix 7 by Carl 5. Shoup, "Economic Impacts of Particular State and Local Taxes on Banks with Special Reference to Neutrality," pp. 425-461 above. PAGENO="0494" 474 given tax or a tax system as a whole if we measure neutrality in terms of differences among firms or industries in the tax burden imposed. Thus, for example, a tax such as the corporate income tax is clearly unneutral in the broad sense; its unneutrality is exacerbated if it is so imposed that the effective rate on net income varies capriciously and widely among firms and industries. If we grant, then, that the kinds and levels of taxes paid by cor- porate enterprises do matter, and that rntercori)orate and inter- industry comparisons are important, we confront questions as to how such comparisons should or can be made and how meaningful they are likely to be. Defining Taxes Paid by Corporations. In the case of corporate tax comparisons, unlike that Df inter- personal comparisons, our concern is with taxes l)aid by the corpora- tion, irrespective of incidence. This follows from the fact that, as we have seen, corj)orate entities as such do not bear taxes. But they do pay taxes, and those payments represent additions to costs or dis- positions of income which, in turn, give rise to changes in relative income distribution among individuals that are directly traceable as economic consequences of the imposition of corporate and other tax 1)aylfleIltS. For purposes of inter-industry tax comparisons, therefore, because we are concerned with tax payments rather than incidence, both the conceptual and empirical problems involved should be far simpler than those encountered in interperson al comparisons. Nevertheless, some problems do remain. Quasi-public prices or user charges, for which the corporation is simply purchasing goods or services, such as water or sewage disposal, from public authorities do not in any meaningful sense constitute tax "burdens." They should be excluded from our calculations. The same may be said for special assessments, under which there is a general expectation that the beneficiaries of a public improvement who are subject to the assessment will realize direct benefits worth at least as much to them as the amount paid. But, as noted in our discussion of interpersonal tax comparisons, such taxes as those imposed on motor fuel purchased for use on the highways are not sufficiently distinguishable, in the sense relevant here, from other general taxes, particularly local property taxes, to warrant their exclusion.8 Another group of taxes that presents some conceptual difficulties for interinclustry comparisons consists of the severance taxes em- ployed by many of the states. To the extent that these taxes may be imposed in lieu of, or are in the nature of, royalties we should exclude them, but frequently they are, in the opinion and intent of the taxing jurisdiction, in lieu of real property taxes. The case for exclusion is far from clear. Where, as in Western Canada, the government retains all mineral rights and is the lessor of the right to exploit them, it is clear that severance taxes and royalties are indistinguishable in substance, We are inclined to this view for the general case, although we would not be willing to defend it strongly, but we would insist on departing from it where the industries subject to comparison included those for which the services provided by the publichighways and paid for through highway user taxes comprise a substantial production input. These would include firms engaged in over-the-road transportation of passengers and freight and the auto leasing companies. IIighway user taxes paid by these corporations are much more closely akin to prices paid for production inputs than they are to general taxes. PAGENO="0495" 475 if not in form. In the U.S., however, most actively exploited mineral deposits are privately owned and severance taxes are not alternatives to royalties but may be regarded as additional to them. We would, therefore, include them for tax comparison purposes. Of far greater quantitative importance are the selective and general sales taxes. Such excises as those imposed on trucks, automobiles, motor fuels, cigarettes, beer, liquor, and wine, are typically paid by the manufacturer, wholesaler, or retailer to the levying jurisdiction. Irrespective of legislative intent with respect to shifting, or actual shifting, these taxes appear to be conceptually indistinguishable, for our purposes, from other taxes that add to the costs of goods or services sold or that reduce net receipts from their sale. A basic objective of interindustry tax comparisons is to obtain a measure of the relative tax impact among industries. Given this objective, it is difficult to justify the exclusion of the specific excises. rfo exclude the liquor excise, for example, is to suggest that this tax is of no consequence for the level of output of the affected industry, for its demand for labor and capital, or for the relative prices of its products. Much the same may be said for the more general sales taxes. The other major state and local taxes paid by corporations in general are the property, corporate income, and corporate or business privilege taxes, the latter commonly being imposed on corporate capital, variously defined. These taxes offer no conceptual problems in the present context. Of the taxes authorized by Section 5219 clearly the real property and net income taxes (whether directly on or measured by net income) offer no peculiar difficulties. The same may be said for the tax on bank shares, unless it is paid by stockholders and it is simply part of a uniform tax on corporate shares. In the latter case attributing the tax to banks would be no more justifiable than similar attribution for all other corporations. Similarly, whether or not a tax levied on dividends paid by banks should be counted as part of the banks' taxes would seem properly to turn on the test suggested for the bank shares tax. Bank dividends taxable to stockholders under state and local general income or intangibles taxes are not bank taxes, but in the absence of such general taxes they would be. The implied criterion is one which asks whether or not the tax may be expected to influence to any appreciable extent the allocation of resources to the banking (or any other) industry. For example, a tax on bank divi- dends levied by a State that does not otherwise tax corporate dividends may be expected to increase the price or cost of capital to banks in that State, and thereby reduce the allocation of resources to banking. If, on the other hand, all dividends were uniformly taxed in the State, no such effect would occur. Thus we would include virtually all taxes actually paid by corpora- tions in our comparisons of tax "burdens," excluding, in general, only clear-cut user charges. This seems to us to be a reasonable, "common sense" approach. It is based on the premise that all taxes paid by corporations are ultimately "borne" by individuals in their capacities as consumers and/or as suppliers of labor and capital. For purposes of identifying taxes that are properly includable in interindustry com- parisons, it is irrelevant, therefore, whether taxes are shifted forward or backward, nor does the form taken by the tax or the definition of its base matter. PAGENO="0496" 476 Some observers may prefer an alternative approach that excludes all taxes that are meant to be, or are widely believed to be, shifted forward. Among these excluded taxes would be found the selective and general sales taxes. All other taxes paid by corporations would be included. But any such line of demarcation appears to us to be rie~es- sarily arbitrary. Moreover, given existing uncertainties about the direction of shifting with respect to such major taxes as property and corporate income taxes, any observer may pick and choose taxes for exclusion or inclusion to suit his own objectives. At this point, how- ever, the game of comparing tax burdens among industries would descend to an all too obvious absurdity, losing sight entirely of the fundamental reason for the tax comparison exercise. A more reasonable and potentially productive approach might involve confining intercorporate or interindustry tax comparisons to corporations subject to similar sets of taxes or functioning in closely related industries. Thus, for example, for purposes of evaluating the relative level of taxes paid by commercial banks, the severance taxes paid by iron ore mining or crude petroleum producing companies, or the excises paid by tobacco and liquor producers or distributors, or the sales taxes paid by retail establishments, are not immediately relevant because the comparisons may not be particularly relevant. In a broad, general way, the banking industry no doubt has some interest in taxes paid by all industries, but its immediate interest, and that of the U.S. Congress and State legislative bodies, lies in the comparison between taxes paid by banks and those paid by close competitors such as mutual savings banks, savings and loan associ- ations, consumer and commercial credit companies, life insurance, and mortgage companies.9 If tax comparisons were to be confined within such limits the difficulties, uncertainties, and ambiguities attaching to the inclusion or exclusion of various taxes would lose much of their importance. On the other hand, however, confining interindustry tax comparisons within such narrow limits would imply ignoring the fact that banks and other financial institutions compete for resources and markets in the economy at large. Bases for Comparison ~° There remains the problem of selecting the appropriate base or bases against which taxes paid may be related for purposes of corn- parisons among corporations or industries. Obviously taxes paid by~ one firm or industry relative to another cannot be said to be either' high or low without reference to some common base. There are a number of bases that might be selected, of which four appear to be most promising: net income; net worth; gross receipts; and value added. Once the base for tax comparisons has been defined, tax "burdens" may be stated in terms of ratios, the numerator of which is taxes 5 The range of industries immediately and directly competitive with the banks has, apparently, been, increasing in recent years. National banks have expanded their activities to include data processing services, leasing of personal property, ownership of subsidiaries `engaged in mortgage servicing, factoring, and ware-- housing, handling of collective investment accounts, sale of insurance, travel agency functions, and the issue of credit cards. This listing is drawn from a letter dated May 23, 1969, from Charles F. Cordon to the Honorable Wright Phtman and printed in Hearings Before the Committee on Banking and Currency, House of Representatives, Ninety-First Congress, First Session, on H.R. 7491, May 26, 1969, pp. 30-31. 10 The issues relating to the choice of base for tax comparisons are discussed in Ronald B. Welch, Carrier- Taxation (79th Congress, 1st seas., House doe. 160, Sept. 19, 1944; Washington, D.C.: U.S. Government. Printing Office, 1945), pp. 382-6; and John D. Helinberger, State and Local Taxation of Bank8 (Minneapolis: unpublished doctoral dissertation, 1960), pp. 46-49. PAGENO="0497" 477 paid and the denominator is the selected base. The function of the denominator is to provide a norm that can be regarded as a common measure of relative tax contribution. Its choice implies a judgment on the "appropriate" or preferred business tax base. But appropriateness of the selected denominator for purposes of tax comparisons need not rest on its acceptability as the sole or even major business or corporate tax base. Considerations of administrative and compliance costs, of entrenched institutions, and of political feasibility, as well as of hard- dying notions on the virtues of diversity in taxation, may mean that the preferred base for tax comparison purposes is not even a strong candidate for use as the one base for state-local taxation of business enterprises. In the discussion that follows of the four "candidates" for use as our base for comparison of taxes paid, we are acutely conscious of the fact that the relative tax "burden" of any firm or industry will depend crucially on the choice of base or denominator. Thus the criteria for evaluation of the alternatives should be clear at the outset. The essen- tial criteria appear to us to be the following: availability of required data; absence of capricious or controllable variance in the value of the base for any firm or industry; commensurability between firms and industries engaged in widely divergent kinds of activities; and the denominator in the tax "burden" ratios should permit these ratios to provide reasonably clear indications of whether and to wh~tt extent state and local taxes tend to depart from neutrality with respect to particular firms or industries. This latter criterion contains, in our view, the principal justification for any business tax coniparisons. Net Income. Net income has been widely used as the base for com- paring state and local taxes paid by banks with those paid by other corporations.11 The use of net income foi this purpose implies both that state-local taxes are in fact a charge against the corporation's profits or net income, and that the net income of the corporation is closely analogous to the income of the individual or the family. The first of these implications suggests that state and local taxes are shifted neither forward to customeis nor backward to suppliers of labor services, but are borne solely out of profits and thus by suppliers of capital. This may or may not be the case, but we doubt that anyone strongly believes that it is. For the corporation net income is in no really pertinent sense analo- gous to income of individuals. It is a measure of the amount earned by the corporation after contractual and other obligations have been met. It is the amount available as return to equity capital. The fact that state and local taxes paid represent a high or a low portion of that amount, which at least in the short run may be regarded as a "residual," tells us nothing of very special significance. A high ratio of taxes to net income, for example, may mean either that taxes are relatively high or net income is low. And whether the impact is likely to be, or to have been, large or small with respect to various measures of the size of the firm's operations or level of activities is not revealed at all. That impact may be large where the taxes to net income ratio is low, because the ratio of net income to sales, output, or value added is very high. Alternatively, of course, it may be small even where the taxes to net income ratio is high, because net income relative to output, sales, or 11 See, for example, the studies by Iielr~berger, op. cit. and Welch, op. cit. 79-421 0 - 72 - 32 PAGENO="0498" 478 value added is low. It follows, therefore, that the ratio of taxes paid to net income may tell us little or nothing about the direction of the influ- ence of taxation on resource allocation. Thus, unless we are prepared to view corporate net income as analo- gously representative of "ability to pay," tax comparisons expressed in terms of the taxes to net income ratio are not likely to be either informa- tive or useful as a policy guideline. And if one were to accept the analogy it would be necessary, as in the case of interpersonal compari- sons, to distinguish between taxes shifted forward to purchasers and backward to labor on the one hand, and those that can be estimated to impinge directly and immediately on net income distributed or attributable to stockholders. The task, as we see it, is impossible. The fact that such comparisons have been drawn frequently in the past and no doubt will continue to be drawn in the future in itself adds nothing to their usfulness. If, nevertheless, one still finds that the net income base for tax comparisons retains some appeal we suggest that the concept of corporate net income be examined carefully. It is defined in the federal Internal Revenue Code and in the income tax laws of the states as well. It is also defined in terms of so-called "generally accepted accounting principles."12 Unfortunately, however, these definitions are not consonant with each other and the differences appear to have vastly different consequences for different industries. For all corporations ffling returns with positive net income for 1966, as may be seen in Table 1, the net income after tax reported as per the federal Internal Revenue Code was $47.5 billion, $6.7 billion or 14.2 percent less than the after-tax net income reported in the corpo- rations' books of account. The corporations' accounts presumably present management's best judgment as to the amount of income earned in 1966. Differences between this judgment and income as defined by the I.R.C. arise from such sources as differences in depre- ciation, depletion, and bad debt allowances taken for "tax" and for "book" purposes, and in the treatment of state-local bond interest. As the data in the table clearly indicate, these differences vary widely, even among such closely related industries as banking, insurance, and credit agencies other than banks. The relevant data, purely by way of* illustration, are also presented for petroleum refining and chemicals. For our purposes the most startling fact is that the banks' accounts show net income after taxes as being substantially more than twice as large as the amount shown under I.R.C. rules. On the other hand, for insurance carriers the difference is less than 5 percent, while for the chemical industry it is less than 6 percent. Even in petroleum refining, where percentage depletion and expensing of certain capital outlays are so important for tax purposes, the corporations' books record net income after taxes as being "only" twice as large as the figure arrived at in tax returns. The actual federal corporate income tax paid by banks and trust companies for 1966 was $757.6 million.13 Pre-federal income tax net income was $1,865.4 million according to I.R.C. rules, and $3,275.9 12 On which committees of the. American Institute of Accountants have frequently been observed to disagree. 13 U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income, 1906, Corporation Income Tax Returns (Washington, D.C.: Government Printing Office, 1969), P. 113. PAGENO="0499" 479 TABLE 1.-NET INCOME AFTER TAX i PER INTERNAL REVENUE CODE AND PER BOOKS OF ACCOUNT, BY MAJOR SELECTED INDUSTRY, 1966 [Dollars in millions[ Per Internal Per books Difference Revenue Code of account (2)-(1) Industry (1) (2) (percent) Banks and trust companies $1, 107.8 $2, 518. 3 127.3 Credit agencies other than banks 753. 1 1, 180. 8 56. 8 Insurance carriers 1, 658.9 1,579.0 -4.8 Petroleum refining, etc 1,533.3 3,103.5 102.4 Chemicals and allied products 2, 151. 7 2, 277. 9 5.9 All industries 47, 465. 5 54, 190. 6 14. 2 I For returns reporting net income only. Source: U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income, 1966, Corporation Income Tax Returns(Washington, D.C.: U.S. Government Printing Office, 1969), table 7, pp. 112-113. million according to the corporations' books.14 Thus where the statu- tory rates of the federal corporate income tax were 22 per cent on the first $25,000, 48 per cent on all income in excess of $25,000, and 25 per cent on long term capital gains, the average effective rate of federal corporate income tax paid by banks and trust companies was either 40.7 or 23.1 per cent, depending on which measure of "net income" the observer chooses to use. Irrespective of the merits of present rules governing the definition of corporate net income for federal and state tax purposes, the tax law definitions are clearly unacceptable for purposes of tax "burden" comparisons. In a recent study the staff of the U.S. Treasury Depart- ment has offered, with particular reference to banks and other financial institutions, ". . . a measure of their income which would encompass what the organizations really earned after payments to depositors." `~ This measure, labeled "economic income," is defined as taxable income plus tax-exempt interest, 85 per cent of domestic dividends received, the excess of deductions for bad debts over actual bad debt losses, and the excluded 50 per cent of long-term capital gains.'6 The Treasury estimated that in 1966 the economic income of all commercial banks was $3,643 million, compared with $2,092 million reported for federal income tax purposes.'7 Of the difference of $1,551 million, more than three-quarters was accounted for by exempt inter- est, almost one-quarter by the excess of~ deductions for bad debts over actual losses, and the remainder, amounting to less than $50 million, was nearly evenly divided between excluded dividends and excluded long-term capital gains.'8 The usefulness of the concept of "economic income" for inter- industry tax comparisons depends, in the first instance, on whether or not it is possible to define it satisfactorily. We may agree that "excess" 14 These amounts are arrived at by adding corporate net income tax paid of $757.6 million to after-tax income, as shown in columns (1) and (2) of Table 1. 15 U.S. Treasury Department, Tax Reform Stndies and Proposals (91st congress, 1st sess., committee print; Joint publication, House Committee on Ways and Means and Senate Committee on Finance; Wash- ington, D.C.: U.S. Government Printing Office, 1969), part 3, p. 459. 16 Ibid. The text (page 459) appears inadvertently to omit 50 percent of long-term gains, but this item appears in Table 5, page 475, which lists tax exempt income, whereas "the net operating loss carryover" does not appear in that Table although it is suggested as part of economic income in the text. 17 The difference between $2,092 million and tile $1,865 million shown above is due to the fact that the Treasury figure is for all commercial banking corporations, whereas ours is for corporations showing not income after tax only, and we were unable to separate banks, mutual savings banks, and trust companies. 18 Derived from U.S. Treasury Department, op. cit., Tables 1 and 5, pp. 470 and 475. PAGENO="0500" 480 bad debt deductions and excluded interest, dividends, and capital gains should be included in income for comparison purposes, but are these the only adjustments that are desirable? Depreciation in excess of actual reduction in value appears to be an obvious candidate for in- clusion, as may various "fringe benefits" for executives, such as sub- sidized dining rooms, "jumbo" insurance policies, and so forth. If interindustry comparisons are to be drawn the importance of depre- ciation is very much enlarged, and certainly depletion in excess of cost depletion and expensing of drilling and development costs in petroleum and other mineral operations must be cut back in order to obtain a measure that fits the Treasury staff's concept of "economic income." It seems to us, however, that the objectives to be served by using net income, no matter how defined," as the base for comparison are elusive, to say the least. The ratio of state and local taxes to net income tells us, at best, something about the level of taxes paid relative to the return to equity capital. But a high ratio is compatible with either a heavy or a light tax load on the firm or industry's capital. The high ratio clearly signifies a heavy tax load if the rate of return oil equity is high, but not if it is low. To illustrate, suppose that the ratio of taxes paid to net income is .30 for corporations A and B, and suppose further that the rate of return (before taxes) on net worth for A is 40 percent and for B 10 percent. Taxes, therefore, amount to 12 percent of net worth for A, but only 3 percent for B. Rather than falling with equal weight on the two corporations, it would appear that they tread far more lightly on corporation B than on A. This suggests more than the obvious observation to the effect that the tax "burden" ratio will vary widely and perhaps even capriciously with our choice of denominator. In our judgment it casts further serious doubt on the usefulness of net income, defined narrowly or even broadly, as a base for tax comparisons. Net Worth. This brings us to consideration of corporate net worth. as a base for tax comparisons. The ratio of taxes paid to net worth is a direct measure of the relative weight of taxes on equity capital and their influence, therefore, on the attractiveness of investing funds in one industry compared to others. Data for net worth are readily available. Unfortunately, however, they reflect wide differences in income and asset accounting practices, generally do not distinguish between differences in amounts attribut- able to price changes a.nd those due to "real" changes, and the use of net worth as the denominator in tax ratios involves drawing a sharp and arbitrary line between equity and borrowed capital. Thus the initial appearance of attractiveness attaching for our purposes to net worth seems to wane rapidly on examination. Although it seems to offer a base that is capable of providing significant insights for policy purposes, its defects of measurement, being cumulative over the years, are not as readily corrected as in the case of net income. Adding borrowed capital to the net worth base would appear to avoid the distortion otherwise introduced by differences among firms and industries in their capital structures. Some question remains, 19 For some alternative definitions see Heimberger, op. cit., pp. 46-49. Tn order to avoid allowing the cor- poration's capital structure to influence its tax burden ratio Heimberger suggests, as a base for comparison, net income plus interest and rents paid. PAGENO="0501" 481 however, as to how to define "borrowed capital." Should it include all liabilities having maturities of more than one year? But why the arbitrary line drawn at 12 months? Or should we include all liabilities, current and long-term, interest bearing as well as non-interest bearing? At the extreme, then, we approach very close to total liabilities plus net worth as our base and this, of course, is total assets as well. A base such as total assets, or total liabilities plus net worth, is not intuitively attractive for tax comparison purposes. And yet any point between what is ordinarily understood to be net worth and total assets can be selected only arbitrarily, for the basis for rational choice is not at all evident. This consideration suggests that net worth and modifica- tions thereof are not likely to offer promising means of achieving tax "burden" comparisons that are likely to command widespread atten- tion and respect in tax policy debates. Gross Receipts. Gross receipts from sales of goods and services as a basis for tax comparisons has much appeal. In this context "receipts from sales of services" are, of course, to be broadly construed so as to include rental receipts and interest, dividends, and royalties. Some problems would arise in connection with the desirability of distinguish- ing between sales that represent "ordinary" business and those that involve partial liquidation of the firm's capital. Alternatively one may view the problem as one of distinguishing between the firm's in- ventories or stock-in-trade and its "assets held for the production of income." In some industries, and especially in commercial banking, millions of dollars worth of services may be offered "free," as in the case of maintenance of checking accounts, check clearing and collec- tion, and other services provided to demand depositors. The con- sideration involved is the availability to the banks of the non-interest bearing deposits. Would the banks' gross receipts tend to be sub- stantially understated and their tax ratios thereby overstated if such "barter" transactions are ignored? The answer is undoubtedly "yes", but it does not seem to us to provide a tellingly negative argument against the usefulness of gross receipts in the present context. Apart from these problems, the definition and accounting for gross receipts or gross revenue is straightforward and requires no record keeping beyond that which all corporations now maintain. Moreover, it enables us to avoid the problems presented by some corporations having negative bases, as will occur when the base used for compara- tive purposes is net income. In addition to simplicity and certainty, the use of the gross receipts base offers the virtue of relating the amount of state and local taxes paid to the value of output sold, thus telling us directly what the relative size of the tax element is relative to the prices of the products of various industries. This, one need hasten to add, is not to imply anything about shifting or incidence of the taxes. It merely tells us that for each dollar of goods or services sold the corporation or the industry paid X cents in state and local taxes. Surely for purposes of judging whether a given industry's taxes are high or low that information is more directly useful than the ratio of taxes to net income which, at best, can by itself only tell us something about the relative shares of the firm's or the industry's receipts going to state and local govern- ments on the one hand, and available for distribution to stockholders or addition to equity capital on the other. PAGENO="0502" 482 The major flaw associated with gross receipts in the present context arises from the fact that corporations and industries differ widely in the degree to which they are vertically integrated. For example, sup- pose that industry A is fully integrated, so that it purchases nothing from other industries, industry B's purchases from industry C equal 50 per cent of its gross receipts, and industry C purchases nothing and sells all of its product to industry B. Now if for each of the three industries the ratio of state and local taxes to gross receipts were, say, 3 per cent, it would be wrong to conclude that the ratios of taxes to the value of the products of industries A and B were equal. In fact, of course, the ratio for A is 3 per cent, but for B it is 3 per cent plus the 3 per cent of half the value of its product paid by industry C, or a total of 4.5 per cent. Value Added. Correction for this problem, long familiar in the dis- cussion of turnover taxes, may be found in recourse to an alternative base in the form of value added. Comparison among firms or industries of state and local taxes paid as a percentage of value added will provide a clear, meaningful set of numbers. Value added is the product of the labor and capital of the firm or industry, and state-local taxes may be said to be non-federal governments' share in this product, assuming that it is valued at prices inclusive of all taxes.2° Then, if we assume that we begin in a state of long-run equilibrium, it is unambiguously clear that an increase in an industry's tax payments that raises its tax ratio relative to that of other industries should be expected to give rise to a shift away from it of labor and capital and a reduction in its output. Unlike the alternative bases for use in drawing tax comparisons, value added permits the obtaining of measures of relative tax "bur- dens" that are independent of such things as differences in rates of capital turnover and differences in degrees of vertical integration among firms or industries, and relative to net income it can be defined in simple, unambiguous fashion. It is possible to define value added in a variety of ways.2' In Pro- fessor Shoup's terminology we may distinguish "Gross Product Value Added" (GNP), "Income Type Value Added" (NNI), and "Con- sumption Type Value Added" (C) *22 The first of these is defined as GNP=C+I=W+P+D, where C is consumption, I is gross invest- ment, W is wages, P is profits, and D is depreciation. We neglect external trade and the government sector. For the individual firm, as for the economy as a whole, gross value added is simply the sum of factor payments, W and P, and depreciation. Income Type Value Added is GNP less depreciation, or NNI=C+I-D=W+P. Finally C=W+P+D-I gives us the Consumption Type Value Added. 20 If value added is net of taxes paid ourlanguage becomes less neat, but the same general conclusions hold. 21 For a discussion of the conceptual issues relating to the use of value added as a tax base see Carl S. Shoup, Public Finance (Chicago: Aldine Publishing Company, 1069), pp. 250-255. The Office of Business Economics of the U.S. Department of Commerce has long been concerned with the specific problems involved in measuring value added by commercial banks. See National Income, 1954 Eddion, A Supplement to the Survey of Cnrrent Business.(Washington, D.C.: U.S. Government Printing Office, 1054), pp. 46-47. 22 Public Finance, pp. 251-2. PAGENO="0503" 483 Where, as in several European nations, the value added tax is employed, the consumption type is favored. This form seems to present fewest complexities for compliance and administration and now enjoys the advantage of widespread familiarity. Since it exempts saving, it enjoys the support of those who argue that it is wrong from the standpoint of efficiency in resource allocation to tax income in- clusive of saving and who fail to see redeeming equity gains in doing so. Our objective here, however, is to evaluate the alternative forms of value added in terms of their merits as a base for interfirm and interindustry tax comparisons, and not necessarily as a tax base or subject of taxation. Thus even if we grant the case for the C-type as a tax base, for our purposes it suffers from the fact that allowing the deduction of capital outlays (I) would be likely, particularly in the case of smaller firms, to give rise to values for the denominator in tax ratios that fluctuated from year to year to an extent far greater than the fluctuation in resource using activities. The Income Type Value Added would provide a base for comparison purposes that would more closely reflect each period's level of activities for the firm or industry, but it involves subjecting the base to all of the uncertainties associated with the problems of estimating depreciation. There is much to be said for an approach that avoids the kinds of artibrary rules and decisions that govern tax depreciation or, where it differs, depreciation as "booked" by the firm. This brings us to the GNP version of value added, where GNP=W+P+D. The firm may view value added so defined either as the sum of its wages, profits, and depreciation or, alternatively, as its net proceeds from sales of goods and services, plus additions to stock in trade and less purchases from other firms. The virtues of this version of value added are that it seems to minimize difficult or arbitrary decisions, and it does reflect broadly the resource using activities of the firm or industry. It does not appear to us that. the choice between W+P and W+P+D is easily made. The former requires that we rely on arbi- trary decisions which, under newly proposed Treasury rules, appear to be departing further than ever from reflecting "true" depreciation. But if we disallow the deduction or exclusion of depreciation we are undoubtedly choosing an alternative, that discriminates against the capital intensive as compared with the labor intensive firm. That is, heavy capital users will be required to show a relatively high value for the denominator in their tax ratio, thus appearing to be lightly taxed compared with others. Irrespective of our choice in this matter, however, other problems must be solved. How are we to deal with interest.and rent paid? Our choice, though admittedly it is subject to some argument, is to regard interest and rent as being akin to wages and profits, representing prices paid for factor inputs and therefore part of value added by the paying firm. Our expanded version of value added is, then, W+P+R+K, where R is rent paid and K is interest paid, or W+P+R+K+D. PAGENO="0504" 484 It has been argued that value added for commercial banks is difl~cult to estimate because of the "free" services rendered to depositors. This is, admittedly, the case for the Department of Commerce, concerned with estimating that part of consumption that consists of such serv- ices.23 For our purposes, however, using the additive approach sug- gested, value added appears to be as unequivocal conceptually and from an accounting standpoint for banks as it is for other industries, even manufacturing, in which it has long been a familiar and widely used concept. It appears to us that value added most closely meets the criteria stipulated at the outset of our discussion of the choice of a base or bases for tax comparisons. The data are available from income tax returns, although they are not now published in adequate detail. If either of the favOred versions of value added is accepted there is not likely to be large capricious or controllable variance in the size of the base for any firm or industry. The value added base will provide for commensurability between firms and industries engaged in widely divergent kinds of activities. And, finally, with value added as the denominator, tax "burden" ratios will clearly reflect unneutralities *where and to the extent that they exist. CONCLUSIONS That there are conceptual problems associated with efforts to com- pare tax burdens is clear enough, even in the case of interpersonal, as opposed to intercorporate or interindustry, comparisons. It is equally clear that these problems are unlikely to be soluble in a manner that will be satisfactory to all interested parties. Nevertheless, the first step inevitably involved in the effort to produce informative tax comparisons must be agreement on the objectives we seek in drawing these comparisons. We may, with the skeptic, hold that the only appropriate base for comparison purposes is that one which best makes the case for tax relief for the industry in which we are interested. This is to suggest that those responsible for minimizing the tax burdens of their specific industries or firms are unlikely ever to agree that one base is clearly superior to another. Tax minimization for a given industry or the effort to stave off tax increases for that industry are not the kind of objectives that will produce the agreement we have in mind. If, however, our comparative tax measures are to be so designed as to inform us about the relative weight of taxes among industries, the comparative measure that appears to us to be far superior to alternatives examined is value added. Given other objectives, however, it is conceivable that there may also be a useful role for such bases for comparison as net income or gross receipts, despite their quite obvious shortcomings. Much as we should like to believe otherwise, it is probably still true that ". . . the tax burden ratio method of testing for overtaxation is not a simple and objective process from which impartial and in- formed investigators are bound, or even likely, to emerge with a single answer." 24 ANN ARBOR, MICH., March 3, 1971. 23 See Office of Business Economics, U.S. Department of Commerce, op. cit., p. 47. 24 Welch, Carrier Taxation, p. 394. PAGENO="0505" APPENDIX 10 Liability of National Banks for Generally Applicable State and Local Taxes CHARLES F. CONLON Executive Director, Federation of Tax Administrators Under the interim provisions of P.L. 91-156, in addition to presently authorized taxes, any state or political subdivision may impose on national banks a sales or use tax, a real estate tax or a tax on the occupancy of real estate, documentary taxes, tangible personal property taxes (except on cash or currency), and various license, registration and transfer fees or taxes imposed with respect to the ownership, use or transfer of tangible personal property. Provided the usual jurisdictional requirements are met, these taxes may also be im- posed on a national bank not having its principal place of business within the taxing state. Existing taxes of the types mentioned become effective as to national banks without further state legislative action so long as (1) there is nothing in the existing law to bar its imposition, for example, a specific statutory exemption in favor of national banks, and (2) the state or political subdivision did not already impose another tax or an increased rate of tax in lieu thereof.1 The interim provisions of the new law also permit the imposition of any generally applicable state or local tax on a national bank except a tax on intangible personal property. However, save for the taxes enumerated above, the imposition of other generally applicable taxes are subject to two limitations. First, a tax of this type may be imposed only by affirmative legislative action subsequent to December 24, 1969, the effective date of P.L. 91-156. Second, such a tax may be imposed only by the state or political subdivision in which the national bank has its principal place of business. If the permanent provisions of P.L. 9 1-156 become effective without further amendment by Congress, a state and its political subdivisions would be free to impose any type of tax or combinations of taxes on national banks conducting business activities within the state or political subdivision, whether or not the principal office of the bank were located in that state. In short, the status of a national bank for state and local tax purposes would be the same as any other business corporation. No special problems are foreseen in connection with time imposition of the taxes unconditionally authorized in the interim provisions of P.L. 91-156, such as sales and use taxes, taxes on tangible personal property, documentary taxes, motor vehicle fees and taxes, and the like. Accordingly, the comments which follow deal only with those potential new dimensions to the taxation of national banks which involve: `For a brief review of developments preceSing the enactment of P.L. 91-156, see Conlon, Repeal of National Bank Tax Immunity, National Tax Journal, June 1970, p. 223. (485) PAGENO="0506" 486 1. The "doing business" types of taxes from which, save for taxes on or measured by net income, national banks have hitherto been exempt under R.S. Sec. 5219; 2. Taxes on intangible property other than the share tax authorized by R.S. Sec. 5219; 3. Exposure of a national bank to liability for "doing business" types of taxes, including taxes on or measured by net income, in a state other than the one in which its principal office is located; and 4. The division, apportionment or allocation of income, assets or other taxable base attributable to business activities in two or more states. Presumably the states generally will continue their usual practice of taxing state banks compr~rab1y to national banks in which case these comments are equally applicable to the taxation of state banks. In any event, constitutional principles would no doubt prohibit a state from discriminating against a national bank by taxing state chartered banks on more favorable terms than national banks. "DOING BUSINESS" TYPES OF TAXES Aside from taxes on or measured by net income, the major "doing business" types of taxes authorized by P.L. 91-156 are (1) those on. or measured by the value of issued or authorized capital stock or the use of capital or property within the state, and (2) those, other than retail sales taxes, imposed on or measured by gross receipts or gross income from business activities within the state. CAPITAL STOCK TAXES Taxes on or measured by capital stock or the use of capital or property in the state are imposed in 32 or so states. These taxes variously referred to as corporation franchise taxes, corporation license taxes but perhaps more frequently as capital stock taxes, are con-~ ceptually a type of property tax. However, from a legal standpoint, they are usually imposed in the form of an excise and thus are not. subject to the uniformity requirement which might be applicable to a property tax. The legal incidence of this type of tax differs somewhat from state to state, but generally speaking, it is imposed on the privilege of doing business as a corporation, on the privilege of exercising the corporate franchise or of conducting business activities including the use or ownership of property within the state, or as a license to do business. in corporate form. The kinds of activities that constitute doing busi- ness may be spelled out in some detail. Capital stock-type franchise taxes may be classified in three groups in respect to their application to domestic and foreign corporations. In one group of states, a domestic corporation is taxed on the total amount of its authorized or issued stock and a foreign corporation on that proportion of its capital stock representing capital employed or business done in the state. Alabama, Florida, Georgia, Kansas, Nebraska, Washington, and West Virginia are in this category. In the second group, domestic and foreign corporations alike are taxed on that proportion of the capital employed or business done in the PAGENO="0507" 487 state. Arkansas, Illinois, Kentucky, Louisiana, Michigan, Mississippi, Missouri, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas and Wyoming are in this group. In a third group of states, the capital stock of a domestic corporation is subject to a tax graduated by brackets while foreign corporations pay a low flat fee. The states in this group are Colorado, Maine, Maryland, Oregon, Rhode Island, Virginia, and the District of Columbia. New Hampshire probably should be classed with this group since a foreign corporation pays only an annu al "maintenance fee." Delaware taxes the capital stock of domestic corporations only and there are alternative invested capital provisions in the general cor- poration taxes measured by net income in Connecticut, New Jersey and New York, and a property element in the general corporation excise (income) tax in Massachusetts. Idaho taxes both domestic and foreign corporations on the full amount of authorized capital stock. For the most part, capital stock taxes are imposed at a mill per dollar (or equivalent basis) or at bracket rates graduated according to the value of the capital stock or the amount of capital employed in the state. The use of minimum and maximum rates is not uncommon. For example, in Florida, the minimum tax is $20 and the maximum is $2,000. The maximum is imposed in respect to $2,000,000 or more in capital stock issued by a domestic corporation or a similar amount of capital employed in the state by a foreign corporation. Examples of rates in other states are: Alabama, $2.50 per $1,000 of capital employed; Michigan, $5 per $1,000; Ohio, classified rates ranging up to $5 per $1,000, and Pennsylvania, $7 per $1,000. The bases of capital stock or franchise taxes also vary considerably. In some states, the value of a corporation's caj)ital stock is the stated value of the authorized or issued stock or the stated value of the stock 1)lus paid in surplus. In others, the value of the capital stock for cap- ital stock or franchise tax purposes may include the stated value, undivided surplus, reserves and borrowed capital. In most states, capital stock and franchise taxes are generally applicable to business corporations although there are exceptions, for example, an insurance company which pays a gross premium tax in lieu of other taxes except those on real estate. Banks are also expressly exempt from capital stock and franchise taxes of this kind in some states. As to a corporation conducting all its busmess operations in a single state, the capital stock or franchise tax involves no unusual problems of compliance or administration and the amount of tax paid will depend on the combination of rate and base in effect in the state. As indicated above, the tax paid might range from a nominal amount to the equivalent of a substantial property tax on the assets repre- sented by the share capital. Where a corporation has some business activity in two or more states imposing capital stock or franchise taxes or uses property in two or more such states in the conduct of its business, it probably will be subject to a capital stock or franchise tax in those states. The jurisdictional rules which determine whether a corporation is taxable in two or more states and the methods used to divide the tax base PAGENO="0508" 488 among the states in which the corporation is "doing business" are discussed below. GROSS RECEIPTS TAXES Another type of doing business tax is one imposed on or measured by the gross income or gross receipts of a business conducted in the state. It is difficult to categorize these gross receipts taxes neatly, but in general, as the term is used here, it means any tax on or measured by the gross receipts of a business except a tax which is, for all practical purposes, a retail sales tax or a use tax complementary thereto. A gross receipts tax of the kind under discussion may be imposed on business generally or limited to a particular function or combination of functions, for example, manufacturing, wholesaling, retailing, process- ing, service industries, and the like. The tax may be imposed independ- ently; or as one schedule of a series of related excises which includes a conventional retail sales tax; or as an adjunct to or extension of a con- ventional retail sales tax. The names of these taxes vary from state to state. They may be called license or occupation taxes, business and occupation taxes, gross income taxes, or gross receipts taxes. The legal incidence of these taxes also varies; they may be imposed with respect to the privilege of doing business or conducting business activities, or as a license tax or simply as an excise on receipts from sales or on the value of specified activities. Most of the gross receipts taxes employ a classified rate structure with rates varying according to the specific type of business (mining, contracting, printing, etc.) or the different stages in the manufacturing and distributive functions (wholesaling, retailing, manufacturing, etc.). Public utilities aside, tax rates are mostly in the range of one-half of one percent to two percent of gross receipts with a few lower and some higher. Gross receipts taxes are imposed in a limited number of states and, except in the States of Indiana and Washington, banks are either exempt from a general gross receipts tax or not included among the types of businesses subject to selective gross receipts ttxes. The major gross receipts taxes in effect in the several states may be summarized as follows: Alaslca.-The gross receipts privilege tax is a generally applicable tax imposed for the privilege of engaging in business in Alaska. Ex- emptions are numerous. The composite tax rate consists of a fiat fee plus 0.5% of gross receipts in excess of $20,000 and 0.25% above $100,000. Banks are subject to a 2% net income (license) tax in lieu of the gross receipts privilege tax. Arizona.-The transaction privilege tax in Arizona consists essen- tially of two parts; one, a 3% retail sales and use tax (sale of tangible personal property at retail); and the other, a tax at classified rates, 1.5 to 2.0%, on the gross receipts from specific business activities- utility services, publishing, printing, advertising, contracting, timber- ing, mining, oil and gas production, meat packing and the wholesale feed business. (There are also several other categories of taxable re- ceipts, e.g., from leasing or renting tangible personal property which, although separately classified, are basically part of the retail sales tax base and taxed at the same rate as retail sales.) PAGENO="0509" 489 The transaction privilege tax does not apply to sales of intangible property; nor with the exceptions noted above to any professional or personal service occupations or businesses which involve the sale or transfer of tangible personal property only as inconsequential elements thereof. L. 1970, Ch. 170 provides that all banks including national banks and investment companies and savings and loan associations are subject to all taxes imposed generally on a nondiscriminatory basis to the same extent as such taxes are imposed on other corporations. Delaware.-The gross receipts tax is a low rate tax (flat fee plus rates of from 0.1% to 0.8%) and is imposed only on contracting, manufacturing, wholesaling, and retailing businesses. Hawaii.-The general excise (gross income) tax is imposed on the gross income of businesses and professional activities. The rates range from 0.5% on manufacturing to 4% on receipts from the sale of tangible personal property and receipts from service businesses and professions. Banks subject to the income tax are expressly exempt from the general excise (R. S. Sec. 237-23). Section 241-2(b) of the bank tax act provides that nothing in it shall exclude the application of other taxes imposed by the state or its political subdivisions on national banks when such taxes may be imposed in addition to those authorized by R. S. Sec. 5210 or other similar laws. Jndiana.-The gross income tax is a generally applicable levy on businesses. The rates range from 0.5% on. wholesale sales and sales of retail merchants to 2.0% on income from most service businesses and professions. Individuals subject to the net income tax are exempt from the gross income tax. Corporations are subject to both the gross income and net income taxes but pay only the higher of the two. For banks and other financial institutions, the base of the tax is "gross earnings." The tax rate of 2.0% applies to such "gross earnings" of banks as commissions, interest, carrying charges, dividends, fees, rentals, etc. The gross income tax does not apply to national banks because, according to an opinion of the attorney general, it is in con- sistent with B. S. Sec. 5219. (1936 OAG 132; see also Inst. 4-145.) Banks, including national banks, are expressly exempted from the corporation net income tax. (Adjusted Gross Income Tax Act, Sec. 205 as amended by L. 1965, Ch. 233.) Mississippi.-In addition to sales of tangible personal property at retail (rate 5.0%), the Mississippi sales tax applies also to gross receipts from wholesaling (0.125%), from mining and the production of some natural resource products (5.0%), public utilities (5.0%), contracting (2.5%), and a variety of service businesses (5.0%). The tax does not apply to banking and finance functions. New Mexico.-The Gross Receipts and Compensation Tax Act is a genera] levy on gross receipts from the sale or lease of property in New Mexico or from the performance of services in New Mexico.' Because it does not apply to wages and salaries and by `virtue of a series of interrelated exemptions and deductions, this tax is in effect a tax on receipts from the snie of tangible personal property at retail and on~ receipts from a variety of business and professional services. The tax rate is 4.0%. The receipts of banks and other financial corporations from selling or leasing property or services in the course of their regular banking PAGENO="0510" 490 or financial corporation functions are exempt from the tax. (Sec. 72-16A--14. 16) The Bank and Financial Corporation Tax Act (income tax), L. 1969, Ch. 151, provides that the income tax is in lieu of all other taxes imposed by the state on banks and financial corporations except real estate taxes and taxes arising from activities not in the course of the regular banking and financial corporation functions (Sec. 72-15B-6). Washimgton.-The business and occupation tax is one of a series of excises which includes a tax on the sale of tangible personal property at retail, plus some services such as contracting (rate 4.5%) and on public utilities (rates 0.6% to 3.6%). The B & 0 tax applies to gross receipts from businesses and professions at classified rates ranging from 0.01% to 1.0%. The rate on receipts from manufacturing, whole- saling and retailin.g is 0.44%. The rate on business activities not otherwise classified and on professional and service activities (not taxed under the retail sales tax) is 1.0%. L. 1970, Ch. 101 repealed, effective March 1, 1970, the exemption for national banks and trust companies under the ~B & 0 tax. Banks are now taxable at the rate of 1.0% in the service category. In general, as applied to banks, the base of the tax includes interest, commissions, dividends, fees and carrying charges, rentals from safe deposit boxes, and charges for bookkeeping or data processing. Banks and other financial businesses may deduct the following items in arriving at taxable receipts: dividends received by a parent from its subsidiary, interest received from obligations of the State of Washington, its subdivisions, *and municipal corporations organized under Washington law. Gross pro- ceeds from sales or rentals of real estate are not regarded as items of gross income as defined in the statute. West Virginia.-The business and occupation tax and its relation to other excises is quite similar to the Washington B & 0 tax except that in West Virginia some public utility services are subject to the B & 0 tax while others are included in the measure of the utilities gross receipts tax. The B & 0 tax applies to business generally at classified rates ranging from 0.25% (wholesaling), 0.5% (retailing), 0.8% (manufacturing) up to 5.2% (sales of electricity for domestic purposes). Service businesses or activities not otherwise classified are taxed at 1.05% of gross receipts. Banks are exempt from the tax except with respect to receipts from rentals of real property other than in the banking house.1'~ (Code, Ch. 11, Art. 13, Sec. 3). Substantially similar taxes are imposed by local governments in some states. From the administrative and compliance standpoints, these gross receipts taxes do not present any particularly difficult problems. Most of them have been in force for a number of years and questions relating to the classification of a specific type of income or a specific business activity have been mostly resolved. Questions regarding the taxability of receipts derived from business activities in two or more states occasionally arise, but the principles governing here are also fairly Well settled. Presumably these settled administrative and judicial determinations would be equally applicable if receipts from banking la [Editorial note: Effective April 1, 1971, West Virginia extended the business and occupation tax to banking and financial businesses at a rate of 1.15 per cent of gross income. Laws 1971, H.B. 1078.] PAGENO="0511" 491 were subject to gross receipts taxes. However, as noted above, with the exception of Indiana (state banks) and the recently enacted legislation in Washington, banks have either been exempted from gross receipts taxes or not included in the selective categories of business subject to this type of tax. Jurisdictional and division of receipts problems in the gross receipts tax field are discussed in more detail below. INTANGIBLES The treatment of intangibles (including cash and currency) for state and local property tax purposes falls into four groups, as follows: 1. Intangibles are exempt from property taxes. 2. Intangibles are classified separately and taxed at an effective rate that is less than the effective rate applied to other types of property. This classification may involve either assessment at a lower percentage of value than other property or a low tax rate. Also, the effective tax rate may vary depending on the kind of intangible. 3. Intangibles are taxed at a percentage of yield in lieu of property tax. In those states, non-income yielding intangibles are usually taxed at a low effective rate, for example, 1/10th of one percent of value. 