Hon. DUNCAN U. FLETCHER, TREASURY DEPARTMENT, Chairman Senate Committee on Banking and Currency, Washington, D.C. DEAR MR. CHAIRMAN: I have your letter of March 10, 1934, requesting report on S. 3009, "A bill to amend section 5219 of the Revised Statutes, as amended." This bill would place both State and national banks in a segregated class for taxation purposes. National banks are till instrumentalities of the Government. While they are no longer the chief source of paper money, they are compulsory and the most numerous members of the Federal Reserve System and, as such, are essential not only to the currency function, but to an adequate supply of credit in other forms. The bill would, in effect, place power in individual States to wreck these Federal instrumentalities by unsound taxation, if the State so desired, and is therefore dangerous. It must be remembered that it is often difficult to reach the property of individuals for taxation purposes and that where the burden of taxation on moneyed capital employed upon individuals becomes too great, it can and usually does leave the States which imposes the heavy burden. On the other hand, the bank's property may be easily ascertained and reached. It cannot leave the State and must either pay the tax or cease to do business. Moreover, the individual would look with favor upon the burden of heavy taxation on banks when the result would be to lighten his taxes, thus giving to the legislature which enacts the tax law a strong temptation to impose the heavy burden on the banks. The safety of the Federal banking structure should not be left to the power of the legislature to resist such temptation. Therefore the Treasury is opposed to the enactment of S. 3009 into law, but does favor the enactment of S. 2788, which has already been reported by the Banking and Currency Committee of the Senate. Sincerely yours, HENRY MORGENTHAU, Jr., Mr. SISSON. Would the gentleman's association favor the Fletcher bill? Mr. BLINN. What association? Mr. SISSON. Would your association Mr. BLINN. The American Bankers Association? Mr. SISSON. Favor the Fletcher bill? Mr. BLINN. It does; yes, sir. Mr. SISSON. Did you discuss-if you did, I will not ask you to repeat it the question regarding the language in subdivision (b) of section 5219, about the average burden? Mr. BLINN. That was not discussed. Mr. SISSON. And how the average burden could be determined? Mr. BLINN. That was not discussed here, but I am prepared to discuss it, sir, if you would like an answer to it. Mr. SISSON. Not unless the chairman wants you to, but I wondered if it was in the record. I was unable to be here part of the time. Mr. BLINN. Not so far as I know. Mr. Foley will touch on that. Mr. SISSON. I would be glad to be enlightened on it, because it strikes me that that sets up something that is an absolute impossibility to determine. Mr. BLINN. Mr. Chairman, with your approval, Mr. Foley would like to proceed, so as to catch a train west, and he will answer Mr. Sisson. Mr. GOLDSBOROUGH. Is that agreeable to you, Mr. Sisson? STATEMENT OF LEON F. FOLEY, REPRESENTING THE MILWAUKEE CLEARING HOUSE ASSOCIATION Mr. FOLEY. My name is Leon F. Foley. I am here representing the Milwaukee Clearing House. I have listened to the discussion here in favor of the Steagall bill particularly, and it seems to me that there are two questions involved: One, whether the classification of State and national banks will result in discrimination against banks generally by the States, and, two, whether national banks at the present time are paying their fair proportion of taxes to the States. Mr. GOLDSBOROUGH. If this bill is passed, would the condition of the banks be any different in regard to the taxation by the States than what that condition was prior to the decision in the Richmond case? Mr. FOLEY. No. Mr. GOLDSBOROUGH. They were not taxed out of existence in that decision? Mr. FOLEY. Let me go on with my discussion and I think I can illustrate the discrimination that took place. Both of these questions, I think, are answered by the history of bank taxation in Wisconsin. In 1911 Wisconsin went on an incometax basis. It preserved generally its real-estate tax. It did at that time provide for a personal-property tax, but the personal-property tax could be offset against the income tax. The other tax generally was the income tax, and there was no tax on intangibles. However, the State at that time proceeded on the assumption that so long as national banks were taxed at no higher rate than State banks, they could be put in a class by themselves and taxed