Sullivan's statement, the reason they cannot tax the shares is because there is some prohibition in the Federal statute.

Mr. SULLIVAN. Yes; and that is why we want 5219 amended.
Mr. BROWN. How does 5219 read now?

Mr. SULLIVAN. It reads that the States shall have the power to tax the stock, but the rate shall not be greater than the capital of individual citizens in the State coming in competition with the capital investments of banks.

It is upon the interpretation of that statute by the various courts. that this so-called "limitation" has grown into an absolute prohibition in practice, and it is because of that situation that for 7 years. we have been before this committee whenever we had an opportunity, to try to induce the Congress to change that limitation from one which it is impossible for the State to meet, to one which is practical

to meet.

Mr. REILLY. Under the law what is the difference between the taxation of a manufacturing plant and a bank in your State?

Mr. SULLIVAN. It is because the property of the corporation is taxed as such, both the real and personal property. That is a general rule in most States. The only reason banks are taxed upon their shares, is because that is the only way that Congress has ever authorized them to be taxed.

Mr. REILLY. Why should it not be sufficient if you taxed the bank on the real estate, and then taxed it on its income, the same as any other business institution?

Mr. SULLIVAN. You mean tax on the income only?

Mr. REILLY. Why would it not be proper for you to tax the income, just the same as a manufacturer is taxed?

Mr. SULLIVAN. I will agree with you that it is proper, if you will say you will tax a bank the same as any other corporation in the State. The reason I make that statement is that in all States that have ever used the income method, that method is not the exclusive method. In addition to that, in all States that tax on the real estate, which is now out of the controversy, they also tax on the property of the corporation. Under 5219 that cannot be done as to a bank. If you tax a bank on the income, that bank might have $10,000,000 worth of beautiful furniture, fixtures and equipment, and you could not tax that a dime.

Mr. HANCOCK. In respect to any given corporation, the State usually taxes its inventory, including all personals.

Mr. SULLIVAN. Yes; that is correct.

Mr. SPENCE. How do the courts construe this money coming into competition?

Mr. SULLIVAN. They have construed that, if in the locality where the bank does business there are loans made by private individuals, and if the moneys and the credits tax is 3 to 5 mills, which is imposed upon the moneys and credits, then no higher tax can be put on the bank shares. That is decided in the Richmond case and also in the case of the First National Bank v. Minnesota, and the Bank of Hartford v. Wisconsin.

Mr. HANCOCK. Have the courts construed a loan of that character as being in competition with a loan made by the banks?

Mr. SULLIVAN. Yes. I do not think there is any dispute about what the law is on the part of both sides here, because in the taxation of

moneys and credits it was found you had to use a low mill rate, or you would not get anything at all.

Now, 5219 you have in your hand is full of very wonderful provisions in favor of the banking interests, and the one I have called attention to repeatedly is if a State taxes on the share method they cannot use the income method; if they tax on the income method they cannot use any other method. Then there is a third provision which permits a State to measure the tax by the income, which is called the excise tax, or another form of income tax, and you cannot use any other if you use that method.

That results in the State being obliged to make a low rate on the banks, because they must apply the same rate to the mercantile and manufacturing and financial corporations; and those corporations have to pay an additional rate to what the bank pays, and the bank rate must be low. The bank, therefore, gets the advantage of the low rate, and they are by the terms of 5219 exempt from any other

taxation.

Mr. SAXE. Senator Sullivan is absolutely wrong in his statement. In most of the income-tax States where you have the income tax, the personal property is from the ad valorem taxation.

Mr. REILLY. At the present time, if I am running a manufacturing plant, I pay taxes on my plant and on my personal property, and I pay an income tax. Under the present law the bank would pay a tax on its banking institution, but would have no personal property

tax.

Mr. SULLIVAN. That depends on whether he paid the income tax. Mr. REILLY. In other words, an ordinary merchant running a department store, if he owned the building, pays taxes on the real estate and pays a personal property tax on his stock, and he pays an income tax?

Mr. SULLIVAN. Yes.

Mr. REILLY. Now, is there any way by law whereby a banker would have to pay on that basis?

Mr. SULLIVAN. Yes; there would be, if you would pass Mr. Steagall's bill.

The CHAIRMAN. Can you do it under the existing law?