4. Intangibles are treated the same as any other property and taxed at prevailing property tax rates.2 In general, where intangibles are classified separately or taxed at a percentage of yield, the effective property tax or property tax equivalent is usually well below $3.00 per $1,000 of full value of the intangible (less than 0.3% of full value). In states where intangibles are subject to general property tax rates, the nominal tax rates on intangible property might be sub- stantial-$50 or more per $1,000 (5% of full value)-and very high even after adjustment to the prevailing assessment level. While there is no evidence to indicate that intangible property is in fact broadly and effectively subjected to nominal general property tax rates in any state, nevertheless in these states the owners of intangible property are legally subject to taxation on this basis. One reason that is generally accepted as having an important bearing on the administration of general property taxes on intangibles is the implicit recognition that the combination of the federal income tax on interest and dividends and the nominal general property tax rate amounts to more than the yield from the intangible. Another reason is the difficulty of enforcing the general property tax on intangibles against a large number of individual owners, many of whom own a relatively modest amount of such property. Considered strictly from an administrative standpoint, however, it would be no great problem, even for local officials, to enforce a general property tax on intangibles against a very small number of owners, say, banks and other financial institutions, with relatively large amounts of intangible property. The repeal of the present restrictions in R. S. 5219, therefore, raises two practical problems for national banks in those states where 2 The basic provisions of state and local intangible tax laws currently in force have been digested and compiled in another study paper in the bank tax project and are not repeated here. See appendix 7, section 6(c), including Table 4 therein at pp. 448-451, above. PAGENO="0512" 492 intangibles are taxable on the same basis as property generally. The first is the possibility that national banks might be subjected to a substantial amount of tax on their intangibles. The second is that the administration of such a tax might, in fact, discriminate against national banks and other financial institutions even though the tax law on its face applies to every owner of intangibles. Intangibles taxes imposed at general or special tax rates are prop- erty taxes and cannot be imposed on Federal securities. Where a yield tax is imposed in lieu of a property tax, the income from Federal securities is likewise exempt. The provisions of 31 U.S.C. § 742 do not itpply to this type of in-lieu tax. Bank financing may result in a proliferation of intangibles related to the same basic security, for example, where a group of separate loans are combined in one package and participating interests in the package are sold to other banks or investors. The net effect here is that a new layer of intangible property has been created. Analogous problems arise where the parent corporation and a subsidiary are both taxable in the same jurisdiction although special rules may be provided in this situation. See, for example, Florida Statutes, Sec. 199.102 as amended L. 1970, Ch. 70-185. rfhe possibility that the same intangible may be taxed in more than one state is discussed below in connection with jurisdiction. LIABILITY FOR TAXES IN TWO OR MORE STATES On the assumption that the provisions of B. S. Sec. 5219, effective January 1, 1972, dispose of any question that might otherwise be raised in respect to the implied constitutional immunity of a national bank, as a federal instrumentality, from state and local taxes, it seems clear that with the repeal of the present restrictions in the statute, a national bank will be subject to tax liability in a state other than its headquarters state on the basis of the same rules applicable to corpo- rations generally. As noted above, the legal incidence of "doing business" types of taxes on corporations varies both by state and by type of tax. How- ever, the requirements of practically all these tax laws will be met and. constitutional due process tests satisfied if the corporation maintains an office or other place of business in the state, or if in the conduct of its business it uses tangible property which has a situs in that state. Even if the corporation has no office or tangible property in the state, constitutional due process requirements are met if the corpora- tion has employees or agents permanently located in the state. These requirements would undoubtedly be satisfied also if the corporation's nonresident employees or agents regularly negotiate and make binding contracts within a state, assuming, of course, that there is a tie be- tween some incident of the contract and the place where the contract is negotiated and made, for example, that the borrower or the prop- erty which secures the loan is located in that state, or the contract is to be performed there.3 3 The case law has been extensively analyzed in studies commissioned by the Board and there Is no need to go over the same ground here. For purposes of this discussion, it is sufficient to state generally the juris- diction and apportionment rules that apply in the circumstances outlined. (See appendixes 11 and 12.) PAGENO="0513" 493 In a situation differing from the foregoing oniy in that the contrac- tual negotiations are subject to formal acceptance or approval at the corporation's office in another state, the same rule would probably apply even though at first glance it might seem that the jurisdictional basis or nexus is not quite as substantial as it is in the cases where binding contracts are made within the state. However, to decide otherwise as a matter of general principle would mean that the parties could render substantial business activities meaningless from a juris- dictional standpoint by providing for the formality of approval or acceptance outside the state. Concededly, questions of fact could arise in these situations. Transient or occasional activities by nonresident employees and agents on behalf of a corporation which does not maintain a place of business, permanent employees nor property within a state, might or ,might not, by themselves, meet constitutional due process require- ments. For example, good will calls, missionary activities, "showing the flag," institutional visits and similar activities by themselves probably would not be sufficient for that purpose nor is it likely that there would be any attempt to assert jurisdiction under these cir- cumstances. It has been suggested that if the permanent provisions of P. L. 91-156 become effective without amendment, a bank will be subject at least to an income tax in any state where it has a loan customer. This is extremely doubtful. By itself, the residence of the borrower does not appear to have any bearing on state tax jurisdiction and certainly this would be true of the location where the borrower might spend the proceeds of a loan. In any event, so far as can be determined, state income tax jurisdiction is not, in fact, asserted solely on the basis that a resident of the state pays interest to a lender in another state, nor does it appear that the situation would be any different, at least in many states, if the lender filed `a financing statement in the state to give notice of his security interest or recorded a mortgage to secure his loan.4 From a jurisdictional standpoint, this situation is not analogous to the presence of income producing tangible property within a state because intangible property generally is attributed to the domicile or business domicile of the owner. Neither is this a case where an intangible acquires a business situs as that term is commonly understood. There are a variety of other transactions of a contractual nature which, by themselves, do not appear to subject a bank to the tax jurisdiction of another state. Participation in overline loans, the purchase of accounts receivable and the making of reserve loans to correspondent banks are examples of such transactions. By themselves, such transactions would not appear to constitute the doing of business in the debtor's state any more, than transactions by mail with savings depositors by themselves would constitute doing business in the state where the depositor resides. The application of these general jurisdictional rules would probably dispose of the potential out-of-state tax problems of many banks or at least limit them to adjoining states. ~ See Supplementary note, below, p. 503. 79-421 0 - 72 - 33 PAGENO="0514" 494, For the money market banks and other very large banks whose business transactions involve a number of states, the analogy to the jurisdictional rules applied in the case of general business corporation is not too helpful. Two maj or points of difference are that banks seldom maintain offices or other places of business outside the home state nor do they maintain inventories of tangible personal property at various locations. Thus, two factors that constitute fairly certain and easily identifiable jurisdictional criteria in the case of a general business corporation are not characteristic of the operations even of the money market banks. Another important and complicating point is that these large banks do not limit their out-of-state relationships to some single activity which, by itself, would not be jurisdictionally significant, for example, receiving deposits by mail. To the contrary, their out-of-state activ- ities and transactions considered in the aggregate are substantial even though not nearly so visible as the general business corporation with its office or warehouse. rflleir field representatives regularly visit customers and potential customers even though they are not perma- nently located in a single state; their correspondent banks constitute a permanent point of contact both for originating business and for servicing loans; they have loan customers in the state from whom they receive interest and both time and demand deposits from busi- nesses and individuals within the state. From the constitutional standpoint,, there is little doubt that operations of this type meet due process requirements even though the bank does not maintain a permanent 1)]ace of business in the state. Accordingly, in the case of a bank, it seems appropriate to conclude that if its officers or other representatives regularly solicit the use of its facilities and the bank does make loans to or conducts other busi- ness activities with individuals and corporations located in that state, then the bank is subject to the tax jurisdiction of that state. For the money market banks, this would unquestionably involve an exposure of the entire net income of the bank to taxation in a number of states. For the small bank, this jurisdictional statement might initially pose some borderline questions, for example, whether an occasional visit, or regular but infrequent visits, to a customer in another state constitutes the regular solicitation of business in that state. Questions involving factual situations of this kind and the interpretation of state tax laws as applied to these situations have to be expected initially simply because national banks, and perhaps most state- chartered banks, have not hitherto been subject to any of the doing business types of taxes in a state other than the headquarters state. However, as noted previously, a sm all bank or a bank located near the border of a state might likely be concerned with jurisdictional problems only in one state other than its home state. Tangible property.-If a bank leases out business equipment or other tangible property within a state, it probably is subject to the general tax jurisdiction of the state although it is not certain that jurisdiction would be asserted universally on that basis. If jurisdiction is asserted and the leasing of tangible property is really one element in a generally integrated banking business, then the bank's operating income will be subject to taxation (in the case of an income tax) on an PAGENO="0515" 495 apportioned basis. If, on the other hand, the leasing business is con- ducted independently through a subsidiary or a division of the bank so that for all practical purposes it is separately operated and managed, the income of the leasing business might be regarded as the unit subject to apportionment rather than the operating income of the bank. This type of situation is not unusual and it is well recognized that one corporation may conduct two or more completely unrelated businesses, each of which is treated as a separate business for purposes of jurisdiction and apportionment. The determination here depends on a question of fac1~. Partnership operations and joint ventures by themselves would ordinarily involve similarly restricted jurisdiction. Subsidiaries.-Where interdependent and complementary functions of what is essentially a single integrated business enterprise are divided among a number of subsidiaries, it is quite likely that the resulting fragmentation of income will not be recognized for purposes of juris- diction and apportionment. A not uncommon example of such frag- mentation is the operation of what is really a single, integrated manufacturing and selling business through a series of subsidiaries, one of which purchases raw materials, another which processes and manufactures them into a product for the market, a third which provides the sales organization, and a fourth which finances the sale of these products. It would, of course, be advantageous to the taxpayer if each of the subsidiaries were treated as an independent business and taxable in a state only on some portion, say, of the sales "profit" or the purchasing activity "profit." But it would also be highly unrealistic to disregard the fact that the income of this enterprise is the product of a number of interrelated and interdependent activities. Accordingly, in order to m ake a fair and equitable apportionment of the income of the enter- prise among the states in which it conducts business, the tax adminis- trator might be expected to require that the operations of the parent and the subsidiaries be combined in a single return and the apportion- ment made on the basis of the combined net income of the whole enterprise. Since banks have not been subject to tax on their out-of-state activities, there is little in the way of tax precedents relating spe- cifically to the interdependence of the various functions and operations carried on by them. Certainly no one would suggest that the loan and deposit functions could be considered separately from each other or from the operations of the bank as a whole. At the other extreme, no doubt a strong case could be made for the separate treatment of a bank subsidiary carrying on an essentially independent business, just as in the instance of a separate business conducted by a division of a single corporation. In between, there are undoubtedly some situations that would have to be decided on a case by case basis, depending on the facts and circumstances and the general principles already out- lined. These same principles would likewise apply to activities in- volving the subsidiaries of one-bank holding companies. Edge Act subsidiaries are discussed below in connection with foreign income. At this point, about all that can be said is that there is no indication that the banking industry would encounter any unique or insoluble problems in this area. PAGENO="0516" 496 Foreign operations.-Comments on the treatment of income from foreign branches or from subsidiaries of banks operating in foreign countries must be limited due to the lack of experience. In a few instances, the state policy has been to exclude the foreign income of a state-chartered bank from the state tax base. In these cases, the amount of foreign income to be excluded is established on a direct accounting basis. Federal law permits national banks to maintain foreign branches but it also stipulates that the profit and loss of foreign branches must be established on an independent accounting basis for each branch and separately from the home office. (12 U.S.C. § 604.) If a state uses federal taxable income as the starting point for the determination (with modifications) of taxable income for state pur- poses, and income from foreign branches is included in the federal figure, there would appear to be no constitutional objection to the inclusion of such income for state tax purposes. Presumably, in such a case, the apportionment formula would include all the factor data relating to the foreign branches. Federal law also authorizes the organization of corporations for the purpose of engaging in international or foreign financial operations and a national bank may be a shareholder in, or may in fact control, such a corporation. (Edge Act, 12 U.S.C. § 611-631.) The activities of an international financial corporation of this kind are limited by the statute which expressly provides that it shall not carry on any part of its business in the United States except such as in the judgment of the Board of Governors of the Federal Reserve System shall be incidental to its international or foreign business. An Edge Act corporation may be taxed by the state within which its home office is located in the same manner and to the same extent as other corporations organized under the laws of that state which are transacting a similar character of business. Shares of stock in the corporation are subject to tax as the personal property of the owners or holders of the stock in the same manner as shares of stock in similar state corporations are taxed. (12 U.S.C. § 620.) Although an Edge Act corporation may be taxed only by the state where its home office is located, in fact, it is probably taxed there only in respect to its incidental income earned in the United States. Since the corporation is taxable in a foreign country, it would come withm the category of businesses taxable in two or more jurisdictions and hence entitled to apportion its income. A final comment on foreign income involves the question whether the operations of an Edge Act corporation might be considered to be an integral part of the business of an out-of-state national bank with which it is affiliated. The point here is whether the state where the Edge Act corporation is headquartered may require a combined tax return reflecting the operations of both the out-of-state bank and the international corporation so as to bring some part of the bank's income within the reach of the state where the Edge Act corporation is taxable. That a combined return could be required in those circumstances is doubtful in view of the fact that the federal statute prohibits the Edge Act corporation from carrying on any business in the United States except that which is incidental to its foreign business. In the face of PAGENO="0517" 497 this prohibition, it would be difficult to sustain the position that the Edge Act corporation's operations were an interdependent and inter- related part of an integrated banking business carried on in the United States. Intangibles.-The risk of double taxation of the same intangibles due to conflicting jurisdictional concepts seems minimal. The standard rule that intangibles are attributed for property tax purposes to the domicile of the owner (the commercial domicile or principal place of business of a corporation) is generally recognized. The state of incor- poration could assert jurisdiction to tax intangibles owned by a cor- poration, but apparently none of them do so. It was the practice some years ago in a few states to impose an inheritance tax on the transfer of corporate stock owned by nonresident decedents. The states have since adopted the policy, believed to be universal, of exempting in- tangibles owned by nonresidents from inheritance or estate taxes. The state where the debtor resides does not, at least ordinarily, assert jurisdiction to tax the nonresident owner on the intangibles representing the debt. Florida is an exception as to one class only of intangible property. The law there provides that intangibles arising out of the sale, lease, or servicing of tangible personal property in the state are taxable in Florida. Under the business situs concept, intangible property arising out of or principally connected with a business conducted in the state is deemed to have a situs there rather than in the state where the owner of the property is domiciled. However, this concept may be more widely used as the standard for assigning the value of intangibles or the income from intangibles in the numerator of an apportionment fac- tor than as a jurisdictional rule for the imposition of an ad valorem property tax on intangibles. One example of such use is an apportion- ment formula for capital stock purposes where business receipts is one of the factors; another is in connection with the receipts factor of a corporation income tax where the taxpayer's incon'ie includes interest or dividends. To be certain about the extent to which the business situs concept is used as a jurisdictional rule for the ad valorem taxation of intangible property and the possibility of instances of double taxation where the application of that concept conflicts with the domiciliary basis of taxa- tion, a careful check of all the state intangible laws would be required. There are, however, two practical considerations which indicate that instances of double taxation of intangibles are minimal, if any do exist. First, the states which use the business situs concept recognize its application in respect to property owned by its domiciliaries and used in similar circumstances in other states. See, for example, Ohio, R. C., Section 5709.03. Second, multistate general business corporations have complained of conflicts in state laws and practices in several respects, but none appear to be concerned with the double taxation of intangibles. Accordingly, subject to a state by state check definitely indicating the occurrence of double tax situations, it seems reasonable to assume that, considered solely from the standpoint of the risk of double taxation of the same intangible property, the elimination of all restrictions on the taxation of national banks by state and local government does not appear to pose any serious problem. PAGENO="0518" 498 Capital stock and gross receipts taxes.-Generally speaking, the jurisdictional concepts already discussed are applicable for capital stock and gross receipts tax purposes. Under some of the older cases, the "doing business" test for capital stock purposes would not he met in the absence of some kind of business location in the state. It is doubtful that this would be required today. At any rate, this would seem to be primarily a question of state law. As noted previously, banks, including state banks, are usually expressly exempted from capital stock or franchise taxes measured by capital stock or assets employed in business in the state and that in most of the states imposing general or broadly applicable gross receipts taxes, banks are also exempt. These exemptions, of course, may be nothing more than an express recognition of the fact that under R. S. Sec. 5219 such a tax could not be imposed on a national bank. However, in respect to gross receipts taxes particularly, the bank exemption might well reflect the policy that taxes of this type are better suited to mercantile and manufacturing activities or activities generally in- volving the production and sale of tangible personal property than to the activities of financial corporations and banks which primarily involve services and activities connected with intangible personal property. It might be pointed out also that. in some states, the conduct of specified activities by a bank or investment corporation organized in another state does not constitute "doing business" in the state. These activities include making investments and loans of money and purchase of notes secured by mortgages on real property located in the state, etc.5 Interstate cominerce.-For all practical purposes, it may be assumed that a corporation whose business activities with in a state are wholly in interstate commerce is not by that fact alone protec.ted from state taxation. While it has been held that a tax imposed solely in respect to the privilege of doing business may not be imposed on a corporation whose only business activities in a state are in interstate commerce, it seems clear that this technical distinction may be avoided simply by specifying some additional incident to which the tax might be tied, for example, the ownership or use of property or capital within the state in the conduct of a business. DIVISION OF INCOME In all but two or three states, the income of a general business corporation derived from activities in two or more states is appor- tioned among them by the use of a three factor formula. There is sub- stantial uniformity in the apportionment method in the 25 or so states where the Uniform Division of Income for Tax Purposes Act promul- gated by the National Conference of Commissioners on Uniform State Laws is in effect and the practice does not differ greatl~ in the additional dozen or so states which also use a three factor formula. UDITPA also provides in certain circumstances for the direct alloca- tion of specific types of income. The Uniform Act is by its terms inapplicable to banks and financial business presumably because the drafters thought that modifications See Supplementary note, below, p. 503. PAGENO="0519" 499 in both the property factor (real and tangible personal property in- cluding inventories) and the receipts factor (which emphasizes re- ceipts from the sale of tangible personal property) would be desirable for banks and other financial institutions. Public service enterprises are also excluded from UDITPA. Hitherto, the lack of a standard formula for apportioning bank income among the states has not constituted an urgent problem because national banks are not subject to income taxes outside the home state. Consequently, state experience in dealing with the division of financial income among the states has been limited to state banks and nonbank financial companies. In view of these circumstances, there are, as might be expected, considerable differences among the formulas presently in use among the states to apportion bank and finance company income. A recent review by the Federation of Tax Administrators indicates that in 14 states bank income is not apportioned at present. Six States use a direct accounting approach; nine use the standard three factor formula (property, payroll, receipts) ; four use a modified version of the three factor formula with loans in the property factor; eight use receipts as the single apportionment factor; and one state uses a combination receipts and payroll factor. There are further differences among the states in the rules for determining the composition of a factor, for example, the receipts factor and also the property factor where loans have been included. Of the four states which include loans in the property factor, one includes loans in the numerator of the state where the borrower is located; one includes them on the basis of the location of the office from which the loan is serviced and two on the basis of the location of the office from which the loan was negotiated. Perhaps in practice the service office and the negotiating office are the same, in which case the differences in these rules of attribution are less than appear at first glance. A similar question arises in respect to the receipts factor in con- nection with the inclusion of interest in the numerator of the fraction. In four states, interest is attributed to a state on the basis of the location of the property securing the debt, and in three others, on the basis of the location of the borrower. In many cases these two locations may be the same. In six states, interest is attributed to a state on the basis of the location of the office where the loan was negotiated, in another ac- cording to the location of the office from which the loan is managed or serviced, and in two others according to the location of the office at which the interest is received. Prospects for standardization.-The N~tional Conference of Com- missioners on Uniform State Laws has indicated that it would supple- ment UIDITPA with modified formulas appropriate for application to banks, financial institutions and public service enterprises, but up to the present time, no specific proposals have been presented for discussion A bill for an interstate taxation act has passed the House in the 90th and 91st Congress, but it, too, excludes banks and public service enterprises from its coverage. Moreover, this bill makes no provision PAGENO="0520" 500 for a standard apportionment or division of income formula. It does prescribe a formula which, in effect, constitutes a ceiling on the amount of income which may be apportioned to a state. Tinder this approach, a state could use any formula it desired as long as it did not apportion more income to the state than the ceiling amount fixed by the formula in the bill. There is no doubt that the most effective way to establish a uniform apportionment formula on a natiOnwide basis is by Congressional action. However, Congress has not acted to prescribe such a formula for mercantile and manufacturing corporations which constitute a considerably larger number of business entities than the number of banks which would be substantially affected by the permanent pro- visions of P.L. 91-156 as presently enacted. Moreover, as noted above, in the one bill that has passed the House, the uniform standard formula approach has been rejected in favor of the ceiling approach. Under the circumstances, the chances for state action looking toward uniformity in the apportionment of bank income may be more promising than any other. While it is probably unrealistic to expect absolute uniformity as the result of state action, substantial uniformity in the reasonably near future might be achieved. The prosPects may be appraised about as follows. While as indicated above, there are several states which use a single factor (receipts) to apportion bank income, most of the states use a three factor formula, either UDITPA or a modification of UDITPA. In addition, several states where bank income has not been apportioned previously have indicated that a three factor formula probably would be used for that purpose. Finally, all the states now using a single receipts factor for bank income employ UDITPA or a reasonably similar three factor formula to apportion the income of general business corporations. All this suggests that the basic structure of UDITPA with modifica- tions to deal specifically with banking and financial companies prob- ably would find a high degree of acceptance among the states. It is likely also that in a number of states these modifications could be prescribed by regulation as long as there is no substantive provision of law contrary to the modifications that would be made. A com- mittee recommendation on the specific modifications to be made probably could be forthcoming in a matter of a few months. In addition to the standard language in the statute, there is the further need for uniform interpretation of that, language. Under a federal statute, uniform regulations or interpretations might be prescribed on a national basis by an appropriate agency, but it is possible that substantial uniformity in regulations might also be achieved under a state statute. The National Association of Tax Administrators has had a committee working on proposed uniform regulations under UDITPA for the past two years. After considerable study and discussion, the committee has now proposed for adoption by the state tax departments a series of regulations covering various key sections of UDITPA, including the composition of each of the three factors used in the formula. Additionally, a committee of the Multistate Tax Commission has recommended that an identical series of regulations be formally approved by the Commission. PAGENO="0521" 501 To what extent these proposed regulations will be adopted by the state tax departments remains to be seen. With one exception, the few comments received to date have been favorable. The most im- portant point about the project is that it shows that the importance of uniform interpretations is recognized and that there is machinery through which this type of regulation can be worked out and proposed~ to the tax departments for adoption. Capital stock.-There are also differences, although perhaps not so marked, in the formulas used to apportion capital stock tax bases among the states in which a corporation is doing business. According to a survey made some years ago, most of the states used a combina- tion of property and gross receipts; a few used property alone or gross receipts alone; and a few states used a three factor formula (property, payroll, receipts) similar to the formula commonly used to apportion income. There probably has been some movement toward the use of the three factor formula in the capital stock field simply to provide a standard basis for apportioning these two business taxes. Neverthe- less, some state tax people remain of opinion that since a capital stock formula essentially involves an apportionment of property values, a payroll factor is irrelevant. From a practical~ standpoint, the differences in capital stock appor- tionment formulas are not as immediately important as those in the income tax field because in most states the capital stock tax does not apply to banks. Gross receipts.-In the gross receipts tax field there are provisions for apportionment or separation of receipts from interstate commerce in some states. On the whole, however, these taxes are usually so imposed that either the full amount of the gross receipts is taxable or none at all. Again speaking generally, where a transaction involves a sale of tangible personal property shipped to the buyer in another state, the state of origin cannot impose its gross receipts tax on the proceeds of the transaction. However, a vendor within a state is generally liable for the tax on receipts from the sale of goods shipped on his order to a buyer in the state even though the order was sent to a point outside the state for acceptance and the goods were shipped directly to the purchaser from a point outside the state. This general statement is subject to the qualification that the trans- action could not be subjected to a similar tax by another state. For all practical purposes, the applicatioii of the Supreme Court's risk-of- multiple-burdens rule in interstate commerce is avoided by imposing the tax at the last stage in the transaction where a tax of the kind involved, for example, a tax on the privilege of engaging in a wholesale business, could be imposed. The same principle can be utilized to localize receipts from a service function, for example, the inclusion in taxable receipts of interest paid on loans secured by real property within the state, assuming, of course, that the lender is otherwise sub- ject to the jurisdiction of the state. Thus, from a practical standpoint, potential administrative and compliance problems in the gross receipts tax field do not appear to be very serious because banks are not usually included among the busi- nesses subject to classified gross receipts taxes and also because of the all-or-none character of the gross receipts tax as it works in practice. PAGENO="0522" 502 VERIFiCATION OF BANK TAX RETURNS One concluding point of importance should be mentioned, the verifi- cation of state and local tax returns made by national banks. While, strictly speaking, this point is perhaps not within the terms of reference of the study, it is of great practical significance, particularly in view of the extensive tax powers which states and local governments may exercise following the enactment of P. L. 91-156. The Comptroller of the Currency, as administrator of national banks, has consistently taken the position that, save for inspection of a list of shareholders, state and local tax officials may not audit the books or records of a national bank to verify the accuracy of tax returns filed by the bank. The Comptroller construes the inspection of the books and records of a national bank by a state or local tax official as an exercise of visitorial powers which are exclusively vested in the Comptroller of the Currency. This policy is stated in paragraph 6025 of the Comptroller's Manual for National Banks. The Comptroller also has indicated that the enactment of P. L. 91-156 makes no change in the situation. Whether or not the Comptroller's position that state tax audits are tantamount to the exercise of visitorial powers can be sustained,6 these restrictions on the examination of a national bank's books and records are unwarranted. It is not sound policy to subject a person, whether it be a bank, a general business corporation, or an individual, to a tax liability and at the same time to deny the officials charged with the administration of the tax the practical power to determine whether the taxpayer has requited his liability in accordance with the law. It is no answer to say that the income tax liability of a national bank is established by audits conducted by the Internal Revenue Service and that the results of these audits are available to state tax departments. In the first place, the Internal Revenue Service cannot possibly audit all corporations, including banks. Second, the states and their local governments impose several taxes which the federal govern- ment does not impose, and IRS audits would not cover these taxes in any case. Third, it simply does not make sense, nor is it fair to tax- payers generally, to permit one group of taxpayers to determine their respective tax liabilities at their own discretion without any review or verification whatsoever by the state or local officials commissioned to administer and enforce the tax. CHICAGO, February 26, 1971. `See First Nalional Bank of Yov~nqstown v. Hughes, 6 F. 737(CC); Guthrie v. Harkness, 199 U.s. 148 and Bank of America National Trust and Savings Assse. v. Douglas, 105 F. 2d 100. PAGENO="0523" 503 SUPPLEMENTARY NOTE Transacting Business in the State The general corporations laws of a number of states describe several types of activities carried on by a foreign corporation that do not constitute the transaction of business in the state so as to require qualification. Among these are making loans, taking mortgages on real property in the state, and enforcing security rights. Sections 6450-52 of the California Corporation Code afford one example of an extremely broad provision of this type; Section 12:302 of the Louisiana Revised Statutes is another. Section 106 of the Model Business Corporation Act drafted by the Committee on Corporate Laws, Section of Corporation, Banking and Business Law of the American Bar Association, provides that a foreign corporation shall not be considered to be transacting business in a state, for purposes of the business corporation act, by reason of carry- ing on the following activities (among others): (a) maintaining or defending any action or suit. . . . (c) maintaining bank accounts; (g) creating evidences of debt, mortgages or liens on real or personal property; and (h) securing or collecting debts or enforcing any rights in property securing the same According to the American Bar Association, the Model Business Corporation Act has been adopted in the States of Alaska, Arkansas, Colorado, Georgia, Iowa, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Wyoming and the District of Columbia; and it has been substantially adopted in the states of Alabama, Connecticut, Louisiana, Maryland, Massa.. chusetts, New Jersey, New York, North Carolina, and South Carolina. Of these two groups of states, the transacting business exemptions in three states, Mississippi, New Jersey, and New York, are narrower than most of the others and do not specifically refer to creating evidences of debts and security interests therein. The Mississippi exemption is expressly limited to investments in nonoperating mineral interests made outside the state. The Model Business Corporation Act Annotated lists an additional group of states where foreign corporations are permitted to lend money and enforce security provisions on local real estate without qualifying. Those states include Arizona, Florida, Hawaii, Idaho, Illinois, Kansas, Michigan (Federal Housing Administration and Veterans Adminis- tration loans only), Missouri, Nevada, Ohio, Oklahoma, and West Virginia. (MBCA Annotated (1960 ed.) p. 577; 1966 Supp. p. 182-183.) In addition, California has the broad provision noted above (Corpo- ration Code, Sees. 6450-52); Minnesota has a special provision applicable to savings and loan associations organized in an adjoining state, and Pennsylvania has a special provision in respectto loans and security (PSA, Title 15, Sec. 1001)~ Six states, Delaware, Indiana, Kentucky, Maine, New Hampshire, and Vermont, do not appear to have any comparable provisions in respect to foreign corporations making loans secured by local real estate. PAGENO="0524" 504 The "transacting business" exemptions in general corporation laws are not necessarily decisive of the status of the exempted activities for tax purposes and with few exceptions these statutes do not make any reference to tax laws. One exception is in the California Corpo- ration Code, Sec. 6452, which does provide for tax exemption. The Nebraska law expressly states that the corporation qualification standards do not establish standards for those activities which may subject a foreign corporation to taxation; the North Dakota and Pennsylvania statutes provide that these standards are not necessarily the standards governing taxation, and the Tennessee statute declares that the corporation law activity standards relate solely to qualifica- tion. However, where a tax is imposed on or in respect to the conduct of business activities in a state, these statutory definitions relating to the transaction of business for qualification purposes probably do have some bearing on the application of the tax laws. PAGENO="0525" APPENDIX 11 Federal Constitutional Limitations on State Taxation of Multistate Banks JEROME R. HELLERSTEIN Professor of Law, New York University Law School INTRODUCTION SUMMARY OF MAJOR FACTS AS TO HOW MULTISTATE BANKS OPERATE OUTSIDE THEIR HOME STATES* Lending money and providing other forms of financing are the central business of banks, along with providing the depository fa- cilities-demand and time-through which they obtain the maj or portion of their funds. Banks also furnish a variety of other services closely related to these traditional banking functions, including serv- ices as correspondent banks, fiduciary, securities underwriting and distribution, equipment leasing, credit cards, and data processing. Although banking normally is oriented toward the local market, a substantial part of the business of commercial banks is conducted with customers located in states other than the home State of the bank. This is particularly true of large banks located in national and regional financial centers, which serve large national corporations or other sizable businesses whose banking needs cannot be met ade- quately by their local banks. For purposes of this paper, these banks are referred to as "multistate banks." However, many smaller banks located in close proximity to state borders also attract appreciable amounts of out-of-state business, mainly because of locational and other advantages they offer for customers in their areas. Such banks are here referred to as "state border banks". In this summary, the major facts are outlined covering the manner in which multistate banking activities are conducted. The discussion first takes up multistate banks and examines the manner in which they conduct each of the above listed major types of banking activity. After that, brief consideration is given to the out-of-state activities of state border banks. LOANS AND FINANCING ACTIVITIES Loans and other types of financing of out-of-state customers ac- count for a substantial part of the business of multistate banks, par- ticularly the larger institutions. While no recent data are available, a study made as of October 1955 disclosed that 29 percent of all loans *1 want to acknowledge my indebtedness to James B~ Eckert, Assistant Adviser, Division of Research and Statistics, Board of Governors of the Federal Reserve System, for valuable assistance in the prepara- tion of this factual summary. (505) PAGENO="0526" 506 made to businesses by member banks of the Federal Reserve System outstanding at that time, totaling $30.8 billion, were made to out-of- state borrowers.1 Member banks then accounted for more than 90 percent of the business loans outstanding at all commercial banks; and the percentage of out-of-state loans increased with the size of the bank. Thus, member banks with deposits of under $100 million made less than 8 percent of their business loans to out-of-state bOrrowers, while banks with deposits of $1 billion or more made 44 per cent of such loans out-of-State. Since October 1955, not only has the outstanding volume of business loans quadrupled, but also the ratio of out-of-state lending is believed to have increased appreciably, particularly at large banks.2 Moreover, multistate banks extend large amounts of other types of credit to out-of-state borrowers, including real estate mortgage credit and loans to nonbank financial institutions. Thus, the larger banks currently make or participate in substantial amounts of out-of-state loans and financing arrangements covering customers in virtually every State in the Union.3 While the maj or part of the lending and financing activities of multi- state banks is in the form of direct extensions of credit to out-of-state as well as local customers, an appreciable part of bank lending to business involves some kind of participation or joint arrangement with other banks. The patterns of activity of the banks involved in loans made to out-of-state customers directly and under participation ar- rangements naturally vary. We consider first the loans made directly by the multistate banks without any participation. The initial contact with the multistate bank loan customer may, of course, have been made in any number of ways-by request by the customer to the bank at its home office in person, by telephone, or by mail. On the other side, it may result from solicitation by the bank through advertising in trade and other journals, or by personal visits by a representative of the bank to the customer's place of business. The larger banks regularly send officers to the States in which they have a substantial volume of loan business; contact is maintained with the customer, and new loan business may be generated in this manner. Some large banks in recent years have been adertising that their loan officers are organized into divisions according to industrial classifica- tion, such as aviation, oil and gas, electronics, etc. Such advertise- ments appear regularly in national trade publications, and at times in the popular press. The suggestion is that a customer relationship with the bank will be beneficial to the borrower, because this source of expertise can be utilized by the borrower as an aid to making sounder business decisions. It is often stressed that the bank's experts will make an on-site inspection of the customer's operations, regardless of their location, in order that they may better counsel the customer on his general credit needs. These activities also provide the bank with information useful in its decision-making processes. 1 This summary is based on unpublished data from a survey made by the Federal Reserve System and reported in part in "Business Loans of Member Banks", Federal Reserve Bulletin, April 1916, p. 327. 2 This statement is based on conversations with staff of the Division of Research and Statistics of the Federal Reserve Board. See the facts concerning First National Csty Bank of New York in "Report on the National Bank Tax Act," p. 13, submitted by First National City Bank to the Board of Governors. PAGENO="0527" 507 Precise information as to the magnitude of these out-of-state "con- tact" or solicitation efforts, the number of people involved, the territories covered, the time spent, and the scope of their activities while on their trips, is not available. But it does appear that there is regular, systematic visitation by personnel of the banks at the responsi- ble officer level to the areas in which the bank does substantial business, in order to maintain contact with the customer, to keep and expand business; and doubtless, to some extent, to make at least a superficial check-up on the general status and condition of borrowers. Most traveling loan officers of multistate banks have substantial lending authority and are able to commit the bank up to the limits of that authority, but ordinarily they do not make legally binding commitments during their out-of-State visits to customers. Generally, they solicit business, negotiate deals, and work out the major terms of the loans while in the field, but the preparation of the loan documents is typically done at the home office, and the signing of the papers by the bank is also generally done there or completed by mail. Moreover, the proceeds of the loan are made available to the borrower by crediting his account at the home office, where repayments on the loan are mad~. All reports and steps required to be taken during the course of the loan ordinarily are localized, so far as possible, at the bank's home office. These procedures have been dictated in part by the desirability, from a legal point of view, of avoiding activities which would consti- tute "doing business" in a multiplicity of jurisdiction Before a loan is made, the bank, of course, investigates the credit standing of the borrower. For this purpose, the bank usually, par- ticularly in the case of large national corporations, relies on reports that are received and analyzed at the home office-financial state- ments certified by a certified public accountant, legal opinions, etc. In some cases, however, the bank sends its own investigators, or retains local investigators, to check the credit of the prospective borrower, to inspect the plant, or check inventory, or the like, in making specific loans. i\'Ioreover, in the case of certain secured loans, there are steps which the banks are legally required to take locally in order to perfect their liens, such as recording mortgages on real or personal property, or other security instruments, in the appro- priate office in the area where the customer does business. These may be handled directly by the bank by mail from its home office, or by local counsel. During the period the loan is outstanding, it appears that the multistate banks ordinarily do not use local agents, lawyers or others in the customer's area to look after their interests, to check up on the condition of the borrower, or to warn of impending difficulties. The bank relies principally on documents, inventory reports, certified financial statements, legal opinions, proof of payment of taxes, in- surance, and the like, which are received at the home office. The costs of these reports are borne by the borrower. As suggested above, however, this information is supplemented by visits of the bank's traveling representatives to the area, at which time they visit the borrowers' plants, warehouses, stock rooms, etc., in order to appraise methods of operation and the adequacy of control procedures. When a borrower defaults on the loan, the bank's representative may visit the customer, or local counsel may be retained to try to PAGENO="0528" 508 salvage the loan or to bring suit, steps which are likely, of course, to be taken in the customer's State. If the loan is secured, the proceedings may involve foreclosure or local property, or enforcement of other liens on property in the State. The bank may take title to real property acquired on foreclosures through a separate local corporation, an agent, or in its own name. In enforcing judgment, the bank, through local counsel, will use the courts, sheriff and other appropriate au- thorities of the State. A few banks maintain representative offices in major out-of-state cities, such as New York, Chicago or San Francisco, to serve customers in those areas. Also, in rare instances, banks have set up "loan produc- tion" offices in States other than the home State, staffed by their own employees, who represent the bank in obtaining loan business within the State. `Where they exist, such offices do not ordinarily qualify to do business in the State. Multistate banks, as indicated earlier, also extend appreciable amounts of credit involving participation with other banks. While such loans accounted for 18 per cent of total member bank loans to business in October 1955, the proportion was niuch higher, 34 per cent, in the case of out-of-state loans, the bulk of which were made by large multistate banks.4 Participation loans are of two general types. One type involves a joint loan arrangement between a large multistate (correspondent) bank and another (respondent) bank.~ For the most part, these participations are the overline type-loans which exceed the legal or policy lending limit of the initiating (respondent) bank, but re- spondents also participate in loans initiated by their correspondents. In October 1955, 11.5 per cent of all out-of-state participations of member banks were overlines. The second major type of participation relates to unusually large loans made by a group of multistate banks to a major enterprise. These pool arrangements accounted for 22 per cent of all out-of-state lending of member banks in late 1955. In the typical overline situation iii which the local bank obtains the assistance of its correspondent in a large financial center, the loans are originated by the respondent for a local business. Although the negotiations and dealings are likely to be handled by the respondent in its home State, the correspondent may play an active role in setting the terms and conditions of the loan and, in exceptional cases, may take the lead in preparing the supporting documents. It may also supplement the respondent's credit check by its own investi- gation. The transaction may take the form of separate loans by the originating respondent bank and the correspondent bank, with each having direct claims against the borrower, or it may be a loan by the respondent bank alone to the customer, followed by an assignment of part of the loan to the correspondent bank. The servicing of over- line participations, i.e., receipt of interest and principal payments, checking on payments of taxes and maintenance of insurance, etc., generally is done by the respondent bank, although loan agreements may require that the borrower send duplicates of such information, See Note 1 for source of data reported here and in the next paragraph. `The term "correspondent bank" or "correspondent", as used in this report, refers to the bank accepting deposits from other banks, which in return offers its services to those banks. The term "respondent" refers to the bank making the deposits and receiving services. PAGENO="0529" 509 together with financial data needed for continuous credit checks, directly to the correspondent bank. In case of a default, the respondent bank normally takes the laboring oar in trying to collect, whether by negotiation, suit or otherwise, on behalf of its correspondent and itself. Loan participations by correspondents with their respondent banks were analyzed in some detail in a 1969 survey of over 2,100 banks, made by the Federal Reserve Banks of Kansas City and St. Louis.6 Almost 60 per cent of the banks covered by the survey had loans outstanding in which their correspondents were participating.7 These participations constituted a substantial part of the loans originated by respondent banks; they amounted to 5-10 per cent of originations in the case of total loans and from 10-28 per cent of commercial and industrial loans. The percentages vary inversely with the size of the respondent banks.8 The respondent banks also participate in loans originated by their correspondents. In these cases, the procedures outlined above are reversed and it is generally the correspondent bank that conducts the negotiations, administers and services the loans and, in case of default, takes the lead in trying to collect, by negotiation, suit, or other- wise, on behalf of its respondents and itself. In the 1969 survey, over 36 per cent of the banks surveyed reported that they had acquired participations in such loans made by their correspondents.9 There is a wide variety of types of loans involving joint participa- tions, including not only traditional loans for general corporate purposes but also unusual or special types of loans. These include loans to finance construction of local private and public housing projects, office buildings, shopping centers and other large local projects; ac- counts receivable financing of a substantial borrower; the purchase of mortgages by the respondent bank from a mortgage company and an assignment of a part of the acquisition to the multistate bank. The second major type of participation, those not involving re- spondents, may be used where a very large loan is made to a major business. These involve joint arrangements of major banks over the country. While each bank ordinarily makes its own credit check of the borrower, the negotiation of the terms may be done by a committee representing all participants or by a manager bank acting for the whole group. This bank also is responsible for preparation of the documents and servicing of the loan. And these acts may take place in Chicago, Philadelphia, St. Louis, San Francisco, or other cities, by personnel acting for banks whose home States are scattered over the country. Presumably, counsel to the banks try to see that each bank signs the papers and takes official action only in its home State, but this may not be feasible where a number of banks are involved in a complex loan. The recording of security, collections, foreclosure and other legal actions to recover the debt necessarily involve steps taken in. various States on behalf of all the banks in the pool; such actions are generally taken by local legal counsel under the direction of the manager bank or a committee of two or three banks. ~ survey covered all banks in Colorado, Kansas, Missouri and Nebraska, most of the banks of Wyo. milig and about half of those in New Mexico. The data here cited are taken from an article on the survey by Robert B. Knight, entitled "Correspondent Banking, Part II: Loan Participations and Fund Flows", Monthly Review, Federal Reserve Bank of Kansas City, December 1970, pp. 12-24. . Jdem, Table 1, p. 14. 8 Idem, Table 2, pp. 18-19. ~ Ideen, p. 20. 79-421 0 - 72 - 34 PAGENO="0530" 510 SERVICES TO RESPONDENT BANKS The role played by the respondent banks on behalf of the multi- state financial center bank is indicated by the foregoing recitation of its activities in connection with participation loans. The financial center correspondent bank expects and receives from the respondent bank one other major benefit-the respondent bank usually maintains deposits with the multistate bank in a dollar range commensurate with the services it expects to receive, thereby giving the multistate bank an additional source of funds for loans. These deposits are held without interest, and constitute consideration for the services the correspondent renders to the respondent bank.'