Arizona OutReach

Abolish corporate income tax on financial institutions (Continued)

The first series of this study disclosed the effect Arizona corporate income tax has on the dramatic erosion of bank assets in our state.  Further evidence of the value of eliminating corporate tax on financial institutions is revealed when comparing changes in the amounts of bank deposits housed in Arizona, Nevada and South Dakota.

Banks in Arizona held a combined $61.8 billion in deposits as of June 30, 2004.  Five years later, June 2009, the growth reached $82.3 billion, a 25% increase, in spite of one of the greatest economic booms ever experienced by Arizona.  During this same period Nevada banks grew from $40.7 billion in deposits to $195 billion, an increase of more than 479%.

Neighboring Nevada provides a good example of what Arizona could gain by eliminating corporate income tax.  With a population of 2.5 million, a much smaller state than Arizona, the Nevada Legislature altered its tax.  Since that time financial institutions poured in setting up subsidiaries and headquarters operations in a tax haven.  They contributed their wealth and high-paying jobs to the Nevada economy.  And yes, Nevada has high unemployment and budget problems since they overspent income as did most other states.

As of June 2009 Arizona had 2 locally chartered banks (both owned by out-of-state interests) with out-of-state branches.  The 2 banks had 21 out-of-state branches that controlled $741 million out-of-state deposits.

Nevada by comparison had 4 banks with 1,040 out-of-state branches that controlled more than $180 billion out-of-state deposits.

South Dakota provides another worthwhile benchmark.  With a population of 781,919 that state enticed a Citibank subsidiary to move there.  Subsequently, South Dakota went from $15.7 billion in deposits in 2003 to $86.8 billion in 2009, a 553% increase.  Their deposits increased by $12 billion from 2008 to 2009.   South Dakota, a much, much smaller state than Arizona, now has more in deposits than we do.  An added bonus is that South Dakota has 6 banks with 3,495 branches that control $304.7 billion out-of-state deposits.

Both South Dakota and Nevada have gathered extensive information about the value financial institutions bring to their respective states in the way of economic dynamics, including added taxable wages from job creation.  These states have benefited from favorable tax treatment that is an attraction to major financial institutions.  Even tiny Delaware, with a population of 853,904, has $170.6 billion in deposits and 5 banks with 1,045 out-of-state branches that control another $77.3 billion of out-of-state deposits.

The wealth controlled in Nevada, South Dakota and Delaware is phenomenal on a per capita basis.  Their bank asset ranking is equally extraordinary.   Again, of the 50 states, Nevada is number 3, South Dakota is number 4, and Delaware is number 5.

Yes, we can blame some of our per capita lag on our illegal immigration and related issues!  I don’t know to what extent.  But, I can say without question that the issue has long been an integral part of the assets of financial institutions across our country.  Several years ago I pointed out to the FDIC the need to address the $5 billion to $8 billion in mortgages to illegal immigrants on the books of American Banks.   Yes, some banks have been profiting from loans to illegal immigrants!

Another serious problem that has surfaced is the enormous role of U.S. banks in the illegal drug trade.  As an example, Wachovia, a major American financial institution was closed by the FDIC.   Jeffrey Sloman, the federal prosecutor who handled the illegal drug trade case said, “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”  Yes, some banks have been profiting from the illegal drug trade!

Arizona’s economic crisis is serious and has many origins, but, incredibly, the legislature continues to overlook a surefire way of clawing its way back to economic stability.  This legislative neglect of the power of receptive finance laws forces our citizens to earn smaller incomes.

We need to keep Arizona money in Arizona!  We can raise per capita income, provide more money for business loans, and generate greater sales tax revenues for our state.

Our bank asset and deposit growth is currently limited and both are sucked out of Arizona.  We no longer control our own economic destiny in Arizona.  Decisions are made for us by out-of-state money centers.  Our local control of bank assets has gone from 95% at the time I was Arizona State Treasurer down to about 4% to 5%.

We can reverse this trend by providing a statutory environment that will encourage businesses and banks to headquarter here or to move subsidiaries to our state.

In the next installment in this series, I’ll describe another bill that would help stop financial crimes and bring about $12 billion to $15 billion in deposits to our state.

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Copyright July 4, 2010

Stop Financial Crimes and Attract Billions of Dollars in Deposits to Arizona

Billions of dollars of investors’ monies have been lost and more are at risk!  Roughly $185 billion in Internal Revenue Code, IRC Section 1031 Like-kind Exchanges was processed and held as deposits nationally in 2008.

Although, Federal Law mandates that each exchange must be executed with the services of an Exchange Facilitator, (Qualified Intermediary – QI), an Exchange Facilitator is not audited or otherwise monitored by any federal regulatory body.  Consequently, billions of investors’ dollars have been stolen.

Arizona should move without delay to establish standards for Exchange Facilitators.

