TAXATION OF NATIONAL BANKS THURSDAY, APRIL 12, 1934 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee this day met at 3:30 p.m., Hon. Henry B. Steagall (chairman) presiding, for consideration of H.R. 9045. STATEMENT OF CHARLES P. BLINN, JR., THE PHILADELPHIA NATIONAL BANK, PHILADELPHIA, PA. The CHAIRMAN. Please give your name for the record. Mr. BLINN. My name is Charles P. Blinn, Jr., vice president of the Philadelphia National Bank, Philadelphia, Pa. Also, I am chairman of a special committee of the American Bankers' Association on section 5219, United States Revised Statutes. This committee has had charge of State taxation of national banks for a great many years and since matters pertaining to section 5219 have been under controversy. There are 14 members of that committe at the present time and 12 States are represented on the membership. The members are Charles P. Blinn, Jr., chairman, vice president of the Philadelphia National Bank, Philadelphia, Pa.; D. J. Needham, secretary general counsel, American Bankers' Association, New York City; Thomas W. Bowers, vice president of the Manhattan Co., New York City; W. J. Bramman, executive vice president, Mississippi Valley Trust Co., St. Louis, Mo., Walter S. Bucklin, president, the National Shawmut Bank, Boston, Mass.; Thornton Cooke, president the Columbia National Bank, Kansas City, Mo.; Edward Elliott, vice president, Security-First National Bank, Los Angeles, Calif.; R. E. Harding, president, the Fort Worth National Bank, Fort Worth, Tex.; Walter Kasten, president First Wisconsin National Bank, Milwaukee, Wis.; R. R. Mattison, president the National Bank of Tacoma, Tacoma, Wash.; Austin McLanahan, president the Savings Bank of Baltimore, Baltimore, Md.; Charles H. Mylander, vice president the Huntington National Bank, Columbus, Ohio; James Ringold, president the United States National Bank, Denver, Colo.; and A. McWashburn, vice president First National Bank & Trust Co., Minneapolis, Minn. I should like to read to you a letter from Mr. D. J. Needham, general counsel of the American Bankers' Association, who could not, unfortunately, be here today. He succeeded Judge Paden, 39 former general counsel of the American Bankers' Association. It says: Hon. HENRY B. STEAGALL, Chairman Banking and Currency Committee, WASHINGTON, D.C., DEAR MR. STEAGALL: Late this afternoon Mr. Charles P. Blinn, Jr., chairman of the special committee of the American Bankers' Association, which committee has been handling legislation relative to section 5219, Revised Statutes, called at my room in the Willard Hotel and advised that he and his associates had been in a hearing before your committee today on H.R. 9045 and H.R. 5045. Mr. Blinn tells me that notice of this hearing was only received yesterday, and, consequently, he hurriedly arranged to be present today for the hearing. The first knowledge I had of this hearing was late last night, and inasmuch as I had another engagement today before the Agricultural Committee of the House on the Grain Futures Act, it was impossible for me to attend the hearing this morning. Unfortunately, I have made plans and engagements in New York City for tomorrow and Friday and am leaving the city Friday for a period of a week or 10 days. Under these circumstances, I regret very much that it will be impossible for me, as general counsel of the American Bankers' Association, to appear before your committee tomorrow afternoon. I would appreciate your courtesy in extending me an opportunity to appear before the committee at some future time, if the committee sees fit to grant me the privilege. Very truly yours, D. J. NEEDHAM, General Counsel. Mr. BLINN. I will just touch briefly on the present law relating to section 5219, Revised Statutes. In the first section four alternative forms of taxes are provided. First, a tax on the share method, with certain limitations; secondly, an income tax, under certain limitations; thirdly, a tax on dividends in the hands of shareholders, with certain limitations; fourth, an excise tax with income from all sources, including all tax-free investments, as the measure of the excise. Going back to the original banking act of 1863, it did not provide for the taxation of national banks by the States. It is a fact that a State has no inherent right to tax a national bank, and the right of a State to tax a national bank is only done by permission of Congress. That grant is subject to certain limitations. The year after the national bank act was adopted the Congress gave that permission to the States to tax the shares, with limitations. That law continued without important change under that method of taxation until 1923. In 1921 there was considerable controversy on account of