° However, to an increasing extent, correspondent services are also being provided on a fee basis. The correspondent bank provides, in addition to its participation in loans, the clearing of checks and transit services, collection of notes and other debt instruments, and general bank management technical services, such as periodic reports on general business conditions and continuous reports on current money market developments, recom- mendations as to the purchase and sale of securities, and advice on loan transactions of an unusual nature. It also provides safekeeping facilities and credit information and a variety of miscellaneous serv- ices, including the development of specialized lending programs, such as equipment leasing, arranging international transactions and as- sisting in a general portfolio review and analysis.1' FIDUCIARY AND RELATED ACTIVITIES l\'fultistate banks, to the extent permitted by the laws of the various States, render extensive services as fiduciaries, acting as executor or trustee under wills and trusts, and thereby hold and manage property located in various States. They also act as trustees under corporate indentures securing bond issues, and render services as corporate registrar, transfer agent, and custodian, and as corporate paying agent. They also perform similar services for corporations in connec- tion with stock and bond rights offers, mergers, and the like. Finally, banks sometimes act as paying agent for State or local governments or governmental agencies, typically within the home State of the bank. The work of multistate banks in the pension trust area includes advising State and local authorities and acting as trustee under employee pension plans, both of which may involve out-of-home-State activities. New business is generally solicited through personal calls on prospective customers, or by telephone or mail. In addition, certain of the multistate banks do a good deal of national advertising by news- paper, in journals, and otherwise, to obtain business as pension trustee, for this is an area of large and growing importance in handling huge amounts of investment funds. While most of the bank's work as pension trustee is done at its home State office, nevertheless, par- 10 For a full description of the correspondent banking system, see Knight, "Correspondent Banking, Part I: Balances and Services", Monthly Review, Federal Reserve Bank of Kansas City, November 1970, pp. 3-14 and Part II, Note 6, supra. Some indication of the magnitude of the network of respondent banks may be gleaned from the fact that one New York City bank alone is reported to have relationships with more than 3,500 respondent banks located in all 50 States and the District of Columbia. 11 Ibid. PAGENO="0531" 511 ticularly in the case of a pension plan for a company with offices located over the country, or a system-wide plan in the case of a business conducted through a group of affiliated companies, some of the bank's work may take place outside the bank's home State, such as out-of- State meetings with company management, its pension board, its actuary, or counsel. UNDERWRITING AND DISTRIBUTION OF SECURITIES Banks play a substantial role in the underwriting of billions of dollars of State and local securities sold annually throughout the country. In 1970, they handled about three-fifths of all general obliga- tions sold by State and local governments and over two-fifths of total State and local obligations sold, aggregating $18 billion. The issuer, i.e., a State, city, school district, etc., sells its securities to a syndicate, often selected via competitive bidding, which resells the securities to investors throughout the country. Banks located in all sections of the country participate in this market as maj or underwriters, distributors, and purchasers of State and local securities. In underwriting securities, banks operate in a manner similar to nonbank dealers. In almost all instances there is a mix of dealers and dealer banks in an account; a bank may or may not be the active manager, or several members of the syndicate may be designated as joint managers. The syndicate is treated for Federal income tax pur- poses as a partnership; and there is normally a j oint venture agreement entered into by the members of the syndicate to buy the bonds from the issuer. When the syndicate is formed, the agreement is mailed to, and returned signed by, syndicate members before the date of sale. Price, profit margin and offering terms are decided in one or two syndicate meetings with the active participation of all members. Syndicate meetings almost always take place in New York. However, when the manager is located outside New York, e.g., Chicago, there may be simultaneous meetings in Chicago and in New York, at the office of one of the syndicate members. On smaller issues, the New York member may approve the terms by telephone. The terms and the actual participation of each member are agreed upon at the last syndicate meeting, although in the case of a small issue, members may give their approval by telephone. A lawyer is usually designated by the issuer to act on behalf of the syndicate, although in some cases he may be retained by the syndicate at its own expense. The mechanical details of preparing, figuring and submitting the bid to the issuer are handled by the manager. A syndicate member which is dissatisfied with the proposed bid or the terms of the issue may withdraw from the syndicate before the bid is submitted. When the bid is accepted by the issuer, a letter detailing the terms, percentage of participation, and the like, is mailed to each member. Each bank member of the syndicate usually provides its own funds in payment of its share of the issue, and some members may provide funds for non-banking members. The manager receives the securities and de- livers them to the member, as they are sold. Delivery of the securities by the issuer may be made in New York, in the locality of the issuer, or in the home State of the manager bank. PAGENO="0532" 512 The sale of securities acquired by the banks in the syndicate on an underwriting generally is handled from the home offices of the banks. Sales to customers outside the bank's home State are usually made by telephone or letter solicitation to respondents and other outlets throughout the country. EQUIPMENT LEASING Economically, equipment leasing is essentially a form of lending or financing the purchase of equipment by business and industry. Because the transaction takes the form of ownership of the equipment by the bank (or its nominee), the tax consequences of this form of financing warrant special consideration. The leasing of computer equipment, airplanes, railway equipment, industrial machinery, trucks, turbine generators, and other capital goods has increased substantially in recent years. It has been estimated that there was approximately $30 billion of equipment on lease by. bank and nonbank lessors in the country as of December 31, 1969, of which $20 billion was in computer leasing, and that the annual volume of leasing is about $2 billion.'2 The consequence is that many multi- state banks are owners of large amounts of tangible personal property being used by their lessees in various States in the country. As of December 31, 1970, 390 national banks reported direct lease financing totaling $790 million." Some of the property, such as transportation equipment of utilities and bakeries, is probably used principally in a single State, but other property, such as railroad cars, is used all over the country, and airplanes all over the world. In equipment leasing, ordinarily the negotiations for the design of the equipment, the price, delivery dates, and the like, are handled entirely by the company that will use the equipment. The bank-lessor normally does not participate in these negotiations, and, with the possible exception of granting prior credit approval, is usually brought into the picture only after the contract for purchase has been executed: The bank's economic role is that of providing the funds to pay for the equipment, although part of the funds may be provided by non- bank sources. Many banks participate in "leveraged-leasing" trans- actions, a device whereby other long-term lenders furnish a substantial portion of the cost of equipment-perhaps up to 80 percent-and a bank or group of banks advances the balance of the cost in the form of equity funds. The bank, either singly or jointly with others, takes title to the equipment~ and leases it to the intended user. The bank- lessor recovers its investment, including any loans made by others, plus interest and profit, in the form of periodic lease rental payments. Maintenance and repair of the leased equipment are the obligation of the user-lessee, and at the end of the leasehold or useful life, .the property is supposed to revert to the bank. At the termination of the lease, the property is returned to the possession of the bank or its designee. The lessee is usually given an option to purchase the equip- ment at the fair market value at the termination of the lease. As 12 Leasing JVorld, Kansas City, Missouri. Lease rentals totaled $137 million in 1969 for equipment of United States trunk and international airlines. As of June 30, 1970, leased aircraft operated by those airlines had an imputed value of about $2.6 billion. N~Y. Times, Dec. 27, 1970, p. F-3. 13 Press release, Comptroller of the Currency, April 13, 1971. PAGENO="0533" 513 indicated above, the bank may take title to the leased equipment in the name of a nominee or trustee, in order to avoid various kh~ds of liabilities. However, for tax purposes, ownership by the trustees or nominee would, at least in many States, be treated as ownership by the bank. CREDIT CARDS The development of credit card (or charge card, as they are often called) and check credit plans "has recently been one of the more publicized aspects of commercial banking." `~ As recently as Sep- tember 1967, only 197 banks offered credit card plans, with total credit- card balances of $633 million. This amounted to less than 1 percent of total consumer installment credit, and only 8 percent of the con- sumer loan portfolio of banks engaged in credit card operations. By June 30, 1970, about 1,350 commercial banks reported credit card balances totaling more than $3 billion.'5 Credit card programs are still expanding rapidly, although the rate of increase has slowed since plans came into operation in most major marketing areas. The operation of any credit card program requires agreements be- tween a bank and its customers allowing them to use the cards, and between the bank and merchants agreeing to accept the cards. As these charge card plans have spread in recent years, interchange arrange- ments have developed, which permit holders to use their cards in making purchases from merchants who have no direct dealings with the customer's bank. These arrangements also permit customers of one bank to obtain cash advances from other banks belonging to the same interchange system. At the present time, there are two large credit card systems, Na- tional BankAmericard, Inc., and Interbank Card Association, which facilitate nationwide interchange. They include banks operating in all 50 States and many foreign countries. In this country, there are cur- rently over one million merchant outlets that honor these cards, "BankAmericard" and Interbank (usually "Master Charge"). Banks affiliated directly or indirectly with these two systems flOW hold close to 95 percent of all U.S. bank credit card receivables. A few banks with credit card programs remain outside the two major plans, some completely independent, operating without inter- change, and some affiliated with a larger bank. The major example of the latter type is Uni-Card of Chase Manhattan. This group performs the same general functions as the major systems, and its operations are similar, but it is mainly confined to the States of New York, Massa- chusetts, and New Jersey. Operations of the few completely inde- pendent banks are similar to the other plans, except for the absence of interchange. The growth of national systems has been facilitated by a flexibility of organization allowing for considerable variation in an individual bank's credit card operations, which makes the interchange systems suitable for a diversity of banks. For example, in the Interbank Card Association, banks may participate as direct members, as affiliates of 14 The summary description of credit card plans contained in this section ic largely drawn from a Federal Reserve System report, "Bank Credit-Card and Check-Credit Plans" (July 1968) and updated by the Consumer Credit Section of the Board's Division of Research and Statistics. "In addition, about 1,185 banks reported that they had outstandings under check credit and revolving credit plans totaling nearly $1.2 billion. Assets and Liabilities, Commercial and Mutual Savings Banks, June 30, 1970, published by the Federal Deposit Insurance Corporation, p. 2. PAGENO="0534" 514 a member, or as members of an association of banks with the associa- tion as the member. Affiliate status permits a bank to engage in card operations without the need to assume directly all of the functions and responsibilities of a card plan. The role that each affiliate plays is determined directly by the banks involved. In some cases the affiliate's name will appear on the card; in others the member bank's name. Usually an affiliate relies on computerized help with accounting and billing services and authorizations for credit covering sales that exceed a prescribed amount. The affiliate may carry out all the functions of the credit card plan, or it may act merely as an agent for a principal bank. In the latter case, it may do little more than forward customers' card applications to the principal bank, which may issue its own card after such credit investigations as it Lonsiders necessary; and sign agreements with merchants authorizing use of the principal's card, in turn agreeing to accept sales slips thus generated. However, such an agent bank does not hold these receivables; it simply forwards them to its principal, which extends any credit and assumes the risks. Agent banks usually are smaller banks, which receive payment for their services and obtain the benefits of a charge plan for their customers. Associations include groups of banks that operate or support special facilities or services, such as computer processing, credit sales author- ization, and promotion, in order to obtain efficiencies of joint opera- tion. These associations vary in size; in the case of Interbank they range from a single market, such as greater New York, to a nine-state area served by the Mid-West Bankcard Association in Omaha. The relationships within the National BankAmericard, Inc., system, and the functions it performs, are generally similar to those within Interbank. Associations of banks for the joint operation of service functions and facilities exist within the BankAmericard system, but all participants must also belong directly to National BankAmericard, Inc., instead of obtaining the advantages of membership in the system indirectly through the association. Income to banks from credit card operations comes from two sources; an interest charge of usually 1~ percent per month on any unpaid balance after a grace period of about 30 days from the statement date, and a merchant discount on credit card transactions. The merchant discount normally ranges from a low of about 1~ percent to a high of about 53~ percent, depending on factors such as the aver- age dollar amount of sales slips and total volume generated by the merchant. This discount is deducted from the face value of the sales slip at the time that the merchant's bank credits his account. In the case of an interchange transaction, the merchant's bank then sends the sales slip to the cardholder's bank along with a transmittal and sum- mary draft to cover the reimbursement made to the merchant, and *the cardholder's bank bills the cardholder periodically for his pur- chases. The way in which the merchant discount is distributed varies with the system and with the type of bank relationship. Out of this dis- count, a specified amount generally goes to the cardholder's bank to cover cost, including processing costs, risk, and the cost of money, with the merchant's bank retaining any residual. Interest charges on PAGENO="0535" 515 any unpaid balance go to the card-issuing bank (or its principal), whichever holds the receivables. A nationwide interchange system enables a credit cardholder to obtain credit from any participating merchant anywhere in the country, including those located outside his own bank's area of opera- tions. Consequently, a sale of merchandise made by a retailer in Denver, Colorado, may obligate a bank in New York to pay the charges indirectly to the Colorado retailer through the retailer's local bank, and the customer to pay the New York bank. The New York bank earns a share of the discount on the Colorado purchase made by its cardholder; that transaction creates a claim of the retailer against his local bank and a claim of the retailer's bank against the New York bank, and it effects a loan by the New York bank to its credit card- holder. The New York bank is thus the lender for this local retail sale; and the Colorado bank will be rendering handling services to its merchant and the New York bank, for which it retains any balance of the merchant discount. This transaction has its counterpart daily thousands of times over the country. Interchange credit cards have opened to banks a new method of broadening their national banking services.16 ACCOUNTING, DATA PROCESSING AND MISCELLANEOUS ACTIVITIES There are other activities of banks, such as the furnishing to their customers of accounting, data processing, loan and mortgage servic- ing, and the like. It is understood that these activities are usually confined to the bank's home state, although a few banks have orga- nized or acquired out-of-state affiliates to render accounting and data processing services in neighboring states.'7 BANK AFFILIATES The rapid growth of bank holding companies has enabled banks to utilize corporate affiliates to handle some of their activities. This is now the case with a number of the largest multistate banks in the country.'8 Thus, the holding company may organize or acquire a subsidiary to handle equipment leasing, the credit card business, fiduciary functions, or other activities related to banking. The banks themselves may be directly and intimately involved in such activities; thus, in equipment leasing and credit card operations, the banks may provide the funds, within the established legal limits, and their affiliated corporations may act as their agents in carrying 18 It has been suggested that the bank credit card system may be a limited substitute for branch banking. See "Bank Credit-Card and Check-Credit Plans," p. 37 (note 14, supra). 17 First National City Corporation. the parent company of New York's largest bank, with over $25 billion in assets, has recently acquired one of the nation's leading management consultants, Cresap, McCormick & Paget. New York Times, Jan. 5, 1671. The acquisition is subject to approval by the Federal Reserve Board, under the standard established by the Federal Bank Holding Company Act, as not being anticorn- petitive and as being "so closely related to banking or managing or controlling banks as to be a proper inci- dent thereto." 18 See "The One Bank Holding Company" in Business Conditions, July 1970, Federal Reserve Bank of Chicago. On Dec. 31, 1969, 9 of the 10 largest banks in the country were owned by one-hank holding com- panies, and 43 of the 100 largest commercial banks were among those with one-bank holding companies in existence or in the planning stage. Idem, pp. 2 and 6. As of June 30, 1970, Federal Reserve Board staff esti- mate that more than 1,100 commercial banks were affiliated with one-bank holding companies and those banks accounted for about one-third of total commercial bank deposits. In addition, there were about 800 banks affiliated with multi-bank holding companies and they accounted for an additional 16 percent of deposits. In view of the liberalized holding company powers authorized by the Congress in the Bank Hold- ing Company Act Amendments of 1970. approved December 31, 1970 (Public Law 91-607), the volume of interstate banking and bank related activities administered through holding company affiliates is likely to expand substantially. Banks are also able to utilize so-called Edge Act corporations to carry out some of their junctions with respect to international finance. PAGENO="0536" 516 out these financial activities. Also, a good deal of interplay between banks and their affiliates develops as banks combine their operations with activities closely related to banking in the holding company systems. STATE BORDER BANKS As indicated earlier, there is a considerable number of banks over the country, many of them comparatively small, local banks, that do not carry on out-of-state activities of the magnitude or character of the multistate banks described above, which, nevertheless, conduct business that reaches beyond their home State. These are typically banks whose offices are located in communities near the border of their States. They have depositors located in the neighboring State who come to the bank's office to deposit or withdraw funds from their accounts with the bank or who may handle their accounts by mail. Likewise, the bank makes loans to borrowers in the neighboring States, typically negotiated at the office of the bank. Where the loans are secured, the mortgages or other security documents are recorded by the bank in the appropriate recording office of the customer's State. Investigation of the credit of the prospective borrower may be made by the bank's own employees by phone or mail or by its agents or tepresentatives in the customer's State. In the event of default on the loan, collection efforts and suit may be brought in the customer's State and in the latter case, by lawyers in that State acting for the bank. There are other activities of such banks that frequently extend to the neighboring State, which may include advertising and the issuance of credit cards to residents of that State. PART I JuRIsDICTIoN To LEVY INcoME, FRANCHISE, CAPITAL STOCK, AND OTHER BUSINESS TAXES This portion of this report deals with the question of how far Federal constitutional provisions limit the power of the States and local governments to subject multistate banks to income, franchise, capital stock, or other taxes on doing business.' A. THE COMMERCE CLAUSE: GUIDING PRINCIPLES 1. Whether banking constitutes interstate commerce Banks cannot, of course, obtain the protection of the Commerce Clause with respect to state taxation, in the silence of Congress, unless multistate banking constitutes interstate commerce. Traditionally, "commerce" was narrowly construed under the Constitution to en- compass essentially the selling of goods across State lines and trans- portation and communication between the States. In the leading early case of Paul v. Virginia, the Supreme Court upheld the constitutional- ity of a Virginia statute regulating insurance companies, resting its decision on the premise that "Issuing a policy of insurance is not a transaction in commerce"; 2 and the same view was expressed in I The term "business taxes" is sometimes used in this report to refer to excise taxes on the privilege of doing business, or the actual conduct of business, within the State. Such levies may be measured by net income, capital stock, gross receipts, or otherwise. 2 8 Wall. (U.S.) 168, 183 (1869). PAGENO="0537" 517 later decisions, including tax cases.3 This restiictive conception of inter- state commerce was repudiated in the 1944 case of United States v. South-Eastern Underwriters Association,4 in which the Court held that the Sherman Anti-Trust Act could be applied to a group of fire insurance companies. In part, the decision was grounded on the principle that "legal formulae devised to uphold state power cannot uncritically be accepted as tiustworthy guides to determine congres- sional power under the Commerce Clause".5 But the Court went further and rejected the Paul v. Virginia view that, because insurance policies "are not commodities to be shipped or forwarded from one State to another", or that "insurance policies are mere personal contracts subject to the laws of the state where executed", the in- surance business does not constitute interstate commerce.6 It held that "a nationwide business is not deprived of its interstate character merely because it is built upon sales contracts which are local in nature".7 The Court traced the "commanding position" of the modern insurance business "in the trade and commerce of our . nation". Observing that a large share of the insurance business is concentrated in comparatively few companies located, for the most part, in the financial centers of the East, the Court declared: "This business is not separated into 48 distinct territorial compart- ments which function in isolation from each other. Interrelationship, interdependence, and integration of activities in all the states in which they operate are practical aspects of the insurance companies' methods of doing business." 8 On these facts, the Court held that the insurance business constituted interstate commerce, and sustained the indictment. The foregoing characterization of the insurance business closely fits the multistate banking business. Given the nationwide lending activities of major multistate banks, their penetration of the financial markets of virtually every State in the Union through direct lending,. loan participations, their network of respondent banks, equipment leasing, credit card operations, the marketing of securities, etc., it is no longer seriously open to debate that they carry on an interstate business. Although the decision in *the South-Eastern Underwriters case dealt with the regulatory power of Congress under the Commerce Clause, which presents different problems from the powers of the State to tax interstate businesses in the silence of Congress, never- theless, the Court's broad conception of the scope of "commerce" and "interstate commerce" is equally apposite to State taxation of interstate businesses. t?. The effect of Federal legislation on the Commerce Clause protection afforded banks (a) The Federal regulation of banks goes back to 1863, when it resulted from the chartering of commercial banks by the Federal 3 New York Life Insurance Co. v. Deer County Lodge, 231 U.s. 495, 510 (1913), in which the Court said, in sustaining a Montana tax against an out-of-state insurance company, "contracts of insurance are not commerce at all, neither state nor interstate". 4 322 U.S. 533 (1944). 5 322 U.S., at p. 545. 6 Idem, pp. 546-547. Idem, p. 547. 8 Idem, at pp. 541-542. This case is discussed in Robert L. Stern, "The Commerce Clause and the Na. tional Economy: 1933-1946" (part II), 59 Harvard Law Review 883, 917, et. seq. (1946). PAGENO="0538" 518 government. The establishment of the Federal Reserve System in 1913 broadened the supervision by the national government, and extended it to those state banks which chose to enter the Federal Reserve System. Following the bank failures during the 1930s, the Federal Deposit Insurance Corporation was added to the regul~atory structure and was extended to state banks not within the Federal Reserve System. To complete the picture of banking regulation, there is, of course, the comprehensive regulation by the States of their own chartered banks.9 The constitutional foundations for the chartering and regulation of national banks lie in the "ordinary and necessary" Clause of the Con- stitution, granting Congress authority to implement its enumerated powers and its power over the monetary system of the nation.'° This legislation was not grounded in the power of Congress to regulate interstate commerce, although that is not to say that the commerce power could not be relied on to sustain Federal banking regulation." Consequently, the comprehensive Federal regulation of national banks would appear not to have affected state taxation of banks under the Commerce Clause, as distinguished from the immunities of the national banks as Federal instrumentalities. Accordingly, the tax status of national banks is to be approached in the context of the silence of Congress in exercising its powers under the Commerce Clause, vis-a-vis state taxation. (b) Does P.L. 91-156 restrict or broaden the powers of the States to tax national banks insofar as the Commerce Clause is concerned? The impact of P.L. 91-156, considered as an exercise by Congress of its powers over national banks as Federal instrumentalities, is dis- cussed in Part III, infra. The narrower question we consider here is whether the legislation either narrows or broadens the protection otherwise afforded multistate national banks by the Commerce Clause, for it is established that Congress, under its power to regulate interstate commerce, has plenary power to broaden or narrow the effects of state taxation or regulation of the commerce.'2 The language of P.L. 91-156 does not specify the base of the congressional power being exercised. It provides: "For the purposes of any tax law enacted under the authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located." (Sec. 2(a)). This language seems inappropriate to action under the Commerce Clause; it does not refer to interstate commerce and it draws no dis- tinction by reference to whether a bank is engaged in interstate or intrastate commerce. Instead, the provision appears to be designed to waive only intergovernmental tax immunity of national banks. Reference to the language and techniques used in legislation in which Congress has exercised its power under the Commerce Clause to effect state taxation reenforces this conclusion. Thus, when Congress sought `The history and status of national and state banking regulation are discussed extensively in Symposium on Banking: Part I. Banking Regulation, 31 Law and Contemporary Problems (Autumn, 1966), 635 et. seq. For a summary of the dual system of regulation, see Archie K. Davis, "Banking Regulation Today: A Banker's View," id., at p. 639, et. seq. 10 See Emmette S. Redford, "Dual Banking: A Case Study in Federalism", in Symposium on Banking, Note 9, supra, at pp. 749-753. 11 The power to regulate commerce is suggested by Professor Redford as one possible basis for congres- sional action to bring all state banks completely under Federal supervision and regulation. See Note 10, supra. 12 International Shoe Co. r. Washington, 326 U.S. 310 (1945); Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). PAGENO="0539" 519 to assure or broaden the power of the States to impose unemployment insurance taxes on multistate businesses generally, it explicitly referred to interstate commerce. "No person required under a State law to make payments to an un- employment fund shall be relieved from compliance therewith on the ground that he is engaged in interstate or foreign commerce. Likewise, in authorizing state taxation of insurance companies, Con- gress, while not referring explicitly to interstate commerce, used the term, "the silence of Congress", a phrase that was developed and is frequently used in the Commerce Clause area: ". . . The continued regulation and taxation by the several States of the business of insurance is in the public interest and silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States." 15 Again, P.L. 86-272, which embodies the 1959 restrictions on the taxation of interstate vendors, makes explicit reference to "interstate commerce".16 Finally, the legislative history of P.L. 91-156 likewise indicates that Congress was working within the framework of inter- governmental immunities, not the Commerce Clause. The Act is an amendment to Section 5219, which had its origin in McG~ilIoch v. Maryland 17, the landmark immunity case, and the Committee Re- ports on P.L. 91-156 speak entirely in immunity terms.18 Accordingly, I conclude that Congress did not purport to exercise its Commerce Clause powers in enacting P.L. 91-156, but relied on its sweeping powers to waive state tax immunities for its instrumen- tality, national banks. As a consequence, insofar as the Commerce Clause is concerned, we approach the power of the States to tax na- tional banks in the "silence of Congress", treating national banks as if they had been organized under the law of the States of their respec- tive principal offices. 3. The interrelation of the subject and measure of taxes on doinq business There is one other preliminary constitutional principle to be noted. Under the Commerce Clause and the Due Process Clause, once a locally taxable activity has been found, i.e., a taxable subject, the tax may be measured by property, income, or other bases, which are not themselves directly taxable. rphus the Court has held: "A franchise tax imposed on a corporation, foreign or domestic, for the privilege of doing a local business, if apportioned to business done or property owfied within the state, is not invalid under the commerce clause merely because a part of the property or capital included in computing the tax is used by it in interstate `~ ~`53 Stat. 1391; 26 U.S.C., Sec. 3305 (a). 14 See Henry W. BikiS, "The Silence of Congress", 41 Harvard Law Review 200 (1927). `-° McCarran Act, 59 Stat. 33, 15 U.S.C., Sec. 1011. 16 73 Stat. 555, 15 U.S.C., Sec. 381. The key provision restricts the power of the States to impose certain taxes dn the "income derived . . . from interstate commerce `~ 4 Wheat. 316 (1819). 18 "There may have at one time been justification for giving national banks privileges and immunities which were denied State banks, under the theory that national banks are peculiarly an instrumentality of the Federal Government, and, as such, hold a unique and distinct position from th~t of other institutions. Without specifically addressing the question of whether national banks remain, in substance, such a Federal instrumentality, the committee is agreed that there is no longer any justification for Congress continuing to grant national banks immunities from State taxation which are not afforded State banks." Report of the Senate Committee on Banking and Currency, "State Taxation of National Banks" page 2 (Rep. No. 91-530, 91st Cong., 1st Sess.). 19 International Shoe Co. v. Shartel, 279 U.S. 429, 433 (1929); see Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602, p. 610 (1951). PAGENO="0540" 520 "Nor does the fact that a computation such as that used under Ohio's law includes receipts from interstate sales affect the validity of a fair apportionment." 20 The effect of these decisions is that once a bank is doing some intrastate business within a State and is in consequence subject to a tax on doing business, the measure of the tax may include income, properly apportioned, that is attributable to interstate business done in the State; and the same is true with capital stock and other meas- ures. The measure is not limited to the activities or property that gives rise to taxability. 4. The power of the States to impose direct net income taxes on income derived from an exclusively interstate business The landmark cases of Northwestern Portland Cement Company and Stockham Valves furnish the most recent guidelines for defining the Commerce Clause limitations on State business taxation.2' In both cases, foreign corporations, not authorized to do business in the taxing States, conducted interstate selling of their manufactured products through local salesmen, working out of offices maintained in the State by the corporations. They conducted the business in the traditional pattern that has grown up over the years for avoiding local taxes-the salesmen were merely solicitors, taking orders that were accepted at the manufacturer's out-of-state headquarters; all orders were filled by shipment from outside the State directly to the customer, with no inventory or warehouse located in the State. All payments for the merchandise were made directly to the home office of the seller. The Supreme Court stated, in its opinion, that "there is need for clearing up the tangled underbrush of past cases", observing that the Court in its history had handed down more than 300 full-dress opinions in the area, and declared that, "From the quagmire there emerge, how- ever, some firm peaks of decision which remain unquestioned." 22 First, the grant to Congress by the Constitution of the "power to regulate Commerce among the several States" 23 by its own force imposes some restrictions on State taxation of interstate commerce; in the silence of Congress, the constitutional effect of the Commerce Clause is that "interstate commerce shall be free of any direct restric- tions or impositions by the States." Second, the Commerce Clause does not "immunize such commerce from carrying its fair share of the costs of State government in return for the benefits it derives from the States." As summed up in a.nother opinion by Mr. Justice Rut- ledge; whose contributions to the development of a thoughtful and realistic approach to State taxation under the Commerce Clause were notable: "The long history of this problem boils down in general statement to the formula that the States, by virtue of the force of the commerce clause, may not unduly burden interstate commerce." 24 Early in the history of the Commerce Clause, in giving content to the yardstick of "undue burden", and in reconciling the conflicting interests of maintaining a national economy and the needs of the 20 International Harvester Co. v. Evatt, 329 U.s. 416, 421 (1947); compare, also Cheney Brothers Co. v. Massachusetts, 246 U.S. 147 (1918). 21 Northwestern States Portland Cement Co. v. Minnesota and Williams v. Stockham Valves and Fittings, Inc., both decided in a single opinion, 358 U.S. 450 (1959). 22 358 U.S.~ at p. 458. 28 Art. 1, Sec. 8, Clause 3. 24 International Harvester Co. v. Department of Treasury, 322 U.S. 340, 358 (1944). See, generally, Paul 3. Hartman, State Taxation of Interstate Commerce (1953). PAGENO="0541" 521 States for revenue, the Supreme Court had sustained State and local property taxes on the real and personal property of interstate rail- roads, telegraph companies and express companies, and other instru- mentalities of commerce,25 while at the same time striking down levies imposed on the privilege of conducting an exclusively interstate busi- ness and taxes on gross receipts derived from interstate commerce.26 In so doing, it had drawn the line between "direct taxes" and "in- direct taxes", holding that property taxes on interstate business were indirect, hence did not impose undue burdens on the commerce. The net income taxes involved in the cases before the Court did not suffer from ~tny constitutional infirmity. As }evies on the profits de- rived from the enterprise, unlike taxes on gross receipts, they were in- direct taxes and, therefore, imposed no undue burden on the commerce. ~ * * J~ is too late in the day to find offense to that (Commerce) Clause because a State tax is imposed on corporate net income of an interstate enterprise which is attributable to earnings within the taxing state." 27 `While the Court thus established the law of the land, for the first time-with clarity, at least-in our constitutional history, that the Commerce Clause does not debar the States from imposing net income taxes on income derived from an exclusively interstate business car- ried on within the State,28 at the same time it explicitly reaffirmed i~ts traditional holding that "the privilege of engaging in interstate com- merce cannot be granted or withheld by a State, and * * * the as- sertion of state power to tax the `privilege', is, therefore, a forbidden attempt to `regulate' interstate commerce." 29 The rationale and distinctions thus drawn by the Supreme Court are less than satisfying, and, indeed, there have been several recent state court decisions that have cut away at, or sought to undermine, the holding that the Commerce Clause proscribes state franchise taxes levied on exclusively interstate businesses.30 Nevertheless, current highest court doctrine remains that, in the silence of Congress, the Commerce Clause prohibits such levies on the privilege of carrying on interstate commerce, but it does not prevent the States from imposing a direct net income tax on an exclusively interstate business, provided the tax base is fairly apportioned.3' The Delaware Railroad Tax, 18 Wall. 206 (1874); Pullman's Palace Car Co. v. Pennsylvania, 141 U.s. 18 (1891); Cleveland, Cincinnati & Chicago St. Louis Railway v. Backus, 154 U.S. 439 (1894). ~ Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203 (1925); Cheney Bros. Co. v. Massachusetts, 246 U.S. 147 (1918); Crew Levick Co. v. Pennsylvania, 245 13.5. 292 (1917). 27 358 U.S., at p. 462. The Court was quoting from its earlier opinion in State of Wisconsin v. Minnesota Mining & Mfg. Co., 311 U.S. 452, 453 (1940). 23 The outcry by business interests which greeted this holding was largely responsible for the prompt enactment by Congress of P.L. 86-272, 15 U.S.C., Sec. 381, the first congressional legislation in our history that imposed Commerce Clause restrictions on State taxation of manufacturing and mercantile businesses. 20 358 U.S., at p. 463. This holding is supported by longstanding authority. Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203 (1925); Cheney Brothers Co. v. Massachusetts, 246 U-S. 147 (1918); Leloup v. Port of Mobile, 127 U.S. 640 (1888). In 1951, the Court had rejected an opportunity to overrule this doctrine when it reviewed the powerful opinion of the Second Circuit (139 F. 2nd 809 (1944)), holding that a state tax on the privilege of doing an exclusively interstate business, when measured by fairly apportioned net income, was valid; the highest Court reversed this holding and reaffirmed traditional doctrine. Spector. Motor Service, Inc. v. O'Connor. 340 U.S. 602 (1951). 30 Roadway Express, Inc. v. Director, Division of Taxation, 50 NJ. 471, 236 A. 2d 577 (1967), appeal dis- missed for want of a substantial federal question, 390 U.S. 745 (1968); Mid-Valley Pipeline Co. v. King, 221 Tenn. 724, 431 SW. 2d 277 (1968), appeal dismissed for want of a substantial federal question, 393 U.S. 321 (1969). There is a thoughtful analysis of this problem in Comment, "State Taxation of Interstate Com- merce: Roadway Express, The Diminishing Privilege Tax Immunity, and the Movement Towards Uni- formity in Apportionment", 36 University of Chicago Law Review 186 (Autunm 1968). 31 The fluid and changing course of judicial decision in the Commrce Clause area needs to be recognized, particularly in view of the fact that four of the nine Justices dissented from the holding in the Northwestern- Stockham Valves cases, and that there has been a significant change in the Court's personnel since 1959. Perhaps this factor emphasizes the need for congressional action in the area. PAGENO="0542" 522 B. THE TAXABILITY BY THE DEBTOR'S STATE OF. INCOME REALIZED BY OUT-OF-STATE CORPORATIONS FROM LOANS TO PERSONS OR CORPORA- TIONS DOMICILED WITHIN THE STATE Before dealing with the power of the States to apply either direct net income taxes or doing business or other excises measured by net income, capital stock, gross receipts or otherwise, to out-of-state banks, which would typically involve a tax on an allocated or apportioned part of the entire tax measure, there is a narrower issue, albeit impor- tant to banks, that needs to be considered. May the States levy direct net income taxes on interest or other income derived by out-of-state banks from loans made to persons residing in the State or corporations there domiciled, regardless of the extent or magnitude of the business carried on in the State? When the Supreme Court sustained income taxes on non-residents with respect to income derived from sources within the State, it met the Due Process objection by declaring that: "The States have general dominion . . . over all persons, property and business transactions within their borders; they assume and per- form the duty of preserving and protecting all such persons, property, and businesses, and, in consequence, have the power normally pertain- ing to governments to resort to all reasonable forms of taxation in order to defray the governmental expenses." 32 it is not uncommon for State statutes to contain general provisions taxing income derived from "sources within the State",33 or from "property located or business done in the Sthte".34 Prior to the adop- tion of the uniform act referred to below, interest income was allocated or apportioned under State corporate income and business taxes in a variety of ways. In some States interest was allocated to the State of legal domicile,35 whereas others allocated the income to the business situs of the debt outside the creditor's State, if the obligation had acquired such a situs.36 The widespread adoption of the Uniform Division of Income for Tax Purj~oses Act (UDITPA) since 1957, when it was promulgated by the National Conference of Commissioners on Uniform State Laws,. particularly after embodiment of its provisions in the Multistate Tax Compact, has produced a greater uniformity in the treatment of interest income in corporate taxation.37 Under UDITPA, interest, along with dividends, is allocated entirely to the State of the taxpayer's. commercial domicile, if the item constitutes "non-business income";. otherwise, it is apportioned under the three-factor formula embodied in the act.38 The uniform act does not, however, apply to banks.39 32 Shaffer v. Carter, 2.52 U.S. 37, 50 (1920); see, also, Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920). "See, e.g., Calif. Revenue and Taxation Code, Sec. 17041. 34 See, e.g., Wise. Stat., ch. 71.01(1). ~ An enumeration of the 10 states that followed this rule is set out iii "State Taxation of Interstate Corn- merce", Report of Special Subcommittee on State Taxation of Interstate Commerce, House Committee~ on the Judiciary, vol. 1, p. 204 (1964), H.R. No. 1480, 88th Cong., 2d Sess. "Nine states fell into this category. Ibid. See United Gas Corp. v. Fontenot, 241 La. 488, 129 So. 2d 748, 759 (1961), in which the Court discussed the Louisiana statute which provides that "interest on customer's notes and accounts shall be allocated to the state in which customers are located". `~ As of June 30, 1970, there were 20 States that had enacted the Multistate Tax Compact, and 14 other States had become associate members of the Multistate Tax Commission. See Third Annual Report, Multi- state Tax Comm., p. 1. `~ Sees. 4 and 7. There is considerable doubt among state tax men as to what constitutes "non-business'~ income under UDITPA, and there is a movement to eliminate this qualification altogether and allocate interest income in all cases to the State of the commercial domicile. ~° The activities of "financial organizations", Including banks and trust companies, are excluded from. UDITPA, Sec. 2. PAGENO="0543" 523 In considering the question as to whether a State has the power to tax an out-of-state bank on interest income derived from loans made to persons or businesses residing or domiciled in the State, where little or no connection with the States is present other than the existence of the loan,40 the key decisions are those that have arisen under intangible property and inheritance taxes. In those cases, the Supreme Court has determined that the State in which the individual debtor resides, or the corporate debtor maintains its domicile, may levy property taxes on the out-of-state lender's loan.4' The rationale behind the decisions, namely, that because the State has dominion over the debtor and furnishes the benefits and protection of its laws to the creditor in enforcing his claim, the debt has a tax situs in the State, would appear equally to justify taxation by the debtor's state of the lender's income from the loan. Since the debt has a tax situs within the State, the tax would be levied on property located in the State-one of the traditional bases for jurisdiction to tax income under the Due Process Clause 42 There is another jurisdictional string which State tax administrators will frequently have to their bows, in asserting that the income from loans made to individual or corporate debtors domiciled within their territories is taxable by them, namely, the taking and recording within the State of security instruments by the out-of-state bank. The security documents may take various forms, such as a mortgage or trust instrument in the case of real property, a chattel mortgage or conditional sales agreement in the case of tangibles, or assignments in the case of accounts receivable and other intangibles. These instru- ments, when recorded in the appropriate state office, provide liens, or a priority in claim for the secured creditor; the security may be foreclosed or otherwise enforced by resort to the Courts of the re- cording state.43 Thereby, the creditor bank obtains the benefit of the protection of the laws of the State; it will not only be able to enforce its claims by resort to the Courts of the State, but it may also utilize the ancillary machinery of the State to foreclose, levy execution, and collect the debt. At least one Court has made the benefit and protection afforded by a State to holders of secured loans made to debtors located within its borders the basis for jurisdiction to tax the creditor. In State ex rd. United States Sugar Gorp. v. Gay, an intangibles property tax was imposed on notes held by a New York corporation, secured by a mortgage on the debtor's real estate located in Florida.44 Although the creditor conducted an insurance business in Florida., the Court found that the loan had no relation to that business and that neither the creditor corporation, in relation to the loan, nor the note had a business situs in the State. The creditor corporation contended that the tax violated the Due Process Clause, but the Court held that the Florida mortgage justified the levy, saying: * * It may be fairly said that the transaction * * * would not have been entered into without the security afforded by the mortgage 4~ The "business situs" doctrine is discussed in Part II, pp. 471-75, infra. 41 See ibid. 42 See the income tax cases cited in Note 32, supra. ~ For the protection granted to the creditor, whose claim is secured by personal property, by state law, see the Uniform commercial Code, Art. 9; the recording provisions are set out in Sec. 9-301, et seq. This Cods has been adopted by all the States. See, generally, Gi,lmore, Security Interests in Personal Property, vol. 1, Ch. 15 (1965). ~ 46 So. 2d 165 (Fla. 1950). PAGENO="0544" 524 on Florida realty and the protection afforded by our recording statutes, and others, relating to the rights of a mortgagee. And the `practical fact of our power' or sovereignty over such security is obvious. It is the fact of our sovereignty which gives life to such security- which transforms it from a worthless piece of paper into a valuable legal right * * * * "It appears, therefore, that if the question is `whether the state has given anything for which it can ask return', State of Wisconsin v. J. C. Penney Co., supra, or whether the state can demonstrate `the practical fact of its power or sovereignty', Blackstone v. Miller, supra, the tax here in question could satisfy the test, and that there is ample justification for the tax." ~ Accordingly, it is my view that there is no Federal constitutional barrier to the imposition by the debtor's state of an income tax on the creditor, with respect to income derived from loans to debtors residing or domiciled in the State. In the case of a bank loan, the State of the bank's principal place of business likewise has the con- stitutional power to tax the income to its domictharies on all income from whatever sources derived; and since double taxation of intangi- bles is not proscribed by the Due Process Clause, both the debtor's and the creditor's State have the power to tax the interest income.46 C. THE DUE PROCESS CLAUSE: NEXUS In the i'Jorthwestern-Stockham Valves cases; the taxpayers, in addi- tion to relying on the Commerce Clause, contended that the taxes violated the Due Process Clause. The Due Process issue was whether the activities carried on in the taxing states "form a sufficient nexus between such a tax and transactions within a state for which the tax is an exaction." ~ "Nexus"-a term now familiar to corporate executives, as well as to law vers and accountants-was delineated as meaning "`some definite link, some minimum connection' sufficient to satisfy due process requirements"; the controlling question is whether in im- posing the tax " `the state has exerted its power in relation to 01)- l)OItimnities which it has given, to protection whicli it has afforded, to benefits which it has conferred . . .` "n This question was given an affirmative answer by the Court: "The record is without conflict that both corporations engage in substantial income-producing activity in the taxing states. in feet in No. 12 (the Minnesota case) almost half of the corporation's income is derived from the taxing State's sales which are shown to be promoted by vigorous and continuous sales campaigns run through a central office located in the State. While in No. 33 (the Georgia ease) the percent of sales is not available, the course of conduct was largely identical." ~ The operations of interstate merchants are, of course, different froni those of multistate banks. Indeed, the key fact on which the Court relied in holding that there was an adequate Due Process nexus to 45 46 So. 2d, at p. 168; Compare, also, Kelly v. Bastedo, 70 Ariz. 371, 220 P. 2d 1069 (1950), in which the Court said: "The right to tax exists in the State because the owner of intangibles needs the aid of the State, its laws and Its courts to acquire and enforce his rights to his property." 220 P. 2d at p. 1069. 46 See Part II, pp. 471-75, mIre. 4~358 U.S., at p. 464. 48358U.S., atp.465. ~`358 U.S., at p. 465. PAGENO="0545" 525 the State in the Northwestern-Stoc/cham Valves cases, the maintenance of a place of business in the State to which were attached the com- pany's employees who conducted its business in the State, is usually missing in the case of the banks. There has, however, been a series - of insurance cases in which no out-of-state offices were maintained, in which the activities bear a good (heal of resemblance to those of banks. We turn to those cases and consider their facts in some detail, because of their relevance to multistate bank tax Problems. 1. The insurance tax cases Historically, as is set out above, insurance had not been regarded as interstate commerce until the Supreme Court in 1944 held that the business of insurance is within the Federal regulatory power, under the Commerce Clause.5° Responding to the possible threat of this deci- sion to the validity of State regulation and taxation of insurance, Congress enacted the McCarran Act, which waived any Commerce Clause barrier to such state action.51 Subsequently, the Court was faced iii State Board of Insurance v. Todd Shipyards with the question whether the Due Process Clause i)recluded Texas from taxing the insured on l)remiurns paid to insurers who were not licensed to do business in Texas, where the "only connection between Texas and the insurance transactions is the fact that the l)roperty covered by the insurance is physically located in `fexas"52 `There the entire transaction leading to, and the issuance of the insurance, had been handled outside the taxing State; the insurer did not solicit business in Texas, it had no employees, agents or place of business in the State; the adjustment and payment of losses took place outside the State. The Court held that the tax was repugnant to the Due Process Clause, and, relying on the Congres- sional Committee Report accompanying the McCarran Act, which stated that the legislation was not intended to abrogate the limita- tions set out in three specifically cited earlier decisions dealing with the Due Process issue, it found that Todd Shipyards fitted neatly into those cases. Two recent decisions of State courts, in each of which the Supreme Court dismissed the insurance company's appeal for "want of a sub- stantial Federal question", have, however, severely limited the Todd Shipyards case.53 In People v. Umted National Life Insurance Company, the California Insurance Commission sought an injunction against three out-of-state lie insurance companies carrying on mail order solicitation of policies among California residents; the State sought to prevent the solicitation and issuance of insurance, unless the corn- panie~ obtained certificates of authority to do business in California.°4 The insurance companies maintained offices only in the States of their incorporation outside California; and they solicited business by mailing their literature and application forms to prospects. After receipt of the `° United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944). ~l 59 Stat. 33, 15 U.S.C., Sec. 1011; Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). s2370 U.S. 451, 455 (1962). The Court said: "Congress, of course, does not have the final say as to what constitutes due process under the Fourteenth Amendment. And while Congress has authority by Sec. 5 of that Amendment to enforce its provisions, . . . the McCarran-Ferguson Act does not purport to do so." (370 U.S., at p. 457). 13 The importance of the decisions lies in the fact that, unlike the denial of a writ of certiorari, a dismissal for "want of a substantial Federal question" is a determination of tile Supreme Court on the merits. Ohio ex rd. Eaton v. Price, 360 U.S. 246, 247 (1959); see Note "The Insubstantial Federal Question", 62 Harvard Law Review 488 (1949). ~ 58 Cal. Reptr. 599, 427 P. 2d 199 (1967), appeal dismissed for want of a substantial Federal question, 389 U.S. 330 (1967). Justices Harlan and Stewart were of the opinion that probable jurisdiction should be noted. 79-421 0 - 72 - 35 PAGENO="0546" 526 application, together with the first premium, the policy is then issued at the insurer's home office and mailed to the applicant. Premiums are received by mail from the policyholder.55 The Court sustained the tax, finding that the activities in the State went beyond those involved in Todd Shipyards. In considering the question as to whether "California can constitutionally regulate the transaction of the mail order business", the Court considered the Due Process Clause thesis of the defendant, that: * * * the issue * * * must turn on the presence of agents in the regulating state; that where agents are present, regulation is permis- sible but where, as in the instant cases, agents are not present, regula- tions cannot be upheld even though other contacts between the insurer and the insured have been established through the mails." 56 In rejecting this contention, the Court said: "Applying due process criteria which give recognition to the sub- stantial interest of the regulating state in the insurance transactions involved, we are satisfied that in the circumstances of the instant cases there are sufficient contacts with California to justify regulation. The insureds are, of course, residents of California. The solicitation of insurance actually takes place in California where the advertising material and other forms are received by the individual addressees. Thus realistically viewed the insurer through the instrumentality of the mail is for all practical P~l)OS~S soliciting insurance here as manifestly as if it were to carry on such solicitation through representa- tives physically present within this state. . . . In response to this solicitation, California residents complete and sign in this state the applications for insurance. Indeed, defendant United sends to the California addressee a pre-indorsed policy which becomes effective in this state when the policyholder deposits in the mail here the com- pleted `ownership application' for return to United's home office. In all instances payment of premiums is made by California residents from funds or bank accounts located in California. It is clear that any claims made under the policies will most likely be investigated in this state and that any litigation in connection with the policies will un- doubtedly be commenced in California courts. It is also foreseeable that should defendants for any reason fail to perform their obliga- tions in accordance with the policies, California might be called upon to provide assistance for the persons within its borders who were in- tended to be financially assisted by the benefits under the policies. "In short, these defendants have `realistically entered the state looking for and obtaining business' (Ministers Life and Casualty Union v. Haase, supra, 141 N.W. 2d at p. 295); the main aspects of their insurance transactions are in this state; and to say that they are not doing business here `is to completely ignore the facts of life and reality.' (People v. Fairfax Family Fund, Inc. 235 Cal. App. 2d 881, 885, 47 Cal. Reptr. 