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 that 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 that it would under no tax. Accordingly, the tax may incuce 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 Weich estimated it to be in 1934.32 8. TAXATION OF BANK DEPOSITS Bank deposits are taxable in some states as intangible property of the depositors. Weich, in 1934, fisted 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 35 taxing jurisdictions ranged from mill to 6 milis. Eleven states completely exempted deposits from property taxation.* In the 16 general-property taxing states, certain deposits were exempt, and some states allowed deduction of debts, while as to the taxable deposits Welch estimated that not more than 10 per cent, in many states, were in fact taxed. 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 barks, 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 Tar Handbook. Significantly, 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 consequences 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 legally 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 * Weich, op. cit.. pp. 83-90. Ind., pp. 125-136. 34 Itid., pp. 117-20. Itid.. p. 124. 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 deposits 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 deposits 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-tax states, and no information is available from CCH 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) 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) Kansas-3 percent of gross earnings (1971 ff.). (514) Indiana-25 cents per $100. (507) 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.1 (559) New York-Personalty exempt. (571) North Carolina-10 cents per $100. (575) 1 Communications from bankers. 36 Dick Netzer, Economics of the Property Tax, p. 141. Rhode Island-40 cents per $100 after exclusions; 13 cents-17 cents Virginia Deposits apparently exempt. (622) West Virginia Apparently 50 cents per $100. (631) 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 competing 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, 37 If 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). 66-236-72-pt. 3-26 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 deposits 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 deposits 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-tax states, and no information is available from CCH 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) 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 ff.). (514) Maryland-Intangibles exempt. (528) Michigan-50 cents per $1,000. (536) Minnesota-Intangibles exempt. (540) Missouri-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. 1 (559) New York-Personalty exempt. (571) North Carolina-10 cents per $100. (575) 1 Communications from bankers. 36 Dick Netzer, Economics of the Property Tax, p. 141. |