Modernize Franchise Tax Apportionment for Financial Institutions


The Legislature should change Texas method of apportioning the franchise tax base of financial institutions to put Texas-based firms on equal footing with foreign firms.


Background
The banking and finance industry has changed dramatically over the last two decades. Some medium-sized regional banks have become large institutions with interests across the U.S. Many small banks and thrift institutions have been swallowed up by bigger ba nks and savings and loans in the process. And the role of foreign banks has grown dramatically.

States have begun to update their business tax treatment of financial firms in response t o such changes. Minnesota (effective in 1987), Tennessee (1990) and West Virginia (1991) have adopted new rules for apportioning the tax base of financial institutions under their business tax systems.

Currently, multistate businesses apportion their franchise tax base to Texas according to the share of their business that occurs in the state, as measured by gross receipts. For interest and dividend receipts, non-financial firms use rules that track the legal domicile the state of incorporation of the taxpayer.

Financial institutions (banks and S&Ls), however, are exceptions to this rule; they must apportion all interest and dividend receipts based on the commercial domicile of the institution itself. Texas-chartered banks and S&Ls assign all interest and dividen d receipts to Texas due to their commercial domicile in this state. Non-Texas institutions are treated much more favorably under the law their interest and dividend receipts are apportioned outside of Texas due to their foreign legal status. Texas-chartered wholly owned subsidiary banks, such as NationsBank and Banc One, have their commercial domicile in Texas and therefore are treated like Texas banks.

The main beneficiaries of Texas current apportionment system are non-U.S. banks that compete with Texas banks. In the future if interstate branch banking is approved by the Congress and Texas maintains its current system Texas banks could be put at a competitive disadvantage compared with large banks headquartered in other states. Texas S&Ls already operate under this competitive disadvantage.


Recommendation
Texas method for apportioning the franchise tax for financial institutions should be updated to place Texas banks and thrifts on an equal footing with foreign institutions.

To accomplish this, all banks and thrift institutions should determine their share of Texas business by reference to where their business is conducted, rather than where they are legally chartered. The location of business activity should be based on a set of rules taking into account many factors, including the location of property secured by a loan, the commercial domicile of business borrowers and the residences of credit card holders.


Implications
This recommendation is based upon the work of the State/Industry Financial Institutions Working Group, a group composed of major U.S. banks, the Multistate Tax Commission and the Federation of Tax Administrators, which seeks uniform apportionment methods among states for financial institutions. This recommendation in large part follows the group s findings presented in Chicago on November 23-24, 1992.

Texas S&L firms would be put on an even playing field with out-of-state S&Ls. Discrimination against Texas banks in favor of foreign banks would be diminished. Texas-based institutions would probably pay somewhat less tax. Non-U.S. banks would probably pay more tax.

Implementation of this recommendation would prepare Texas for potential future changes in federal banking laws, particularly the advent of interstate branch bank ing. State franchise tax revenues from banking organizations would not be at risk should federal law change before Texas legislative action could occur.

The proposal would have no effect on local governments.

Fiscal Gain to the Change in
Year General Revenue Fund 001 FTEs

1994 $10,500,000 0
1995 10,900,000 0
1996 11,200,000 0
1997 11,700,000 0
1998 12,700,000 0