812, 815). We think the substantial interest of California in these transactions is obvious." ~ In Ministers L~fe ~ £as~ialty Union v. Haase, an insurance com- pany organized in Minnesota and conducting a mail order business in life, accident and health insurance, brought a declaratory judgment 55 In the case of one of the companies, the procedure was somewhat different. United, in soliciting policies on the lives of recently inducted servicemen, mailed pre-endorsed policies to the parents of the servicemen, requesting them to fill them out and mail back tne applications with the first premium; the policy becomes effective on deposit of the completed application and the required premium in the mails in California. `5 427 P. 2d, at P. 207. `7 427 P. 2d, at p. 209; footnote omitted. PAGENO="0547" 527 suit attacking the constitutionality of the Wisconsin comprehensive insurance regulatory and tax law.58 The statute imposed a 3% tax on the premiums on insurance business done in the State by unauth- orized insurers, as compared with a 2% tax on authorized insurers, with secondary liability for the tax (with some exceptions) on the insured. On facts much like those involved in the California case, the statute was sustained. The Court distinguished Todd Shipyards on the ground that there the insurance company "carried on no activities within the taxing or regulating state either by mail, by agents, by independent contractors, or otherwise, in connection with the in- surance transaction involved",59 and held that: ". . . systematic solicitation of insurance by mail, not sporadic but continuous, coupled with the use of local doctors and investigative agencies for underwriting and claims settlement purposes, as well as the group leaders' solicitation (even if they are not to be considered; as Ministers contended, its agents) established that the Company `has realistically entered the state looking for and obtaining business' The activities essential to the conduct of this insurance business, both prior to and subsequent to the making of the contract and which are part of the organic whole, take place in Wisconsin and, in addition, the subjects of the insurance are in this state. In common parlance and in any enlighted sense, it cannot be said that Ministers does not do business in Wisconsin." °° To these cases should be added one other insurance decision of a sta e court, which was not appealed to the Supreme Court but which is significant for our purposes. In Howell v. Rosecl~ff Realty Go., an action was brought by the Commissioner of Banking and Insurance to collect the New Jersey 3% tax on insurance premiums paid to under- writers of New Jersey risks. Rosecliff, a New Jersey corporation with its principal place of business at Fort Lee, New Jersey, owns and operates Palisades Amusement Park in New Jersey; the insurance risks at issue related to the ownership of the property covering the amusement park and the operation of the business at the park, in- cluding public and garage keeper's liability, fire and extended cover- age, burglary, theft and employee security ~61 The insurers are all of London, and are unauthorized to write insurance on New Jersey risks (except in limited circumstances not here relevant to issue certain insurance through a "licensed surplus agent"); they maintain no offices, employees or property in the State. The contracts of insurance on which the tax was levied were nego- tiated in New York City, through a New York broker, and the premiums were paid in New York by Rosecliff's check on a New York bank. When a loss occurs, other than in the case of public liability, Rose- cliff notifies the broker at the latter's New York City office, who, in turn, informs the insurer; the latter then assigns an adjuster to the loss. The only major claim of any kind during the year at issue grew out of a fire at Fun House. The adjuster assigned by the insurer was an independent contractor, located in New York, who went to the amusement park to inspect the damage with the broker. Thereafter, 5~ 30 Wis. 2d 339, 141 N.W. 2d 287 (1966), appeal dismissed for want of a substantial Federal question, 385 U.S. 205 (1966). Justices Harlan and Stewart were of the opinion that probable jurisdiction should be noted. Petition for rehearing denied, 385 U.S. 1033 (1967). `~ 141 N.W. 2d, at p. 293. 60 Idem, at p. 295. 61 52 NJ. 313, 245 A. 2d 318 (1968). PAGENO="0548" 528 negotiations with the adjuster followed in New York City, with the broker and a New York accountant retained by Rosecliff acting for the company. The loss, when finally determined, was paid in New York to Rosecliff's broker by check on a New York bank; the broker then issued its check to Rosecliff (presumably by mail from New York to Fort Lee, but this fact is not stated). The same procedure as to pay- ment was followed when minor losses occurred. To deal with accidents occurring at the amusement park, Rosecliff maintains a register of each occurrence, in which it records relevant information. During the park season, a representative of the adjust- ment firm designated by the insurer, an independent contractor located in New York, visits the park at least once or twice a week, and copies the information set out in the register. The adjuster visits or telephones the victim of the accident at his home, and he, of course, is frequently a New Jersey resident. Many claims are settled by the adjuster directly with the claimant, some at the latter's home in New Jersey, and, in those cases, releases may be executed by the claim- ant at his home. `Where a lawyer represents the claimant, Rosecliff turns all "lawyer letters" over to the adjuster, and the adjuster picks up the dealings with counsel. When litigation ensues, the insurer undertakes the defense of the case, through attorneys who will or- dinarily be New Jersey lawyers; and the legal proceedings will take place in that State. Public liability accounts for the largest part of the premiums at issue-approximately $100,000. Chief Justice Weintraub, one of the most highly regarded State Supreme Court judges in the country, writing for the New Jersey Supreme Court, reviewed the facts relating to the public liability policy and said: "The insurers are obliged to investigate, to settle, to defend, and to pay. The stipulation of facts . . . reveals intensive activity in that regard. It is no answer to say, as Rosecliff does, that the insurers engage `independent contractors' to perform contracts for them; the fact remains that the obligation is the insurer's to perform, and it is irrelevant to the subject of taxation whether they perform through employees or through individuals who, as to the insurers, have the status of contractors." 62 The other policies involved no such extensive activity on the insurer's part, but the Court noted that the adjuster came to the amusement park in connection with the fire loss, a practice which it observed would be normal, and concluded that "such acts within the State would themselves be enough to support the tax." Chief Justice Weintraub concluded: ". . . Rosecliff is a New Jersey corporation, earns in this State the money with which it pays the premiums, draws its premium checks here, and . . . realistically, the policies are an integral part of the total business operation conducted in this State alone." 63 These decisions, as will be seen below when we apply the authorities to the operations of multistate banks, are among the forefront cases dealing with a business that presents many of the crucial questions involved in state taxation of banks, and they lend strong support to the constitutionality of state corporate net income and d oing business taxes as applied to multistate banks. ~2 245 A. 2d, at p. 325. "Idem, at p. 326. PAGENO="0549" 529 ~?. Equipment lea~ses as a basis for jurisdiction to levy income or business taxes The ownership of real estate, inventory, or other tangible personal property located in a State, and used by a taxpayer in its business, is typically made the .basis for an income or business tax.64 The power of the States to tax income from realS or personal property located within their borders is well established.65 Consequently, rents from real estate located in a State, and from personal property having its situs in the State, at least if there used by the taxpayer in its business, are taxable. The conduct of a business in a State, based on the owner- ship of real or personal property having a more or less permanent location there, would thus warrant the levy of an income or doing business tax.66 An issue was presented to the Oregon Supreme Court in a case having important bearing on equipment leasing by banks. In American Refrigerator Transit Go. v. State Tax Gommission, the taxpayer (ART) owned refrigerator cars, which it leased to operating railroads for use by them in rendering transportation service.67 ART had no rental agreement with any railroad operating in Oregon, but under railroad interchange practice, some of ART's cars aie interchanged with rail- roads that operate in that State. Servicing and light repairs are done by the railroads, but all major repairs are handled by ART outside Oregon. The refrigerated cars are delivered to the railroads by ART at various junction points outside Oregon, and ART has no control over their routing, movement, interchange or use. The State Tax Commission applied Oregon's net 8% income tax to ART on "its net income derived from sources within the State". That term as defined includes "income from tangible or intangible property located or having a. situs in this state". The tax was assessed on the rental income received by ART for the use of its cars while in Oregon; the rental is a fixed rate per mile of use. `While conceding that the presence of its cars in Oregon warranted the imposition of a property tax-which ART pays without objec- tion 68-the Oregon Tax Court had invalidated the net income tax under the Due Process~Clause, because of a lack of sufficient nexus between ART and the State, saying: "A review of the cases brings forth, from those cases in which sufficient nexus has been found, the presence of one salient and deter- minative feature which is not found in this case. In each of those cases finding sufficient nexus, there was, within the borders of the taxing state, a person or persons connected with, and engaged in business activities and transactions on behalf of, the proposed taxpayer. In the instant case there is no such person or activity in Oregon. . . . Thus the required nexus between tax and transaction fails for want of one of the elements which due process requires. * * * * * * * ° See, e.g., New York Tax Law, Sec. 209; 72 Pa. Purdon's Statutes, Sec. 1901. 65 Shaffer v. Carter, 252 U.S. 37 (1940). ° Cheney Brothers Co. v. Massachusetts, 246 U.S. 147 (1918). See, also, the emphasis placed on property In the State, in sustaining a doing business tax measured by gross proceeds of sales, in General Motors Corporation v. Washington, 377 U.S. 436 (1964). 67 238 Ore. 340. 395 P. 2d 127 (1964). 68 Apportioned property taxes on railroad moving stock regularly moving in and Out of a State were early sustained by the Supreme Court. Pullman's Palace Car Co. v. Pennsylvania, 141 U.S. 18 (1891). For a more recsnt case in that general line, applied to boats and barges, see Ott v. Mississippi Valley Barge Line Co., 336 U.S. 169(1949). PAGENO="0550" 530 "There is nothing that this state does or provides which has a con- nection with that income as such and for which it can exact its tax, especiafly having already exacted its property tax for the protection of the plaintiff's income-producing property." 69 The Oregon Supreme Court rejected this view of the nexus require- ment, saying: "We cannot accept the lower court's concept of nexus necessary to sustain the constitutionality of the tax imposed upon plaintiff. We do not regard it as essential to the existence of a nexus that the tax- payer, through its agents, directly engage in some form of physical activity within the state in furtherance of a business purpose. The connection between the taxing state and the out-of-state taxpayer necessary to establish nexus is essentially an economic rather than a physical relationship. "The nexus exists whenever the corporation takes advantage of the economic milieu within the state to realize a profit. The state is en- titled to tax if the benefits it provides are a substantial economic factor in the production of the taxpayer's income. These benefits are found in the maintenance of conditions essential to the pro.duction or marketing of goods. They may be realized simply in the protection of the taxpayer's property used in the production of income. Nexus may be found even where neither property nor per- sonnel of the taxpayer is employed within the taxing state if it can be said that the state substantially contributes to the production of the taxpayer's income." 70 The holding of the Oregon Court that the presence of leased `equip- ment in a State, used by the lessees in their business, affords a basis for imposing an income tax on the lessor, measured by the rentals, has the support of the Supreme Courts of Arkansas and Oklahoma,7' but a contrary decision has been re,ached in Kentucky.72 The question has not yet reached the Supreme Court of the United States. 3. The exploitation of a local market as a jurisdictional basis for imposing an income tax on an out-of-state corporation The. opinion in the Oregon case gives credence to the view that the exploitation of a local market by a corporation, not doing business in the State, establishes the constitutional power to impose an income tax, regardless of the presence or absence of employees, agents or property within the State. This general approach is likewise given some SUpl)ort by the opinions in the insurance premium tax cases. How far has the Supreme Court gone to accept or reject this viewpoint? 69 395 P. 2d, at pp. 129-130. 70 395 P. 2d, at pp. 130-131. The Court evoked the following comments from Professor Paul Hartman: Should not the exploitation of a state's markets for the capture of profits be enough for that state to demand something in return, thus satisfying the requisites of the due process clause? Several hundred travelling salesmen, no matter how avidly they hawk their wares, are not nearly as effective a `nexus' for an exploitation or invasion of a consumer market as a Dinah Shore or a Pat Boone as they croon their sponsor's products into the hands of thousands of purchasers on interstate television and radio. Is the state of market to be denied a tax from either the out-of-state seller or the broadcasting company because the contacts of such out-of-state sellers and broadcasters are ethereal only? Or, should a well-known milk company be permitted to milk the consumer market with the sonorous singing of ballads by hillfolk and western singers without paying its tithe to tne state of market on the ground that the interstate radio and television milking process is too ethereal?" Hartman, "State Taxation of Corporate Income from a Multistate Business", 13 Vanderbilt Law Review 21, 43 (1959). 7' Commissioner of Revenue v. Pacific Fruit Express Co., 227 Ark. 8, 296 SW. 2d 676 (1957); Oklahoma Tax Comm. v. American Refrigerator Transit Co., 349 P. 2d 746 (Okla., 1960). 72 Kentucky Tax Comm. v. American Refrigerator Transit Co., 294 SW. 2d 554 (Ky.. 1956). The Georgia Court held the rentals not taxable on statutory grounds in Williams v. American Refrigerator Transit Co., 91 Ga. App. 522, 86 SE. 2d 336 (1955). PAGENO="0551" 531 The Court has had to deal with this general contention in a different tax area from that here under consideration-the duty of the inter- state merchant to collect use taxes on sales made to persons residing in the taxing state. In National Beilas Hess v. Department of Revenue,73 a direct mail order merchandise house, a Delaware c'orj)oration, with its principal l)lace of business in Kansas City, Missouri, solicited sales of its wares by catalogues and fliers sent by mail to residents of Illinois. it maintained no office, warehouse, or other place of business in Illinois, and owned no proJ)erty there; it had no salesmen, representatives or other agents or employees in that State. All goods are mailed or sent by common carrier to the customer in Illinois from outside the State; all ~)ayments are made directly to National at its office in Kansas City. In considermg National's contention that the imposition of the duty to collect the use tax would violate the Interstate Commerce or the Due Process Clause, the Court began by observing that the two claims are closely related.74 It pointed out that the earlier (lecisions sustaining the power of the States to make an interstate seller a use tax collecting agent had been cases in which the sales were arranged by local agents in the taxing State,75 or in which a mail order seller maintained local retail stores in the State.76 in those cases, said the Court, "the out-of-state seller was plainly accorded the l)lotOction and services of the taxing state." n The farthest constitutional reach that the Court had approved up to that point was in 8cr ipto, Inc. v. Garson, where independent contractors, as distinguished from em~)loyees-therG were 10 wholesalers, jobbers or salesmen-con- ducted continuous solicitation of orders within the State.78 To extend this duty to collect use taxes to the mail order business, in the absence of such employees or agents, or retail stores in the State, would, the Court held, unduly burden interstate commerce. It stated that the "resulting impediments upon the free conduct of interstate business would neither be imaginary nor remote," referring to the numerous local taxes, the variations in rates and exemptions, and the book- keeping and filing of returns that would be required, which: "~ * * could entangle National's interstate business in a virtual welter of complicated obligations to local jurisdictions with no legiti- mate claim to impose `a fair share of the costs of the local government'. "The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements." n Using this Commerce Clause language, the Court held that the imposition of the duty to collect the tax was beyond the power of the State. The dissent by Justice Fortas, joined in by Justices Black and Douglas, reflects the genera.l l)oint of view~ of the Oregon court and of ~3 386 U.S. 753 (1967). ~ "For the test whether a particular state exaction is such as to invade the exclusive authority of Congress to regulate trade between the States, and the test for a State's compliance with the requirements of due proc- ess in this area are similar. . . . As to the former, the Court has held that `State taxation falling on interstate commerce . . . can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protectionit enjoys'. Freeman v. Hewit, 329 u.S. 249, 253. . . . And in determining whether a state tax falls within the confines of the Due Process Clause, the Court has said that the `simple but controlling question is whether the state has given anything for which it can ask return'. Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444". Compare Mr. Justice Rutledge's comments on the interrelations of the Commerce and Due Process clauses in International Harvester Co. v. Department of Treasury, 322 U.S. 340, 353 (1944). ~` General Trading Co. v. Tax Commission, 322 U.S. 335 (1944). Th Nelson v. Sears Roebuck & Co., 312 U.S. 359 (1941). ~ 386 U.S., at p. 757. ~ 362 U.S. 207 (1960). ~` 386 U.S., at pp. 759-760. PAGENO="0552" 532 some commentators, that the "large-scale, systematic, continuous solicitation and exploitation of the consumer market is a sufficient `nexus' " to permit a State to impose the duty to collect a use tax,'° and to warrant the levy of a tax on the income derived from the State in such market exploitation; and that neither the Commerce Clause nor the Due Process Clause debars that result.8' D. THE CONTOURS OF "INTRASTATE BUSINESS", THE JURISDICTIONAL FOUNDATION FOR A DOING BUSINESS TAX In the insurance premium and interstate selling cases considered above, the question as to whether the business being conducted within the taxing State was interstate or intrastate was not a central issue. The issue was whether there was a sufficient nexus to the State to satisfy the Due Process Clause. We must now come to grips with the delimitation of the scope of interstate, a.s compared with intrastate, business. This distinction is of particular importance in the taxation of banks, because of its bear- ing on the taxation of income from Federal securities and the use of the securities themselves in the tax base. The problem arises out of another conceptual distinction-some commentators have categorized it as "metaphysical"-between the subject and the measure of taxes. The States are debarred by the intergovernmental immunity doctrine and by Federal statute from applying their income taxes to the interest on Federal securities or from subjecting the securities to an ad valorem tax.'2 Nevertheless, the States may include in a net income measure of an excise, such as a doing business tax, the interest that Federal securities throw off, or, in a capital stock measure, the securities themselves.'3 Because "banks hold a large proportion of their total assets in federal, state and local government bonds, the base of a direct income tax on banks is probably less than half as large as that of an excise tax on net earnings from all sources".'4 The result is that most States that tax banks with respect to their net income use excise taxes." Unless Congress should modify the existing rules of immunity, the question as to whether a multistate bank is doing an intrastate busi- ness within the taxing State can have a very significant effect on both State revenues from banks and the magnitude of the liability of mdi- vidual multistate banks. We therefore consider the scope of the "intrastate business" as it relates to banking activities. In approaching this matter, the conclusion reached above becomes relevant, namely, that once a foreign corpora- tion is found to be engaging in a locally taxable activity, the tax 0 386 U.S., at pp. 760-766. `1 See Hartman, op. cit., supra, Note 70. 82 Weston v. charleston, 2 Pet. 449 (1829); 31 U.S.C. Sec. 742; see Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429. 524 (1895); Thomas Reed Powell, "The Waning of Intergovernmental Tax Immunities", 58 Harvard Law Review 633 (1945), and "The Remnant of Intergovernmental Immunities", id., at p. 757 (1945). 83 Flint v. Stone Tracy Co., 220 U.S. 108 (1911); Plummer v. Cole, 178 U.S. 115 (1900); see Helvering V. Gerhardt, 304 U.S. 405, 418-419 (1938). For a list of States that currently impose taxes on, or measured by, net income, see Sally Hey, "Information and Opinions Supplied by State Bank Tax Administrators", Part III, Report of the Bank Tax Study, appendix 4, at pp. 74-89, 126, and 127. 84 See Samuel B. Chase, Jr., "State Taxation of Banks," 32 Law and Contemporary Problems (Winter 1967), Symposium on Banking: Part II. Developments in Banking, 149, 157; also the paper by Harvey E. Brazer and Marjorie C. Brazer, appendix 9, at pp. 399-414, supra. 85 See Chase, Note 84, supra, at p. 155. PAGENO="0553" 533 measure may include income, assets, and the like, which are used exclusively in interstate commerce.86 The maintenance of a sales office within the State, to which are attached salesmen who carry on regular and continuous solicitation of orders in the State, was treated as interstate activity in the North- western-Stocicham Valves cases, and, hence, would iiot lay a foundation for a franchise or other excise tax on doing business (although it did furnish the Due Process nexus requisite for the direct net income taxes there sustained) 87 Other longstanding decisions of the Court have, however, perm itte(l corn paratively minor ancillary activities carried on locally to be used as the basis for finding an intrastate business, which lays the foundation for an excise on doing business, that in turn, sweeps into the measure of the tax the income from, or capital dedi- cated to, interstate business. 88 The principle is illustrated by the 1918 decision in Oheney Brothers Go. v. Massachusetts, decided in an era when Supreme Court (loctrine was interpreting the Commerce Clause as imposing far stiffer barriers to State taxation than now prevails.89 The tax at issue was a Massa- chusetts excise on doing business, measured by authorized capital stock; the opinion treats with seven taxpayers, three of which are here relevant. Cheney Brothers was a Connecticut corporation that manu- factured silk outside Massachusetts, and maintained an office in Boston, to which were attached salesmen who solicited orders and transmitted them to Connecticut for acceptance; the orders were filled by shipment to the customer across State lines. The tax was invali- dated because the Court found that the corporation was engaged ex- clusively in interstate commerce. Lanston Monotype Corn pany likewise rn anufactured its product, typesetting machines, outside the State, "and sells them in interstate commerce". Lanston had a place of business in Massachusetts "where it keeps on hand a stock of the several parts of its machines likely to be required for purposes of repair . . . and the parts are sold exten- sively to those who use the machines in that and adjacent States'~. Because the Court found that "a considerable portion"of the business of selling and supplying the repair parts is "purely local and subject to local taxation", it sustained the doing business tax.9° In the case of Locomobile Company, which manufactured auto- mobiles in Connecticut and sold them in "interstate commerce", the "extensive local business in M assachusetts" in repairing Locorn obiles, and reselling other cars in trade, was held to constitute intrastate 86 The discussion and the problems are not limited to net income and capital stock measures. Some States use gross income or gross receipts measures for their privilege or other doing business taxes. See, e.g., New Mexico Stats. Ann., Sec. 72-16A--4 (1953, Repi. Vol. 2, Part 2, and Supps.); and the Business and Occupation Tax of the State of Washington, which is considered in General Motors Corp. v. Washington, 377 U.S. 436 (1964). While direct gross receipts taxes encounter Commerce Clause barriers that are not present in direct net income taxes (Adams Manufacturing Co. v. Storen, 304 U.S. 307 (1938)), once an intrastate business is being carried on, the States have the power to impose doing business taxes, measured by gross receipts or gross income, in essentially the same circumstances as such levies measured by net income. See General Motors Corp. v. Washington, supra. The apportionment and allocation of gross receipts may, however, present their own special problems. 87 It is interesting to observe that in enacting P.L. 86-272, 15 U.S.C., Sec. 381, Congress apparently regarded the maintenance of an office, including a sales office, as justifying state taxation of the income of an interstate vendor. 88 There is a New York State court decision in wnich some of the ancillary activities that in other cases would probably have laid the basis for a doing business tax, were disregarded as de minimis. United Piece Dye Works v. Joseph, 282 App. Div. 60, 121 N.Y.S. 2d 683 (1st Dept. 1953), aff'd 307 N.Y. 780, 121 N.E. 2d 617 (1954), certiorari denied, 348 U.S. 916 (1955). The Supreme Court, however, has not enunciated such a doctrine. 89 246 U.S. 147 (1918). 90246 U.S., at p. 154. PAGENO="0554" 534 business, on the basis of which the State was empowered to impose the tax. The Court rejected the argument that because the local (repair) business had some influence on the volume of interstate business done by the Company in the State, the tax was invalid.9' E. THE APPLICATION OF THE CONSTITUTIONAL PRINCIPLES TO THE BUSINESS OF MULTISTATE BANKS: INCOME AND BUSINESS TAXES In applying the Commerce Clause and Due Process guiding prin- ciples, developed in the foregoing materials, to corporate net income and business taxation of banks, I propose to consider both clauses together, because, as set out above, the two clauses are closely related, and the judicial tests developed in interpreting the two clauses are similar." The presence of l)ersonnel within a State, on a regular and con- tinous basis, was a key element in establishing nexus in the interstate vending cases in which direct net income taxes were sustained. The traveling representatives of multistate banks, who periodically visit various States in order to look after the bank's existing business, if not to solicit loans, to solidify relations for future loans and other business, and to maintain and develop relations with respondent banks, may in part be analogized to traveling salesmen in the inter- state vending cases. The analogy to cases such as Northwestern- Stockham Valves is not complete, because in those cases the salesmen had offices in the taxing State, which the multistate banks typically do not maintain. The insurance cases, however, in which services were rendered by persons who were not attached to any office of the taxpayer in the State, indicate that clue process requirements may be satisfied even though no office is maintained and no personnel are regularly stationed in the taxing State.93 The use by out-of-state banks of local agents, includii~g lawyers, to file security and enforce liens and collect on defaulted loans is very much akin to the use of lawyers, investigators and doctors in the insurance cases; and the holding in tile Rosecliff Realty case that juris- diction to tax attaches through the activities in the State of an agent who is an "independent contractor" has the imprimatur of the Supreme Court.'4 The correspondent banking system adds another important dimen- sion to tile presence of tile multistate banks in the States in which their respondent banks are located. Where the legal form is that of joint lending, the respondent bank may be acting as agent for the multi- state bank in the negotiation of the loan, the investigation of the borrower's credit, and the preparation and execution of the loan agree- ment and security instruments. Typically, these documents are signed by the customer in the respondent bank's office. Servicing of the loan, the receipt of payments, examination of reports of compliance with conditions of the loan, steps to collect in the event of delay or default in_payment-these are also likely to involve actions in the local State 91 246 U.S., at p. 154. ~ Sea Note 74, p. 4t1, supra. `~ Periodic visits by out-of-state divisional representatives of General Motors to the!State of Washington tofacilitate and promote local sales and improve service and relations with local dealers, was a factor relied ollby the Court in upholding the huriness tax in General Motors Corp. v. Washington, 377 U.S. 436 (1064). ~ Scripto, Inc. v. Carson, 362 U.S. 207 (1960). PAGENO="0555" 535 by the respondent on behalf of the multistate bank. The servicing of account receivable loans, construction mortgage, and other compli- cated lending transactions may produce a considerable amount of local activity on behalf of an out-of-state participating bank.95 This presence is further augmented by the variety of sporadic and irregular activities carried on directly by the bank's employees in States away from the home office and by other banks acting as its agents. This area includes bids made on behalf of an underwriting syndicate of banks with respect to bond issues, and participations in large loans made by a group of banks. Here again, the out-of-horn e- state actions may include negotiations, the preparation and execution of legal documents, closings, servicing in the case of a loan, actions on defaults, modifications of the loans, and the like. Then, there is the modern development of leased equipment, which has vested in banks, or their nominees, large amounts of tangible prop- erty scattered over the country. While I am dubious that the Su- preme Court would be likely to hold that the location in a State of leased equipment, used there by the lessee in its business, constitutes the doing of business in the State by an out-of-state bank which owns the equipment,96 nevertheless, this factor could readily be thrown into the hopper as part of the larger complex, and be given some weight in deciding whether an intrastate business is being conducted. On the contrary, I do not put much stock in the likelihood that the Supreme Court would accept an argument that the mere existence of a large amount of loans to residents or corporations within the State constitutes property in the State that would justify a doing business tax.97 Nor are the extensive holdings over the country of stocks, bonds and real estate by banks as executors of wills, trustees of inter vivos and testamentary trusts, and under employee pension plans likely to be taken into account in deciding whether the banks, qua banks, are tax- able in the State. At the outset, it is to be noted that there are state statutes that exonerate banks from being deemed to be doing business ~` There are state statutes which provide that an out-of-state bank may make loans in the State, acquire and hold mortgages and other security on real and personal property, on its own behalf or as trustee, inspect the property, bring suit to collect on the loans and foreclose on security, etc., without being deemed to be doing business in the State. See, e.g., California Corporations Code, Sec. 6450; Illinois Business Corporations Act, 32 Smith Hurd, Ill. Annotated Statutes, Sec. 212. (For a review of these statutes, see supra, supple- mentary note to appendix 10 of the Bank Tax Study.) These statutes are designed to exempt the out-of-state banks irons the requirement of registering to do business in the State and to prevent their being barred from collecting on the loans in the Courts of the State for failure to register. Of course, if the States should decide to rely on the lending activities and the taking and holding of security to support a doing business tax on out-of-state banks, these statutes would have to be amended so as to be inapplicable to tne taxing statute. The existence of such statutes is not relevant to the constitutional power of the States to tax out-of-state banks, which is the concern of our inquiry. Nevertheless, the repeal of such safeguards for banks, built over the years into corporate statutes, may in fact be both undesirable and extremely difficult to accomplish in State legislatures. 56 W'hat constitutes "doingbusiness" by a foreign corporation in a State is not the same issue as to whether income has been derived from "sources within the State", although the questions are not unrelated. It is for that reason that it is by no means clear that, if the Supreme Court were to accept the rule of the American Refrigerator case and uphold direct income taxation of rentals from leased equipment used by a lessee in the State, it would also hold that the lessor is thereby doing business in the State. The same doubts would be applicable to the consequences of the Court's following State cx rd United States Sugar Corp. v. Gay, Note 44, supra. 97 The argument would run as follows: The existence of a large amount of loans, owed by debtors located in the State, establishes that the multistate bank is maintaining property in the State, relying on the reinstate- ment of Blackstone v. Miller to establish that the debts have a situs within the State. (See Part II, infra.) And just as the ownership of inventory or real estate in a State warrants the levy of a franchise or doing business tax, so the locus of the intangible debts justifies the levy. This appears to me to be pressing the im- pact of Blackstone v. Miller too far; it would mean that every interstate merchant who has customers in the State who owe him for goods purchased. would be subject to a doing business tax. I doubt that the Supreme Court is ready to push the law to that point, See, also, the statutes referred to in Note 95, supra. PAGENO="0556" 536 in the State by reason of such fiduciary activities. 98 Although the trust or estate itself may be taxable in the State,99 and conceivably the bank may be subject to income tax for any trustee's or executor's fees it may be deemed to earn from sources within the State, none of this would be likely to have much bearing on the treatment of other aspects of the bank's activities in the State so as to subject it to a general income tax, or in deciding whether the bank is doing business in the State. To be sure, theoretically, the States have the power to modify these statutes, by declaring that they are to have no application in deter- mining whether the out-of-state bank is taxable, but such a develop- ment is highly unrealistic. It is extremely unlikely that the States will be moved to disrupt these long-standing safeguards, which have been built up at the behest of banks in order to enable them to accommodate to the needs of the country's mobile wealth that winds up in estates and trusts, and more recently, in pension plans. Consequently, in my judgment, the fiduciary activities of banks and their holdings as fiduciaries ought to be disregarded in evaluating the taxing jurisdiction of the State over banks.10° Promotion and advertising to obtain loan business and deposits from residents of other States, and to develop the credit card business, are, I believe, activities to be taken into account. While we do not have data as to the amount of expenditures for these purposes, there appears to be a considerable amount of advertising and promotion in news- papers, magazines, over television and radio, and by mail order that transcend State lines. The competition for depositor's funds in recent years, given the tight money market, has also seen vigorous newspaper and other advertising that reaches beyond State lines. `While such exploitation of a State's market, taken alone, has not been accepted by the Supreme Court as warranting taxing jurisdiction, it is unlikely that it would he ignored when it is part of an overall package of other activities in a State, in judging whether an intrastate business is being conducted. In the analysis made of the judicial decisions, I reached the con- clusion that, once the permanent provision of P.L. 91-156 becomes effective, the States in which debtors to whom multistate banks have loans outstanding reside or maintain their dorniciles, will be empowered to levy income taxes on the income realized by the banks from the ° State statutes over the country authorize banks to act as executors or trustees within the State on com- plying with stated conditions, such as the filing of copies of the will or trust instrument with the state author- ities. These statutes do not require compliance with the laws of the State relative to qualification of foreign corporations to do business in the State. See, e.g., Illinois. 32 Smith-Hurd Annotated Statutes, Sec. 304.2. The statutes of the various states are collected in 4 Prentice-Hall, Wills, Estate and Trust Service, Par. 17,101. Thus, in Massachusetts a bank organized under the laws of another State may obtain a certificate authorizing it to act in a fiduciary capacity within the State, provided the bank's home state grants a recip- rocal privilege to Massachusetts banks. Mass. General Laws Annotated, Ch. 167. Sec. 45A. The certificate will not be issued unless the bank agrees to "pay any such taxes. . . as may be levied or imposed upon it in the commonwealth." It also provides that: "Such a corporation . . . to the extent only that it acts a~ fiduciaì-y as hereinbefore authorized, shall not be deemed to transact business in the commonwealth for purposes of sections thirty-seven to forty-five inclusive", which prohibit out-of-state banks from transacting business without a certificate of authorization. 99 See Greenough v. Tax Assessors of City of Newport, 331 U.S. 486 (1947). 1® The taxation of the business of banks, because of their activities in a State as fiduciaries, presents different problems from taxing banks on account of their lending activities. In the former case, the trusts and estates or the distributee-beneficiaries are already typically subject to income tax on income derived from sources within the State, and the corpus to property taxes. But the borrower's State collects no revenue from the out-of-state lender's loans. hence, although we are here, of course, speculating, the States are, in my view, more likely to be moved to provide that the exoneration statutes applying to out-of-state lending are not to be taken into account, in determining whether an out-of-state bank is doing business in the State for tax purposes or is to be subjected to the State's general corporate income tax, than in the case of fiduciary activities. PAGENO="0557" 537 loans. No more need he established to warrant the imposition of a direct net income tax than the existence of the loans to local debtors. When we treat with corporate franchise or other excise taxes on doing business, whether measured by net income, gross receipts, capital stock, or otherwise (and with general corporate net income taxes), more activity and more localized connections within the State are required to justify the levies. The judicial test in the doing business tax cases is whether an intrastate business is being done, for which the state may exact the levy. The character of this tax appears to require, inter alia, that the out-of-state corporation carry on a more or less continuous business which, to use the tantalizingly vague stand- ard established by the Supreme Court, is "apart from the flow of commerce", or is "sufficiently separate from the interstate commerce" to he treated as a local activity.'9' The requisite regularity and continuity of the business carried on by at least many multistate banks *outside their home States are clearly present. We are not here dealing with banks that occasionally make a loan to a customer in another State, but with a continuous flow of banking activities regularly carried on in various States, in- duced by a considerable amount of advertising and promotion. That the multistate banks maintain a "presence" in the States in which they operate likewise appears from the foregoing summary of the activities of their employees and agents within such States. The crucial question is: Is this an "interstate" presence, like that of the salesman who takes orders that in form at least must be approved by the home office, or do the activities of the employees a.nd agents of the multistate bank add up to an "intrastate" presence in the various States? The States can, in my opinion, make out a persuasive case for the view that a local, intrastate business is being carried on by the em- ployees and agents of the multistate bank. The visitations by the multistate bank's representatives to confer with customers and cor- respondents, to maintain and develop business, to iron out problems, and to visit the customer's plants are not unlike the maintenance in the State of properties used in interstate commerce,'°2 or the rendition of ancillary services to customers who purchase goods shipped into the State from out-of-state l)lants; 103 these have been held to constitute the conduct of an intrastate business. And the activities of the re- spondent banks on behalf, or as agents, of their out-of-state correspond- ents in handling participation loans, take on a distinctly local charac- ter; the making of contracts within a State has traditionally been regarded as local commerce. `When to this is added the servicing and collection of loans, and the use of the local courts by the bank's repre- sentatives to collect debts and foreclose on security, the case is very strong, indeed, for the conclusion that at least many multistate banks maintain a considerable "presence" in the local States through em- ployees and agents, who are conducting on behalf of the banks, a local business that is "apart from the commerce itself". Ill See Memphis Natural Gas Co. v. Stone, 335 U.S. 80, 87, 90 (1948). `°` See Memphis Natural Gas Co. v. Stone, Note 101, supra; West Publishing Co. v. McColgan. 328 U.s. 823 (1946), affirming per curiam, 27 Cal. 2d 705, 166 P. 2d 861 (1946). 103 Cheney Brothers Co. v. Massachusetts, 246 U.S. 147 (1918). PAGENO="0558" 538 Finally, the sheer magnitude of the lending and other services provided by at least the larger multistate banks in the markets over the country may add weight to the conclusion that intrastate business is being carried on by them.'°4 Given the fact that an estimated nearly 30% of all business loans outstanding by member banks were made to customers located outside the home States of the banks, it is apparent that a very substantial loan business is being handled over the country by multistate banks.105 Viewing the overall presence of personnel, the entire range and magnitude of activities being carried on by, or on behalf of, multistate banks in States outside their home states, I conclude by paraphrasihg one of its opinions that the Supreme Court is likely to "approve"a "State's decision to regard such a rivalry with its local merchants (here merchants of banking) as equivalent to being a local merchant".'°t The authorities, and particularly the decisions of the Supreme Courts of California and Wisconsin sustaining the taxation of out-of-state mail order insurance companies, decisions which were certified by the Supreme Court as within the constitutional powers of the States, are highly persuasive precedent for sustaining the power of the States to impose doing business taxes and, a fortiori, general net income taxes on multistate banks.107 Accordingly, it is my opinion that in the event the permanent provisions of P.L. 91-156 should come into effect unamended, the States would be empowered to impose doing business taxes or general corporate net income taxes on the typical multistate banks here described; that the doing business taxes could be measured by net income, capital stock, gross receipts, or other base properly apportioned or allocated to the State, embracing the segments of the base involving interstate, as well as intrastate, business. F. THE STATE BORDER BANK Taxation of the State border banks, as that term is described in the summary of facts set out above, presents somewhat different problems from those of the type of multistate bank to which our attention has been directed up to this point. The State border bank's business is conducted largely through its home office; while at times its employees go into the neighboring State to negotiate loans or investigate borrowers, this is likely to be on a sporadic and irregular basis. Th bank is, however, likely to engage in promotion and advertising that reach the market in the neighboring State for loans, deposits, credit cards, and the like. Under the cases discussed above, there is no Due Process or Commerce Clause barrier to the imposition on State border banks by their neighboring States of a direct net income tax on income~ derived from sources within the State, such as interest on loans to residents or businesses domiciled in the State; and, if the American Refrigerator Transit case should be followed, rentals attributable to the use of the equipment in the State likewise would be taxable. `°` There is an intimation in Field Enterprises, Inc. v. State of Washington, 47 Wash. 2d 852, 289 P. 2d 1010 (1955), affirmed per curiarn 352 U.S. 806 (1956), that interstate selling, if carried on at a sufficiently large scale within a State, may take on an intrastate character. This is considered in Jerome R. 1-lellerstein State and Local Taxation: Cases and Materials, 184-185 (3rd ed. 1969). For a comment on the case see Richard L. Strecker, "Local Incidents of Interstate Business", 18 Ohio State Law Journal 69 (1957). `°` See Summary of the Major Facts, pp. 435-36, supra, in this appendix. `°° See Miller Brothers Co. v. Maryland, 347 U.S. 340, 346 (1954). 107 While the insurance cases cited deal only with the Due Process and not the Commerce Clause, I have set out above the view of the Supreme Court that essentially the same considerations govern both clauses. PAGENO="0559" 539 Credit card income presents somewhat complicated and perhaps novel l)roblems in determining the "source" of the income, but one way to look at the transaction is that every time a customer uses the border State bank's credit card in the neighboring State in buying goods, or renting a car, or the like, he acts as agent for the State border bank in creating an obligation by the bank to pay the merchant or car rental agency.108 Likewise, the credit card holder at the same time is thereby borrowing from the bank, so that a loan is made in the State where the transaction takes place. While there may be other ways of analyzing the legal consequences of a credit card transaction, however one views the matter, legal relations, including a debt and a loan, are created by acts taking place in the State of the purchase or rental, and ultimately the State border bank will derive income from the transaction, which might well justify the levy by that State of a properly apportioned net income tax on this income.109 There may be other miscellaneous income derived by State border banks from the neighboring States which might be taxable under a direct net income tax. For example, if a bank renders electronic data service to customers in the adjoining State and sends its employees into that State to carry on some of this work, a J)art of this service income would be derived from sources within that State, and wou1d~ be taxable by it. In general, however, if the bank conducts its business as outlined above, particularly if it is not a large institution, has no respondents in the State, and its employees (10 not spend any consid- erable amount of time in the neighboring State, it appears unlikely that the Supreme Court would hold that the neighboring State may subject it to a. franchise or other excise tax for the ~)rivilege of doing business there. Nevertheless, the state of the law in this area is by no means neat and clear, and the innumerable variety of particular transactions and banking services involved could result in State court decisions adverse to l)articular State border banks. In view of the fact that we are here considering banks that would ordinarily not he large institutions-if they fall into the latter category, they are likely also to be multistate banks, as we have used that term, and be subject to the principles outlined above-and inasmuch as the State revenues at stake would be comparatively small, it is, I believe, wise to recommend congres- sional action proscribing income or doing business taxation of such banks by the neighboring States. The costly controversies that would thereby be avoided in cases in the penumbra between taxability and non-taxability and the sheer administrative expense of taxpayer compliance with the tax laws and of audit by the States, given the comparatively small amounts of revenues involved, would, in my opinion, adequately justify this recommendation. To accomplish that result, the most appropriate technique, in my view, would be to impose a quantitative minimum standard of receipts or income that must be derived from the State before it would have jurisdiction to impose income or doing business taxes on an out-of-state bank. 108 For a consideration of the proper legal treatment of credit card transactions, see Thompson, "The Applicability of the Letter of Credit to Modern Bank Card Systems", 18 University of Kansas Law Review 871 (1970). 100 It is my understanding that the bank issuing the credit card frequently interposes a separate wholly- owned corporate entity-a credit card subsidiary-between itself and the customer. However, since the funds are provided by the bank, which winds up with this income, if there is a profit, it is likely, in many States at least, that the separate entity of the credit card affiliate would be ignored, or that its income would be combined or consolidated with that of the bank. PAGENO="0560" 540 G. CONCLUSIONS WITH RESPECT TO JURISDICTION TO IMPOSE NET IN- COME AND BUSINESS TAXES ON OUT-OF-STATE BANKS 1. Many banks are engaged in businesses outside their home states which, it is be]ieved, would be held by the Supreme Court to con- stitute, in part at least, interstate commerce. 2. Under the current doctrine of the Supreme Court, the Commerce Clause does not prohibit the imposition by the States of a direct net income tax, properly apportioned or allocated to the State, on an out-of-state corporation conducting an exclusively interstate business within its borders. However, the Commerce Clause does prohibit excise taxes imposed on a foreign corporation for the privilege of doing an exclusively interstate business within the State. This principle extends to excise taxes measured by net income, capital stock, grOss income, gross receipts taxes, and the like. 3. A foreign corporation (which is not an instrumentality of inter- state commerce, such as a railroad or an airline) conducting within the State an intrastate business, along with its interstate business, may be subjected to a franchise tax or, other excise tax on doing business. Although the subject of such taxes is the privilege of doing an intrastate business, they may, nevertheless, be measured by income, capital stock, gross income, gross receipts, or otherwise, from all aspects of the business conducted in the State, interstate as well as intrastate. 4. The Due Process Clause proscribes extraterritorial taxation, by requiring that there be a "nexus", or "some definite link", between the out-of-state corporation, its personnel, its activities, its income, its receipts or property, and the taxing State, as a basis for State income or business taxes. 5. Net income taxes may, in my opinion, be levied on out-of-state banks, including national banks, unless protected by immunity from state taxation, with respect to interest or other income derived from loans made to residents of the State, or *to businesses maintaining their commercial domiciles within the State. Moreover, although the Supreme Court has not yet Passed on the issue, the highest courts of some States have upheld the application of corporate income taxes to rentals derived by an out-of-state corporation from leased equipment, owned by it and used by the lessee within the taxing state. 6. The permanent provisions of P.L. 91-156, which are designed to waive the immunity of national banks from state taxation, would place out-of-state national banks, vis-a-vis state taxation, in the same position as other foreign corporations. As a result, once the permanent provisions become effective, the constitutional principles outlined above will be applicable to national banks. 7. The established doctrine, that once a foreign corporation engages in the conduct of an intrastate business within a State, it may be subjected to an excise tax measured by income, property, receipts, and the like, from its interstate as well as its intrastate business within the State, has particular significance in bank taxation. This grows out of decisions of the Supreme Court dealing with the immunity from taxation of Federal securities. Under the authorities and the Federal statute, neither the Federal bonds themselves nor the income they throw off may be taxed directly by the States, but the bonds and the income are includible in the measure of excise taxes, including taxes PAGENO="0561" 541 on doing business. The consequence of these decisions is that a sub- stantial part of the income of banks would be excluded from the tax base of a direct State net income tax, but if the bank is engaged, in part at least, in an intrastate business, this income could be included in the base of a doing business tax, measured by net income; and the securities could be included in the base of a doing business tax, measured by capital stock. 8. A review of the banking activities conducted by typical multi- state banks in States other than their home States, leads me to conclude that the Due Process nexus requirements for a direct State income tax would be met in the case of the typical multistate bank. Multistate l)anks that carry on lending or other activities outside their home States, on a more or less regular or continuous basis, act as correspond- ents for banks in other States and engage in loan participations with them, and carry on the miscellaneous activities in such States that are a normal part of the business of regional and nationwide banking institutions, would, in my opinion, be held to be doing an intrastate business in such States. Consequently, they would also be subject to doing business taxes in those States. 9. The smaller State border banks that do not engage in the mag- nitude or variety of out-of-state business of the multistate bank, as we have used that term, but regularly make loans to residents and busi- nesses of the neighboring State, receive deposits and issue credit cards, 1)rovide some miscellaneous banking services to them, and utilize adver- tising that reaches into the neighboring State in order to solicit this business, would, in my opinion, be subject to income tax by the neigh- boring State with respect to income from loans, and probably on some income from the miscellaneous activities. On the other hand, the case for the imposition by the neighboring State of a doing business tax on such a State border bank appears to me to be considerably weaker and open to question und er the Due Process Clause, unless the bord er bank's activities begin to loom sufficiently large as to link it to the neighboring State in a manner that begins to push the bank into the category of a multistate bank. PART II PROPERTY TAXES National banks have long been subject to real property taxes im- posed by state and local governments under R.S. 5219, and P.L. 91-156 leaves this power unchanged. There appears to be no reason for recommending Federal legislation in this area to alter existing practices. Likewise, shares of stock in banks are subject to intangible property taxes under Section R.S. 5219, and continue to he taxable under P.L. 91-156. There are thirteen States which tax bank shares, and no good reason has been advanced for congressional limitation of State taxation in this area.' The controversial issues with respect to property taxation relate to intangible property held by banks, i.e., taxes on credits, bonds, stocks and other intangibles, for these are levies that the States have been denied as to national banks under R.S. Section 5219; they will be empowered to impose such a tax if the section remains in its 1 See supra, appendix 4; chase, "State Taxation of Banks," in Symposium on Banking, 32 Law and Con. temporary Problems (Winter, 1967), 149, 154. 