separately from all other property. So that you had in the State of Wisconsin, commencing in 1911 and continuing until 1926, an interpretation of section 5219 which was identical with the Steagall bill as it is proposed now. What happened? The rate of taxation in Wisconsin on banks ran from 25 percent to 60 percent of the net income of the banks. How do I know that? I know it because we had the income tax law, and under the income tax law, all corporations in the State of Wisconsin are required to file returns, and those returns are open to the public, so that you may go and examine them. I can examine them, and I have had accountants do so. Those returns disclosed at the average rate of tax, including the real-estate tax, personal-property tax, and other taxes upon other corporations generally, ran about 16 percent of the net profits of those corporations; and at the same time, and during this same period, the taxes on the net profits of banks ran as high as 60 to 70 percent. They started in Milwaukee at some 36 percent of the income of those banks. That is under the identical theory that is now being presented as the Steagall bill. The facts are there. You cannot dispute them, gentlemen, because they are records of the Wisconsin Tax Commission. Mr. GOLDSBOROUGH. What happened to the banks? Mr. FOLEY. They struggled along during that period until they were compelled to raise the question that was raised in the Richmond case. Mr. GOLDSBOROUGH. They continued to live, did they not? Mr. FOLEY. I would say they managed to exist during that period. Mr. GOLDSBOROUGH. And perform these functions we have been told were so necessary? Mr. FOLEY. I am talking of the question of fair taxation. I do not see how it can be contended here that a bank should pay any greater rate of tax in proportion to its net return on its investment than any other type of corporation. Mr. GOLDSBOROUGH. Are you willing then for the banks to be taxed as other corporations? Mr. FOLEY. Yes. You present a bill that proposes to tax them in the same way as we have in Wisconsin at the present time, and I think that it will work a fair solution. But you do not have that sort of proposition in either the Steagall bill or the Hancock bill. Mr. BROWN. What was the basis or method of taxation in Wisconsin? Mr. FOLEY. It was the share tax. Mr. BROWN. The share tax? Mr. FOLEY. The share tax, the tax on the share. Mr. FOLEY. Based on the market value of the share. Mr. FOLEY. Yes. That tax ran in Milwaukee-the general rate at that time was 3 percent on a thousand dollars. That is, you paid $30,000 on each $1,000 of valuation. The rate varies. The highest rate I knew of in the State of Wisconsin at that time was 5.2 percent In other words, there were little communities in the State where, if you owned one share of bank stock worth $100, you paid $5.20 tax on it each year. Mr. SPENCE. Was there any discrimination in favor of national banks against State banks? Mr. FOLEY. No, they were both taxed the same way. Mr. LESER. How about other corporations? Mr. FOLEY. There was no tax on the shares of stocks of other corporations. Mr. SULLIVAN. Is that not an advantage to the bank? Mr. FOLEY. It was an advantage to the other corporation. Mr. SULLIVAN. It is always an advantage to the bank. Mr. FOLEY. No, sir; because other corporations were paying much less tax in comparison to the banks. Mr. SISSON. Turning again to the Fletcher bill, your association is in favor of that bill? Mr. FOLEY. Yes. Mr. SISSON. You have this language, commencing with the fourth line of that subdivision: The rate shall not be higher than the rate assessed upon other financial corporations. I am speaking just now of the practical matter, that one or two members of the committee have spoken of. Mr. FOLEY. Yes. Mr. SISSON. So far as you know, taking the building and loan associations, you class them as financial institutions, do you not? Mr. FOLEY. That is in the present law. I do not think that is in the Fletcher bill. Mr. SISSON. If they are not taxed, so far as you know, by any of the States? Mr. FOLEY. Yes. Mr. SISSON. They are not taxed in certain States, at any rate. In most States they are not taxed. Mr. FOLEY. They are not taxed in Wisconsin. Mr. SISSON. If the Fletcher bill were enacted in this form, could you not raise in any of those States the question in the courts as to whether you should be taxed at all? Mr. FOLEY. Because of the exemption of the building and loans? Mr. SISSON. Because of this language, that The rate shall not be higher than the rate assessed upon other financial