the low rate of intangibles and Congress at that time inserted two additional alternate methods, namely, the income method and the tax on dividends. In 1926 certain States wishing to tax on the income basis and wishing to include in the income the income on tax-exempt securities, Congress again amended the law to provide for the excise tax with the income from all sources as the measure of the excise. Yesterday Mr. Leser went into the Richmond case somewhat in detail. The impression might be gained from his remarks that that was the first important case that arose in the Supreme Court on that section. I should like to say for the benefit of members of the committee, and particularly the newer members, that the first important case was handed down in 1880, it being the so-called "Boyer" case, in Pennsylvania. Pennsylvania, which was then taxing on a millage basis, had endeavored to tax bank shares at a rate higher than other intangibles. Following that case, which went against the State of Pennsyl vania, Pennsylvania taxed on the millage basis and there has not been any trouble there since. The Merchantile Bank case followed a few years later. When the Richmond case was handed down in 1921 there had been two important decisions on section 5219. The Richmond case was the last and it was followed by cases arising in Minnesota, Wisconsin, New York, and several other States, which counsel are more familiar with and will discuss. So that the Richmond case was not any more important than any other of the cases that might be discussed; but I will not dwell upon that. There are three classes of property for taxation-real estate, tangible personalty, and intangible personalty. Banks are paying taxes on real estate. There is no levy, so far as I know, on tangible personalty. There is no reason why there should not be. The reason is, perhaps, that a bank has practically no tangibles. Of course, it has desks and adding machines, and so forth, that are wearing out; but no bank that is in good standing and has been going for several years and developed an earning power carries its equipment on its books. That practice is frowned upon in the banking profession-this carrying of such things as assets. The CHAIRMAN. The bell has just sounded for a roll call. Let me suggest that members slip out one at a time, answer the call, and then return immediately. Mr. BLINN. Referring to the matter of intangibles, it is a general rule of taxation of intangibles that where the levy is against intanbibles the taxpayer is permitted to deduct, his debts from the intangibles and he pays on the net count. When a manufacturing concern pays a tax on tangible personalty it pays the tax directly upon the value of that after a deduction for debts. If you deduct debts from banks and debts of banks are the deposits-from the total assets, what do you have left? That is the basis of tangible taxation favored by the American Bankers' Association-that bank shares are intangibles and they can be tied to no other class of property for purposes of taxation; that the levy of a rate on intangibles must be and should be the rate levied against the bank shares. Where a taxing State is not satisfied with the income from a levy of an intangible rate on the value of the shares it has three other alternatives, namely, the income method, the excise method, and the dividends in hands of shareholders method. Cumulative taxation is permitted in some States, but Congress in section 5219 provided that where a State taxes the dividends of domestic corporations in the hands of shareholders in addition to taxing the income of the corporation itself it may in addition to taxing the income from a bank tax the dividends from the bank in the hands of shareholders according to the income or excise method. Turning to H.R. 9045, the new bill which we desire to oppose, we oppose it on two grounds. First, it classifies banks for purposes of taxation; and I say to you in all sincerity that if you pass a law which permits a classification of banks for purposes of taxation, the sky is the limit. Mr. GOLDSBOROUGH. It was said here that you would oppose taxing banks the same way other corporations are taxed. Mr. BLINN. That was the result of a loose question. I do not think it was a question well put. We are dealing here with conditions in 48 States. I do not think that an adequate answer could be made to a question of that kind in three or four words. Mr. GOLDSBOROUGH. What is the analysis of that situation? Mr. GOLDSBOROUGH. You object, as I understand, to the banks being segregated for the purpose of taxation. The question arises: Is there objection on the part of banks to their being taxed as other corporations are taxed in the various States of