79-421 0 - 72 - 36 PAGENO="0562" 542 present amended form. These levies, which have diminished in use over the years, are not now widely employed and have never been effectively enforced. Where such intangible property taxes are still used, they are frequently imposed at rates lower than those applied to real property.2 The Supreme Court's treatment of State taxation of intangibles under the Due Process Clause has come full cycle during this century. In 1903, Mr. Justice Holmes handed down a decision upholding the power of the State of New York to include in its inheritance tax on the estate of a resident of Illinois, a debt due him by a New York firm and a large deposit in his account with a New York bank. The Court sustained the tax against the contention that New York had no jurisdiction to include the debt in its inheritance tax, and that to do so would violate the Due Process Clause.3 Recognizing that Illinois could tax the intangibles owned by a decedent domiciled in that State, the Court, nevertheless, sustained New York's tax. The rationale was that the Due Process Clause does not debar taxation of the same property by more than one State; what the Due Process does forbid is extraterritorial taxation; and here the jurisdictional basis for the tax (viz., "nexus", the term developed in later cases) was explained as follows: "If the transfer of the deposit necessarily depends upon and involves the law of New York for its exercise, or, in other words, if the transfer is subject to the power of the State of New York, then New York may subject the transfer to a tax. But it is plain that the transfer does depend upon the law of New York, not because of any theoretical speculation of the whereabouts of the debt, but because of the prac- tical fact of its power over the person of the debtor. . . . What gives the debt validity? Nothing but the fact that the law of the place where the debtor is will make him pay. "Power over the person of the debtor confers jurisdiction, we repeat. And this being so, we perceive no better reason for denying the right of New York to impose a succession tax on debts owed by its citizens than upon tangible chattels found within the State at the time of the death." ~ In 1930 the Supreme Court repudiated Blackstorte v. Miller and enunciated the doctrine that the Due Process Clause does generally forbid double taxation of intangibles. It followed the ancient maxim of mobilia sequuntur personam, with the consequence that the State of the domicile of the owner could tax intangibles, and not the domi- cile of the debtor. Accordingly, it held unconstitutional a ~\`1innesota inheritance tax imposed on a non-resident decedent, with respect to bonds held by him that had been issued by the State of Minnesota.5 That set of constitutional precepts prevailed for less than ten years. The rule of Blaclcstone v. Miller that the Due Process Clause does not proscribe double taxation, was reinstated in 1939, with respect to the 2 See supra, Shoup, appendix 7, 377-83; also appendix 4. 3 Blackstone v. Miller, 188 U.S. 189 (1903). Idem, at pp. 205-206. It is to be observed that Mr. Justice Holmes was of the view that in the case of tangible personal property, as well as intangibles, there is no constitutional proscription on taxation both by the State of the owner's domicile and the State where the tangible is more or less permanently located. This view was rejected by the Supreme Court as to tangibles, and that rejection still prevails today, so that under the Due Process Clause, only the situs of tangible personal property may impose property taxes, or include such property in a death tax. Frick v. Pennsylvania, 268 U.S. 473 (1925); Treichler v. Wisconsin, 338 U.S. 251 (1949). See Professor Boris Bittker's dissent from this holding in "The Taxation of Out-of- State Tangible Property", 56 Yale L. J. 640 (1947). Farmers Loan & Trust Company v. Minnesota, 280 U.S. 204 (1930). PAGENO="0563" 543 taxation of intangibles.6 The rule, which still obtains at present, was described by the Court in a later case in these words: "We held that the power to tax intangibles was not restricted to one State, whether `we regard the right of a state to tax as founded on power over the object taxed . . . through dominion over tangibles or over persons whose relationships are the source of intangible rights; or on the benefit or protection conferred by the taxing authority, or both.' " ` Under these guiding principles, the Supreme Court has also sus- tained inheritance taxes on shares of stock owned by a decedent that were levied by the State of incorporation of the company, even though the decedent had no other connection with that State.8 The same rules apply to ad valorem taxes on shares of stock.9 During the earlier era in which the more restrictive view of the taxing powers of the States governed, the Court had carved out two important exceptions to the rule that intangibles have a single situs for tax purposes. If intangibles have become an integral part of a business carried on in a State, they acquire a "business situs", and may be taxed in that State, while still remaining taxable by the State of the owner's domicile.'° And if the State of incorporation is essentially only a formal, legal domicile, and the principal seat of the corpora- tion's activities is in another State, as often happens with Delaware incorporations, the latter becomes its "commercial domicile" and may tax all the intangibles." At the same time the State of incorporation, having given the corporation its legal existence, appears to retain its full power to tax the intangibles, despite the corporation's out-of-state commercial domicile.'2 The business situs cases are of particular relevance to State taxa- tion of loans and credits of multistate banks, because they arose largely out of lending activities of out-of-state corporations, carried on in* jurisdictions in which they were not qualified to do business.1' Those were cases in which the out-of-staters, frequently northeastern banks and insurance companies making loans to residents of southern States, carried out more or less continuous loan activities, acting through local agents who handled the business for them. As indicated above, property taxes on the loans levied by the local jurisdictions were upheld, under "the principle that choses in action may acquire a situs for taxation other than at the domicile of their owner if they become parts of som e local business".'4 The reinstatement of Blaclcstone v. Miller and its holding that the State in which the debtor resides, or has its principal seat of business, 6 Curry v. McCanless, 307 U.S. 357 (1939); Graves v. Elliott, 307 U.S. 383 (1939); State Tax Commission of Utah v. Aldrich, 316 U.S. 174 (1942). The history is traced in Jerome R. Hellerstein and Edmund B. Hennefeld, "State Taxation in a National Economy", 54 Harvard Law Review 949 (1941). As to tangibles, see Note 4, supra. State Tax Commission of Utah v. Aldrich, Note 6, supra. 8 See Note 7, supra. Greenough v. Tax Assessors of Newport, 331 U.S. 486 (1947). 15 First Bank Stock Corp. v. Minnesota, 301 U.S. 234 (1937); see Thomas Reed Powell, "Business Situs of Tax Credits", 28 W. va. L.Q. 89 (1922). For a more recent case discussing and applying the business situs doctrine, see John Hancock Mutual Life Insurance Co. v. Neill, 219 P. 2d 195 (Idaho, 1957). ii Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936); see also. Southern Pacific Co. v. McColgan, 68 Cal. App. 23,156 P. 2d 81(1945), and United Gas Corp. v. Fontenot. 241 La. 488, 129 So. 2d 748 (1961), which contain extensive discussions of both the doctrines of "business situs' and "commercial domicile". 12 Cream of Wheat Co. v. Grand Forks, 253 U.S. 325 (1920); see the concurring opinion of four Justices in Newark Fire Insurance Co. v. State Board, 307 U.S. 313 (1939); and Commonwealth of Pennsylvania v. Universal Trades, 392 Pa. 3271, 141 A. 2d 204 (1958). 13 New Orleans v. Stempel, 175 U.S. 309 (1899); Bristol v. Washington County, 177 U.S. 133 (1900); Board of Assessors v. Comptoir National D'Escompte, 191 U.S. 388 (1903); Metropolitan Life Insurance Co. v. New Orleans, 205 U.S. 395 (1907). 14 Wheeling Steel Corp. v. Fox, 298 U.S. 193, 210 (19361. PAGENO="0564" 544 has the power to include the debt in the measure of an inheritance tax levied on the nonresident creditor, and subsequent decisions of the Supreme Court indicate that the existence of a debt owed to an out-of- state corporation provides an adequate Due Process basis for the im- position by the State of the debtor of an ad valorern tax on the debt.'5 And this power probably does not impair the authority of the State of the creditor's legal domicile, or the principal seat of its business, like- wise to impose a property tax on the intangible. In point of fact, however, most of the States have not reached out to exercise this full taxing power. Instead, the statutes are drawn or administered by reference to the now-rejected constitutional premise that intangibles may not be taxed outside the State of the creditor's domicile, unless they have a business situs or, in the case of a corpora- tion, the latter has a commercial domicile within the State.16 And some State courts are still deciding cases by reference to Supreme Court doctrine as it prevailed during the period 193O-1939,'~ aided and abet- ted by misleading statements of the law in standard commercial legal reference works.'8 Consequently, the current doctrine in this area of law, albeit 30 years old, has been slow to affect the actual taxing practices of the States, a lag that is not unknown elsewhere in the constitutional history of State taxation.'9 Some State courts have, how- ever, understood and accepted the implications of the cases, with the result that their opinions and decisions are beginning to reflect the broadened taxing power of the States under the Due Process Clause, as enunciated by prevailing Supreme Court decisions.20 The conclusion that I draw from this analysis of the authorities is that the Due Process Clause would not stand as a barrier to the impo- sition by the States of property taxes on loans or credits held by out- of-state banks having no connection with the taxing State other than the fact that the debtor resides there, or in the case of a corporation, has its commercial domicile in the State.2' The same rule would obtain 15 See, however, the summary and extensive listing of the cases by Mr. Justice Jackson in Miller Brothers Co. v. Maryland. 347 U.S. 340, 345 (1954), and the appendix at p. 347. et seq. The opinion implies, although it does not explicitly state, that an intangible has a taxable situs in a State only if it has a business situs there or the taxpayer has its commercial domicile within the state. 16 See, e.g., Fla. Statutes Annotated, Sec. 109.11, and the cases and rulings in Prentice-Hall State and Local Tax Service, Fla. Par. 34,355; Georgia Code, Sec. 92-121; West Virginia Code, Sec. 719, and In re United Carbon Company Assessment. 118 W. Va. 348. 190 SE. 546 (1937). " Green v. Burroughs Corporation. 137 So. 2d 595 (Fla. 1962): Suttles v. Northwestern Mutual Life In. surance Co., 193 Ga. 495, 19 SE. Id 396 (1942); see Commercial Credit Co. v. O'Brien, 115 Mont. 199, 146 P- 2d 637 (l944~. In the Suttles case, the Court used as its premise the proposition that unless anintangible has a "business situs" in the State, or in the case of an out-of-state corporation, the owner has its "commercial domicile" there, the intangible is not within its taxing jurisdiction. In Davis v. Penn Mutual Life Insurance Co., 198 Ga. 550, 32 SE. 2d 180 (1944), the Court refused to follow the Supreme Court, and held that, under its own interpretation of the Due Process Clause of its state con- stitution, promissory notes executed by Georgia residents and secured by mortgages on property in the State, when held by an out-of-state insurance company, cannot be subjected to the ad valorem tax on intangibles. In Humble Oil & Refining Co. v. Calvert, 414 SW. 2d 172 (Texas, 1967), the Court took an even more restrictive view of the power of the States to tax intangibles, by refusing to accept the "business situs" or "commercial domicile" jurisdictional bases for taxing a foreign corporation. iS In 51 American Jurisprudence, Section 463 (1944; Cumulative Supplement, 1970). the authors refer to the business situs and commercial domicile rules, and then state that "the general rule of very extensive applica- tion is that the situs of intangibles for the purpose of property taxation is the domicile of the owner. and only there. Ordinarily, a State has no right to tax intangible property of a nonresident owner". And they add the assertion that "for the purposes of property taxation, it is settled. both as a matter of constitutioiial law and statutory construction, that a debt or credit cannot be assigned a situs for property taxation in a particular state . . . other than the domicile of the creditor merely because the debtor is domiciled or resides there." Idem., Section 464. 19 See the history of the flouting by the States for nearly a quarter of a century of a Supreme Court decision, holding that a widely used State procedure, which limited challenges to discriminatory real property taxa- tion, violated the Equal Protection Clause of the 14th Amendment, set out in Jerome H. Hellerstein, "Judicial Review of Property Tax Assessments", 1958 National Tax Ass'n Procs. 429, 14 Tax Law Review 327, 346 (1959). 20 See John Hancock ?i'Iutual Life Insurance Co. v. Neill, 79 Idaho 385, 319 P. 2d 195 (1957); Commonwealth of Pennsylvania v. Universal Trades, Note 12, supra; United Gas Corp. v. Fontenot and Southern Pacific Co. v. McColgan, Note 11. supra. 21 This principle presumably could be applied to the taxation of deposits made by a respondent bank with its out-of-state correspondent. PAGENO="0565" 545 as to taxes on bonds issued by the taxing State or its local subdivisions.22 CONCLUSIONS AS TO INTANGIBLE PROPERTY TAXATION 1. The State in which a bank maintains its principal office may impose an ad valorem tax on intangibles, such as loans, bonds, de- posits in other banks, and credits held by the bank.23 2. The States in which borrowers from banks reside, or maintain their commercial domiciles, may impose ad valorem taxes on the out- of-state lending banks with respect to the loans. 3. Corporate stock owned by a bank is subject to property taxation both by the bank's home State and the State in which the corpora- tion whose stocks are held is incorporated; and conceivably, also, at the commercial domicile of the corporation, if it has one outside the State of incorporation. PART III THE POWER OF THE STATES To IMPosE DISCRIMINATORY LiCENSE OR OTHER DoiNG BUSINESS TAXES ON OUT-OF-STATE NATIONAL BANKS UNDER THE PERMANENT PROVISIONS OF P.L. 91-156 A. DISCRiMINATORY LiCENSE TAXES ON FOREiGN CORPORATIONS The question arises as to whether, once the permanent provisions of P.L. 91-156 come into l)lay, the States may be empowered to impose discrnnrnatory license taxes on out-of-state national banks, or levies that are more onerous than those applied to their own domestic banks. By way of background, we start with the recognized po~ver of the States to impose on foreign corporations, as a condition to the grant of a license or privilege of conducting an intrastate business within the jurisdiction, annual taxes that are n~t levied on domestic corporations, or employ higher rates or bases than those ap~lied to domestic corporations.' The theory ba( k of t.hese holdings is that the States have a right to exclude foreign corporations from conducting intrastate bu~ir1ess within their borders, and in consequence, they may exact conditions on the grant of the privilege-a nonsequitur which has been criticized by commentators.2 This doctrine has led to the holding in some cases that "unconstitutional conditions", such as discrinunatory taxes, may be imposed OP the grant of the license to enter the State,3 while other cases have limited ~liscrimninatory taxes to those imposed before the corporation commenced its intrastate business in the State and not thereafter.4 The latter qualification on 22 Property taxes on intangibles are a comparatively insubstantial factor in State and local tax revenues- Indeed, there are 20 States which have exempted intangibles entirely from the property tax. Netzer, Eco- nomics of the Property Tax, 140 et seq (1966). There are 15 States that impose the property tax on a compara tively broad basis of intangibles, whereas 20 additional States have either narrowed the coverage of the tax or use low flat rates, usually of less than one-half of one percent. Idem, at p. 143. Because of the wide- spread evasion of the tax and the high mobility of intangibles, the yield tends to be very lOW where the levy is imposed. Professor Dick Netzer estimated the 1962 yield from intangible property taxes over the country at no more than $180 million from special types of property taxes and $120 million from general property taxation. Ibid. See also Shoup, appendix 7, supra in this volume at pp. 447-448. 23 It is standard practice for banks to maintain their principal offices in the State of incorporation. Hence, no consideration is given to the problem of a commercial domicile of banks outside the State of incorporation. 1 Philadelphia Fire Association v. New York, 119 U.S. 110 (1886); Lincoln National Life Insurance Co. v. Read, 325 U.S. 673 (1945). 2 See Paul v. Virginia, 8 Wall. 168, 181 (1869); Note, "Unconstitutional Conditions", 73 Harvard Law Review 1595 (1960). 3 Lincoln National Life Insurance Co. v. Read, Note 1, supra. Hanover Fire Insurance Co. v. Harding, 272 U.S. 494 (1926). PAGENO="0566" 546 the power of the States to levy discriminat iry taxes on foreign cor- 1)oratiofls was shorn of most of its force when the Corrt held that post-entry discriminatory taxes are valid in States in which the corporation, on obtaining its license to do an intrastate business, had agreed to "pay all such taxes and fees" as the State Legislature may impose on such companies.5 The Supreme Court's 1944 decision in Lincoln National Life Insurance Go. v. Read went far to affirm broad powers of the States to levy discriminatory taxes on foreign corpora- tions. There, the Court eistained a 4% tax on gross premiums received by on t-of-state insurance companies from Oklahoma policies, although no similar tax was levied on domestic inst~rer~. Mr. Justice Douglas wrote for the Court: "It has been held both before and after the Fourteenth Amendment that a State may impose on a foreign corporation for the privilege of doing business within its borders more onerous conditions than it imposes on domestic companies. Paul v. Virginia, 8 Wall. 168, 19 L. Ed. 357. . . . But it is said that a State may not impose an unconsti- tutional condition-that is it may not exact as a condition an infringe- ment or sacrifice of the rights secured to the corporation by the Consti- tution of the United States. The argument apparently is that since appellant is entitled to the equal protection of the laws, a condition cannot be imposed which results in its unequal and discriminatory treatment. "But that argument proves too much. If it were adopted, then the long established rule that a State may discriminate against foreign corporations by admitting them under more onerous conditions than it exacts from domestic companies would go into the discard. More- over, it has never been held that a State may not exact from a foreign corporation as a condition to admission to do business the payment of a tax measured by the business done within its borders. See Continental Assurance Co. v. Tennessee, 311 U.S. 5, 61 5. Ct. 1, 85 IL. Ed. 5. "And the equal protection clause does not require the tax or rate of tax exacted from a foreign corporation as a condition of entry to be the same as that imposed on domestic corporations." 6 It is by no means clear, however, that this holding would justify the levy of a discriminatory entry or license tax on a foreign corporation conducting a mixed interstate-intrastate business. In the first place, it is to be observed that the doctrine that discriminatory levies may be enacted from foreign corporations seeking authorization to conduct a local business within a State had its origin, and was piincipally developed, in insurance cases during the reign of Paul v. Virginia, when insurance was not regarded as commerce.7 In the recent Lincoln National Life Insurance case, quoted above, the company raised no issue under the Commerce Clause; it did not contend that it was engaged in interstate commerce.8 And there is a paucity of cases presenting the discriminatory tax issue, where the taxpayer was, and contended that it was, engaged in interstate commerce.9 `See. Lincoln National Life Insurance Co. v. Read, Note 1, supra, 325 U.S., at pp. 677-678. 325 ITS., at pp. 676-678. See Notes 1-4, supra. 8 325 U.S., at p. 678. 9 Atlantic Refining Co. v. Virginia, 302 U.S. 22 (1037), has been cited for the holding that a foreign cor- poration engaged in a mixed intrastate-interstate business may be subjected to more onerous taxes than domestic businesses. when it seeks a license to conduct a local business in the State. See "Unconstitutional Conditions", Note 2, supra. However, Mr. Justice Brandeis, who wrote the opinion in the case, did not view the facts as involving discriminatory taxation against a foreign corporation. See 302 U.S., at p. 31. PAGENO="0567" 547 Accordingly, the law is unsettled as to whether a State has the power to impose on an out-of-state bank, conducting both an intra- state and interstate business within its borders, a license or entry tax for the privilege of doing intrastate business that is more onerous than its taxes on banks which it has incorporated.'0 Nevertheless, given the uncertainty in the law, particularly in the light of the sweeping dicta in the Court's opinions over the past 100 years sup- porting the state taxing powers, the multistate banks cannot, in my opinion, rely comfortably on the notion that the States are powerless to impose upon them discriminatory license or entry taxes. Theie is a risk, which cannot be dismissed as insubstantial, that. intergovern- mental immunities aside, the States may ultimately be found by the highest Court to have that power to impose on out-of-State banks, whether national or State, annual doing business taxes more onerous than those applied to their own chartered banks. B. THE EFFECT OF P.L. 91-156 ON DISCRIMINATORY LICENSE TAXES ON OUT-OF-STATE NATIONAL BANKS. The celebrated case of McCulloch v. Maryland," decided 150 years ago in an opinion handed down by Chief Justice Marshall, "a principal architect of our federalism",'2 was the fountainhead of the complete immunity from state taxation that national banks enjoyed until Congress waived immunities. Hence, no tax on national banks was within the constitutional power of the States prior to the enactment of IRS. 5219, which authorized the States to levy real estate taxes on national banks and any one of four other specified taxes on national banks or their shareholders." The tax immunities of national banks as Federal instrumentalities will be terminated on December 31, 1971, unless P.L. 91-156 has the effect of preserving some residue of im- munity. We turn to the question as to whether that statute prevents the States from imposing on foreign national banks more burdensome license, privilege, or doing business taxes than those applied to their own chartered banks. The provision of P.L. 91-156 dealing with this matter declares: "For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of' the State or other jurisdiction within which its principal office is located." `~ The contention by the States that this language authorizes license or doing business taxes on multistate national banks, although equiva- lent taxes are not levied on domestic banks, might run along the following lines. By declaring that "a national bank shall be treated as a bank organized and existing under the laws" of a sister State, Congress has placed out-of-state national banks on a level of complete 10 There is another doctrine that the Supreme Court developed to protect "instrumentalities" of inter- state conimerce from paying any license or similar tax for the privilege of doing a local business in the State. It applies to telegraph companies, railroads, and other instrumentalities of commerce, whose interstate and intrastate business are so inseparably interconnected that the court felt that any such levy, although non-discriminatory, would unduly burden the commerce. See Western Union Telegraph Co. v. Kansas, 216 U.S. 1 (1910); City of Chicago v. Willett Co., 344 U.S. 574 (1953); and Jerome R. Hellerstein, State and Local Taxation 244-247 (3rd ed. (1969)). It seems unlikely that this doctrine would be applied to multistate banks. 114 Wheat. 316 (1819). 12 These are the words of another Justice Marshall, Mr. Justice Thurgood Marshall. in First Agricultural National Bank of Berkshire County v. State Tax Commission, 392 U.S. 339,. 350 (1968). 13 The history of R.S. 5219, first enacted in 1864, the amendments and some of the eases arising under the statute are considered in the First Agricultural National Bank of Berkshire County case, Note 12, supra, and in appendix 6, supra, pp. 145-354. l45ection 2(a). PAGENO="0568" 548 tax parity with foreign State banks. ]If national banks were organized under State instead of Federal law, and "exist", that is to say, carried out their functions and conducted their business under State super- vision and regulation (together with such Federal regulation as may apply to the State bank), the entire underpinning of their immunity as Federal instrumentalities would have been eliminated. Conse- quently, by declaring that national banks should be "treated" as "organized" and "existing" under State law, Congress consented to the stripping of national banks of all tax immunity as Federal in- strumentalities. Since, as it would be contended, a State organized bank which seeks to conduct intrastate business within the territory of a foreign State may be subjected to license or doing business taxes that are not levied, or are more onerous than those levied, on domestic banks, it follows that by P.L. 91-156, Con~ress has consented to such taxation, and there is no constitutional infirmity in the levy. That the purpose of the P.L. 91-156 was to waive all Federal tax immunity of national banks and put them on complete parity with State banks for tax purposes, is indicated by the legislative history of the statute. In the Report of the Senate Committee on Banking and Currency, it is stated: "Without specifically addressing the question of whether national banks remain, in substance, such a Federal instrumentality, the corn- mittee is agreed that there is no longer any justification for Congress continuing to grant national banks immunities from State taxation which are not afforded State banks." `~ This language supports the view that the congressional purpose was to eliminate all immunity from taxation enjoyed by national banks as Federal instrumentalities, since State banks never possessed such immunity. Moreover, the Congressional Committees were fully aware of the problem of taxation of national banks by States other than the home State, when they recommended this sweeping waiver of immunity.'6 Paul W. Eggers, General Counsel of the Treasury Department, in a letter to the House Committee on Banking and Currency, referred to the fact that the "so-called `doing business' question raises different issues from that involved in the sales tax controversy" and recommended that "the question of taxation of national banks by States other than the home State, be considered and treated separately".'7 Congress, apprised of this problem, nevertheless, authorized the States, after December 31, 1971, to treat out-of-state national banks for tax purposes in the same way as banks chartered by other States. The House Managers of the bill summarized the effect of the permanent amendment to Section 5219 as follows: "Likewise, any State will be free to impose taxes on income derived within its borders by the operations of a bank having its principal office in a different State, regardless of whether the foreign bank is State or National. This has always been the law with respect to state banks." 18 15 Rep. No. 91-530, 91st Congress, 1st Sess., p. 2 (Nov. 12, 1969). 16 Idem, at pp. 3-4. 17 Hearing, House Committee on Banking and Currency, H.R. 7491, 91st Congress, 1st Sess., p. 2 (May 26, 1969). Seethe letter of Chairman William McC. Martin, Jr., of the Federal Reserve Board, quoted in Senate Committee Report, Note 15, supra, at pp. 3-4. 18 See Conference Report, H.R. 7491, Rep. No. 91-728, 91st Congress, 1st Sess., p. 5 (Dee. 9, 1969). PAGENO="0569" 549 Hence, Congress has completely accommodated the out-of-state national bank to the tax position of the foreign State bank, and has thereby brought into piay the doctrine of the Lincoln National Life Insurance company and related cases. The conclusion that Congress did not seek to prohibit taxes on out- of-state banks, whether national or state, that are more burdensome than those applied to the State's own chartered banks is further evi- denced by the fact that the possibility of discriminatory taxation of banks was considered by the Committees,19 and, indeed, provisions ~)roscribing discriminatory taxation were adopted in other parts of P.L. 91-156. Thus, in the temporary provisions of the statute, which authorized the States to tax national banks having their prin- cipal office in the State, Congress explicitly limited the taxes authorized to those "imposed generally on a nondiscriminatory basis throughout the jurisdiction", and it specified that they could be levied only "in the same manner and to the same extent" as taxes levied on banks incorporated by the State.2° And in authorizing taxes on sales and use, real and personal property, documentary stamp and recording levies, and the like, applicable to out-of-state national banks, once again Congress explicitly required that they be "imposed generally through- out such jurisdiction on a nondiscriminatory basis".21 But when it came to the permanent l)roviSions here at issue, Congress did not require that the levies be nondiscriminatory. The conclusion is thus warranted that in the permanent provisions waiving intergovern- mental tax immunity for national banks beginning in 1972, Congress imposed no requirement that the taxes authorized be nondiscrimina- tory. Instead, in carrying out its clearly expressed objective of putting national and State banks on full tax parity, Congress was content to remit national banks to whatever constitutional protection State banks enjoy, no more and no less. Accordingly, as counsel for a State taxing authority would argue, since State banks seeking to do, or carrying on, an intrastate business within a State, may be subjected to license, privilege and doing busi- ness taxes that are more onerous than those levied on domestic State banks, the effect of P.L. 9 1-156 is to empower the States to levy sim- ilar taxes on out-of state national banks. Of course, the power of Congress to waive the tax immunities of Federal instrumentalities is indisputable.22 The foregoing outline of an argument that national and State banks are now on a parity in respect to this taxing power of the States is an impressive one. Perhaps the most persuasive argument to the contrary is that it seems unlikely that Congiess intended to put its own chartered national banks, which had theretofore enjoyed broad tax preferences, at a possible tax disadvantage vis-a-vis domestic banks operating within the taxing State. It is also relevant to point out that the Supreme Court historically has been quick to ferret out and strike down State taxes that even remotely discriminate against 19 The Committees were much concerned with discriminatory taxation of intangibles. See the statement 0 Chairman William McC. Martin, Jr., of the Federal Reserve Board. Hearing, Senate Committee on Banking and Currency, S. 2095, 5. 2906, HR. 7491, 91st Congress, 1st Sess., pp. 57-58 (Sept. 24, 1969). Moreover, the concern of hankers was reflected in the proposal of the American Bankers Association which recom- mended a "specific. requirement that the additional taxes imposed under the new A.B .A. provision be generally applicable to State banks and business corporations on a non-discriminatory basis." Idem, p. 59. 20 Subsection 5(a). 21 Subsection 5(b). 22 Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). PAGENO="0570" 550 Federal instrumentalities 23 Nevertheless, given the language of the statute and its legislative history, there is, in my opinion, a risk that P.L. 91-156, if not modified, will be held to authorize the States to levy discriminatory license, privilege and doing business taxes on national banks maintaining their principal offices outside the taxing State, if the Court should hold that the States have the power gener- ally to discriminate against foreign corporations doing a mixed inter- state-intrastate business 24 In the event that it should be determined that FL. 9 1-156 should be amended to prohibit the types of discriminatory taxation against out-of-state national banks described above, the provision should, in my opinion, be drawn so as to extend the same protection to out- of-state banks chartered by the States. No good reason has been ad- vanced that would justify less. advantageous tax treatment of multi- state State banks than of multistate national banks. indeed, the history of P.L. 9 1-156 is instinct with the reiterated purpose of putting State and national banks on a level of full tax parity. Given the plenary power of Congress over interstate commerce, its constitutional power over money and credit, the extensive Federal legislation dealing with the nation's banking system, and the role that multistate state banks play in that system, Congress, in my opinion, has adequate con- stitutional power to prohibit discriminatory taxation of State as well as national banks.25 C. CONCLUSION WITH RESPECT TO DISCRIMINATORY TAXATION OF OUT-OF-STATE BANKS There is a risk that once the permanent provisions of P.L. 91- 156 become effective, the States may have the power to levy dis- criminatory or more onerous taxes on out-of-state banks, including national banks, for the privilege of doing business in the State, than they impose on their own domestic banks. ~`EW YORK, April 30. 1971. 23 Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376 (1960); Moses Lake I-Tomes iflC. v. Grant County, 365 U.S. 744 (1961); compare Comptroller v. Pittsburgh-Des Moines Steel Co., 231 Md. l:t2, 189 A. 2d 107 (1963), certiorari denied, 375 U.S. 821 (1963). 24 Some concern has been expressed that P.L. 91-156 may permit the States to tax out-of.state national banks at a higher rate, or on a more burdensome basis, than foreign state banks. The language of the statute and its legislative history seem to me to make such a construction of P.L. 91-156 unlikely. Moreover, such tax differentials between two classes of out-of-state corporations, each seeking licenses to conduct intrastate business within the State, or doing an intrastate business in the State, would probably be held to be an unreasonable classification, in conflict with the Equal Protection Clause of the 14th Amendment. 25 For a discussion of the congressional power under the Commerce Clause to limit State taxation, see Jerome B. Hellerstein, "The Power of Congress to Restrict State Taxation of Interstate Commerce", 12 Journal of Taxation 302 (1960). PAGENO="0571" APPENDIX 12 Multiple State Taxation of National Banks: Division of Tax Base-Income Taxes and Doing Business Taxes J. NELSON YOUNG Professor of Law, University of Illinois INCOME TAXES Development of underlying constitutional doctrine One of the major concerns in appraising the impact of P.L. 91-1156. is the extent to which the net income of national banks may become subject to multiple state taxation) Under the provisions of section 5219 of the Revised Statutes as amended by P.T~. 91-156, national banks on January 1, 1972, will be in the same position as other business corporations with respect to the risk of multiple state taxation of net income.2 Evaluation of this risk, which is imposed for the first time upon national banks, turns upon the answer to two critical questions. First, do the business activities of a particular bank in a state outside the state in which it has its principal offices constitute local activities. which form a "sufficient nexus" to support imposition of an income tax by such other states? ~ Assuming an affirmative answer to the first question, the next question is one as to the appropriate basis for allocation or apportionment of the bank's income to such other state. The first question is essentially one of due process under the fourteenth amendment and the test is "whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state." In other words, has the taxing state "given any- thing for which it can ask return"? The second question involves both due process and commerce clause considerations. To state it differently, does the tax reach income earned in other states and result in the imposition of a multiple burden upon interstate com- iThe issues dealt with in this part relate to direct income taxes and not to franchise or privilege taxes measured by income. The distinction is important in that a state cannot impose a franchise or privilege tax upon the privilege of engaging solely in interstate commerce within the taxing state even though the tax is nondiscriminatory and is based upon a fair apportionment of income derived from such commerce. Spector Motor Service v. O'Connor, 340 U.S. 692, 71 S. Ct. 528 (1951), di~cu~ced nfra at pp. 503-4. 2 Under the permanent amendment, section 5219 reads as follows: "For the purposes of any tax law enacted under authority of the United States or any State, a national basik shall be treated as a bank organized and existing under the laws of the State or other Jurisdiction within which its principal office is located." 3 Provisions of the United States Code governing the organization of national banking associations require that the organization certificate for an association shall state "the place where its operations of discount and deposit are to be carried on, designating the State, Territory, or District, and the particular county and city, town, or village." 12 U.S.C. § 22 (1959). National banks are limited in the operation of branches to the city, town, or village and to other points within the State in which the bank is situated, a.s may be permitted state banks under the law of the State. 12 U.S.C. § 36 (1962). No national bank may establish (and with the exception of only one or two older institutions, no national bank now maintains) a branch in a state other than that in which its principal office is located; (551) PAGENO="0572" 552 merce? ~ These issues are not. wholly separable and the cases which have established the legal doctrines in this area have often dealt with both. Development of the law with respect to the taxation of the income of interstate manufacturing and mercantile businesses is important in an appraisal of the vulnerability of national banks to multiple state taxation. As a review of the cases illustrates, the basic constitutional framework was erected during the period 1918 to 1931. The first case to reach the United States Supreme Court, United States Glue Go. v. Town of Oak Greek,6 presented the question as to whether the state of corporate domicile could validly tax the net income of a manufacturing business to the extent derived from goods manufactured within the state but sold to out-of-state customers. Sales giving rise to the income in question were of two types: sales made upon orders received from out-of-state customers, the goods being delivered from the company's Wisconsin factory; and sales made upon orders received from out-of- state customers at out-of-state branches with the goods, which had been manufactured in Wisconsin, being delivered from such branches. The specific issue was whether taxation of net income derived from these interstate transactions constituted the imposition of an un- constitutional burden upon interstate commerce. In sustaining the validity of the tax imposed by the domiciliary state, the court stressed the point that a tax on net income is not a direct and immediate burden upon interstate commerce since the tax is occasioned not by reason of the commerce itself but by reason of the fact that the trans- actions in interstate commerce proved to he piQfitable. Thus the tax was held not to he inherently discriminatory with respect to such commerce. With this decision the Court established the validity of a tax upon the net income of a domiciliary corporation irrespective of the source of such income, whether derived from intrastate or inter- state commerce.7 Upon the basis of this early doctrine a.nd the per- manent amendment of section 5219, a state in which a national bank 1511 Fisconsin `. .1. C. Piincy Co., 7.11 U.S. 435. 61 S. Ct. 246 (1940) the question was whether Wisconsin, a iion-domieil~arv stat, could impose a tax of 2i~% upon "the privilege of declaring and receiving (lividends. out of income derived from property located and bueinees traneacted in" Wisconsin. Taxpayer, a 1)elawace (orporatiOs, voted and paid dividends from ifs principal office in New York with checks drawn upOn New York bank art'ossnrs. In sustaining the tax in the face of the taxoayer's challenge that it violated due process concepts of jurisdiction, the Court mad~ the following observation: `Taxable event', `j .irisdiction to tax'. `business sit.us', `extraterrilorialitv', ace all compendious ways of implying the impotence of state Power because state power has nothing on which to operate. These tags are not instruments of adjudicasion but statements of result in applying the sole constitutional test for a case like the present one. That test is whether property was taken without due process of law, or, if para- phrase we must, whether the taxtng power exerted by the state bears fiscal relation to protection, opportu- nities and benefits given by the state. The simple hut controlling question is whether ttse state has given anything for which it san ask return. The substantial privilege of carrying on business in Wisconsin, which has here been given, clearly suoports the tax, and the state has not given the less merely because it has con- ditioned the demand of the exaenon upon happenings outside its own bordeis. The fact that a tax is contin- gent upon events brought to pass without a state does not destroy the nexus between such a tax and trans- actions within a state for which the tax is an exaction," (Ill U.S. at 444-45, 65 5. Ct. at 250). For purposes of this part relating to direct income taxes, it is assumed that the nationwide activities of major banks and the straddle.state transactions of small banks located in border communities constitute interstate commerce. See Hellerstein. Federal constitutional Limitations sn State Tax.otion of.ifaltistate Banks, Introduction [appendix 11]. at pp. 435-40 above. 6 247 T.J.S. 321, 38 S. Ct. 499 (1918). 7 This decision was foreshadowed by Peck & Gb. v. Lowe, 247 U.S. 165, 38 S. Ct. 432 (1918) which field that the imposition of the federal income tax upon net income derived from foreign exports did not violate the constitutional proscription of a duty upon exports. Two years later, the Court sustained an income tax upon an individual domiciled within the taxing state with respect to income received by him as a beneficiary of an out-of.state trust. Maguire v. Trefry, 253 U.S. 12, 40 S. Ct. 417 (1920). PAGENO="0573" 553 has its principal office could constitutionally impose a tax upon the entire net income of the bank.8 Two years later, in Underwood Typewriter Co. v. Chamberlain,9 the Court first considered the question as to the validity of an appor- tioned state income tax imposed upon a foreign corporation engaged in interstate commerce. Underwood Typewriter Co. was a Delaware corporation with its principal office in New York and all of its manu- facturing facilities in Connecticut. Under the applicable statutory provisions, net income of the corporation was allocated to Connecticut upon the basis of a single factor property formula, namely, the ratio of the fair cash value of corporate real estate and tangible personal property located in Connecticut to the total of all its real and tangible personal property. This formula resulted in an allocation of 47% of the corporate income to Connecticut. It was the taxpayer's contention, apparently based upon the volume of sales consummated within the state, that only 3.3% of its net mcome was received in Connecticut. Underwood Typewriter Co. challenged the statute as imposing an undue burden upon interstate commerce and as an attempt to tax income arising from business conducted outside the taxing state. The first argument was given only brief attention and was brushed aside on the basis of United States Glue Co. With respect to the second, the Court found that the taxpayer had failed to sustain the burden of proving "that the method of apportion- ment . . . was inherently arbitrary, or that its application . . . pro- duced an unreasonable result." 10 On this issue, the Court alluded to the unit rule of valuation relating to the imposition of property taxes upon property employed as an integral part of an interstate trans- portation system and made the following observation: "The profits of the corporation were largely earned by a series of transactions beginning with manufacture in Connecticut and ending with sale in other States. In this it was typical of a large part of the manufacturing business conducted in the State. The legislature in attempting to put upon this business its fair share of the burden of taxation was faced with the impossibility of allocating specifically the profits earned by the processes conducted within its borders. It, there- fore, adopted a method of apportionment which, for all that appears in this record, reached, and was meant to reach, only the profits earned within the State. `The plaintiff's argument on this branch of the case,' as stated by the Supreme Court of Errors, `carries the burden of showing that 47 percent of its net income is not reasonably attributable, for purposes of taxation, to the manufacture of products from the sale of which 80 percent of its gross earnings was derived after paying manufacturing costs.' The corporation has not even attempted to show this; and for aught that appears the percentage of net profits earned in Connecticut may have been much larger than 8Acaveat should be stated on this point. In Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S. Ct. 357 (1959), reference was made to the possibility that a domiciliary state might tax all the income of a corporation engaged in interstate commerce and that a tax imposed by a non-domiciliary state upon apportioned income would result in double taxation of a portion of the same income. In a footnote on this point, the Court cited the fact that in Standard Oil Co. v. Peek, 352 U.S. 382, 72 S. Ct. 309 (1952), it had struck down an ad valorem property tax imposed by the domiciliary state upon a fleet of barges plying in interstate commerce because it was not apportioned. 358 U.S. at 463, 79 S. Ct. at 364. For a discussion of the decision in Northwestern States Portland C'einent C's., see p. 487. 9254 U.S. 113, 41 S. Ct. 45 (1920). "Id. at 121,41S. Ct. at 47. PAGENO="0574" `554 47 percent. There is, consequently, nothing in this record to show that the method of apportionment adopted by the State was inherently arbitrary, or that its application to this corporation produced an unreasonable result." ~ By this decision, multiple state taxation of net income derived from interstate commerce was assured, with the Court bestowing its blessing upon a statutory formula method of apportionment. During the next decade, the Court decided two additional cases which involved the validity of a tax upon apportioned net income of a foreign manufacturing corporation where the apportionment was made upon the basis of a single factor property formula. In Bass, Ratcl?ff cQ~ Gretton v. State Tax Commission,'2 decided in 1924, the Court sustained a formula for allocating net income which included not only real and tangible personal property but also accounts and bills receivable and investments in the capital stock of other corpora- tions. The taxpayer, a British corporation, was engaged in manu- facturing ale in England which was sold both in England and in the United States. Sales in the United States were made through branches located in~ New York and Chicago. The Court sustained the validity of the apportionment relying principally upon its prior decision in Underwood Typewriter Co. In its opinion the Court observed that the "company carried on the unitary business of manufacturing and selling ale, in which . . . profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places . . . [and] the State was justified in at- tributing to New York a just proportion of the profits earned by the Company from such unitary business." 13 From the record, it was concluded that the method of apportionment was not "inherently arbitrary or a mere effort to reach profits earned elsewhere." There are two aspects of the decision in Bass, Ratcliff cQ~ Gretton which are of some significance with respect to the matter of taxation of the income of national banks. The first is the inclusion of intangible property in the allocation formula. The second is the fact that the Court specifically referred to the unit rule concept relating to the allocation of interstate property values as "directly applicable to the carrying on of a unitary business of manufacture and sale partly within and partly without the State." 14 Thus, the stage was set for subsequent articulation of the unitary concept with respect to the allocation of net income from interstate business. The last case during this period of development of constitutional doctrine was decided in 1931. In Hans Rees' Sons v. North Carolina,'5 a New York corporation was engaged in the business of tanning, manufacturing and selling belting and other heavy leathers. Its manufacturing operations were conducted exclusively in North Carolina. The company maintained its sales office and a warehouse in New York and sold its products both at wholesale and retail. Sales of the company products were made throughout the United States, Canada and Western Europe. Approximately 40% of the output of 11 Id. at 121-22, 41 S. Ct. at 47. 12 266 U.S. 271, 45 5. Ct. 82 (1924). 13 Id. at 282, 45 S. Ct. at 84. It is of interest to note that the corporation reported no net income for the year from its operations in the United States for purposes of the federal income tax. Thus, the income appor- tioned to New York was based upon the world-wide income of the corporation. 14 266 U.S. at 282, 45 5. Ct. at 84. 15 283 U.S. 123, 51 S. Ct. 385 (1931). PAGENO="0575" 555 its manufacturing plant in North Carolina was shipped to the New York wi~rehouse and the balance was shipped direct to customers upon order from the New York sales office. Under the statutory property formula, approximately 80% of the corporate income was allocated to North Carolina. In the trial court, the taxpayer offered evidence to show that its net income was comprised of buying profit, manufacturing profit, and selling profit and that income having its source in the manufacturing and tanning operations within North Carolina was 17 percent. This evidence was stricken by the trial court. The state supreme court sustained the ruling of the trial court but proceeded to hold that even if the evidence were deemed to be competent it would not change the result. On the basis of this record, the United States Supreme Court viewed the case as if the evidence had been received by the state court as true and* accurate but as having no bearing on the validity of the statute in the particular circumstances. The taxpayer's objection was premised upon both due process and the commerce clause. In reaching its decision, the Supreme Court observed that with respect to an interstate business where different states each have jurisdiction to impose an income tax on the basis of what is done within its own borders, the question becomes one of apportionment. In these circumstances, "evidence may always be received which tends to show that a state has applied a method, which albeit fair on its face, operates so as to reach profits which are in no just sense attributable to transactions within its jurisdiction." 16 reliance upon the assumption made. by the state court with respect to the facts shown, it was concluded that the taxpayer had sustained the burden of proving that the statutory method as applied to it "operated unreasonably and arbitraiily in attributing to North Carolina a percentage of income out of all appropriate proportion to the business transacted by the appellant in that state." 17 With the triumvirate of Underwood Typewriter Co., Bass, Ratcliff cQ~ Grettort, and Hans Rees' Sons, the rule was firmly established that a non-domiciliary state could tax upon an apportioned basis the net income of a corporation engaged in manufacturing and selling in interstate commerce. These cases in general validated the single factor property formula but the taxpayer's success in Hans Rees' Sons, though attributable to a procedural aspect of the case, clearly indicated that such a formula was highly vulnerable. At this point, the Court not only had established the validity of the formula method of apportioning net income from interstate business, but also had provided an impetus for the development of a multiple-factor formula for such apportionment.'8 In-st ate business activity sufficient to support apportionment of income from interstate business By 1931, the Court, in its decisions relating to apportionment of income from interstate commerce, had dealt only with cases where the "Id. at 134, 51 5. Ct. at 389. 17 Id. at 135, 51 S. Ct. at 389. ~B It should be noted that in 1919, Massachusetts, under its corporate franchise tax, initiated the three- factor formula for allocation of income based upon property, payroll and sales. Mass. Gen. Acts, 1919, ch. 355, § 19. This tax was held invalid as applied to a corporation deemed to be engaged exclusively in interstate commerce. Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203, 45 5. Ct. 477 (1925). In a recent de- cision the Court indicated that a single-factor formula based solely upon sales would he an inappropriate method of allocating net income from interstate business. See General Motors Corp. v. District of Columbia, 380 U.S. 553, 85 5. Ct. 1156 (1965). PAGENO="0576" 556 taxpayer-corporation could be considered as having a sIgnificant presence in the non-domiciliary state through the ownership of property in the state coupled with the activities of full-time employees. Fifteen years were to pass before the Court considered the question as to whether a lesser degree of business activity within the taxing state consisting only of the solicitation of sales was sufficient to support an apportionment of net income. In 1946, in a per curiam decision in West Publishing Go. v. McGolgan,19 the Court sustained the allocation of net income where the principal and only significant activity or ~presence within the taxing state consisted of the solicitation of orders ~for law books published out-of-state and shipped to customers from `out-of-state locations. The taxpayer, a Minnesota corporations employed four full-time salesmen to sell law books in California. These salesmen solicited orders, received payments thereon, collected delinquent accounts, and handled customer complaints. The taxpayer did not rent offices in California, but its salesmen obtained space in the offices of certain attorneys by making available the use of the publisher's sample books which were kept on hand in connection with their sales activities. In legal newspapers and periodicals circulated in California, the taxpayer advertised as its local offices these offices which had been obtained by its employees. Under the California statutes, a tax was imposed upon the net income "of every corporation derived from sources within [the] State." Income from sources withm the state was defined to include "income from tangible and intangible property located or having a situs in this State and income from any activities carried on in this State, regardless of whether carried on in intrastate, interstate or foreign commerce." The taxpayer challenged imposition of the tax upon any of its income principally upon the ground that California could not impose a tax on any part of the net income of a foreign corporation which was engaged exclusively in interstate commerce. The taxpayer also contended that the tax violated the due process clause of the fourteenth amendment, asserting that the state was without jurisdiction to tax. The Supreme Court of California in a comprehensive opinion had sustained the tax principally in reliance upon United States Glue Go., emphasizing the well established principle that a tax upon net income derived from interstate commerce is not barred by the commerce clause. In refuting the taxpayer's due process argument, the California court made the following observation: "The record shows without conflict that plaintiff engages in sub- stantial income-producing activities in California. It has local offices ihere as well as employees who devote their entire time to soliciting orders, receiving payments, adjusting complaints, collecting delinquent accounts, and performing other services for plaintiff. This state pro- vides a market in which plaintiff operates in competition with local law-book publishers. Plaintiff's agents receive the same protection arid other benefits from the state as agents carrying on business activities for a principal engaged in intrastate business. The state pro- tects plaintiff's business transactions within its borders and maintains courts in which plaintiff enforces payment for the sale of its publica. 19328 11.8. 823, 66 S.-Ct. 1378 (1946), affirming per curiam, 27 Cal. 26 705, 166 P. 26 861 (1946). PAGENO="0577" 557 tions. In West Publishing Co. v. Superior Court, 20 Cal. 2d 720, 128 P. 2d 777, certiorari denied 317 U.s. 700, 63 S.Ct. 514, 87 L. Ed. 559, it was held that by virtue of these activities plaintiff is present in this state and subject to the jurisdiction of its courts." 