corporations. Mr. FOLEY. I can only answer that in this way. Mr. BLINN. Mr. Sisson, you are from New York, are you not, sir? Mr. SISSON. Yes. Mr. BLINN. You know we have the income tax both on the banks and the other corporations? Mr. SISSON. Yes. Mr. BLINN. You know that we do not tax the building and loan companies up there, and you know no question has been raised upon it? Mr. GOLDSBOROUGH. That does not answer his question. Mr. BLINN. And no question can be raised upon it. Mr. SISSON. This is new language. Mr. BLINN. No, that is in the present law. Mr. FOLEY. That is in the present law. Mr. BLINN. That is in the present law, Mr. Goldsborough. Mr. FOLEY. I can only answer that in this way, that the building and loans are not taxed in Wisconsin. The fact they are not taxed does not invalidate our law. The history of it runs back to a decision by Justice Taft when he was on the circuit bench, in which he held that the exemption of buildings and loans did not invalidate such a tax law. Mr. LUCE. You said, if I understand you right, that in Wisconsin you taxed the shares of national banks? Mr. FOLEY. From 1911 to 1926, yes. Mr. LUCE. How did that affect the business of the bank itself? What relation did it have to the business of the bank itself? Mr. FOLEY. I would say that they were placed at a very unfair advantage as compared to other competing moneyed capital in the State. Mr. LUCE. You are taxing only the shareholders, you are not taxing the bank? Mr. FOLEY. The tax on the shares is reflected the tax was paid by the bank. It had to be, by State law. In theory it was a tax on the stockholder, but it was actually paid by the bank. You could not collect it from the stockholders because some of them are living in other States. Mr. GOLDSBOROUGH. It was the stockholders' money, though? Mr. LUCE. The tax did not necessarily diminish the capital of the bank? Mr. FOLEY. But it had to come from the shares, did it not? Mr. LUCE. Sure, but it affects the shareholder. Mention was made of the bank struggling along. Mr. FOLEY. Yes; because the bank actually paid the tax. Mr. LUCE. Why did it have to pay the tax? Mr. FOLEY. That was provided for by the State law. Mr. GOLDSBOROUGH. They were not paying their own money out, they were paying the shareholders' money out. Mr. FOLEY. They paid their own money out. Mr. GOLDSBOROUGH. They could not be. That simply is impossible. I am not trying to contradict you, but it is just simply impossible. Mr. FOLEY. I will show you some cases that justified that. Mr. REILLY. How high did the bank-shares tax go? Mr. FOLEY. The rate in Milwaukee was 3 percent, and there were some small cities in the State that paid as high as 5.2 percent on each $100. Mr. SULLIVAN. What was the market value of the shares? Mr. FOLEY. That is based on $100 shares. Mr. SULLIVAN. What was the market value of the Milwaukee banks? Mr. FOLEY. They varied, I would say, from $50 up to $200 a share. On the $200 shares, the tax at that time would be $6. Mr. BROWN. That 2 percent was on the par value? Mr. FOLOY. On the market value of the stock. Mr. BROWN. On the market value; yes. That is not the answer you gave. It was assessed on the real market value? Mr. FOLEY. Real market value of the stock. Mr. BROWN. As a matter of fact, in Wisconsin, as I think is the fact in my State of Michigan, the market value of bank stock is readily ascertainable and reached. Mr. FOLEY. Yes. Mr. BROWN. Whereas, the stock of domestic and foreign corporations is rarely ever reached by a property tax. Mr. FOLEY. There was no other tax on other shares of stock of any other corporation. In that connection, to show you the unfairness of a tax which picks out banks and attempts to discriminate against them, let me read into the record, or put into the record a compilation which was made for me from the records of the secretary of state of the State of Wisconsin in 1926. I have other data going up beyond that, but unfortunately I do not have it here. For 1924 and 1925 there were 140 corporations organized in the State of Wisconsin, whose articles of incorporation stated their business to be investing their capital and funds in promissory notes, commercial paper, bonds, mortgages, and other securities, and discounting thereof and the loaning of money, the purchasing of acceptances, and the financing of partial-payment paper. The capital of those corporations organized in the 2 years was slightly in excess of $8,000,000. The organization of that type of corporation represented a departure, a progressive departure. In 1923 there were 23 of them organized. In 1924 there |