Mr. SULLIVAN. No, you cannot; because under the law we are trying to amend, if the State applies the income tax it cannot apply any other tax. If it applies the excise tax, it cannot apply any other tax; and if it applies the share tax, it cannot apply any other tax. Mr. REILLY. Why not fix the law so that they can put all taxes on the bank, the same as you can any other business?

Mr. SULLIVAN. That is what we are trying to do.

Mr. REILLY. Now you are separating it in the Steagall bill, as a separate institution.

Mr. SULLIVAN. We would be perfectly willing to say that the legislature may tax banks and their property the same as other corporations.

Mr. REILLY. I do not see why that should not be done.

Mr. SULLIVAN. We have talked about the Fletcher bill this morning. That bill applies the same tax on shares that is applied by the State to moneys and credits of individuals. We will accept the rule if you will apply the same tax to the property of banks as you do to property of individuals. We will accept it if you will say we will

apply to the banks the same character of taxes that is applied to the same property owned by individuals, but they will not do that.

The CHAIRMAN. Why should Congress desire to interfere if a State sees fit to classify its property for taxation? For instance, take the State of Alabama, suppose as a policy we wanted to invite and induce manufacturers to make investments in that State, as we have done with reference to cotton mills in the past, and if we see fit to exempt a corporation engaged in that business for a certain period, why should not the State of Alabama or any other State be permitted to do that if it sees fit to do so?

Mr. SULLIVAN. I think it ought to, unless it is clear they make a discrimination, arbitrarily discriminating against a national bank.

Mr. HANCOCK. You refer to the Fletcher bill, which I assume is the bill Mr. Blinn referred to; is that correct?

Mr. SULLIVAN. Yes; that is the same bill.

Mr. HANCOCK. Did you ever appear before the Senate Committee? Mr. SULLIVAN. We did not.

Mr. BLINN. There were no hearings held on that.

Mr. SULLIVAN. The Senate has had hearings on that question for years and years, the same as this committee has, and they decided no hearings were necessary, and decided to report the bill out.

Mr. REILLY. Mr. Sullivan, your contention, I take it, is that the deposits of banks should be considered personal property and taxed just the same as property of a business man?

Mr. SULLIVAN. No; I say this, if a tax is applied to notes and bonds the same as similar property which we denominate moneys and credits in the hands of individuals, a fair rule would be to apply the same tax when they are owned by banks.

Mr. REILLY. There is a bank in my town which has $6,000,000 deposits and ordinarily it has about five million and a half of loans. It is your contention that the five million and a half should be taxed just the same as the stock of a merchant in his store?

Mr. SULLIVAN. No; my contention is that it should be taxed the same as similar property, notes and bonds in the hands of individuals. Your merchant across the street does not own notes and bonds, he has tangible personal property.

My contention is that if the 3-mill rule was applied on notes and bonds in the hands of an individual, it would be a fair rule to apply the same rate to the same property when it is owned by banks.

Mr. REILLY. In other words, this bank that has five and a half million dollars of securities would have to pay 3 percent on it?

Mr. SULLIVAN. No; 3 mills, or whatever rate it happened to be, if the same rate was applied to those individual owners of similar property.

Mr. BROWN. Would you deduct the indebtedness of the depositors to the bank?

Mr. SULLIVAN. If you deducted the indebtedness of the individual, yes; but treat them all alike.

Mr. BROWN. The bank is a trustee in holding that property, and it would be different from the case of an individual.

Mr. HANCOCK. Let me ask just one more question: I have before me here the report on the Fletcher bill, reported by Mr. Glass, and the last paragraph of that report reads as follows:

S. 2788 is the result of more than 10 years of study by the special committee on section 5219 of the American Bankers' Association, which association is the

representative body of all the banks throughout the country. The American Bankers' Association is sponsoring this legislation as the sound solution of the troublesome problem of bank share taxation which has been before Congress continuously during the past decade.

I assume for that reason there was an real necessity of any member of the association appearing before the committee; is that correct? Mr. SULLIVAN. I do not know. Let me make a little explanation, please.

Mr. GOLDSBOROUGH. Before you do that, let me make this statement. Bankers who come to see me say what they object to is being put in a class to be shot at by the legislatures. I understand a representative of the American Bankers' Association has just told you they not only object to that, but they object to having banks taxed as other corporations are taxed. Did I correctly interpret what he said to you a few minutes ago?

Mr. SULLIVAN. I do not know whether they object to that now, but they have always objected to that heretofore.