20 With its per curiam affirmance of West Publishing Go., the United States Supreme Court endorsed the view that the mere solicitation of sales within the taxing state was a sufficient activity upon which to premise an allocation of net income from interstate business. However, a fully definitive decision upon this issue was not forthcoming until 1959 when the Court decided Northwestern States Portland Gement Go. v. lklinnesota.2' Two cases were consolidated for purposes of this later opinion. One related to Northwestern States Portland Cement Co. and involved the application of the Minnesota income tax. Minnesota imposed a general income tax upon the "taxable net income" of residents and non- residents including domestic and foreign corporations "whose business within the state during the taxable year consists exclusively of foreign commerce, interstate commerce, or both." A three-factor formula ~ras provided for allocation of income based on sales, tangible property and payroll. Northwestern States Portland Cement Co., an Iowa cor- poration, operated a cement manufacturing plant in Mason City, Iowa, maintained a sales office in Minneapolis and ~licited orders in. Minnesota through its salesmen. All orders were forwarded to Mason City for~ acceptance, all sales were made on a delivered price basis, and all billings and collections were made from the Iowa office. The corporation owned some office equipment but no real estate in Minne- sota, and did not warehouse any of its products in that state. Forty-. eight per cent of the company's sales were made to Minnesota cus~ tomers. The second of the two consolidated cases related to Stockham Valves and Fittings, Inc. This case involved application of the Georgia income tax which provided that "every domestic and every foreign corporation shall pay annually an income tax equivalent to five and one-half per cent of the net income from property owned or from business done in Georgia," such income to be allocated to the state by a formula based on inventory, wages and gross receipts. Taxpayer, a Delaware cor- poration, with its principal office and plant in Birmingham, Alabama, manufactured valves and pipe fittings which were sold to wholesalers and jobbers. Taxpayer maintained a sales-service office in Atlanta, Georgia, which served five states. Except for some office equipment, the company owned no property in Georgia. All sales were processed and filled by the main office in Birmingham, shipment being made direct to the customer on an f.o.b. warehouse basis. In each of these cases the taxpayer conceded that the particular method of allocation of income was lair and reasonable. The challenge to the validity of the tax in each case paralleled the position taken by the taxpayer in West Publishing Go., namely, that the statutes violated both due process and the commerce clause. In its opinion, the Court focused most of its attention upon the .commerce clause issue. After reviewing its earlier decisions, the Court concluded with the observa- tion that "these cases stand for the doctrine that the entire income of a corporation, generated by interstate as well as intrastate activities, 20 27 Cal. 2d at 713, 166 P. 2d at 866. 21 358 U.s. 450, 79 S. Ct. 357 (1959). 79-421 0 - 72 - 37 PAGENO="0578" 558 may be fairly apportioned among the states for tax purposes by formulas utilizing in-state aspects of interstate affairs." 22 The Court laid particular stress upon West Publishing (Yo. as having dispelled any doubt as to the propriety of an income tax upon net income derived frnm interstate commerce. There are two notable aspects of this portion of the Court's opinion. The first is the Court's observation that "it is significant . . . that West had not qualified to do business in California." 23 The second is the statement that "the [state coui't'~] opinion was not grounded on the triviality that office space was given West's solicitors by attorneys." 24 Thus, the Court underscored its position that mere solicitation of sales constituted adequate "in-state aspects of interstate affairs" to support a formula allocation of net income. Proceeding to the due process argument, the Court observed that "the taxes imposed are levied oniy on that portion of the taxpayer's net income which arises from its activities within the taxing state. These activities form a sufficient `nexus between such a tax and transactions within a state for which the tax is an exaction'." 25 On the basis of this decision, one can reasonably conclude that the solicitation or negotiation of loans in a state other than that in which the principal office of a national ban.k is located would provide a sufficient nexus to warrant apportionment of the net income to such other state.26 The decision in Northwestern States was met with an immediate legislative response. Congress promptly enacted Public La~ 86-272 which circumscribed the broad rule of nexus articulated by the Court.27 Under this statute, a state is prohibited from taxing income from inter- state business where the only activity within the taxing state is solicitation of sales orders for tangible personal property. Division of income-Specific allocation Turning to the question of division of net income from interstate commerce, the various state income tax statutes generally include pro- visions for specific allocation of certain types of income realized by multistate corporations. 28 These provisions for specific allocation apply to non-operating items of income such as interest, dividends and capital gains which are incidental to the principal business income of a corporation. Under these provisions, interest and dividends are usually allocated to the legal or commercial domicile of the corporation. Capital gains from real and tangible personal property are generally allocated to the state where the property is located; and capital gains from intangibles are allocated in the same manner as interest and 22 Id. at 460, 79 5. Ct. at 363. 23 Id. at 461. 79 S. ct. at 363. With this comment, the court emphasized the wholly interstate character of the taxpayer's operations. 24 Id. at 461, 79 5. Ct. at 364. With this second comment, the court was apparently emphasizing that a "place of business" within the taxing state was not a prerequisite to the apportionment of net income from interstate commerce. 25 Id. at 464, 79 5. Ct. at 366. 26 Concurrent dispositions of other pending interstate income tax cases, all of which sustained imposition of the tax, confirm the conclusion stated in the text. Brown-Forman Distillers Corp. v. Collector of Revenue, 234 La. 651, 101 So. 2d 70 (1958), appeal dismissed and certiorari denied, 359 U.S. 28, 69 S. Ct. 602 (1959) (only in-state activity was solicitation of orders and goodwill services of "missionary men"); ET & WNC Trans- portation Co. v. Currie, 248 NC. 560, 104 S.F. 2d 403 (1958), affirmed per curiam, 359 U.S. 28. 79 5. Ct 602 (1959) (trucking company engaged solely in interstate business maintained local terminals); International Shoe Co. v. Fontenot, 236 La. 279, 107 So. 2d 640, certiorari denied, 359 U.S. 984, 79 S. Ct. 943 (1959) (only in-state activity was solicitation of orders). 27 Public Law 86-272 is discussed infra at p. 501. 26 The Willis Committee report includes a comprehensive discussion of this matter based on the statutes in effect at that time. House Judiciary Comm., Special Subcommittee, State Taxation of Interstate Com- merce, House Report No. 1480, 88th Cong., 2d Sess., vol.1, pp. 197-217 (1964). For a chart summarizing the current statutory provisions relating to specific allocation of items of income, see Prentice-Hall State and Local Tax Service-All States Unit ¶1046. PAGENO="0579" 559 dividends. This scheme for treatment of non-business income has been adopted by the Uniform Division of Income for Tax Purposes Act.29 It is apparent that the existing pattern for specific allocation of items which usually constitute non-operating income is inapplicable to the banking industry. By contrast with manufacturing, mercantile and most service enterprises, interest, dividends and capital gains constitute a major portion of the operating income of a bank. Con- sequently, it reasonably may be expected that the states in drafting specific statutory provisions to govern the division of income of multi- state banks will adopt comprehensive rules which parallel those applied to the operating income of other multistate businesses. It should be observed, however, that the debtor's state of commercial domicile has jurisdiction as a matter of due process to impose an income tax upon interest earned by an out-of-state bank upon loans utilized by the debtor in the taxing state.'° Taxation of the net income derived from these transactions presents no commerce clause issue.3' But the determination of net income in these circumstances presents difficult problems in the division of costs and expenses. This leads to a consideration of formula apportionment of net income derived from the operation of an interstate business. Division of income-Formula method vs. separate accounting The decision in Northwestern States illustrated the application of the Minnesota three-factor formula, consisting of property, payroll and sales, in the apportionment to a non-domiciliary state of net income from an interstate business. The obvious alternative to the application of a formula method of apportionment of net income is a separate accounting for items of income and expense relating to the business activities conducted within the taxing state. This leads to the question which was squarely presented in Butler Bros. v. McOolgan,32 namely, whether the formula method can be required by the taxing state where the taxpayer can demonstrate a reasonably accurate determination of in-state income by its method of separate accounting. In Butler Bros., an Illinois corporation was engaged in the wholesale dry goods and general merchandise business, purchasing from man- ufacturers and others and selling to retailers only. It operated whole- sale houses in seven states including California. Each of the seven locations served a separate territory with its own sales force, handled its own collections and credit arrangements, and kept its own books and accounts. All of its sales in California were handled by its San Francisco office. All purchases were handled by the company's home office in Chicago with goods being shipped to the various warehouses and charged to each location at cost plus transportation expenses. Costs of operating the central buying division, cost of central advertis- ing, and home office general overhead expenses were allocated to the respective area operations. At that time, the California statute provided that income from inter- state businesses should "be determined by an allocation upon the basis of sales, purchases, expenses of manufacture, payroll, value and situs of tangible property, or by reference to these or other factors, or by 25 The Uniform Division of Income for Tax Purposes Act, which does not apply to banks, is discussed at p. 506. infra. 3° Hellerstein, Federal Constitutional Limitations on State Taxation of Multistate Banks, supra, at pp. 452 if. 31 A tax upon the gross interest income realized by an out-of-state bank would raise the spectre of a tax upon gross receipts derived from interstate commerce. See the discussion of gross receipts taxes infra at p. 506. 32 315 U.S. 501, 62 5. Ct. 701 (1942). PAGENO="0580" 560 such other method of allocation as is fairly calculated to assign to the state the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation." In the tax year in question, the taxpayer enjoyed net in- come of approximately $1,150,000 from its entire multistate opera- tions. In applying the three-factor formula based on property, payroll, and sales, the tax commissioner allocated 8.1372% of the total income or approximately $93,500 to the State of California. By contrast, the taxpayer by its method of separate accounting for its California operations, reported a net loss therefrom in the amount of $82,850. The accuracy of the taxpayer's method of separate accounting for costs and expenses allocable to its California operations was not challenged by the tax commissioner. It was the taxpayer's contention that the statutory formula which converted a loss of $82,850 into a profit of $93,500 resulted in an allocation of out-of-state income to the taxing state in violation of the due process requirements of the fourteenth amendment. In resolving this issue the Court relied upon the "unit rule" which had been developed much earlier in the property tax cases involving the valuation of property employed by businesses engaged in inter- state transportation and communication. In its opinion, the Court articulated the analogy to which it had alluded in Underwood Type- writer Go. and Bass, Ratcliff c~ Gretton. Under the property tax unit rule concept, property located within the taxing state which is part of an interstate system may be valued with reference to its connection with such system. Thus, ou~t-of-state property is necessarily taken into account in arriving at the value of the property which is physically located within the taxing state. The unit rule of property valuation had been aptly described in one of the Court's earlier decisions in the following manner: "{W]hen . . . property is part of . . . [an interstate] system and has its actual uses only in connection with other parts of. . . [such] system, that fact may be considered by the State in taxing, even though the other parts of the system are outside of the State. The sleepers and rails of a railroad, or the posts and wires of a telegraph company, are worth more than the prepared wood and the bars of steel or coils of wire, from their organic connection with other rails or wires and the rest of the apparatus of a working whole. This being clear, it is held reasonable and constitutional to get at the worth of such a line in the absence of anything more special, by a mileage proportion. The tax is a tax on property . . . [and] is intended to reach the intangible value due to what we have called the organic relation of the property in the State to the whole system. . . . And this principle . . . has been extended . . . to the lines of express companies, although those lines are not material lines upon the face of the earth. There is the same organic connection as in the other cases." ~ In its opinion in Butler Bros., the Court made three preliminary observations: (1) the statutory formula by its terms was fairly calcu- lated to assign to California that portion of the net income which was reasonably attributable to the business conducted in that state; (2) the burden was upon the taxpayer to show by clear and cogent evidence that the application of the formula resulted in taxation of 33 Fargo v. Hart, 193 U.S. 490, 499, 24 S. Ct. 498, 500 (1904). PAGENO="0581" 561 extraterritorial income; and (3) it was not necessary for the Court to impeach the integrity of the taxpayer's separate accounting system to establish that the taxpayer's contention was erroneous. In sustaining application of the unitary concept to the net income of the taxpayer, the Court pointed to the unity of ownership and management which characterized the taxpayer's interstate business operations. Particular stress was placed upon centralized purchasing which admittedly resulted in obtaining more favorable prices for the benefit of the entire enterprise. In answer to the taxpayer's contention that its method of separate accounting for its California operations demonstrated that none of the net income of the multistate enterprise was attributable to California, the Court responded with the following observation: "If factors which are responsible for that net income are present in other States but not present in California, they have not been re- vealed. At least, in the absence of that proof, California was justified in assuming that the San Francisco branch contributed its aliquot share to the advantages of centralized management of this unitary enterprise and to the net income earned." ~ Determining the unitary character of income of an interstate business Butler Bros. is the only case in which the United States Supreme Court has specifically determined the issue as to whether the entire income of an interstate enterprise was sufficiently unitary in character to warrant apportionment by formula to the taxing state. Subsequent applications of the unitary rule have been made by the state courts and the developments with respect to this aspect of the taxation of income of interstate business are to be found in the state court de- cisions.35 A brief summary of selected state court decisions indicates the fac- tual patterns in which the issue as to the unitary character of an enter- prise has arisen and illustrates that there is some diversity in the posi- tions of the state courts. With respect to integrated wholesale. and retail merchandising, the courts have been consistent in following the rule of the decision in Butler Bros.3° With respect to companies en- gaged in production of oil and gas, the cases have been inconsistent. California has denied separate accounting with respect to in-state operations and has required determination by formula apportionment on a unitary basis.37 A contrary position has been taken by the Kansas and Minnesota courts which have recognized separate accounting for the operations conducted within each of their states.38 There is a similar 34 315 U.S. at 509, 62 S. Ct. at 705. 33 For comprehensive discussions of the problems of apportionment of income of unitary businesses, see Hellerstein, Recent Developments in State Tax Apportionment and the Circscmscription of a Unitary Business, 21 National Tax Journal 487 (1968); Keesling and Warren Galifornia's Uniform Division of Income for Tax Purposes Act. 15 University of California at Los Angeles Law Review 156 (1967); Keesling and Warren, The Unitary Concept isv the Allocation of Income, 12 Hastings Law Journal (1960); Rudolph, State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups, 25 Tax Law Review 171 (1970). 36 Western Auto Supply Co. v. Comm'r of Tax'n, 245 Minn. 346, 71 N.W. 2d 797(1955) (combination whole- sale and retail operations held unitary in view of centralized purchasing and centralized management); Walgreen Co. v. Comm'r of Tax'n, 258 Minn. 522, 104 NW. 2d 714 (1960); Maurice L. Rothschild & Co. v. Comm'r of Tax'n, 270 Minn. 245, 133 NW. 2d 524 (1965); Zale-Salem, Inc. v. State Tax Comm'n, 391 P. 2d 601 (Ore. 1965) (parent and subsidiary corporations engaged in retail jewelry business taxed as a unitary business on an apportionment basis). ~ Superior Oil Co. v. Franchise Tax Board, 60 Cal. 2d 406, 386 P. 2d 33, 34 Cal. Rptr. 545 (1963); Honolulu Oil Corp. v. Franchise Tax Board, 60 Cal. 2d 417, 386 P. 2d 40, 35 Cal. Rptr. 552 (1963). 3S Webb Resources, Inc. v. McCoy. 194 Kan. 758, 401 P. 2d 879 (19651 (Kansas statutes at this time made separate accounting the preferred method); Skelly Oil Company v. Comm'r of Tax'n, 269 Minn. 351, 131 N.W. 2d 632 (1964) (out-of-state production of oil and gas deemed separate from business of refining and marketing where only activity within taxing state was that of marketing). In a recent Mississippi decision, it was held that exploration for and production of gas in Louisiana and Texas was a separate business and not an integral part of an interstate gas transmission pipeline system which originated in the gas producing areas of Louisiana and Texas. Tenneco, Inc. v. Barr, 224 So. 2d 208 (Miss. 1969). PAGENO="0582" 562 conflict in the cases relating to construction companies. Utah has adopted the unitary rule and has applied the statutory apportionment formula to an Iowa corporation engaged in the general construction business.39 In the year in question, the corporation was engaged upon a number of projects in several states but its operations were centralized in and directed from the home office in Sioux City, Iowa. Upon the facts of the case, the result was advantageous to the taxpayer inasmuch as its Utah project was more profitable than its operations in other states. In a more recent decision, Oregon applied the separate account- ing rule with respect to a foreign corporation which was engaged in the construction of a dam within the state. On the evidence presented, the court concluded that the taxpayer had sustained the burden of proof by establishing that the separate accounting method was the only method which would "fairly and accurately" reflect- the net income from the business done within the state.4° This decision also operated to the taxpayer's advantage inasmuch as its construction projects within Oregon had resulted in a loss whereas its out-of-state projects had produced a net gain. Each state court must apply its own statutory provisions. A majority of state income tax statutes provide that if the business income of a corporation is derived from business activities conducted both within and without the state, such income shall be apportioned, usually by a three-factor formula consisting of property, payroll and sales.41 Certain items in the nature of investment income may be classified as non- business income with an exclusive tax situs. Under the Uniform Divi- sion of Income for Tax Purposes Act, for example, items of non- business income include capital gains, rents, royalties, interest and dividends.42 "Business' income" is defined in the Uniform Act to mean "income arising from transactions and activity in the regular course of the taxpayer's trade or business." There is no clear cut delineation of business income and non-business income. This is illustrated by the decision in Montgomery Ward cQ~ Co. v. Commissioner ~ where the Minnesota Supreme Court was presented with the issue as to whether income derived from temporary investments of excess working capital constituted income from intangibles employed in the nationwide operations of the company. If such income reflected the unitary charac- teristics of the company's merchandising operations, it was subject to apportionment under the three-factor statutory formula. In the tax year in which this issue arose, the taxpayer had accumulated approxi- mately $300,000,000 in temporary investments with the expectation of ultimately employing these funds in the expansion of its business operations. The case was remanded to the Board of Tax Appeals to enable the taxpayer to present proof that its income from temporary investments was unrelated to the income derived from its general merchandising bustness. However, prior to reaching its decision to remand, the court made the following observation: 39 Western Contracting Corp. v. State Tax Comm'n. 414 P. 2d 579 (Utah 1966). 40 Utah Construction and Mining Co. v. State Tax Comin'n, 465 P. 2d 712 (Ore. 1970). 41 Prentice-Hall State and Local Tax Service--All States Unit ¶1046. Separate accounting is generally authorized as an alternative where formula apportionment produces a distorted or inequitable result. 42 Uniform Division of Income for Tax Purposes Act §~ 4-8. 4~ Id., § 1(a). The complete definition is as follows:" `Business income' means income arising from trans- actions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." 44 276 Minn. 479, 151 NW. 2d 294 (1967). PAGENO="0583" 563 "The record indicates that the intangibles were carried on the cor- porate balance sheet as current assets and the income derived from the investments was commingled with other corporate business income in accounts used to pay ordinary business obligations. On the present record, the taxpayer has failed to sustain its burden of proving that the intangibles involved were not employed in its principal busi- ness. . . . It is possible that the taxpayer could show that for all prac- tical purposes some part of the amounts up to $300,000,000 held during the period in question and invested in liquid securities was not actually used or usable in its merchandising operation in any significant sense. We recognize the possibility that at some point funds accumulated, held, and invested in anticipation of expansion of a business at a future, but indefinite, date have but a minimal relationship to the successful day-to-day operation of a general merchandising business. Presumably, corporate action segregating this fund was possible. But where the fund so held is not set aside as a reserve for future expansion and made unavailable for current operating expenses; where the management of the investment of corporate funds in the intangibles is entrusted to the corporate officers who manage the principal business; where the in- come from the intangibles is commingled with ordinary business in- come; and where the operating expenses of the business enterprise are paid generally from such commingled funds, the taxpayer's burden of establishing that the intangil~1es were not employed in the principal business would seem to be an extremely difficult one." ~ The foregoing decision suggests that in the context of the banking in- dustry, it would be unlikely that any significant part of a bank's busi- ness operations could be isolated as lacking unitary character and thus reduce the base of operating income subject to apportionment by appropriate statutory formula.46 A decision markedly relevant to the question of the unitary character of interstate banking operations is Household Finance Gorp. v. Fran- chise Tax Board.47 The issue in this case was whether the separate accounting method of determining income earned with respect to the California operations of the corporation should prevail over an appor- tionment by statutory formula of the corporation's entire net income. It was the taxpayer's, contention that its California operations were clearly separable from its business conducted in other states and that there was no basis for resorting to a formula determination. The court, following the rationale of the Butler Bros. decision, noted that if income is derived from or attributable to sources both within and without the state, the statutory requirement of apportionment by formula is valid even through a separate accounting method is reason- ably feasible. In the tax years in question, the taxpayer operated approximately 425 branches, of which 33 offices were located in California. Strong central management was exercised through the Chicago home office. Funds were borrowed by the home office and allocated to the various branches. Excess funds collected by the branches were remitted- to 4' Id. at 483-84, 151 NW. 2d at 296-97. ~` As indicatel by the quotatio from tise decision in Montgomery Ward & co., there is a serious question as to whether any portion of the income of a business corporation can be considered non-business income inasmuch as all economic activity of the corporation is "business." It is also illogical to suggest that capital gains, interest, dividends, and rents are not an integral part of the whole economic fabric of the corporate enterprise. It is likely that the "business" and "non-business" dichotomy has evolved from the accounting concept of stating "operating income" as an item separate from gains and losses from "extraordinary items." For an interesting observation on this point, see Dane, Taxation of Interstate Business-Three Alternate Solutions 01 the Jurisdictional Problem, 23 Tax Executive 218, 260 (1970). 4~ 230 Cal. App. 2d 926, 41 cal. Rptr. 565 (1964). PAGENO="0584" 564 the central office. Real estate leases, purchasing, public relations, advertising and personnel were handled or controlled by the home office. In all, the entire organization operated as an integrated unit. The apportionment formula which was sustained by the California court was based upon three factors-the monthly average of loans outstanding, interest collected, and payroll. In rejecting the taxpayer's objections to the application of this formula, the court drew an analogy to the typical property, sales and payroll formula: "Plaintiff asserts that basing the formula on outstanding loans, interest collected, and payroll, is erroneous. But for a business dealing in large part in tangible goods, a formula based upon the factors of property, payroll, and sales has been upheld (John Deere Plow Go. v. Franchise Tax Bd., 38 Cal. 2d 214, 238 P. 2d 569). The `property' of ilbusehold Finance Corporation is its outstanding loans represented by notes receivable. Its collections of interest appear entirely analogous to the sales of John Deere Plow Company. The payroll factor is the same in both cases. The formula used for the finance company is based upon factors reasonably and fairly adapting to this different type of business the factors found proper in Deere. We find nothing arbitrary in using them to compare the national and California business of plaintiff, and to determine the proportion of total business attributable to California." 48 This decision may indicate the pattern for future statutory or ad- ministrative fOrmulas which may be adopted for the purpose of ap- portioning income derived from interstate banking operations. Other formulas would be appropriate but, in view of the nature of banking operations, the rationa.le of this decision commends the combination of loans, interest and payrolls as particularly relevant factors in devising a fair formula for apportionment of banking income. Another decision which tends to confirm the foregoing pattern as a likely basis for apportionment of income from interstate banking operations is Equitable Savings and Loan Ass'n v. State Tax Commis- sion.49 The taxpayer, an Oregon corporation, was engaged in the business of making loans upon improved real estate with its principal office in Portland. It operated twenty-two branch offices in Oregon, four in Washington, and one in Idaho. All the business activities of the association were centralized in and controlled through the home office in Portland. During the years in question, the corporation made or participated in out-of-state loans not only in the states of Washing- ton and Idaho where it maintained branches, but also in California and Hawaii where it had no branch offices. In addition, the association consummated a large volume of Capehart military housing loans which were closed in Washington, D.C. These loans related to con- struction near military bases in a number of states. At this time, the Oregon statute provided that "if the gross income of a corporation . . . is derived from business done both within and without the state, the determination of net income shall be based upon the business done within the state, and the commission shall have power to permit or require either the segregated method of reporting or the apportionment method of reporting, under rules and regulations adopted by the commission, so as fairly and accurately to reflect the net income of the business done within the state." The 48 Id. at 930, 41 Cal. Rptr. at 568. ~ 444 P. 2d 916 (Ore. 1968). PAGENO="0585" 565 statute further provided that the foregoing rule of apportionment "was designed to allocate to the State of Oregon on a fair and equitable basis a portion of such income earned from sources both within and without the state." Under long-standing regulations, financial insti- tutions had been taxed upon their unitary income by applying a three-factor apportionment formula based upon wages, loans and interest. . It was the position of the tax commission that the association's entire income was taxable in Oregon. The commission offered the following alternative bases in support of its position: First, the tax- payer's operations in other states did not provide a sufficient nexus to warrant allocation of any of its income to such other states. Secondly, since the taxpayer was a domestic corporation and was dealing in intangibles, its entire income from such property was taxable by- Oregon, the state of domicile, under the rule of mobilia sequuntur personam. The taxpayer countered with the contention that its income was unitary in character and that it was entitled by statute and the: regulations to apportionment. Both issues were resolved for the taxpayer. On the nexus issue, the court stated its position by quoting from an earlier opinion. " `[Niexus exists whenever the corporation takes advantage of the economic milieu within the state to realize a profit. The state is entitled to tax if the benefits it provides are a substantial economic factor in the production of the taxpayer's income. * * * It is now firmly established that a state may tax the net in- come of a corporation engaged exclusively in interstate commerce. We would expect the United States Supreme Court to hold, as we do, that due process nexus is established even though the taxpayer has no offices or agents within the taxing state if it could be shown that Oregon's economy was a substantial economic factor in the produc- tion of the taxpayer's income subject to tax.' (Footnotes omitted) 238 Ore. at 346, 350-351, 395 P. 2d at 130, l32."~° On the facts, the court concluded that "there can be no doubt that the `economic milieu' o the other states in which plaintiff engaged in business was a substantial factor in producing plaintiff's income in those states." On the issue as to whether Oregon could tax the entire net income of the association on the basis of its domicile within the state, the court pointed to the contrary rule specifically provided by statute and regulations: "The regulations have provided since at least 1938 that as to finan- cial institutions, their unitary income shall be apportioned by the three-factor formula of wages, loans and interest. There is no dispute in this case about the wage factor. It would be pure sophistry to now suggest that by gross loans the commission did not mean loans made in other states to residents thereof and secured by property in those states. The factor of `gross interest collected' obviously was intended to mean the interest paid on out-of-state loans. "We think the tax court properly apportioned plaintiff's unitary income in accordance with the statute and the plain meaning of the commission's own regulations. If there is to be special taxation of the income from intangibles of a domestic corporation, it should be pro- ~0 ~ at 919. PAGENO="0586" 566 vided by the legislature and not initiated either by the commission or by this court."5' This decision, rendered by the court of the domiciliary state, is significant in its recognition that loans consummated in other states in which the corporation had no branch offices established a sufficient nexus for apportionment of net income to such other states. These out-of-state loans were secured, of course, by real prop~erty located in those states. In the context of commercial banking, however, nexus would not be tied to the geographical location of tangible security for loans made but would be related to in-state activities of solicita- tion and negotiation and the fact that eventual resort might be had to the courts of the taxing state for the collection of the indebtedness. Affiliated corporations and the unitary rule One of the more difficult problems which has arisen in the allocation of income from multistate business relates to the income of affiliated corporations all of which are concurrently ~engaged in interstate opera- tions. To what extent does the unitary rule apply to require combina- tion of the income of each of the several affiliated corporations? There are two types of affiliated groups to consider: (1) an affiliated group of corporations which are engaged in the same line of business in different geographical locations through separate corporations and integrated either on a horizontal or vertical basis; and (2) an affiliated group which is compiised of several corporations engaged in different and unrelated lines of business but operating interstate either in the same or different jurisdictions. Edison California Stores v. McGolgan 52 probably ranks as the leading ease involving the application of the unit rule to affiliated corporations which are engaged in the same line of business in different states. In that case, a multistate retail shoe business was operated through a Delaware parent corporation with its headquarters in St. Louis. There were fifteen wholly-owned subsidiary corporations each of which operated in the state in which it was incorporated. All operations were centralized in the home office of the parent corporation which provided centralized management, centralized purchasing, centralized adver- tising and various other centralized administrative functions. The home office determined operating policies for the entire affiliated group and maintained the principal accounting records for all of the subsidiary corporations. Goods purchased by the central purchasing division were shipped to the various stores operated by the subsidi- ary corporations which were charged with the cost thereof plus a specified percentage and an allocable portion of general overhead expenses. Each subsidiary operated solely within the geographical confines of its particular state. The manner of operation in Edison California Stores paralleled that of Butler Bros. except that the branches within each state were incorporated under the laws of the state in which they operated. In Edison California Stores, the tax commissioner took the position that the three factor formula should be applied to allocate on a unitary basis the income of the entire business enterprise comprising the parent and all of its subsidiaries. The taxpayer's basic objection to application of the unit rule was premised upon the existence of a `~ Id. at 920. 52 30 Cal. 2d 472, 183 P. 2d 16 (1947). PAGENO="0587" 567 separate corporate entity for the California operations coupled with a separate accounting for its operations. In reliance upon the Butler Bros. decision, the court brushed aside this argument, in effect stating that the corporate veil of each separate corporation could not be u~ied to cloak the existence of an integrated multistate unitary enterprise: "In the present case all of the elements of a unitary business are present-unity of ownership, unity of operation by centralized pur- chasing, management, advertising and accounting, and unity of use in the centralized executive force and general system of operation. The business of the parent and all of its subsidiaries is owned and managed under one centralized system, to the same extent as in the Butler Brothers case and other cases considered therein. Thus the business is unitary regardless of the fact that in the Butler Brothers case there was but one corporation involved, owning as parts of the unitary sys- tem seven different branches in as many states, and that in the present case there is a parent corporation owning and controlling as units of one system fifteen different branches organized as corporations in as many states. No difference in principle is discernible. If the crux of the matter is to ascertain that portion of the business which is done within this state, then the same considerations justify the use of the formula allocation method in the one case as in the other." ~ In a more recent case involving the Kennecott family of affiliated corporations-a parent and five wholly-owned subsidiaries-the California court has defined, with apparent acceptance by the United States Supreme Court, the extent to which the unitary rule is appli- cable to the combined income of a legally integrated group of corpo- rations. It was the position of the tax authorities that the unit rule shol4ld be applied to require apportionment of the total income of the whole intercorporate group. The California court in its decision in Chase Brass c~ Copper Co., Inc. v. Franchise Tax Board ~ refused to apply the unitary rule in this pervasive manner. The problem pre- sented can best be appraised by summarizing the intercorporate structure of the Kennecott group and their respect~ive business activities. Kennecott Copper Corporation, a New York corporation and parent of the group, did no business in California. Its business was that of mining copper,~ gold, silver and molybdenite in a number of other states. Approximately 20% of its total production of copper was sold to Chase Brass & Copper Co., one of its five wholly-owned subsidiaries. Braden Copper Company, a Maine corporation, mined copper in Chile which it regularly sold to the Chilean government and on the world market. In the years in question, due to a general shortage of copper, Braden sold some of its production in the United States. Chase Brass & Copper Co. was one of its buyers. Bear Creek Mining Company, a Delaware corporation, was engaged in exploration for new ore deposits. In the years in question, the corporation explored for metals in California, but it made no significant discoveries. Kennecott Sales Corporation, a New York corporation, handled all the sales of copper for the parent and all United States sales for 53 Id. at 479-80, 183 P. 2d at 21. `4 86 Cal. Rptr. 350, rehearing denied, 87 Cal. Rptr. 239 (1970); PAGENO="0588" 568 Braden and was compensated on a commission basis, It made no sales in California; any sales of copper by this corporatiQu which entered California were completed outside the state. Kennecott Wire and Cable Co., a Rhode Island corporation, pur- chased copper from the parent and from Braden Copper which it manufactured into copper rod, wire and cable for transmission of electricity. None of its manufacturing operations were conducted in California, but its products were warehoused and sold in California by Chase Brass and Copper Co. The taxpayer, Chase Brass and Copper Co., a Connecticut corpo- ration, manufactured brass, bronze and copper rod, sheet, wire and tube outside California. Its business activities in California consisted of warehousing and selling its products and the products of Kenne- cott Wire and Cable Co. The OJ)eratiOflS of Chase Brass and Copper Co. were concededly unitary in character and its income was properly subject to appor- tionment pursuant to the statutory three-factor formula. There were two facets to the extension of the unitary rule to the other corporations in the affiliated group. The first concerned the treatment of Kenne- cott Copper, Kennecott Sales and Chase Brass as a single unit in that their operations constituted a vertical integration of mining, manu- facturing and marketing of finished products. As to these companies, the court concluded that the unitary rule was properly applicable. This conclusion was premised upon the court's determination that the test of unity of ownership, operation and use was met in this case. Unity of ownership was clear. Unity of operation was based upon the following findings: centraliZe(l purchasing as to some items; centralized advertising through use of the same agency and reference in the adver- tising materials to membership in the Kennecott group; utilization of the same firm of public accountants; consolidation of tax accounts; representation of Chase Brass by the staff of Kennecott Copper in the particular tax proceedings; loans by Kennecott Copper to Chase Brass to finance rehabilitation of its Connecticut plant~' and adminis- tration by Kennecott Copper of a common retirement plan for salaried employees. Unity of use was found in the integration of top level management which was centralized in the president and board of directors of Kennecott Copper. It was stipulated that the board of directors of the parent was concerned with the `development and maintenance of its fabricating subsidiaries and their basië problems and policies. It was also noted that the executive salary scale of all subsidiary employees earning more than $15,000 was subject to re- view and control by the parent. Consequently, executive control at the highest level was in Kennecott Copper. Finally, emphasis was placed upon the fact that Chase Brass through the year's had been a regular and substantial customer of Kennecott Copper, taking about 20% of its total copper production. On this basis, the court concluded that Kennecott Copper, Kennecott Sales and Chase Brass constituted a unitary enterprise with respect to copper production, manufacture and sale. The operations of Kennecott Copper relating to gold, silver and molybdenite metals were not included as a part of the unitary business. ` A similar issue was whether Braden Copper should `be included within the vertical integrated group since it had supplied Chase Brass with raw materials during the years in question. Inasmuch as the PAGENO="0589" 569 relationship with Braden Copper arose only by reason of the shortage' of raw material which happened to exist in the years in question and since Braden was not a regular part of the integrated domestic opera- tions of the Kennecott family, the court excluded Braden Copper. The Court also excluded Bear Creek Mining since its operations were unrelated to the production and manufacturing operations of Chase. Brass. The second aspect of Chase Brass cQ~ Copper Co. was the question. of horizontal integration with Kennecott Wire and Cable Co., a sibling corporation, which was also engaged in the manufacture and sale of* copper products and subject to common control by the parent, Kennecott Copper. The element of common control and the fact that. Chase Brass since 1944 had handled the sale of a major part of the production of Kennecott Wire and Cable through the Chase Brass sales organization led the court to conclude that these two corporations were engaged in a unitary business. The appeal of Chase Brass cQ~ Copper Co. to the United States Supreme Court was dismissed for want of jurisdiction on December 21, 197O.~~ Implications of this decision with respect to the banking industry do not appear serious. The question is the extent to which the unitary rule applied in this case may be applicable to bank holding companies. This turns, of course, upon the nature of the businesses. conducted by the affiliated corporations. If the lines of business con-. ducted by the non-bank corporations are wholly unrelated to banking,. the unitary rule will not embrace the group or any portion of the income of members of the group.56 On the other hand, to the extent that other corporations in the affiliated group are engaged in banking or related lines of business and to the extent that management and operations are integrated, such corporations within the group will be. exposed to the broader unitary concept.57 In any case, common ownership of a group of corporations engaged' in unrelated businesses does not establish a unitary enterprise for~ purposes of apportioning net income. As indicated by the decision in. Chase Brass cQ~ Copper Co., the operations of an affiliated group are unitary only to the extent that the business conducted by any one of the corporations within the taxing state is dependent upon or con-. tributes to the out-of-state business operations of one or more other* corporations within such group. Furthermore, as in Chase Brass ct~ Copper Co., the unitary character of the group may be determined to exist only with respect to a part of the business operations of members.. of the group. An interesting variation, if not inconsistency, in the application of the unitary rule is found in the decision in Interstate Finance Corp. V. Wisconsin Dep't of Taxation,58 where the taxpayer operated within the state through its own branch offices and also through offices oper-. 55400 U.S. 961, 91 S. Ct. 365 (1970). ~6 Corporations affiliated through non-bank-originated one-bank holding companies would ordinarily lack unitary charhcter. For a study and description of these groups, see: Hearings on S. 1052 (et al) and HE. 6778 Bejore the Senate Comm. en Banking and Currcncy, 91st Cong.. 2d Sess., pt. 2 at 1289-1301 (1970). 57 Corporations affiliated under the umbrella of a bank-originated one-bank holding company would usu- ally constitute a unitary enterprise. As is true generally, the determining factor in the area of bank holding companies is the nature of the business conducted by each of the affiliated corporations. On this point, P. L 91-607, the Bank Holding Company Act Amendments of 1970, is of interest. This act restricts the invest. ments of a bank holding company to shares of companies "the activities of which . . . [are] so closely related to banking or managing or controlling banks as to be a proper incident thereto." Thus, corporations subse- quently acquired by bank holding companies will necessarily possess a unitary character. 58 28 Wis. 2d 262, 137 N.W. 2d 38 (1965). 7s-421 0 - 72 - 38 PAGENO="0590" 570 / ated by its wholly-owned subsidiaries. Interstate Finance, an Iowa corporation with its home office in Dubuque, operated five branch offices in Iowa and two in Wisconsin. It also owned all the stock of seventeen subsidiaries located in five different states, including three which operated in Wisconsin. The parent and its subsidiaries were engaged principally in automobile financing at both the wholesale and retail levels. The former involved the financing of inventories of auto- mobile dealers; the latter involved the purchase of dealers' interests in customer sales contracts. Operations of the entire enterprise were centralized at the home office which determined all matters of general company policy and exercised supervisory control over all of its branches and subsidiary operations. All the funds required in the operation of the enterprise were obtained by the home office through lines of credit established with major banks. Branch managers were selected, trained, transferred and supervised by the home office. The home office participated in loan decisions in connection with its whole- sale financing and in all loans over $5,000; it maintained a central accounting system, took possession of most security documents, with- drew funds from the local branches, and processed payrolls for all employees. Two questions were involved. The first was whether its own branch office operations in Wisconsin were part of a multistate unitary business which would require apportionment of income by the formula method. If the answer to this question were affirmative, the second question was whether the income of the taxpayer's wholly-owned subsidiaries should also be included in the base subject to apportionment. On the first issue, the court rejected the taxpayer's contention that its separate accounting method should control. On this point, the case was substantially on all fours with the factual situation described in Butler Bros. The taxpayer attempted to establish by its separate accounting procedures that its Wisconsin branches were operated either at a loss or at a lesser profit than that determined by applying the statutory formula of apportionment on a unitary basis. The second issue relating to the inclusion of the wholly-owned sub- sidiary corporations as a part of a unitary business was resolved by the court by a strict construction of the Wisconsin statute. The tax- payer argued that if its branches were an integral part of a unitary business, it followed that its wholly-owned subsidiaries were also an integral part thereof. This argument was premised upon the fact that the relationship of the parent and its home office to its subsidiary operations was precisely of the same character as its relationship to its branch offices. In rejecting the argument for inclusion of the sub- sidiaries, the court relied upon the fact that the Wisconsin statute did not specifically authorize the combination of separate corporate entities in applying the unitary rule. There is a question as to whether the decision was correct in recognizing statutory restraints upon application of the unitary rule in the circumstances of this case.59 Legislative limitations upon taxation of income derived from interstate commerce As a review of the cases has indicated, the states have broad constitutional power within the limits of due process and the commerce A9~Rudolph, State Taxation of Interstate Business: The Unitary Bu8iness Concept and Affiuiated Corporate Groups, 25 Tax Law Review 171, 199-200 (1970). PAGENO="0591" 571 clause to tax net income from interstate commerce and this power may now be applied to tax income derived from interstate banking operations. What, if any, are the existing general statutory limita- tions-either federal or state-upon the exercise of this power? Federal limitations can be imposed by Congress in the exercise of its power to regulate interstate commerce. At the state level, the only limitations are those imposed by state constitutional provisions or by self-restraint in the exercise of the taxing power. As previously observed, there was an immediate response by Con- gress to the decision in Northwestern States. In that case, the Court held that mere solicitation of orders for the sale of goods within the taxing jurisdiction provided a sufficient nexus to warrant allocation of net income from interstate business. Prior to the end of the year 1959, Congress in the exercise of its power to regulate interstate commerce enacted Public Law 86_272.60 Although Congress accepted the result reached in the specific cases which were decided by the Court (each corporation maintained a sales office within the taxing state), it proceeded to blunt the full thrust of Northwestern States by prohibiting an allocation of net income solely upon the basis of solicitation of sales orders. Specifically, the statute prohibits the imposition of an income tax if the only business activity in the taxing state consists of "the solicitation of orders . . . in such State for sales of tangible personal property . . . which orders are sent outside the State for approval or rejection, and, if approved, are filled by ship- ment or delivery from a point outside the state." Exemption is also extended to income derived from sales made within a state through independent contractors. This legislation, since it applies only with respect to the sale of tangible personal property in interstate com- merce, imposes no restrictions with respect to the allocation of income from interstate financial or banking operations. Concurrently with the enactment of Public Law 86-272, Congress authorized an extensive study of state taxation of interstate commerce. This study was conducted by a subcommittee of the House Judiciary Committee and was completed in 1965.61 The result was a recommenda- tion for enactment of legislation which (1) would limit allocation of income from interstate commerce to those states in which the tax- payer has a "business location" and (2) would require that the alloca- tion be made solely upon the basis of a two factor (payroll and prop- erty) formula.62 Under these proposals, a taxpayer would be deemed to have a business location within a State if the company owned or leased real property within the State or if the company had one or more em- ployees located in the State. These recommendations have been before Congress at each ensuing session but have not been enacted. In the 91st Congress, the recom- mendations were included in the "Interstate Taxation Act," com- monly known as the Rodino Bill (H.R. 7906), which passed the House but was not acted upon in the Senate. This legislation recently has been reintroduced in the Senate with a modification which would restrict the application of the principle enunciated in Chase Brass cQ~ Copper 60 15 U.S.C. § 381 (1959). 61 House Judiciary Comm., Special Subcommittee State Taxation of Interstate Commerce, H.R. Rep. No. 1480, 88th Cong. 2nd Sess., Vols. 1 and 2 (1964); 1~i.R. Rep. No. 565, 89th Cong. 1st Sess., Vol. 3 (1965): HR. Rep. No. 952, 89th Cong. 1st Sess., Vol. 4 (1965). The report of this subcommittee is generally referred to as the report of the Willis Conmiittee or Subcommittee. 62 HR. Rep. No. 952, 89th Cong., 1st Sess., Vol.4, at 1135 (1965). PAGENO="0592" 572 Go. relative to the apportionment of the incOme of affiliated cor~ porations.63 On the question of taxation of income from interstate banking operations, it should be noted that the proposed legislation would not apply to a corporation which derives 50% or more of its ordinary gross income from banking, the lending of money, or the extending of credit.64 In the past few years, there have been two significant developments at the state level which have an important bearing upon the taxation of net income from interstate business. These are the Uniform Division of Income for Tax Purposes Act 65 and the Multistate Tax Compact.66 The former has been adopted in eleven states; 67 and the Multistate Tax Compact now includes twenty-one member states and fourteen associate member states.68 One of the principal objectives of both the Uniform Act and the Multistate Tax Compact which incorporates the Uniform Act is to promote equitable and uniform allocation of the income tax base of interstate businesses. The Uniform Act incorporates the three-factor property, sales and payroll formula for apportionment of income from interstate business. Although these developments at the state level constitute a significant step forward, neither the Uniform Act nor the Multistate Tax Compact bears upon the issue of taxing income from interstate banking operations. The Uniform Act specifically provides that it has no application to the allocation of income from "activity as a financial organization." 69 A "financial organization" is defined to mean "any bank, trust company, savings bank, private banker, savings and loan ~ssociation, credit union, investment company, or any type of insurance company." 70 Thus, it is apparent that neither existing federal legislation nor existing state legislation will have a restrictive effect upon the exercise by the states of their power to tax net income from interstate banking operations. DOING BTJSINESS TAXES In addition to the question of multiple state taxation of the net income of national banks, there is also the question of multiple state taxation of the capital stock and gross receipts of national banks. By the permanent amendment of section 5219, a national bank will be treated for the purposes of any tax law as a corporation organized under the laws of the state in which its principal office is located.7' 63S. 317, 92d Cong., 1st Sess. § 512(d) (1971). This section provides that a state may not require a corpora- tion with a business location in the state to consolidate its income with any other corporation which does not have a business location within the state. Allowance is made, however, for adjustment of intercompany transactions which have not been consummated on an arm's length basis. 64 Id. § 506(a) (1) (A) (v). 65 The Uniform Division of Income for Tax Purposes Act was approved by the National Conference of Commissioners on Uniform State Laws and the American Bar Association in 1957. 9A Uniform Laws Annot. 448. For background and evaluations of the Uniform Act, see: Lynn, Formula Apportionment of Corporate Income for State Tax Purposes: Natura Non Facit Saltum, 18 Ohio State Law Journal 84 (1957); Lynn, The Uniform Division of Income for Tax Purposes Act Reexamined, 46 Virginia Law Review 1257 (1960); Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747 (1956); Wilkie, Uniform Division of Income for Tax Purposes, 37 Taxes 65 (1959). 65 The Multistate Tax Compact was initiated as an alternative to the recommendations of the Willis Committee that Congress enact Federal rules to govern the apportionment of income from interstate busi- ness. The Compact, which was drafted in final form in December 1966, was prepared under the auspices of the Council of State Governments. It was the joint product of representatives of the National Association of Tax Administrators, the National Association of Attorneys General and the National Legislative Con- ference. 27 Council of State Governments-Suggested State Legislation C-3 (1968). Congress has not con- sented to the Multistate Tax Compact and some hold the view that it may be invalid absent such consent. See: U.S. Const. art. I, § 10; Kust, A New Ventscre in Federalism-Toward a Solution to State Taxation of Multistate Business, 23 Tax Executive 424. 426 (1971). 67 1969 Handbook of the National Conference of Commissioners on Uniform State Laws 244, Appendix 2-Table I. 68 Prentice-Hall State and Local Tax Service-All States Unit ~ 5150 and ¶ 5151. 69 Uniform Division of Income for Tax Purposes Act § 2. 7~ Id. § 1(d). 