Banking reform initiatives in Congress.

• Author: Dotson, Betty

Congress has spent much in 1991 considering comprehensive banking and financial reform legislation, and finance officers soon will be confronted with an array of issues that will affect, in varying degrees, the way they do business. The issues identified here are already in the legislative or regulatory arena, and GFOA members should consult the GFOA Newsletter for the most up-to date information about each of them. There are four areas of particular importance as banking reform becomes a reality.

State Taxation of Interstate Banks

The banking bills originally approved by both the Senate and House banking committees authorize banks, under certain constraints, to operate interstate branches. A last-minute amendment sponsored by Senator William Roth (R-DE) that affects state taxation of banks was included in the Senate banking bill. This amendment would have changed the method by which income earned from a bank branch within a state could be taxed. The language of the Roth amendment would have required a branch of bank to be taxed as a separate entity, therapy prohibiting states from using the principles of formula apportionment and combined reporting in determining the tax to be imposed on an interstate bank.

Formula apportionment is a system used to calculate the income of a multistate entity so that the portion attributable to a particular state may be properly ascertained for taxing purposes. This allows states to tax a multistate business fairly without having to laboriously track separate transactions to determine which ones have been carried out in each state. Formula apportionment had been approved by the U.S. Supreme Court. The Roth amendment would have effectively eliminated this method of state taxation and required the specific tracking of transactions in order to calculate tax liability.

The amendment also might have prevented states from using combined reporting in state taxation of interstate banks. Combined reporting is related to formula apportionment and refers to an affiliated group of companies operating a single multistate "unitary business." Thus, currently a state is allowed to combine the income of all the members of the business in order to then determine the tax liability of those members within its borders that it is permitted to tax. Again, this method of calculation arose because of the difficulty of tracking separate transactions in a multistate business. In the case of banks, their ability to shift funds quickly and efficiently among branches makes it particularly difficult otherwise to determine which transactions have occurred within a particular state.

GFOA and other public finance interest groups contacted all senators expressing their concern about the Roth amendment. While the...