Mr. GOLDSBOROUGH. They have stated to me they object to being put in a class by themselves, but this morning they say they object to paying taxes as other corporations are required to pay taxes. Mr. BLINN. May I answer that?

Mr. GOLDSBOROUGH. Yes.

Mr. BLINN. If you allow the banks to deduct debts, there is no reason why it should not go forward, deduct the debts the same way every other corporation is allowed to deduct debts.

Mr. HANCOCK. In my county a man has a right to deduct debts before he makes a return on moneys and credits.

Mr. SULLIVAN. In some States they do and in some they do not. I could not come before any committee and advocate a rule that did not apply equally to one man as to another, and I only ask that you apply to the banks the rule that applies to the home owner, the merchant, and every individual.

In this country 90 percent and more of taxation is based upon the ad valorem system of taxes. In your village, city, and in your county, every man's property is valued and a budget is made up of the estimated expenditure for the next year, and the total applied to the total valuation, then you get your rate.

The legislature does not make that rate. They talk about the legislature burning up the banks, but the tax rate is made right in the locality by the amount of public expenditure there for schools, police, sewerage, sanitation, and for State government, and the bankers want to avoid their proper share of the local burden and the State burden of taxation.

I stated to you a while ago that every day that passes they are evading it to the tune of a hundred thousand dollars.

Now, then, let us see a figure or two about this, unless there is something else you wish me to explain regarding the law and its operation.

As it is today, the States are virtually in a situation where they cannot act except on an income or excise basis, and the best testimony as to the efficacy of the income-tax basis or the excise-tax basis is experience. What is that experience?

The State of California found itself unable to tax banks upon the share basis, and they imported some of the greatest tax authorities

in the Nation out to that State, and they talked to the Governor, and the Governor called a special session of the legislature. Then they submitted to the legislature an amendment to permit them to tax on an excise basis. What did they get? The first year under that excise-tax basis the Anglo-London & Paris National Bank of San Francisco, which had been taxed on the share basis, with a tax of $68,133, today has a tax of $2,709.55.

Every other State has had a similar experience.

Mr. REILLY. May I ask this question: Suppose the Steagall bill was passed-what would you advise as legislation for the State of Minnesota in reference to taxing banks?

Mr. SULLIVAN. I would not change our legislation any.

Our legislation taxes banks upon the value of their shares, as Minnesota has done since 1864, and as every State did until 1923. Mr. REILLY. In view of the fact that for the past few years no banks have been paying dividends on shares, do you think that is fair?

Mr. SULLIVAN. In view of the fact that most of the manufacturers, merchants, and farmers in Minnesota have not made a dollar in many years, I would say that the bank, right alongside of them, must continue to support the public schools.

The CHAIRMAN. Let me say this, we levy the tax rate on the home of the citizen and require him to pay or surrender his home and turn his children into the street. There certainly cannot be anything more sacred about a banking institution than a home.

Mr. BROWN. The bank must pay taxes on its real estate where it is doing business the same as the home owner pays taxes on his home. There is no exemption there.

Mr. SULLIVAN. That is true, but the exemption runs to the other property it owns, and it is a discrimination against the home owner, the merchant and every other property owner in the State.

I want to say when one class of people does not have to pay taxes on property they own because they have not made a profit and you tell the other man he must pay even if he has made a loss, then I say it is time for Congress to relieve the States of that situation.

Now, in Wisconsin the last year under the share tax, 1926, they collected $1,935,000 from national banks, and the next year when they put in the income, it was $405,000. In the State of Massachusettsand I think you will be interested in this, Congressman Luce and the other members of the committee-you have one of the best tax commissioners in the United States, Mr. Long, and I am proud to say he has been with us on the matter of amending section 5219 for 7 years. In that State, in 1922, they collected $2,874,000 on the share tax, and in 1923 it was $681,000; the next year $577,000; in 1928 it was $514,000; in 1929 it was $739,000; in 1930 it was $691,000; in 1931 they dropped to $384,000; in 1932 they dropped to $83,856; but the poor devil who owned any other kind of business did not escape. Let me call your attention to the heart of this problem, which lies in the great banks in the city of New York. They are the ones that have prevented us from getting relief. Let us see why.

In New York City in the year 1922 the capital and surplus of the national banks of New York City was $399,963,000, and under the share tax method they paid taxes of $11,935,000. In 1932, 10 years

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