7' See note 2 supra at p. 481 for the language of section 5219 as permanently amended. PAGENO="0593" 573 Thus, a national bank will be taxed as a domestic corporation by the principal-office state and as a foreign corporation by all other states. Capital stock taxes-Principal-office state In view of the statutory presumption of paternity of a national bank, the principal-office state will have broad constitutional authority to impose capital stock~taxes. Capital stock taxes initially evolved as hybrid property and excise taxes, but are treated juridically as excise taxes upon the corporate franchise.72 There are a variety of measures for these annual taxes, the most common being issued or authorized capital stock, capital stock and surplus, net worth, or capital value.73 Although most states provide for apportionment of the base of a capital stock tax assessed upon domestic corporations which are engaged in multiple state operations,74 there is no constitutional requirement for apportionment. The rule that there need be no apportionment of a capital stock tax upon domestic corporations is premised on the principle that the tax is an excise upon the privilege of corporate existence and is not a tax upon the property represented by the capital of the corporation.75 Although the principal-office state could impose a capital stock tax upon the total capital of a national bank without apportionment, whether or not the bank is engaged in interstate operations, there could be no discrimination against national banks. By the statutory requirement that a national bank shall be treated for tax purposes as if it were organized under the laws of the principal-office state, both national banks and domestic state banks are placed in the same class. The principal-office state could, however, classify both its national and state banks in a class separate from other domestic business *corporations and impose a capital stock tax by a different method or base, or at a different rate. Capital stock taxes-Other states Imposition of capital stock taxes by states other than the principal- office state presents a different issue. In other states, a national bank will be in the position of doing business as a foreign corporation. The validity of capital stock taxes assessed by these states will turn upon whether the bank is engaged in carrying on an intrastate business within such other states. If the bank were engaged solely in the conduct of interstate commerce, a capital stock tax would fail in the face of the long-standing constitutional Princil)le that "a state may not lay a tax on the `privilege' of engaging in interstate commerce." 76 A leading case which illustrates the application of this principle is Spector it'Iotor Service v. O'Gonnor.77 A Connecticut statute provided that every corporation "carrying on business in this state . . . shall pay, annually, a tax or excise upon its franchise for the privilege of carrying on or doing business within the state." The tax was measured by apportioned net income. Taxpayer, a Missouri. corporation with its principal place of business in Illinois, was engaged in the interstate ..~trucking business. It operated two terminals in Connecticut, but it Rep. No. 565, 89th Cong. 1st Sess., Vol. 3,904-07 (1965). `~ Jd.; Prentice-Hall State and Local Tax Service-All States Unit ¶ 1050. 74 hR. Rep. No. 565, 89th Cong. .1st Sess., Vol. 3. 908-09 (1965). ~5 }:an~a~ City, M. & B. R.R. v. Stiles, 242 kITS. 111., 37 5. Ct. 58 (1916); Kansas City, F. S. & M. Ry. v -~~9Mn, 240 U.S. 227. 36 S. Ct. 261 (1916). Both corporations were engaged in owning and operating interstate railroad systems and their capital was employed both within and without the state of incorporation. ~ Northwestern States Portland Cement Co. v. Minnesota, 358 kITS. 450, 458, 79 S. Ct. 357, 362 (1959). 77340 U.S. 602, 71 S. Ct. 508 (1951). PAGENO="0594" 574 was not authorized to do intrastate trucking and it did not engage in such business. In-coming or out-going shipments in truckload lots were delivered directly to or picked up at the customer's place of business. Less-than-truckload cargos were gathered by pick-up trucks and assembled into full truckloads at the taxpayer's terminals. It was conceded that the tax was nondiscriminatory and that the net income was reasonably apportioned to the carrier's business in Connecticut. Thus there was no undue burden upon interstate commerce. In holding the tax unconstitutional, the Court observed that there- tofore it had "struck down, under the Commerce Clause, state taxes upon the privilege of carrying on a business that was exclusively interstate in character. The constitutional infirmity of such a tax persists no matter how fairly it is apportioned to business done within the state." With this decision, the Court made clear that it is the legal "incidence of the tax" which is~ controlling. Thus, to meet the constitutional requirements, the taxing statute by its terms must operate upon an incident which is an appropriate subject of state taxation. As indicated by the subsequent decision in Northwestern Si~ates, if the Connecticut tax had been imposed directly upon net income, rather than upon "the privilege of carrying on business," it would have been valid. A subsequent case relating to the New Jersey Corporation Business Tax illustrates how a modification of statutory language can alter the determination of the constitutional issue. The facts in Roadway Ex- press, inc. v. Director, Division of Taxation 78 were substantially on all fours with Spector iVlotor an(l involved two interstate motor ctirriers each of which maintained substantial terminal facilities in New Jersey in connection with its interstate operations. The statute in question read as follows: "Every domestic or foreign corporation . . . shall pay an annual franchise tax . . . for the privilege of having or exercising its corpo- rate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State. And such franchise tax shall be in lieu of all other State, county or local taxation upon or measured by intangible personal prop- erty used in business by corporations liable to taxation under this act." (Emphasis added). The measure of the tax was allocated net worth plus allocated net income. In challenging the tax, the taxpayei~s relied solely upon the decision in Spector Motor. There was no question as to the fairness of the allocation and there was no contention that the tax discriminated against or unduly burdened interstate commerce. In sustaining the tax, the New Jersey court distinguished Spector Motor by first observing that the incidence of the tax in question was not confined to that "of carrying on or doing business within the state" as was true of the Connecticut statute. Rather, the court noted that the privilege subject to tax was in the alternative and included "exercising its corporate franchise within the state or of owning or employing capital or property in the state, or of maintaining nn office in the state." Thus the court concluded that there was a "nexus of localized activity within the state of a nature and extent . . `~ 50 N.J. 471, 236 A. 2d 577 (1967), appeal dismissed, 390 13.6. 745 (1968). PAGENO="0595" 575 where it can realistically be said that state government substantially affords protection and gives benefits to the corporation's enterprise within the state." But the more significant aspect of the tax accord- ing to the court was the "in lieu" feature. On this point, the court described at some length the history of the statute. The tax in ques- tion had been enacted to replace a local property tax on both tangible and intangible property of corporations and a state capital stock tax on both domestic and foreign corporations. This background aptly demonstrated the bona fides of the "in lieu" property tax feature. It also brought the tax within a long line of authority which had sustained taxes labeled as franchise taxes but imposed as "in lieu" property taxes measured by apportioned gross receipts derived solely from interstate commerce.79 An appeal to the Supreme Court in Roadway Express ~ras dismissed for want of a substantial federal question. It has been suggested that Roadway Express effectively erodes the rule of Spector Motor.8° Although this appraisal is not without some foundation, one cannot discount the "in lieu" aspect of the tax as the determining factor in Roadway Express. It is submitted that there is nothing in the recent decisions to support a departure from the view that a state other than the principal- office state cannot impose a valid capital stock tax upon a national bank where the business transacted in the other state consists ex- clusively of the conduct of interstate business. With respect to banking operations, the cases support the conclusion that mere solicitation and servicing of loans or other banking business within another state would constitute interstate commerce.8' This conclusion is premised upon the facts and decision in Northwestern States where the Court took the position that in-state solicitation of sales with production, shipment, billing and collection being made from an out- of-state plant and office constituted "activities . . . exclusively in furtherance of interstate commerce." In sum, it is unlikely that a national bank would be deemed to be engaged in an intrastate business in another state for purposes of a capital stock tax in the absence of the establishment of a branch where "operations of discount and deposit" were regularly carried on. Assuming that a national bank were engaged in intrastate business in a state other than its principal-office state, a capital stock tax would be valid only if applied on an apportioned basis. Failure to apportion the base of a capital stock tax with respect to a foreign corporation doing business in the taxing state has been held to constitute a tax upon values outside the taxing state and to violate both due process and the commerce clause.82 It follows that an apportionment of the base of a capital stock tax must be reasonable in relation to the capital employed in the business conducted in the taxing state. Most of the established formulas for apportionment include tangible property and gross receipts, and some include payrolls. In some states, the property 78 E.g., Railway Express Agency, Inc. v. virginia, 358 U.S. 435, 79 S. Ct. 411 (1959). 80 Comment, State Taxation of Interstate Commerce: Roadway Express, The Diminishing Privilege Tax Immunity, and the Movement Towards Uniformity in Apportionment, 36 University of Chicago Law Review 186 (1968). 81 Holding security interests with respect to property ohysically located within the state in coonection with bank loans would not alter this conclusion. The security arranceinents would merely be incidental to transaction.s which are essentially interstate in character. 82 Cudahy Packing Co. v. Hinkle, 278 U.S. 460, 49 5. Ct. 204 (1929). PAGENO="0596" 576 *factor includes intangibles.83 For the banking industry, inclusion of intangible property in the apportionment formula would be partic- ularly relevant; however, a formula which excludes intangibles would not result in an unreasonable allocation of the base of a capital stock tax. Gross receipts taxes A few states have imposed general business taxes based upon gross receipts and these taxes have engendered close scrutiny under the commerce clause.84 By contrast with a tax upon net income, a tax upon or measured by gross receipts derived from interstate commerce is deemed a direct burden thereon. A net income tax al)plieS only if the commerce is profitable, but a gross receipts tax applies solely by reason of the fact that there is commerce.85 J. D. Adams Manvfacturing (Jo. v. Storem86 is one of the landmark cases to deal with the validity of a gross income tax. Section 3 of the Indiana Gross Income Tax Act of 1933 imposed a tax "upon the entire gross income of every person engaged in the business of manufac- turing" at the rate of one-fourth of one percent and "upon the entire gross income of every person engaged in the business of retailing" at the rate of one percent. The taxpayer, an Indiana corporation, manufactured heavy road building machinery and equipment which was sold both within and without the state. Its only manufacturing plant was located in Indiana. After observing that the tax was not "an excise upon the privilege of producing or manufacturing within the state, measured by volume of production or the amount of sales," the Court concluded that the tax as applied to gross income derived from interstate sales imposed an undue burden upon interstate commerce by subjecting such receipts to the risk of multiple taxation: "The vice of the statute as applied to receipts from interstate sales is that the tax includes in its measure, without apportionment, receipts derived from activities in interstate commerce; and that the exaction is of such a character that if lawful it may in substance be laid to the fullest extent by states in which the goods are sold as well as those in which they are manufactured. Interstate commerce would thus be subjected to the risk of a double tax burden to which intra- state commerce is not exposed, and which the commerce clause forbids. We have repeatedly held that such a tax is a regulation of, and a burden upon, interstate commerce prohibited by article 1, section 8, of the Constitution. The opinion of the State Supreme Court stresses the generality and nondiscriminatory character of the exaction but it is settled that this will not save the tax if it directly burdens inter- state commerce." 87 In its decision, the Court pointed to the distinction between the gross receipts tax in question and an excise tax imposed upon the privilege of manufacturing or mining measured by the sales price of the goods produced and concluded with the following statement: "So far as the sale price of the goods sold in interstate commerce includes compensation for a purely intrastate activity, the manu- 83 1-JR. Rep. No. 565, 89th Cong. 1st Sess., Vol. 3, 946-52 (1965). 81 Sales and use taxes are based upon gross receipts but such taxes apply only at the retail level. The gross receipts tax considered here is one which applies generally at all stages of production and distribution. It should be added, however, that subject to state constitutional provisions a state could imoose a selected oc- cupation tax upon banks measured by gross receipts. In that case, the allocation of gross receipts as the measure of the tax would be governed by the principles developed herein. 83 United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 38 S. Ct. 499 (1918); 83394 U.S. 307, 58 5. Ct. 913 (1938). 87 Id. at 311-12, 58 S. Ct. at 916. PAGENO="0597" 577 facture of the goods sold, it may be reached for local taxation by a tax on the privilege of manufacturing, measured by the value of the goods manufactured, or by other permissible forms of levy upon the intrastate transaction. It is because the tax, forbidden as to inter- state commerce, reaches indiscriminately and without apportionment, the gross compensation for both interstate commerce and intrastate activities that it must fail in its entirety so far as applied to receipts from sales interstate." 88 There are two aspects of this decision which warrant emphasis and both are inherent in the multiple burden test which the court applied. First, it will be observed that the Court subscribed to its earlier decisions in which it had sustained excise taxes measured by gross receipts derived from interstate commerce where the subject of the tax was a strictly localized activity. Thus, an excise upon the privilege of mining,89 manufacturing,90 or publishing9' measured by gross receipts derived from the sale of goods or products in interstate commerce is permissible. No other state can impose a tax upon the exercise of these privileges and the tax in each of these circumstances satisfactorily meets the requirement of apportionment to a local activity. The second point relates to subsequent decisions in which the Court has sustained taxes upon gross income derived from interstate transportation where such receipts have been apportioned upon a~ mileage basis to the taxing state.92 Again, there is no risk of multiple taxation inasmuch as the receipts which are the subj ect or the measure of the tax cannot be allocated to any other state. Ar other leading case which p1 ovides background upon the con- stitutionality of a gross receipts tax is Gwinn, White & Prince v. Henneford.93 Washington state imposed a tax upon "the act or privilege of engaging in~ business activities" upon every person "engagmg within this state in any business activity" at the rate of one-half of 1 per cent of the "gross income of the business." The taxpayer, a Washington corporation, was engaged as a marketing agent for Washington and Oregon fruit growers and growers' cooperative or- ganizations. As agent for the growers, it made sales and deliveries of fruit to purchasers in other states throughout the United States, collected the sales price, and remitted the proceeds to its principals after deducting certain expenses and commissions. Many of the sales and collections thereon were effected through the taxpayer's local representatives in the other states. In holding the tax unconstitutional with respect to the commissions earned by the taxpayer, the Court made the following observations: "While appellant is engaged in business within the state, and the state courts have sustained the tax as laid on its activities there, the interstate commerce service which it renders and for which the taxed~ compensation is paid is not wholly perfoimed within the state. A substantial part of it is outside the state where sales are negotiated and written contracts of sale are executed, and where deliveries and collections are made. Both the compensation and the tax laid upon it 88 Id. at 313-14, 58 5. Ct. at 917. 89 Oliver Iron Mining Co. v. Lord, 262 U.S. 172, 43 S. Ct. 526 (1923). 9° American Manufacturing Co. v. St. Lcuis, 250 U.S. 459, 39 5. Ct. 522 (1919). "Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S. Ct. 546 (1938). 92 Canton R.R. Co. v. Rogan, 340 U.S. 511, 71 S. Ct. 447 (1951); Central Greyhound Lines, Inc. v. Mealey,. 334 U.S. 653,68 S. Ct. 1260 (1948). `3 305 U.S. 434, 59 S. Ct. 325 (1939). PAGENO="0598" 578 are measured by the amount of the commerce-the number of boxes of fruit transported from Washington to purchasers elsewhere; so that the tax, though nominally imposed upon appellant's activities in Washington, by the very method of its measurement reaches the entire interstate commerce service rendered both within and without the state and burdens the commerce in direct proportion to its volume. ". . . {I]t is enough for present purposes that under the commerce clause, in the absence of Congressional action, state taxation, what- ever its form, is precluded if it discriminates against interstate com- merce or undertakes to lay a privilege tax measured by gross receipts derived from activities in such commerce which extend beyond the territorial limits of the taxing state. Such a tax, at least when not apportioned to the activities carried on within the state, . . . burdens the commerce in the same manner and to the same extent as if the exaction were for the privilege of engaging in interstate commerce and would, if sustained, expose it to multiple tax burdens, each measured by the entire amount of the commerce, to which local commerce is not subject. "Here the tax, measured by the entire volume of the interstate commerce in which appellant participates, is not apportioned to its activities within the state. If Washington is free to exact such a tax, other states to which the commerce extends may, with equal right, lay a tax similarly measured for the privilege of conducting within their respective territorial limits the activities there which contribute to the service. The present tax, though nominally local, thus in its practical operation discriminates against interstate commerce, since it imposes upon it, merely because interstate commerce is being done, the risk of a multiple burden to which local commerce -is not exposed." ~ As the decision in both J. D. Adams Manvfacturing Co. and Gwinn, White cQ~ Prince indicate, it is exceedingly difficult, if not impossible, to apportion among the several states gross receipts derived from the sale of goods or the rendition of services in transactions consummated in interstate commerce. In each of these cases, the goods sold and the services rendered originated in the taxing state. It is of interest to compare- two more recent cases involving taxes upon gross receipts where the goods sold originated outside the taxing state. The question in each case was the propriety of allocating these receipts to the market state in view of the interstate aspects of the transactions. As in Gwinn, White cf~ Prince, these later cases also involved the application of the Washington "business activities" tax. In Field Enterprises v. State,95 a Delaware corporation, with its principal office in Chicago, was engaged in the business of publishing and selling encyclopedias throughout the United States. It maintained a division office in Seattle with a division manager and four employees. This office was used as a headquarters to train salesmen and there were 175 salesmen within the state. Orders for books, which were obtained through personal calls by salesmen, were submitted with the dow~i payments thereon to the division office in Seattle and forwarded by that office to Chicago. Shipments pursuant to these orders were made directly from Chicago to the customer and billings and collections of the unpaid balance of the purchase price were made by the Chicago 94 Id. at 438-39, 59 S. Ct. at 327-28. ~` 47 Wash. 2d 852, 289 P.2d 1010 (1955), affirmed per curiam, 352 U.S. 806, 77 S. Ct. 55 (1956). - PAGENO="0599" 579 office. On these facts it was held that the tax upon the gross receipts from sales in Washington did not impose an unconstitutional levy upon interstate commerce. The most recent case in point is General Motors Corporation v. Washington 96 in which the Court dealt with the issue as to whether it was constitutional to apply the Washington business activities tax to the taxpayer's gross receipts from wholesale sales of motor vehicles, parts and accessories delivered to independent retail dealers in the state of Washington. Under the GM organizational structure, distribu- tions of its products were supervised through geographical offices. Chevrolet, Pontiac and Oldsmobile divisions maintained a zone office in Portland, Oregon which serviced GM operations in Oregon, Wash- ington, Idaho, Alaska and portions of Montana and Wyoming. GM offices and employees located in the State of Washington consisted of the following: (1) The Chevrolet division maintained a branch office in Seattle to service a major part of the state of WTashington by expediting deliveries and performing some promotional work. This office was under the jurisdiction of the Portland zone office. (2) GM Parts Division maintained a warehouse in Seattle, employed 20 to 28 employees, and supplied all of the Chevrolet, Pontiac and Oldsmobile dealers in Washington with parts and accessories most often called for. (3) Each district manager of the Chevrolet, Pontiac and Oldsmobile divisions resided in Washington and each regularly visited the dealers under his supervision for the purpose of establishing and maintaining sales~ of GM automobiles. Each district manager's home served as his office for the transaction of GM business. With the exception of automobile parts sold from the Seattle office and warehouse of the GM Parts Division, all sales within Washington were consummated on the basis of orders mailed by dealers to out-of- state offices of GM and filled by shipment of goods into the state. The challenge to the tax related to gross receipts from out-of-state ship- ments to Washington dealers. After carefully summarizing all the facts relating to GM business activity in the state of Washington, the Court concluded that GM had so mingled its taxable business with that which it claimed to be not taxable that, in light of all the evidence, at- tribution of all its Washington sales to its local activity was justified. The decision in General Motors and the affirmance in Field Enter- prises were both premised upon the Court's earlier decision in Norton Go. v. Department of Revenue.97 In the Norton case, a Massachusetts corporation with its principal office in `Worcester maintained a place of business in Illinois, where it stocked and sold certain of its prodticts. The Illinois office also processed orders for items not in stock. Goods for various orders were assembled in Worcester and shipped in carload lots to the Illinois office where they were reconsigned to the respective customers. In addition, Norton also filled orders received directly from Illinois purchasers by direct shipments to the customers. The issue in Norton was whether the Illinois Retailers' Occupation Tax "upon persons engaged in the business of selling tangible per- sonal property at retail in this State" applied to all the sales made by Norton to Illinois customers. In its decision the Court concluded that the company could not "channel business through a local outlet to gain the advantage of a local business and also hold the immunities of 96 377 U.s. 436, 84 S. Ct. 1564 (1964). 340 U.S. 534, 71 S. Ct. 377 (1951). PAGENO="0600" 580 an interstate business." 98 The oniy sales which the Court excluded from the Illinois tax were those made upon orders received in Massa-~ chusetts directly from the purchaser and filled by direct shipment to the customer. These transactions were deemed to be clearly interstate' in character and disassociated from the local business outlet. With this datum point, the Court proceeded in General Motors' Corporation to emphasize "the bundle of corporate activity" and found that the business of G~vI was so enmeshed in local connections-so channelled through local activity-that all GM sales within the state were sufficiently localized to warrant imposition of the gross receipts tax. The test is one of degree. In Norton, Field Enterprises and General Motors, there were local offices staffed to provide substantial and continuing services in the promotion, sale, or actual delivery of the taxpayer's products within the taxing state. With the background of these decisions, the application of gross receipts taxes to national banks appears reasonably clear. The principal-office state can tax the gross receipts of a national bank except to the extent that such receipts are derived from banking activities localized in another state. In the absence of branch banking facilities in other states with which the out-of-state loans and other banking services could be associated, the principal-office state is likely to be sustained in the imposition of a tax U~Ofl total gross receipts.99 It is equally clear that if a national bank were to operate branches in other states, such other states could tax the gross receipts derived from banking services rendered therein. But where the activity in another state consists only of solicitation or servicing of loans and other business, there is little risk that a gross receipts tax by such other state would be sustained in the absence of the rnainte- nance of a local office or local branch. CONCLUSIONS AND SUMMARY With the permanent amendment of section 5219 of the Revised Statutes, national banks for the first time are faced with the prospect of multiple state taxation of net income, capital stock and gross receipts. By the permanent amendment, each national bank is subject to taxation as if it were incorporated in the state in which its I)rin(ipal office is located. Thus, a national bank is taxable by the principal- office state as a domestic corporation, and by all other states as a foreign corporation. The risk of multiple taxation of a national bank arises only if it engages in carrying on an interstate banking business. If the bank is engaged exclusively in intrastate business, it will be taxable only by the state in which it operates. The scope of the risk of multiple state taxation of national banks U~OR net income, dapital stock and gross receipts and the requirements for allocation of the tax base of each type of tax are summarized below. NATIONAL BANKS ENGAGED EXCLUSiVELY IN "INTRASTATE" BUSINESS If a national bank is engaged in conducting an exclusively intra- state business, the Princil)al-office state could impose the following 98 Id. at 539, 71 5. Ct. at 381; ~ It is of interest to note that under Rule 194 of the Washington Department of Revenue, a financial institution which has no place of business outside the slate must include for purposes of the business activi- ties tax gross income received from loans placed without the state. CCII Wash. State Tax Reporter ¶68-594; PAGENO="0601" 581 taxes: (1) a net income tax measured by total net income; (2) a capital stock tax measured by the total capital stock base; and (3) a gross income tax measured by total gross receipts. For purposes of a net income tax, the bank would be in the position of a domestic corporation deriving all of its income within the state. For purposes of a capital stock tax, the bank would be utilizing all of its capital in a local business. Existing state statutes applicable to general business corporations provide various bases for measurement of capital stock taxes. rllhe base may consist of authorized or issued stock, capital stock plus capital surplus, net worth, or capital value and the valuation may be determined by par value, book value or market value. Since national banks are to be taxed as domestic corpo- rations in the Principal-office state, there could be no discrimination against such banks relative to domestic state banks. Consequently, the principal-office state would be required to tax the capital stock of domestic national banks and domestic state banks in the same manner. The principal-office state could, however, place domestic national banks and domestic state banks in a class separate from other domestic business corporations and impose a capital stock tax upon these banking corporations by utilizing a different tax base, or by taxing at a different rate. A gross receipts tax imposed by the principal-office state could be either a general business tax or a selective tax applicable only to the business of banking. For the reasons indicated with respect to capital stock taxes, the principal-office state would be required to apply a gross receipts tax uniformly to both domestic national banks and domestic state banks. NATIONAL BANKS ENGAGED IN "INTERSTATE" BANKING OPERATIONS A national bank which is engaged in multistate banking operations will be exposed to income, capital stock and gross receipts taxes not only by the state in which its principal office is located, but also by other states in which it transacts banking business. The principal- office state can impose all three taxe~. Other states can impose a net income tax even though the bank is engaged solely in interstate com- merce within the taxing state, but these states can impose capital stock and gross receipts taxes only if the bank is engaged in intrastate business therein. Net income taxes TaxatioL of the net income of national banks engaged in interstate banking presents the same problems in the division of income which arise with respect to other multistate business corporations. Although the state of incorporation (principal-office state of a national bank) has the constitutional power to tax the total net income of its corpora- tions, it is the established practice under state income tax statutes to divide the net income of interstate corporations among the states to which the income is attributable. Generally, this division is effected by application of a statutory formula for apportionment on the ground that the income of the enterprise is unitary in character-i.e., that the business operations in the respective states are interdependent and contribute to the net earnings of the whole enterprise. rI~here is no apparent reason to anticipate that the income of an interstate banking 79-421 0 - 72 - 39 PAGENO="0602" 582 business would be divided by a different method by either the principal- office state or by other states. The statutory formula utilized by most states in the division of the net income of non-bank multistate businesses is based upon three factors, property, payroll and sales. This or any other formula for the apportionment of net income from interstate business is valid pro- vided it is fairly calculated to assign that portion of the net income which is reasonably attributable to business conducted in the taxing state. In view of the adaptations which have been made under state income tax laws in the apportionment of interstate income of lending institutions other than banks, it is likely that a formula for the ap- portionment of net income of interstate banks will be developed which would utilize outstanding loans, payroll and interest receipts. Under state income tax statutes, the unitary rule for apportion- ment of net income from interstate operations has been applied not only to the net income of individual corporations operating in inter- state commerce, but also to the combined incomes of affiliated groups of corporations engaged in interstate operations. The rule has been held applicable to the extent that the income of each corporation within the group partook of a unitary character. National banks which are engaged in interstate operations and which are members of an affiliated group would be subject to the same rule to the extent that the income of the affiliated corporations is interdependent~ and thus possesses a unitary character. There are two alternatives to formula apportionment of net income from interstate banking operations. One is specific allocation of cer- tain items of income. Under state income tax statutes, it is customary to distinguish between "business" income and "non-business" income. Where a corporation is engaged in multistate operations, business in- come is generally divided by formula apportionment; and non-business (non-operating) income such as interest, dividends and capital gains, is subject to specific allocation. Interest, dividends, and capital gains upon intangible property are generally allocated to the state of com- mercial domicile; capital gains upon real estate and tangible personal property, to the state in which the property is located. This pattern, which may be suitable for general business corporations, is wholly in- appropriate for the banking industry inasmuch as interest, dividends and capital gains constitute a maj or portion of the regular operating income of a bank. Constitutionally, interest income earned by an out-of-state bank upon loans made to in-state debtors could be taxed by the state of the debtor's domicile.'°° It would be necessary, however, to allocate against such income the related costs and expenses incurred by the lending bank to avoid an invalid tax upon gross receipts derived from interstate commerce. The practical difficulties of accounting and administration are readily apparent. The second alternative to formula apportionment is separate accounting for net income derived from operations in the taxing state. Under most state statutes, this method is provided where the formula method of apportionment fails to effect a fair and equitable attribution of income in relation to the operations in the taxing `~° Hellerstein, Federal GonslitutiOflal LimitatiOfl~ on State Taxation of Multi8tate Banks, (appendix 11), pp. 452-54, supra. PAGENO="0603" 583 state. Since the burden is usually upon the taxpayer to demonstrate that formula apportionment operates unfairly, separate accounting is not general]y utilized. An overall evaluation of the several alternatives leads to the prediction that the income of banks engaged in interstate banking operations probably will be divided among the states by formula apportionment. Capital stock taxes The principal-office state can impose a capital stock tax without apportionment upon the total capital stock of a national bank engaged in interstate banking operations. Most states apportion the capital stock tax upon domestic corporations engaged in multistate business, but a considerable number of states do not. It is difficult to predict the pattern which may emerge with respect to the apportionment of capital stock taxes upon domestic national banks which conduct multistate banking operations. As indicated with respect to national banks engaged exclusively in intrastate business, the base of a capital stock tax may vary. A likely base for banks would be total capital or net worth determined either by book or market value. It is significant that a capital stock tax imposed by a principal-office state could not discriminate against domestic national banks relative to domestic state banks and that the principal-office state could place both in a class separate from other domestic business corporations and tax them by a different base or at a different rate.10' A state other than the principal-office state could not impose a capital stock tax for the privilege of carrying on business therein unless the bank were engaged in conducting an intrastate business. It is doubtful that the mere solicitation and servicing of bank loans would constitute an intrastate business. If a national bank were engaged in intrastate business in another state, however, it would be taxable as a foreign corporation and could be subjected to a capital stock tax only by apportionment. Most statutory formulas for apportionment of the base of a capital* stock tax include tangible property and gross receipts, and some in- clude payroll. Some states also include intangibles in the property factor. Since intangibles are a significant asset in the banking business, it could be expected that the formulas which might evolve for alloca- tion of capital stock taxes upon national banks would include intan- gibles in the property factor. Gross receipts taxes Gross receipts of a national bank which is engaged in multistate banking operations may be taxed by the principal-office state except to the extent that such receipts are derived from the conduct of intrastate business in another state and are taxable by such other state. The degree of local business activity sufficient to qualify as intrastate business in another state is not entirely clear. On the basis of the decided cases, however, it is unlikely that a national bank would be deemed to be engaged in intrastate business in another state in the absence of the establishment of a branch where "operations of discount and deposit" are regularly carried on. On the constitutional issue, it would make no difference whether the gross receipts tax were a general 101 There is a risk that states could impose discriminatory capital stock or gross receipts taxes upon out- of-state national banks seeking entry to carry on intrastate bankingToperations. Hellerstein, Federal consti- tutional Linsitations on State Taxation of Multistate Banks, (appendix 11), pp. 452-54, and 475-80, supra. PAGENO="0604" 584 business tax or a selective tax applicable only to the business of banking. CHAMPAIGN, ILLINoIS, April 30, 1971~. PAGENO="0605" APPENDIX 13 Repeal of Restrictions on State Taxation of National Banks: Effects on Multi-Corporate Banking Organizations WILLIAM R. BOLLOW Assistant to the Vice President and General Counsel, Federal Reserve Bank of San Francisco The prospective termination, effective January 1, 1972,' of Federal statutory restrictions on the taxation of national banks by the states may bring to light some special problems with respect to the tax treat- ment to be afforded multi-corporate organizations engaged in banking. For purposes of this study, the term "multi-corporate banking organi- zation" refers to business corporations related as to ownership and control within a bank holding company structure. Consideration of the potential treatment of multi-corporate banking organizations ib warranted in view of the recent and extensive pro- liferation of such businesses throughout the country, and in view of the eX~)anding power and practice of the states to tax related and multi- state enterprises as unitary businesses. In this latter connection, a bank WThiCh is part of a multi-corporate banking organization having opera- tions in a i)artiCular state conceivably could be taxed in a manner which takes into account all related business activities and assets wherever performed or located. The tax problems involving multi- corporate banking organizations, which are likely to arise as a result of the new law, lie largely in this area and are discussed below. ]n addition it appears probable that questions may arise respecting the tax treat- ment of intercorporate dividends. These also are discussed. Foreseeable problems lie primarily in the area of income taxation. rfhe principal change from present and earlier law is that under the new law, effective January 1, 1972, a national bank will be subject to tax by states outside of its home state provided there is foreign activity sufficient in character and extent to justify the imposition of the tax in question.2 DEVELOPMENT OF MULTI-CORPORATE BANKING ORGANIZATI ONS The growth of multi-corporate banking organizations has accelerated rapidly in the last five years with the emergence of bank-originated one-bank holding companies. Between June 30, 1966, and April 1, 1 P.L. 91-156, approved December 24, 1969, amending 12 U.s.c. 548, R. S. Sec. 5219. See appendix 1, above, for statutory texts. 2 Prior to the 1969 amendment to section 5219, national banks were subject to tax only in the state in which their principal offices were located and the types of taxes that might be imposed were specifically designated in section 5219. Under interim legislation which expires January 1, 1972. national banks are subject to limited taxation by foreign states: (1) sales and use taxes, (2) taxes on the execution, delivery or recording of docu- ments, (3) taxes on tangible personal property (excluding cash or currency), and (4) liëense, registration transfer. excise, or other fees or taxes on the ownership, use, or transfer of tangible personal property. Until January 1, 1972, intangible personal property is exempt from taxation. After January 1, 1972, all federal statutory restrictions on the taxation of national banks are removed except that such banks are subject to taxation by the states in the same manner that the states may choose to tax state banks. (585) PAGENO="0606" 586 1970, the number of banks controlled by one-bank holding companies increased by 475, or 74 percent.3 As a result of this trend and during this period, deposits of one-bank holding company banks were increased by 123 billion dollars, placing almost one-third of the nation's commercial bank deposits inthe hands of one-bank holding companies. Significantly, also during this period, nine of the ten largest banks in the country set up. and became owned by one-bank holding companies. In addition to bank-originated one-bank holding companies, there exist other categories of multi-corporate banking organizations. These may be roughly described as including the older type of one-bank holding companies and multi-bank companies registered pursuant to the Bank Holding Company Act of 1956.~ All bank holding companies are now subject to registration as a result of the Bank Holding Company Act Amendments of 1970 (Public Law 9 1-607, approved December 31, 1970). All in all, multi-corporate banking organizations represent a highly significant and increasing percentage of the nation's banking resources and activities. The development of bank ownership by multi-corporate organiza- tions prior to the trend toward bank-originated one-bank holding companies resulted in congeneric and conglomerate corporations which engaged in a wide range of business activity generally considered to be of a non-banking nature.6 The recent trend toward the development of bank-originated one- bank holding companies was motivated to some degree by the need* and desire of commercial banks to expand the traditional range of activities permitted banks. Under the recently enacted legislation amending the Bank Holding Company Act of 1956, Congress has placed the responsibility of regulating all bank holding company activity in the hands of the Federal Reserve Board. Under this legis- lation any company acquired by a bank holding company must be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." Thus, the contours of future expansion of multi-corporate banking organizations will be limited. Non-banking activities conducted by certain of these organizations before June 30, 1968 will be permitted to continue unless the Federal Reserve Board finds divestiture necessary because of undue concentration of resources, unfair or decreased competition, conflicts of interest, or unsound banking practices. "The One-Bank Holding Company-History, Issues, and Pending Legislation," Business Conditions, published by the Federal Reserve Bank of Chicago, July 1970, p. 6. 4 Ibid. at p. 6. "One-bank holding companies in existence in 1967 have been classified on the basis of their primary activities. Of 418 companies for which data were available, nine were foreign companies owning a domestic bank. Of the remaining 409 domestic companies, 21 percent confined their activities solely to banking. About 38 percent of the companies were engaged in activities of a non-banking, but exclusively financial, nature. These were classified as congenerics. The largest proportion, more than 41 percent, engaged in some non-financial activities and were classified as conglomerates." `A bank holding company as originally defined in the Bank Holding Company Act of 1956 controlled two or more banks and was required to register with the Board of Governors of the Federal Reserve System. A "bank" is defined as any institution that accepts deposits that the depositor has a legal right to withdraw on demand; this definition encompasses State-chartered commercial banks as well as national banks. 12 U.S.C. 1841. 6 Seventy-four companies in this category are described in a "Study and Description of Non-Bank- Originated One-Bank holding Companies," prepared by the Association of Traditional One-Bank Holding Companies, May 1970. Hearings before the Senate Committee on Banking and Currency on S. 1052, S. 1211, S. 1664, S. 3823, and H.R. 6778 (Bills to Amend the Bank Holding Company Act of 1956), 91st Cong., 2d Bess. (1970), p. 1289. PAGENO="0607" 587 APPLICABILITY OF THE UNITARY BUSINESS CONCEPT BY STATES SEEKING TO TAX THE INCOME OF MULTI-CORPORATE BANKING ORGANIZATIONS Under the unitary business concept a taxing jurisdiction may disregard the separate status of related businesses and lump such entities together as if they were one business corporation for the purpose of assessing income taxes or taxes measured by income. In general, if a state adopts this approach, the test of applicability in any given case is that business conducted in the taxing state is de- pendent on or contributory to the business outside the state and the affiliated corporations are in some sense integrated in their operations. The concept has enjoyed increasing application by some state taxing authorities and is likely to become even more commonplace as it becomes more generally understood, particularly in view of the press- ing needs and desires of state and local governments to expand their sources of tax revenue.7 Moreover, the concept has been considered in several Supreme Court cases and its validity appears firmly established as a matter of law.8 Its applicability to multi-corporate banking organizations re- mains to be established, however. Opportunity for application to multi-corporate banking organizations will exist under the new law beginning January 1, 1972, whenever more than one taxing jurisdiction is in a position to tax the income of such related businesses. Such a tax of necessity involves the application of an appropriate appoi tion- ment formula designed to calculate that portion o~ the total i~uion~c of a unitary business which may fairly be attributed as earned within the taxing jurisdiction. Application of the unitary business concept to multi-corporate bank- ing organizations will usually involve activities performed in the taxing state by a business entity having an out-of-state domicile. l\~iulti- corporate banking organizations, although there are some exceptions, are commonly composed of entities domiciled in the same state unlike related corporations in other lines of business.9 To date well-established practice and prohibitions have served to discourage the expansion of banks across state lines through branching. For the most part, the unitary concept is likely to be invoked with respect to out-of-state multi-corporate banking organizations by taxing states in which the out-of-state banking business performs some activity or in some other respect has sufficient nexus to give use to the power to tax income earned in the taxing state. In this situation an out-of-state multi-corporate banking organization is very much like an out-of-state single entity corporation.'° In both cases, under the 7See Peter Miller, "State Income Taxation of Multiple Corporations and Multiple Businesses," Tax Foundation Seminar, "Taxation of Interstate Business," April 16, 17, 1970, p. 72; Frank M. Keesling aisd John S. Warren, "The Unitary Concept in the Allocation of Income," 12 1-lastings Law Journal 42 (1960-61); Jerome R. Heflerstein, "Recent Developments in State Tax Apportionment in the Circumscription of Unitary Business," 21 National Tax Journal 487 (1968); E. George Rudolph, "State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups," 25 Tax Law Review 171 (January 1970). See also "State Taxation of Interstate Commerce," Report of Special Subcommittee on the Judiciary, House of Representatives, 88 Cong., 2d Sess., hR. No. 1480, June 15, 1964 (hereinafter cited as Willis Subcommittee Report). vol. 1. chap. 7, on "Division of Income," at 155-249. United States Glue Go. v. Testis of Oak Creek, 247 U.S. 307 (1918); Underwood Typewriter Co. v. chamber- lain, 254 U.S. 113 (1920); Bass, Ratcliff & Gretton v. State Tax Commission, 266 U.S. 271 (1924); Htiss Bees' Sons v. North Garobna, 283 U.S. 123 (1031). See above, appendix 12. It is probable that there will eventually be more activity across state lines as a result of Section 4(c) (8) of the recently amended Bank Holding Company Act. It does not appear that hank holding companies will be restricted in setting up or acquiring out-of-state non-banking subsidiaries where such subsidiarie~ are "closely related to banking." 15 See B. George Rudolph, op. cit., at pp. 194-95 "As a matter of general principle it would seem to make little difference whether an interstate unitary business is conducted by a single corporation or by a group of corporations under common ownership and control." PAGENO="0608" 588 unitary business concept, the activity might permit the state in which it is 1)eIformed to tax the income attributable to that activity through an appropriate appoitioninent of the entire business income of the out- of-state corporation. The difficult question of what constitutes suffi- cient nexus or jurisdiction to tax is the same whether the unitary business is a single bank or an multi-corporate banking organization.'1 Assuming that there is jurisdiction to tax a multi-corporate banking organization in more than one state, the question remains whether such a business can be regarded as unitary. The nature of a unitary business is briefly discussed in the Willis Subcommittee Report: "A combination of the administrative and theoretical difficulties l)resented by separate accounting is responsible for the concept of the `unitary business,' a concept which pervades the area of State taxation of multi-state concerns. In essence, a `unitary business' is a business for which it is felt that the separate accounting method does not reasonably reflect the income attributable to each establishment. A less conclusory statement of the concept is that a business is `unitary' if the several business establishments of the company are mutually dependent upon each other for their success. State tax administrators differ somewhat in their conclusions as to what kinds of business are unitary and what kinds are not, but it is almost universally true that they are extremely reluctant to permit the use of separate accounting in the case* of a business deemed `unitary'." 12 It ha~ been suggested in one study that banking, along with mining, farming, and hotel operations is typical of businesses which are generally not susceptible to unitary treatment, although this study adds that the businesses in question could be conducted in such a way as to make them unitary businesses. Unitary business is defined as follows: "The essential test is whether or not tire operation of the portion of the business within the state is dependent or contributory to the operation of the business outside the state." 13 Although it has never been established that multi-corporate banking organizations are susceptible to unitary treatment by state tax administrators, it is predictable that they will be beginning January 1, 1972. Generally speaking the courts have upheld the states in their attempts to apply the unitary concept. Nonetheless, it should be noted that the states have been relatively conservative in their attempts to utilize the concept and, thus, the courts have not been presented with situations in which its utilization would be clearly inappropriate.'4 Application of the concept to multi-corporate banking organizations is not clearly inappropriate, however, in view of the fact that there is precedent for its use with respect to other types of financial corpora- tions. In Household Finance Corporation v. Franchise Tax Board,15 a California district court of appeal reversed a lower court judgment directing refund of franchise taxes paid under protest for the years 11 Theoretically the unitary concept could also be applied by different taxing jurisdictions within a given state. Nonetheless, the concept has not been applied in such a manner. On questions of nexus, see appendixes 11 and 12, supra. 12 Willis Subcommittee Report, p. 167. 13 Altman and Keesling, Allocation of Inconse in State Taxation, 2d ed. 1950, p. 101. 14 E. George Rudolph, op. cit. at 183: "It is worth noting that the Court has never invalidated formulary apportionment on the ground that the business involved was not sufficiently unified. Nevertheless, as a strictly logical matter, it seems clear from these cases that separate accounting is the basic method for determining the income subject to tax in a particular state, and that formulary apportionment is available only when separate accounting is not appro- priate. The logic is not impaired by the fact that a large majority of the cases may fall in the exceptional category." 15 230 C.A. 2d 926, 41 Cal. Rptr. 565 (1964). PAGENO="0609" 589 1951 and 1952. During the years in question, Household Finance had operated 33 branch offices in California out of more than 400 branches in 28 states and Canada. Operation of branches in California was sufficient nexus to justify the state's jurisdiction to tax income attributable to California operations. The question presented was whether the California operations must be treated separately as the taxpayer maintained, using as a tax base the interest income received by the California branches, less expenses incurred by them, including amounts charged by the company's Chicago headquarters. California wanted to apply the unitary concept and sought to tax the share of the company's total income attributable to California operations as determined by a three factor apportionment formula, i.e., the monthly average of loans outstanding, interest collected, and payroll. The court concluded that the company's more than 400 branches "ultimately operate as an integrated unit." 16 It based this conclusion on three standards set forth in Butler Brothers v. McGolgan,'7 which had involved the California operations of a Chicago based multi- state merchandising firm. These standards were "(1) Unity of owner- ship; (2) Unity of operation as evidenced by central purchasing, advertising, accounting and management divisions; and (3) Unity of use in its centralized executive force and general system of opera- tion." The court applied the standards as follows: "The first element is clearly present here. The second seems equally clear, although the central `purchasing' is by the borrowing of money, which is the `merchandise' of plaintiff. The third element, unity of use, is estab- lished by the centralized distribution of the `merchandise' to the several branches, and the ultimate control of the central headquarters over operational procedures in the branches in all states. It follows that determination of California income by an allocation formula is required." 18 Although multi-corporate banking organizations ordinarily do not operate through branches located in more than one state, it is not impossible to foresee similarity between the centralized manner in which multistate operations might be conducted by such businesses and those of Household Finance. Each case will be decided, of course, upon the particular circumstances and details of intercorporate relationships and operations in the affiliated groups. The Court described Household Finance's operations as follows: "Plaintiff's general administrative offices are located in Chicago. That office prepares and revises operating manuals setting out detailed procedures which the branch offices follow. Within these limits, each branch may make loans. Regional and district supervisors regularly visit branch offices, review their operations, and report thereon to the general office. On the opening of a branch, funds are furnished by the general office. Although each branch has its own bank account, it must forward excess funds to central headquarters, upon which it may draw for further needs. Each branch keeps accounting records, but a central accounting system is maintained in Chicago. Some 60 percent of the sums loaned are from money borrowed in turn by plaintiff. The Chicago office borrows these funds and redistributes them to the "230 CA. 2d 926, 928. 17 17 Cal. 2d 664, 678, 111 P. 2d 334 (1941), affirmed 315 U.S. 501 (1942); see also Edison California Stores v. McG'olgan, 30 Cal. 2nd 472, 183 P. 2d 16 (1947). 18230 CA. 2d 926, 930-31. PAGENO="0610" 500 branches as needed. All leases of real estate are made by Chicago headquarters, which also maintains central purchasing, public re- lations, and personnel departments. Although most advertising is negotiated by branch managers, it is contracted for only after approval by the central advertising director's office, which prepares all copy and is directly billed by the media. Expense of central administration, national advertising (a small part of the total advertising budget), and interest on plaintiff's borrowings, is apportioned among the branch offices. "It is apparent that each branch is accorded a degree of autonomy, but that a strong central management prevails. The more than 400 branches ultimately operate as an integrated unit." 19 it is significant that th~e court in Household Finance was able to regard the loaning of money as a kind of merchandising. In this man- ner the court also disposed of the plaintiff's argument that application of the unitary concept would result in California's taxing intangible assets which did not have a taxable situs in California. Using this case as precedent, it is conceivable that California might seek to tax its apportioned share of the total income of an out-of-state multi- corporate banking organization provided that business had sufficient contacts with California to give rise to jurisdiction to tax. Whether or not a given multistate business is susceptible to unitary treatment is a matter asto which courts and state tax administrators may differ from state to state.2° The standards are not clear and are in the process of being developed.21 However, the possibility certainly exists that the unitary concept may be held applicable to multi- corporate banking organizations once the new section 5219 goes into effect on January 1, 1972. Application of the unitary concept to multi-corporate banking organizations is, of course, more likely if the interstate activities of these companies are interdependent. Under the new bank holding company statute, the future development of bank holding companies is limited to activities which are "closely related to banking"; thus it may be expected that the interstate activities of such companies in many instances will be interdependent and susceptible to unitary treatment. In any specific situation, of course, an activity in another state could be closely related to banking without necessarily being inter- dependent with the banking activities carried on in the taxing state by the multi-corporate group. Under tile unitary concept a state may tax a share of the income of multi-corporate banking organizations derived from intangibles which `~ 230 CA. 2d 926, 928. 