the Union? Mr. BLINN. There is a great difference between a bank and other classes of corporations. A bank is the only class that deals in debts. No other classes of business or corporations has eight or ten times more debts than their net worth; and that is the situation at present. Mr. GOLDSBOROUGH. But the corporation does not make money as you do. It does not make money out of its debts. Mr. BLINN. They are lending on deposits. If the revenue from taxing shares is not sufficient they have three other remedies. They have a right to tax on the income or by the excise method. Mr. GOLDSBOROUGH. That does not answer the question satisfactorily. You are making money out of debts you owe. how you make your living. Mr. BLINN. That is the science of banking; yes. That is Mr. GOLDSBOROUGH. Why not pay a tax on the things on which you make your money? Mr. BLINN. We are doing so. Early in my discussion I related three forms of taxation. I told you that we are paying taxes on real estate. If you want to take our intangible assets and deduct our debts and tax on the difference, all right; but it is not fair to tax the total intangibles without deducting the debts. Mr. GOLDSBOROUGH. The banks have a tremendous advantage over every other corporation. Mr. BLINN. I do not concede that. Mr. GOLDSBOROUGH. You take the money of the people and put it in the banks. You do not pay interest on it. It is your debt. That is the very money you loan the public and from which you make your profits, You call it a debt, but it is a debt only theoretically. Mr. BLINN. No. Mr. GOLDSBOROUGH. You do not pay any interest on that money Mr. BLINN. We pay interest. Mr. GOLDSBOROUGH. That is what you make your money on. When the depositors put their money in your banks they get no interest on it; and then the banks turn around and loan that money to somebody. Mr. BLINN. That is the banking business. Mr. GOLDSBOROUGH. Yes. It is the greatest opportunity to make money that is known to man. Mr. BLINN. I do not agree with you as to that. I will show the earnings of all national banks in the United States from 1920 to 1932, both years inclusive, by inserting a report in the record; and by this you will see that banking is not a highly lucrative business. Mr. GOLDSBOROUGH. Just because the courts have said that the money on deposit in your banks constitutes a debt and is not a trust fund, that is a decision very much in favor of the banks; but it is poor law in its inception. It is, however, the law. Just because it is held legally that deposits constitute a debt, you are using that to make profits, and the only thing from which you make profits is the use of the money of the people. There is no reason why it should not be taxed. Mr. BLINN. It is not the debt that we use; we loan the funds that come to us in one or two ways Mr. GOLDSBOROUGH. If I owe a debt I have to pay interest on it. Mr. BLINN. Yes. Mr. GOLDSBOROUGH. I am not making any money on it; I am paying interest on it; while you take the debt and make your profit from it. So that it is not in fact a debt in the truest sense. Mr. BLINN. Yes; it is our stock in trade. Mr. GOLDSBOROUGH. We may not say that it is anything more than a theoretical debt from the standpoint of taxation. Mr. BLINN. The corporation that borrows from the bank puts that into inventory and receivables and it becomes an object of taxation. One of my advisers in Philadelphia puts it so well that I want to read his quotation in his comments to me. He says: This bill is vicious in principle. Under it the only limit upon State taxation of national banks would be the self-denying limit which the States may place upon their taxation of State banks. It is an enlargement of the principle embodied in the Norbeck bill, S. 1502. Senator Norbeck, however, confined his theory to the tax on shares, but the Shipstead bill carries the vicious principle all along the line. Under it there would be an open season on banks for any form of tax which a desperate legislature might feel moved to impose. As to earnings, it has been reported to this committee that the banking business is a highly lucrative profession. The banking business has its ups and downs the same as every other business. With the approval of the chairman, I will offer for the record a report of the Comptroller of the Currency covering expenses and dividends of all national banks in the United States for the years 1920 to 1932, both years included. The figures for 1933 are not available, but, speaking from my own experience as a banker, I do not believe that the figures for 1933 will be any better than the figures for 1932. Statement of earnings, expenses, and dividends of all national banks in United States (in thousands of dollars) |