29 Compare Superior Oil Co. v. Franchise Tax Board. 34 Cal. Repr. 545. 386 P. 2d 33 (1963) and SIcily Oil Co. v. C'ommissioner of Taxation. 269 Minn. 351, 131 NW. 2d 632 (1964). 21 Jerome R. Hellerstein suggests the following approach might be developed: I have suggested that the test of a unitary business be bottomed on the interdependence of the basic operating activities of the enterprise. This would embrace not only the typical buying or manu- facturing of goods in one state and selling them in another, but also interstate transportation and com- munication, mining or processing in one state and selling in others, and the like. However, centralized management, financing, advertising the use of patents, trade marks and knowhow, the training or furnishing of personnel and of legal or technical services, and other ancillary orsupportive activities, important though they be to the profits of the entire enterprise, ought not ordinarily, at least, lay the foundation formultistate unitary business approtionment by formula. Such an approach to the contours of the unitary conception is amply justified by the broad and flexible statutory provisions for the divi- sion of income, capital stock and other tax measures in most states. And given the recent Supreme Court decisions. which may perhaps reflect a new approach to state tax apportionment problems, such a circumscription of the unitary business may conceivably emerge as a requirement of the Due Process and the Commerce Clauses in preventing extraterritorial taxation and in proscribing undue burdens on interstate commerce." Hellerstein. op. cit., p. 503. See General Motors v. District of Columbia. 380II.S. 553 (1965); Norfolt & Western Railway Co. v. Missouri Slate Tax C'omm., 390 U.S. 317, 88 5. Ct. 995 (1968). PAGENO="0611" 591 are situated out-of-state. Such was the case in Household Finance dis- cussed supra. A similar conclusion was reached by the court in Mont- gomery Ward cQ~ Co. v. Commissioner of Taxation.22 In that case Minne- sota was able to tax a.share of income from securities purchased from earnings retained by the plaintiff from its nationwide merchandising business. It was held that the income from intangibles was available to pay the company's operating expenses and thus could be regarded as part of the company's income from its unitary business. The case does indicate that if the intangibles had been segregated as investment income a different result might have been reached. Nonetheless, the implications as far as multi-corporate banking organizations are con- cerned seem clear. Much of the income of such businesses is derived from intangibles and since it is the business of such enterprises to deal in intangibles, it is certainly possible that this income would be deemed income from a unitary business. Probably the greatest problem posed by the unitary concept is a lack of uniformity in its application by the states. Senator Ribicoff com- mented on this problem in introducing 5. 916 in the Senate on February 4, 1969, a bill which would prohibit the use of the unitary concept to tax the income of corporations having no "business location" within a taxing jurisdiction: "At the same time, if each of the other States [States not presently applying the unitary concept] were conceivably to adopt the unitary practice, the result would be complete chaos, since each tax administra- tor of each State would be called upon to exercise his own individual discretion with respect to the circumstances in which the unitary rule would be applied, as well as the manner of applying the rule to the complex relationship that exists among multi-corporate enterprises." 23 Uniformity might, of course, result from Federal legislation such as S. 916 or from court decisions based on the commerce clause or on due process considerations. Further, there is a trend toward self-imposed uniformity in this area among the states as evidenced by the enactment of the Uniform Division of Income for Tax Purposes Act by nineteen states and the Multistate Tax Compact which has been adopted by eighteen states.24 Nonetheless, as matters now stand, there exists the possibility that different states utilizing the unitary concept will apply conflicting apportionment formulas and interpretations with respect to the applicability of the concept itself which could result in double taxation. TAXATION OF INTERCOMPANY DIVIDENDS Whether a multi-corporate banking organization is considered uni- tary or whether such a -business engages in multistate activities, the possibility of double taxation exists in those states which do not pro- vide for a deduction for income taxes (or other taxes measured by income) paid by a related company and which do not provide for filing a consolidated tax return. Prior to 1968, in California, a dividend distributed by a subsidiary to its parent would be specifically allocated to the parent and taxed to the parent, if its commercial domicile were in California, even though 22 276 Minn. 479, 151 NW. 2d 294 (1967). 23 Congressional Record, vol. 115, pt. 2 (91st Congress, 1st session), February 4, 1069), at p. 2597. See, also, Senator Ribicofi's comments when he introduced a similar bill, S. 317, in the 92d Congress; Congres- sional Record, January 27, 1971, p. 5308 (daily ed.). 24 E. George Rudolph, op. cit. at 177-180. PAGENO="0612" 592 the parent and subsidiary were engaged in a unitary business, and the income of the subsidiary from which the dividend was paid was included in the combined report.25 This provision in California law was amended to provide for the elimination of intercompany dividends to the extent they are paid out of unitary business income.26 Thus, it should be noted that, even in the situation where a multi-corporate banking organization is deemed unitary, there is no guarantee against possible double taxation of intercorporate dividends. Under the Federal Internal Revenue Code, 85 per cent of inter- corporate dividends received from domestic corporations are deducti- ble.27 In the case of an affiliated group of companies, the deduction may be 100 per cent.28 A number of states follow the federal approach and have incorporated the Internal Revenue Code by reference in income tax statutes.29 A few states permit no deductions for inter- corporate dividends 30 whereas a few exempt all dividends from tax.3' Some states permit the deduction of dividends received to some degree, provided that the paying corporation's income is taxable by the state in question.32 Multi-corporate banking organizations are likely to encounter problems in this area once the 1972 version of section 5219 goes into effect. Nonetheless, it does not appear that special considerations are involved which would tend to put multi-corporate banking organiza- tions in a position not shared with ordinary multi-corporate business organizations. However, at least as far as their banking operations are concerned, multi-corporate banking organizations are mole restricted in terms of their ability to choose a favorable domicile for tax purposes than are ordinary multi-corporate business organizations. Relief from possible inequities in this area conceivably could be sought through further amendment to section 5219. The solution, however, could result from judicial decisions, uniform state tax laws, or in federal legislation designed to provide tax benefits for all forms of multi-corporate business organizations. SAN FRANcisco, April 15, 1971. 25 Ibid. at 200; cf Keesling and Warren, op. cit., p. 60. 26 Cal. Rev, and Tax Code Sec. 25106 (Gum. Supp. 1968). 27 I.R.C. Sec. 243. 28 If. George Rudolph, op. cit. at 203. 29 H.R. Rep. No. 1480. 88th Cong., 2d Sess. (1964), p. 266, lists seven states in this category. 30 The above report lists five states in this category. 21 The above report lists four states in this category. 32 The above report lists eighteen states in this category (p. 267), including three states (Arkansas. Ken- tucky, and Mississippi) that allowed a deduction only for dividends received from financial institutions. PAGENO="0613" APPENDIX 14 The Question of Possible Discrimination Against Out-of-State National Banks SHELDON L. AZINE Assistant to Counsel, Federal Reserve Bank of Minneapolis Public Law 91-156, commonly referred to as the National Bank Tax Act, was signed into law on December 24, 1969. Effective Jan- uary 1, 1972, section 5219 of the Revised Statutes (12 U.S.C. 548) is permanently amended to read: For the purposes of any tax law enacted under authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located. In removing all restrictions on the states with respect to the imj)OsitiOn of taxes on national banks, Congress was aware of the possible ramifi- cations that such action would have on national bank structure and operation. For that reason, it directed the Board to study the probable impact on the banking systems, as well as the other economic effects of the changes made in existing law by the permanent amendment. In connection with this study, a number of legal questions need to be resolved. One of these is whether the permanent amendment to section 5219 would l)ermit a State other than a State in which a national bank has its principal office to discriminate against that national bank with respect to the imposition of State taxes. It has been suggested that the rationale which permits a State to impose a discriminatory tax on a foreign insurance company would permit a discriminatory tax on a foreign national bank. This memorandum examines the statutory history and case law dealing with State taxation of foreign insurance companies for the purpose of determining Whether a legal basis* exists that would permit a State to impose a discriminatory tax on a foreign national bank. For many years, the business of insurance was held not to be subject to regulation by the Federal Government because the courts had ruled that, even when conducted interstate, insurance was not com- merce. However, in 1944 the United States Supreme Court overturned this rule when it held that fire insurance transactions stretching across state lines constituted interstate commerce subject to regulation by Congress under the commerce clause. A careful reading of that deci- sion, United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 5. Ct. 1162, 88 L. Ed. 1440, rehearing denied 323 U.S. 811, 65 S. Ct. 26, 89 IL. Ed. 646 (1944), reveals that so long as Congress re- frained from enacting laws regulating or taxing insurance companies transacting business across state lines, each State was free to regulate and tax such companies to the extent that such regulation or taxation related to business transactions within the State. Nevertheless, it (593) PAGENO="0614" 594 was assumed by many that th~ effect of ~th~ South-Eastern decinon was to remove from the states all taxing power with respect to insur- ance business transacted in interstate commerce. In order to allay these fears, Congress enacted the McCarran-Ferguson Act (15 U.s.c. §~ 1011-15) in 1945. Its stated purpose was to make certain that the decision in the South-Eastern case was not to be interpreted as pro- hibiting the states from regulating and taxing foreign insurance companies doing business in their states. The McCarran-Ferguson Act provides, in part, as follows: Section 1011: The Congress declares that the continued regu- lation and taxation by the several States of the business of insur- ance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States. Section 1012(a): The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business. The legislative history of the McCarran-Ferguson Act indicates that some insurance company executives declined to comply with State laws in this field, fearing that if the laws were unconstitutional, they might be exposing themselves nOt only to civil liability but also to criminal sanctions for misappropriation of company funds. In addi- tion, State insurance officials and other persons who came in contact with State regulatory provisions were uncertain as to the state of the law. The McCarran-Ferguson Act represented a considered determina- tion by Congress that the public interest would be served best by permitting continued state regulation and taxation of the insurance industry. The House Committee on the Judiciary, commenting on the proposed legislation, declared: It is not the intention of Congress in the enactment of this legislation to clothe the States with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision of the United States Supreme Court in the Southeastern Underwriters Association case. Briefly, your committee is of the opinion that we should provide for the con- tinued regulation and taxation of insurance by the States, subject always, however, to the limitations set out in the controlling decisions of the United States Supreme Court, as, for instance, in Allgeyer v. Louisiana (165 U~S. 578), St. Louis Cotton Compress Co. v. Arkansas (260 U.S. 346), and Connecticut General Insur- ance Co. v. Johnson (303 U.S. 77), which hold, inter alia, that a State does not have power to tax contracts of insurance or rein- surance entered into outside its jurisdiction by individuals or corporations resident or domiciled therein covering risks within the State or to regulate such transactions in any way. (1945 U.S. Code Congressional Service, pp. 671-72) In Prudential Insurance Company v. Benjamin, 328 U.S. 408, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946), an insurance company challenged the constitutionality of the McCarran-Fcrguson Act. The case involved the right of South Carolina to levy a tax which was to be paid annually by foreign insurance companies as a condition of receiving a certificate of authority to carry on the business of insurance within the State. PAGENO="0615" 595 The tax amounted to three per cent of the aggregate of premiums received from business done in South Carolina, without reference to its interstate or local character. No similar tax was required of domestic corporations. The Supreme Court, partially in reliance upon the McCarran-Ferguson Act, upheld the tax. The Court reasoned that in passing the Act, Congress intended and, in fact, declared that uniformity of regulation and of State taxation were not required with respect to the business of insurance. The Court went on to point out that while certain state taxes would have been discriminatory and hence invalid in the absence of the McCarran-Ferguson Act, that Act represented a determination on the part of Congress that such taxes did not place a sufficient burden on the interstate insurance business to warrant protection by Congress under the commerce clause. The Court, in Prudential, dwelt at some length on the fact that, with respect to the regulation of the insurance business by the individual States, Congress' power under the commerce clause had not lain dormant but had been exercised through the McCarran- Ferguson Act. In effect, the court was saying that Congress, acting in concert with the individual States, had sanctioned the local taxa- tion of the insurance business, irrespective of the effect such taxation would have on the interstate aspects of the business. The Court also noted and was obviously influenced by the fact that Prudential had paid the tax for a number of years prior to the South- Eastern decision and that payment of the tax could not have been excessively burdensome, in view of the fact that Prudential through- out this period competed effectively with local insurance companies which were not subj ect to the tax. The motivation behind Congressional enactment of the McCarran- Ferguson Act, according to the Court in Prudential, was to: give support to the existing and future state systems for regulat- ing and taxing the business of insurance. This was done in two ways. One was by removing obstructions which might be thought to flow from its [Congress] own power, whether dormant or exer- cised, except as otherwise expressly provided in the Act itself or in the future legislation. The other was by declaring expressly and affirmatively that continued state regulation and taxation of this business [the insurance business] is in the public interest and that the business and all who engage in it "shall be subject to" the laws of the several states in these respects (p. 1155). The Court also noted that Congress had: clearly put the full weight of its power behind existing and future state legislation to sustain it from any attack under the commerce clause to whatever extent this may be done with the force of that power behind it, subject only to the exceptions expressly pro- vided for (p. 1155). Prudential had argued that the commerce clause in and of itself pro- hibited discriminatory State taxation of interstate commerce. How- ever, Justice Rutledge, in summarizing Congress' power under the commerce clause, concluded that Congress had the power- not only to promote but also to prohibit interstate commerce, as it has done frequently and for a great variety of reasons. That power [commerce] does not run down a one-way street or one of narrowly fixed dimension. Congress may keep the way open, PAGENO="0616" 596 confine it broadly or closely, or close it entirely, subject only to the restrictions placed upon its authority by other constitutional provisions and the requirement that it shall not invade the domains of action reserved exclusively for the states (p. 1157). While most of the Court's opinion was concerned with the commerce clause, some consideration was given to the due-process and equal- l)rotection clauses of the Fourteenth Amendment. Prudential argued that the South Carolina tax violated both of these constitutional pro- visions. Even though the Court summarily dismissed this argument by Prudential, the language of the House Committee on the Judiciary quoted earlier should be kept in mind.. The Committee there indicated that while the McCarran-Ferguson Act was enacted to permit the continued regulation and taxation of the insurance industry by the individual States, such activity was to be carried out only within the existing framework of decisions like Allgeyer, St. Louis Cotton Compress, and Connecticut General Life Insurance. These cases had detailed the parameters of a State's power to tax contracts of insurance or re- insurance entered into outside its jurisdiction. Congress, in effect, had provided that State taxation of insurance would be held invalid unless there was sufficient nexus or connection, in fact, between the taxed business and the taxing State. The question of contacts between the taxing State and the business being taxed was discussed in State Board of Insurance v. Todd Ship- yards Corp., 370 U.S. 451, 82 S. Ct. 1380 (1962). That case involved a suit by Todd Shipyards against the Texas State Board of Insurance to recover taxes paid under protest by Todd on premiums paid out of State on insurance purchased out of State. The Court found the fol- lowing facts: The insurance transactions involved in the present litigation take place entirely outside Texas. The insurance, which is princi- pally insurance against loss or liability arising from damage to property, is negotiated and paid for outside Texas. The policies are issued outside Texas. All losses arising under the policies are are adjusted and paid outside Texas. rphe insurers are not licensed to do business in Texas, have no office or place of business in * Texas, do not solicit business in Texas, have no agents in Texas, and do not investigate risks or claims in Texas. The insured is not a domiciliary of Texas but a New York corporation doing business in Texas. Losses under the policies are payable not to rfexas residents but to the insured at its * principal office in New York City (p. 1383). Based on the above set of facts, the Court was obliged to hold the Texas tax invalid as a violation of the due-process clause, in that the only connection between the State of Texas and the insurance trans- actions sought to be taxed was that the property covered by the in- surance was physically located within the State of Texas. Justice Douglas, in Todd, emphasized that the history of the MoCarran- Ferguson Act contained an "explicit, unequivocal statement" that Allgeyer, St. Louis Gotton Gompress and Gunnecticut General Life in- surance had not been "displaced" by the McCarran-Ferguson Act. The importance of this statement lies in the fact that while uniformity of State taxation was abnegated by the McCarran-Ferguson Act, clue process and equal protection still constituted viable checks on a State's taxing power. PAGENO="0617" 5.97 The California Supreme Court, in discussing the McCarran-Fergu- son Act in People vs. United National Life insurance Compa'n~y, 58 Cal. Rptr. 599, 427 P. 2d 199 (1967), pointed out that-- The McCarran-Ferguson Act, while validating State power. to regulate and tax in respect to the commerce clause, did not pur- port to circumscribe such power in the light of the due-process clause. That statement by the ~ui~reme Court of California is a reaffirmation of what has been said a number of times already in this memorandum. That i~, while. unifo~'inity .~nay not exist in vjew of the fact that Con- gress in the McCarran-Ferguson Act has specifically allowed the individual States to regulate and tax the busines~ of insurance, nothing in that act purports to i)ermit di~crimination in the imposition of State taxes nor does the act attempt in any way to circum~cribe or curtail the right of an insurance company to challenge a State tax imposed upofl it as a violation of the due-process and equal-protection clauses of the Fourteenth Amendment of the Constitution. In summary, since the contacts between the State of South Carolina and the Prudential contracts were significant, a tax levied upon pre- miums received by Prudential from business done in South Carolina was upheld. However, in Todd, the, absence of significant contacts justified the Court in invalidating the Texas tax as a violation of the due-process clause. The McCarran-Ferguson Act and the Prudential case go no further than affirming the right of a State to collect a tax on business conducted within its boundaries. Neither the statute nor the case specifically can be interpreted as sanctioning the imposition of a discriminatory State tax. Having reached this conclusion with respect to the McCarran- Ferguson Act, it is still necessary to focus on the National Bank Tax Act itself to determine the reasons for its enactment, and whether its language, standing alone, would permit a State to discriminate against a foreign national bank. The legislative history of the National Bank Tax Act details clearly a desire on the part of Congress to permit a State to impose the same taxes on a national bank as it now imposes or will impose in the future on a State bank. The report of the House Committee on Banking and Currency indicated that the National Bank Tax Act says "that national banks shall be subject to the same taxation as State banks and it means exactly what it says" (emphasis added). Somewhat along the same lines, the Senate Ba.nking and Currency Committee indicated that: There is no longer any justification for Congress continuing to grant national banks immunities from . State taxation which are not afforded State banks. The Conference Committee, in summarizing the effect of the perma- nent amendment to section 5219 of the revised statutes, indicated that on January 1, 1972: Any State will be free to impose taxes on income derived within its borders by the operations of a bank having its principal office in a different State, regardless of whether the foreign bank is State or National. This has always been the law with respect to State banks. At the outset, it was indicated that the reason for this memorandum was the concern expressed by some that section 5219 would permit the imposition of discriminatory taxes on foreign national banks vis-a-vis 79-421 0 - 72 - 40 PAGENO="0618" 598 foreign State banks. However, the clear import of the legislative history detailed above is to the effect that national and State banks should be treated the. same for tax purposes, regardless of whether the State imposing the tax is the one in which the national bank has its principal office located or some other State in which a tax is being levied on income derived by the national bank from business carried on within that State. If the purpose of the National Bank Tax Act is to achieve equality between State and national banks, it makes absolutely no sense to limit that equality to situations in which the taxing jurisdic- tion is the one within which a national bank has its principal, office. The Prudential decision would .be of little assistance in upholding a State tax law which discriminates against a foreign national bank vis a vis a foreign State bank; since in that case, the tax imposed by the State of South Carolina applied to all foreign insurance companies engaged in the insurance business, not just to a limited class or type of company. In other words, all out-of-state insurance companies trans- acting business in South Carolina were taxed equally. An analogy to banks would logically lead to a conclusion that a State would have to impose the same' taxes on a foreign national bank as it imposed on a foreign State bank. Furthermore, the earlier discussion in this memorandum indicates that the purpose behind enactment of the McCarran-Ferguson Act and the basis upon. which the Court decided Prudential are different from the purposes behind the National Bank Tax Act. The McCarran-Ferguson Act represented a congressional determination that uniform tax treatment of insurance companies by the several States was not necessary~. This is in clear contrast with Congress' avowed purpose in the National Bank Tax Act of achieving equality and uniformity in the tax treatment by the States of national and State banks. I am not aware of any basis upon which one might argue that Congress intended national banks to be taxed the same as State banks only by the State within which a national bank has its principal office and that the rest of the States could discriminate against a foreign national bank vis a vis a foreign State bank. Having concluded that discrimination against a foreign national bank vis a vis a foreign State bank is impermissible, there still remains the question as to whether discrimination against foreign banks gen- erally vis a vis other types of financial institutions is possible in view of the language of section 5219. In that regard, the answer would appear to be yes. The statutory amendment to section 5219 speaks only in terms of equality between ban/cs. There is nothing in either the statute itself or the legislative history which would indicate a con- gressional policy in favor of treating banks and other types of financial institutions or businesses equally for tax purposes. This is a problem to be resolved. In addition, while both the Senate and the House alluded to the complex problem of multistate taxation, neither body made any recommendations as to what ought to be done in that area. In summary, the permanent amendment to section 5219 of the revised statutes was enacted to permit a State to impose the same taxes on a national bank as it imposes on a State bank. This equality ought to apply regardless ` of whether the taxing jurisdiction is the State within which the national bank has its principal office or some other State in which the national bank is found to be doing business. PAGENO="0619" 599 However, the National Bank Tax Act does not attempt, in any way, to achieve equality between the taxation of a bank and other types of financial institutions or businesses generally. Similarly, the Act did not direct itself to the problem of multistate taxation. The McCarran-Ferguson Act and the Prudential case inter- preting it did permit South Carolina to subject out-of-state insurance companies to a tax which was not levied on domestic insurance com- panies, but the legislative history and the reasoning behind this Act were entirely different from those which motivated Congress in enacting the National Bank Tax Act. In any case, the McCarran- Ferguson Act did not actually sanction the imposition of discrimina- tory taxes on a foreign insurance company. Finally, the protection afforded by the due-process and equal-protection clauses of the Four- teenth Amendment were not, in any way, restricted by the Supreme Court's decision in Prudential. The former would limit a State to imposing taxes on a foreign national bank only with respect to trans- actions entered into in that State, and the latter would prevent discriminatory treatment against a national bank vis a vis a State bank. It is generally admitted that the commerce clause seeks to avoid destructive and retaliatory legislation among the states in the field of interstate commerce. This fact should serve as a deterrent to the court's finding an intention of Congress to sanction such state legis- lation other than in its affirmatively expressed declarations. While the McCarran-Ferguson Act constituted such an affirmative declara tion, clearly the National Bank Tax Act did not. Since it appears that the permanent- amendment to section 5219 of the Revised Statutes cannot be interpreted as permitting discriminatory treatment against foreign national banks vis a vis foreign state banks, additional legis- lation to protect national banks from such treatment does not appear to be necessary. MINNEAPOLIS, November 9, 1970. Acknowledgments Papers in part III this volume were written especially for the Federal Reserve Board study of State and local taxation of banks and were used as reference materials for the Board's report. The contributions of the several authors are gratefully acknowledged. Drafts of most of the papers were reviewed by members of the Advisory Panel (named at pp. 69-70); the comments and suggestions of these advisors were most helpful. The papers were coordinated and prepared for publica- tion by the Director of the Tax Study, Mr. I. M. Labovitz, Senior Specialist in the Congressional Research Service of the Library of Congress. PAGENO="0620" PAGENO="0621" PART IV Impact on State and Local Government Revenues From the 1-Year Extension of the Prohibition of an Intangible Personal Prop- erty Tax for National Banks Report to the Congress of a Study by the Board of Governors of the Federal Reserve System under Public Law 92-213 On December 22, 1971, the President approved a joint resolution of the Congress postponing for 1 year, or until January 1, 1973, the effective date for certain changes in law relating to State and local authority to tax national banks.1 These changes, which had been en- acted in Public Law 91-156, approved December 24, 1969, provided for a two-stage comprehensive revision of Section 5219, revised stat- utes, which governs State-local authority in this area.2 Public Law 91-156 included a "temporary amendment," which not only provided broader State-local authority on an interim basis to tax national banks, but also specifically prohibited imposition of an in- tangible personal property tax on such banks. Initially, this amend- ment was scheduled to terminate and be replaced on January 1, 1972, by a "permanent amendment," which would remove all earlier spe- cific limitations on State and local taxing authority, including the pro- hibition of an intangible personal property tax, and substitute a simple prescription that national banks be taxed the same as State-chartered banks. The joint resolution postponed until January 1, 1973, both the termination date of the "temporary amendment" and the effective date of the "permanent amendment." In connection with the postponement, the Congress directed the Board of Governors of the Federal Reserve System to make a study of the probable impact of that postponement on State and local reve- nues from intangible personal property taxes. The results of the study were to be reported to the Congress not later than 6 months after the approval date of the joint resolution-that is, by June 22, 1972.~ Pursuant to this legislation the Board of Governors has made a study of the tax structures of the various States with respect to the potential for levying an ad valorem intangibles tax on national banks if the au- thority had become available on January 1, 1972. In this study, con- sideration has been given to the constitutional, legislative, and admin- istrative requirements for imposition of such a tax on bank-owned assets, and views have been solicited from State tax authorities regard- `Public Law 92-213, section 4 (see p. viii of this volume). 2 The text of Public Law 9i-156 appears at p. vii of this volume. The revelant section of Public Law 92-213 is as follows: SEC. 4(a). The act entitled "An Act to clarify the liability of national banks for cer- tain taxes," approved Dec. 24, 1969 (83 Stat. 434), is amended by striking out "i972 in sections 2(b) and 3(a) and inserting in lieu thereof "1973." (b) The Board of Governors of the Federal System shall make a study of the probable impact on the revenues of State and local governments of the extension under subsection (a) of the termination date of interim provisions regarding intangible personal property taxes of State and local governments on national banks. The Board shall report the results of its study to the Congress not later than 6 months after the date of approval of this joint resolution. (601) PAGENO="0622" 602 ing the likelihood of such action had the authority become available for 1972. The major finding of the study is that only one State, Florida, was affected by the postponement.4 This State had definite plans to tax intangible assets of commercial banks in 1972. The estimated yield from application of the existing Florida intangible property tax to all commercial banks, State-chartered as well as national, on a full- assessment basis for all of calendar year 1972 is about $9 million. On April 24, however, a new Florida law became effective, retroactive to January 1, 1972, imposing on banks a franchise tax measured by net income.5 This law might affect the future attitude of the legislature of that State as regards the imposition of the intangibles tax on banks. BACKGROUND The "permanent amendment" to Section 5219, which was incorpo- rated in Public Law 91-156, represented a marked shift in Federal policy regarding State and local taxation of national banks. It would remove the detailed restrictions which traditionally have governed State and local tax treatment of these banks and substitute a simple broad delegation of authority that would enable those governmental units to tax national banks in any way they choose, so long as they tax State-chartered banks identically. Because of uncertainties regarding potential effects of this action, the Congress provided that the "permanent amendment" become effec- tive about 2 years after enactment, or January 1, 1972. It directed the Board of Governors to make a study of "the probable impact on the banking systems and other economic effects of the change in existing law" with respect to income taxes, intangible property taxes, and so- called "doing business" taxes, and report to the Congress the results of this study, including any recommendations for further legisla- tion, by December 31, 1970. It was contemplated that any further leg- islative action that the Congress considered desirable could be taken prior to the effective date of the "permanent amendment." Meanwhile, as an interim measure, the States were given authority-urgently needed by some States-to levy several additional types of taxes on national banks by the "temporary amendment," which was scheduled to expire when the "permanent amendment" became effective. The results o~f the Federal Reserve study, together with the Board's recommendations, were transmitted to the Congress on May 4, 1971.6 The Board's major recommendations relate to two areas-(1) taxa- tion of intangible personal property and (2) taxation by States other than the State in which a bank's principal office is located. With respect to intangibles, the Board recommended that the denial of There appear to be other States that would have made changes in taxes applicable to commercial banks if the broader authority provided by the "permanent amendment" had become available. Since these changes did not involve taxes on intangible personal prop~ erty, they are not covered in the present study. ~ Chap. 72-278. See parts I, II, and III of this volume. PAGENO="0623" 603 State and local government authority to tax intangible personal property of national banks, which was implicit in Section 5219 from the outset and made explicit in the "temporary amendment," be con- tinued without a time limit and that such a denial be extended to cover State banks and other depositary institutions (recommendation 1). The Board took cognizance of the possibility that the Congress might not be able to complete a detailed review of the Board's recommenda- tions and take definitive action before the January 1, 1972, effective date of the "permanent amendment." In that event, the Board recom- mended that the effective date be postponed. BOUNDARIES AND FORMAT OF THE STUDY There is considerable variation among the States concerning the specific coverage and form of taxes that are commonly referred to as "intangible personal property taxes." This designation is applied not only to ad valorern taxes on intangible assets, but also to taxes on the income from intangibles and even to the so-called shares or capital structure taxes, which generally are levied on some measure of stock- holder equity. An analysis of the history of the legislation directing the Board to make the present study (Sec. 4 of Public Law 92-213) suggests that the class of intangibles tax that the Congress had in mind was the type specifically covered in the Board's recommendation No. 1, namely, an ad valorem tax on intangible personal property owned by banks. This definition excludes any tax levied as a percentage of revenue received from the ownership of intangible personal property, assessed against shareholders in a corporation but collected from and absorbed by the corporation, and any tax assessed against depositors that is collected from and absorbed by the depository institution. The period covered by the study is clearly defined by the legisla- tion-that is calendar year 1972, the duration of the 1 year postpone- ment of the termination date of the "temporary amendment" and effec- tive date of the "permanent amendment." Nevertheless, an effort was made to obtain information relating to a somewhat longer outlook where that was possible. In conducting the study, a three-stage approach was followed. First, an examination was made of the tax structure in each of the 50 States in order to identify those jurisdictions in which there was a significant possibility that an intangible tax could have been imposed on banks for all or part of the year 1972 and those jurisdictions in which the possibility for such action appeared minimal.~ Second, these prelimi- nary evaluations were then checked informally with a responsible tax official in each jurisdiction. Third, for all States in which there ap- peared to be any significant potential for the imposition of a tax on intangible personal property of banks in 1972, a letter was directed to the tax administ.rator requesting a statement evaluating the probabil- ity of such a tax, had the authority become available, and certain addi- tional information. The District of Columbia was not covered in the study, since taxation of banks In this jurisdiction is governed by the Congress. PAGENO="0624" 604 CURRENT STATUS OF AD VALOREM TAXATION OF INTANGIBLE PERSONAL PROPERTY Intangible personal property currently is subject to an operative ad `valoren-t tax in 16 States, and in two additional States-Arizona and Texas-such property is legally subject to such a tax but the tax is not implemented, as shown in the accompanying table. In nearly all taxing States, the tax is applicable to both individuals and businesses. Over the years the number of States retaining an intangibles tax has been diminishing. The decline in use appears to reflect dissatisfac- tion with the tax mainly on grounds of equity and enforcement diffi- culties, particularly where assessments are made at the local level. This trend is continuing, as indicated by the 1970 repeal of the ad valorem intangibles tax in Iowa, conversion from an ad valorem~ to a gross earn- ings tax in Kansas, and adoption of a constitutional amendment in Illinois providing for the elimination of all personal property taxation in that State by 1979. PAGENO="0625" STATUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY BY STATE AND LOCAL GOVERNMENTS AND POTENTIAL FOR TAXATION OF BANK-OWNED INTANGIBLE PROPERTY IN 1972, BY STATE Status of taxation of intan gible assets Principal State-local tax (other than on real property) levied on commercial banks on required to ta intangibles x bank-owned Probability of taxa- tion of bank-owned intangibles in 1972 if authority had become available Coverage Princi -~ State pal recipient of revenue I Local Type of acti ---~-- Administra- tive action only New legis- lation ----- Consti- tutional amendment State Individuals Businesses Bank shares or capital structure tax (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Alabama (2) (2) Net income X Ne~ligibIe. Alaska do X (local) (3) Do. Arizona (4) (4) do X Do. Arkansas x x x X Capital structure X (local) (0) (5) Do. California Net income x Do. Colorado do x x Do. Connecticut do x Do. Delaware do x Do. Florida )( X X X do X High. Georgia X X X X Shares x Negligible. Hawaii Netincome X Do. Idaho do x Do. Illinois )( X X Shares x (7) Do. Indiana X X X 8 X Deposits and shares x Do. Iowa (9) (9) (9) Netincome x Do. Kansas (10) (10) do X Do. Kentucky X X Shares x Do. Louisiana )( do X Do. Maine )( )( do X Do. Maryland Netincome x Do. Massachusetts do X Do. Michigan )( do X Do. Minnesota do x Do. Mississippi )( Shares x x Do. Missouri )( 11 )( Net income X x Do. Montana x x x X Shares X Do. Nebraska Net income x Do. Nevada )( Shares X X Do. New Hampshire X Ix X Capital stock x Do. New Jersey X (13) (13) Shares x Do. NewMexico Netincome x Do. See footnotes at end of table. PAGENO="0626" STATUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY BY STATE AND LOCAL GOVERNMENTS AND POTENTIAL FOR TAXATON OF BANK-OWNED INTANGIBLE PROPERTY IN 1972, BY STATE-Continued Status of taxation of intangible assets Principal recipient of Type of action required to tax bank-owned Coverage revenue ` intangibles -- -- Principal State-local --- Bank shares tax (other than on real Administra- Consti- or capital property) levied on five action New legis- tutional State Individuals Businesses structure tax State Local commercial banks only lation amendment Probability of taxa- tion of bank-owned intangibles in 1972 if authority had become available (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) New York (14) Net income X X North Carolina X X X do X North Dakota do X Ohio x x x x Deposits and shares X Oklahoma Net income x x Oregon do X Pennsylvania x x X Shares X Rhode Island Net income X South Carolina do X South Dakota X X X do X - Tennessee X X X Shares X Texas (15) (15) X do X Utah Netincome X Vermont do X Virginia X X X Shares X Washington Gross income X West Virginia X )( X X Gross receipts X Wisconsin Netincome X Wyoming X X Shares X Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. Do. , Total 13 15 21 4 18 5 45 6 PAGENO="0627" 1 A distinction is made between locus of the receipt of revenue and responsibility for administration keeping personal property of businesses subject to taxation recently was held unconstitutional by and collection of the tax. Where a tax is administered by the State and more than half the proceeds the Illinois Supreme Court and the case is being carried on appeal to the U.S. Supreme Court. How- returned to the area of residence of the taxpayer, local government would be reported as the principal ever, this action does not impair the `existing authority (that is scheduled to expire by 1979) to apply recipient of revenue, an intangibles tax to bank-owned assets. 2 Statute states that all property is subject to tax, but exemptions cover all intangibles. 8 Combination deposits and shares tax with a gross income tax credit (for State-chartered banks). 3 New legislation would be required to levy an intangibles tax at the State level. Local governmental 1 Shares tax on banks and intangibles tax were repealed in 1970. units now have authority to tax intangibles but none do so. This option would be removed by a revision 10 Statute amended in 1970 to change basis of intangibles tax from ad valorem to a 3 percent tax of the municipal code recently enacted by the legislature and now awaiting approval by the Governor on gross earnings from intangibles. (FCCS SCS CSI-IB 208). 11 Included as part of an excise tax on the privilege of doing business in the State as measured 4 Intangibles are included in the definition of personal property subject to taxation, but the statute by the value of the assets or the par value of the stock allocable to the State, whichever is greater. has never provided a method of equalization or a procedure for collection and enforcement. The State also has a so-called "intangibles" tax but it is measured by the income from intangibles O Local governmental units now have authority to tax intangible property of State-chartered banks rather than being an ad valorem tax on value. In April 1972, legislation was enacted to repeal this at the same rate as other property. A constitutional amendment would be required to authorize tax, effective Jan. 1, 1975 (H.B. 537). taxation of intangibles at a rate differing from that on other property or to authorize taxation of 12 National banks only. intangibles at the State level (where new legislation also would be required). 13 Shared equally by State and local governmental units. State banks only. 14 The corporation franchise tax includes a tax on investment capital as one of the alternative Local governmental units have authority to tax intangible property, but lack enforcement power. methods of computation, but this alternative is not applicable to national banks and rarely is the New constitution adopted in 1970 provides for the elimination of all taxation of personal property required alternative for State-chartered banks. by 1979, but until then, a tax could be imposed on bank-owned intangible personal property. A 15 Included by law but not enforced. section of the constitution (art. IX-A) exempting personal property owned by individuals while PAGENO="0628" 608 In most States, the major portion of the revenue from the intangibles tax accrues to local governmental bodies. This includes several States in which the tax is administered by the State, with more than half of the proceeds being returned to local instrumentalities. In those States where administration of the tax is largely local, there are indications that the tax generally is not a major source of revenue. In large part, according to some State tax officials, this is attributable to lax admin- istration and enforcement, particularly where local assessors are elected officials, because of the sensitive nature of the information needed for effective assessment. In no State are the intangible assets owned by State-chartered banks subject to ad valorem property tax. This undoubtedly reflects the con- tinued prohibition of State and local taxation of the intangible per- sonal property of national banks, since the States generally try to tax these two classes of banks alike. However, in 12 of the 16 States taxing intangibles under either a general or a classified property tax law, commercial banks are taxed under these laws according to their shares or capital structure-types of tax permissible for national banks under section 5219 from its inception. In all but two of these 12 States, this type of tax (or a combination tax including shares as part of the base) is the major State and local levy applicable to commercial banks (other than a tax on real property). In most of the remaining 38 States, the principal tax on banks is a tax on or measured by net income. POTENTIAL FOR TAXATION OF BANK-OWNED INTANGIBLES IN 1972 The analysis of State tax structures, together with the information supplied by State tax administrators, indicates that there was virtually no prospect for the imposition of ad valorem taxes on bank-owned assets during 1972 in any State except Florida. In that State, the tax regulations had been amended in 1970 to provide that the intangibles tax would become effective automatically for both State and national banks on January 1, 1972, if the authority to tax intangible personal property of national banks had become available. The Florida intangible personal property tax currently is levied at the rate of one-tenth of 1 mill per dollar of money and deposits of money held and 1 mill per dollar of just valuation (market or face value, depending on the type of asset) of all other taxable intangibles, both assessed as of January 1 each year.8 The principal exemptions relevant for commercial banks are U.S. Treasury and Federal agency securities and securities issued by the State of Florida and its instru- mentalities. Real estate mortgages also are excluded for present pur- poses, since they are subject to a nonrecurring levy at time of recording that often is collected from the borrower. Applying the above rate schedule to the value of taxable intangible assets of all commercial banks in Florida on December 31, 1971, as derived from the year-end report of condition, the potential yield of the tax for calendar year 1972 is estimated at about $9 million.9 8 Chap. 199, P.S. In deriving this estimate, it was assumed that 35 percent of bank holdings of State and local securities represented exempt issues of Florida and its jns~rurnent~lities. Cash items in process of collection were excluded from the base but the total of "other assets," some of which would not be taxable, was included. In January 1972, the Florida statute was amended to exempt money from the intangibles tax beginning with the report year 1973. If this exemption were applicable in 1972, the estimated yield would be reduced by about $211,000. PAGENO="0629" 609 The major influences and considerations that militated against more widespread potential imposition of an intangibles tax on banks in 1972 are discussed in the following two sections: 1. Inconsistency with prevailing tax policy.-The principal reason for the almost universal absence of potential action to tax intangible assets of national banks in 1972, had the authority become available, is that the tax generally would have been incompatible with prevailing tax structures and policies in the States. This is particularly clear for the 34 States which levy no ad valorem~ tax on intangible assets at the present time.'° Even among the taxing States, the intangibles tax in many cases is held in disfavor, and there is little disposition to extend its coverage. Among the States which do not tax intangibles at the present time, a considerable number never applied such a tax; in all likelihood they would not adopt it now in the face of its limited utilization and grow- ing unpopularity. And those States which had made use of this tax in the past and subsequently discarded it because of unsatisfactory exper- ience would be unlikely to give serious consideration to its reinstate- ment simply because new authority to apply such a tax to national banks had become available. Of all the possible subjects for such a tax, the group exhibiting greatest potential risk of adverse effects, on grounds of both equity and economic impact, is commercial banks and other depositary institutions.1' Among States that impose some form of intangible property tax, the tax generally is not regarded as a highly desirable form of tax and in several States there is considerable dissatisfaction with the tax and its administration. Concern about the operation of this tax, along with all other property taxes, recently has been intensified by court cases challenging the financing of public schools from property tax revenues.12 Moreover, many intangibles-taxing States already have a satisfactory alternative tax for banks in the form of the shares tax, so there would be little incentive to make a change. Thus, in those States where taxation of bank intangibles would appear to have the greatest prospect for acceptability on policy grounds, the prevailing climate appears more conducive to the elimination of the tax generally than to extension of its coverage to additional sectors of the community. In Montana, a constitutional convention recently has prepared a re- vised constitution, to be submitted to the voters on June 6, 1972, that would empower the legislature to exempt any kind of property, in- cluding intangibles, from taxation. In Georgia, a constitutional amend- ment has been proposed that would empower the general assembly to exempt most intangibles from taxation; and in Indiana, Michigan, South Dakota, and Florida (the only State indicating that it woñld have applied the tax to banks in 1972), bills to repeal part or all of the intangibles tax recently have been introduced. In several intangibles-taxing States, a number of additional policy- related considerations would have restricted the possibilities for ex- 10 While nine of these States impose a tax on hank shares which is generally collected from and absorbed by the bank, it is considered a tax on the shareholders and is not char- acterized as an ad valorem tax on assets of the bank. 11 The shortcomings of the intangibles tax, particularly as it applies to banks, were discussed at various places in the Board's report of a study under Public Law 9i-i56: Part I, pp. 2-4; Part II, pp. 22-23, 43-44 and 54-57; Part III, pp. 447-453 and 463-468 in this volume. 12 Serrano v. Priest, 5 Cal. 3d 584, 487 P.2d 1241 (Aug. 30, 197i) and similar cases in other States. PAGENO="0630" 610 tension of the intangibles tax to banks in 1972 if the authority had become available. In a few States the Governors had earlier an- nounced that no new taxes would be requested. In several other States, tax administrators reported that their tax structures had been under- going major reviews by special task forces, legislative committees, or other bodies. Pending completion of those studies, tax policy in large measure is indeterminate and tax legislation is being held in abeyance. In no case, however, were such groups expected to endorse an intan- gibles tax. And in Pennsylvania, where the existing intangibles tax applies only to individuals, application of the tax to commercial banks would represent a marked change in tax structure and thus would appear unlikely. 2. Implementation and timing dif/i culties.-St ate and local tax struc- tures generally are complex and interrelated. They cannot be signifi- cantly altered with respect to any major sector of the community with- out careful consideration first being given to the ramifications of the change, including its impacts on relative tax burdens, economic activ- ity, administration, and the distributio~i of revenues among the vari- ous taxing jurisdictions within the States. Moreover, creation of the legal and administrative framework for a new tax might raise diffi- cult problems of drafting, negotiation, and coordination. Such pro- cedures take time and resources, and they are not likely to be launched, nor is the necessary legal framework likely to be provided, unless there is considerable pressure and support for the change. This would be particularly true in the case of a proposal to levy a new tax on a major industry, as would be involved in the application of an intangibles tax to banks. In 45 States, new legislation would be required to apply an intangi- bles tax to banks, and in six of those States a constitutional amend- ment also would be necessary, as shown in columns 8 and 9 of the table. While an intangibles tax could be imposed on banks through administrative action alone in five States, two of those States do not currently tax intangible property. In addition to the basic legislation establishing the coverage, level, and procedures for adthinistration of the tax, other tax laws in many States would need to be amended in order to remove restrictions against the new tax or to permit it to apply as intended. For example, the bank shares tax statutes in several States provide that the tax shall be "in lieu" of certain other taxes; where that exclusion covered taxes on intangibles, it would need to be amended. Moreover, any~ State which already levied a shares tax on banks might feel impelled to remove that tax if an ad valorem tax on bank assets were adopted, since the shares tax generally is imposed as part of the property tax, and the combination might be regarded as double taxation. This is par- ticularly likely in view of the policies that have been followed by numerous States in determining taxable values of bank shares-that is, the policy, generally applied, of deducting from the aggregate value of the shares in each bank the assessed value of certain assets, particularly real property owned by the bank within the State. Aside from technical drafting problems and lack of strong support, timing difficulties would have precluded action in most States to levy an intangibles tax on banks for the year 1972. To assure adequate advance notification to taxpayers and to provide necessary forms, PAGENO="0631" 611 regulations, and other administrative arrangements well in advance of the assessment date, which usually is early in the year (frequently January 1), legislation would have had to be enacted in 1971. Most State legislative bodies that convened in 1971 adjourned relatively early in the year, while there was still uncertainty as to whether the authority to tax intangible personal property of national banks would become effective the following January 1. Since the Board's report to the Congress, released on May 4, recommended not only continued prohibition of that form of tax on national banks, but also extension of that prohibition to State-chartered banks and all other depositary institutions, it seems highly improbable that many States would have been willing to push forward in 1971 with a legislative program that would have been in such large measure a form of contingency planning. CONCLUSIONS In view of the many difficulties that would have been encountered in attempting to levy an intangibles tax on banks, including the need to overcome strong industry opposition, it appears that inauguration of such a tax in 1972 would have been feasible only in those jurisdic- tions where intangible property already was subject to taxation, where there would be no serious administrative complications in extending the tax to banks, and where this could be accomplished by administra- tive action along or by relatively simple legislation. Such requirements could have been met in only a few States, and in most of these, there has been no desire thus far to take such action. While there are a few intangibles-taxing States that over a longer period might consider the possibility of applying an intangibles tax to banks if that authority becomes available, the prospects appear remote that the tax would actually be adopted in the foreseeable future in more than a very few cases. Among most States which do not tax intangibles at the present time, views expressed by State tax officials indicate that there is little prospect that such a tax upon banks would even be considered. 0