Bank deposits in Arizona as of June 30, 2009 (last figures available) were in excess of $82 billion.  I believe this legislation alone, properly marketed across the U. S., can bring $12 billion to $15 billion more to Arizona in deposits by our state becoming a safe-harbor.  This substantial increase in deposits is money that could be reinvested in our state causing a 4 to 10 time multiplier effect when loaned locally.

The risk of trust fund loss is great, but unnecessary if our Arizona legislature would take action.  This past session is the second time I have had a bill introduced in the state senate.   It failed both times without as much as a hearing.

During these same two years, 7 states provided the leadership to regulate this process; Nevada, California, Washington State, Oregon, Colorado, Virginia and Maine.   Colorado Legislators passed their law January 25, 2010.  See http://www.1031.org/.

Your money becomes their money to do with as they wish!

The defense of the QI that lost $120 million dollars of clients’ money in Nevada by comingling personal, client and company monies was, “There was no regulation of what could be done with the funds.”  The Nevada legislature did not act to protect its citizens until after this loss.

Losses in Arizona have happened and more are inevitable!  I personally know of a bank that was approached with an offer to use client money as collateral for personal loans to the owners of a QI.  Absolute power over money corrupts.  We don’t need to continue stalling passage of legislation while more people loose money!

In December 2008 the QI of LandAmerica filed bankruptcy with over $400 million of consumer funds. The monies are now in limbo and may never be seen again due to co-mingling and improper investment under LandAmerica’s control.

In the meantime, the victims are further penalized by being forced to pay income tax for non-compliance.

Arizona consumers, inundated with a flood of downward economic trends, should not have to include money entrusted to Qualified Intermediaries that due to a lack of both federal and state legislation are riddled with intentional and unintentional fraud. QI’s are not required to be bonded, insured, or even licensed. This regulatory void has left unscrupulous and incompetent Exchange Facilitators with doors wide open for malpractice or outright fraud.

Arizona must move quickly to become the 8th state in the nation to bring regulation to this important business function. Our state could become home to billions of dollars of 1031 exchanges.  This legislative act would bring assets, tax revenues and jobs to Arizona.

For examples of frauds see:

http://www.patriotledger.com/business/x1162817610/S-Shore-investors-lose-hard-earned-money-in-alleged-tax-scam for $132 million in losses.

http://www.hollandhart.com/presentations/Outline_1031Exchanges(CrenshawMaxfield).pdf II, C. Recent Qualified Intermediary Failures and Defalcations.

http://1031netex.wordpress.com/2008/03/30/more-1031-exchange-accomodators-in-hot-water-lawsuit-claims-80-million-stolen-in-scheme/ for $80 million in losses.

Now for the surprise

What do you think happened to SB 1333 Exchange Facilitators Regulation?  Without a hearing and without warning, everything after the enacting clause was stricken.  The bill was changed to regulate canneries, fertilizer plants, refineries, commercial feed lots, meat packing plants and tallow works by the Senate Commerce and Economic Development Committee chaired by Senator Barbara Leff.  The sponsor of the bill, Senator Thayer Verschoor is also a member of the Committee.  Both are now candidates for the office of Arizona state treasurer.

In the next installment in this series, I’ll describe the Task Force that has been created to bring reform to Arizona’s antiquated tax system and introduce ways that you can help.

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Copyright July 4, 2010

Arizona Financial Institutions Task Force

I formed the Arizona Financial Institutions Task Force in 2006 to help State Senate Majority Leader Chuck Gray address bank related economic solutions for Arizona.  Senator Jim Waring, now a candidate for U. S. Congress, was a regular participant and supporter.

I chair the Task Force.  Candace Wiest, President & CEO of West Valley National Bank and a former member of the San Francisco Federal Reserve, is our Vice-chair.  Our members are highly successful local business people and community bank presidents.

Our mission is:  To provide an independent assessment of opportunities for financial institutions to improve the business climate in Arizona.

Our Task Force believes we will act as a magnet to major global financial firms that want to locate to the U.S. as well as to out-of-state banks and their subsidiaries if we eliminate state income tax as an obligation for locally headquartered financial institutions.  Those in other states with sizable state corporate income tax expenses would trip over themselves to move their headquarters to Arizona because this change would increase the value of their charters and therefore the value of their stock.  It is no mystery because that is exactly what happened in the states that I cited in the earlier parts of this series!

Can you imagine the money multiplier effect we are losing by not retaining control over our own assets and deposits?  Each dollar reproduces itself by 4 to 10 times when loaned locally.  It is like giving Arizona our own printing press.  Our state is losing out on the maximum multiplier effect that bank dollars can create while other states benefit from what should be ours.

In addition, without charging a state corporate income tax, we may encourage some of the big guys that Congress is bailing out of their holes with billions of our dollars to move here.  I believe we can capture some of that money for Arizona.

You can see in the chart below that Arizona went from a state ranking of 36^th in per capita personal income in 2005 to 43^rd in 2009.  This happened during our unprecedented dynamic growth that covered up our underlying problems from the public.  Our public policy makers and economist were shouting how well we were doing from the roof tops of new homes being built and automobiles being sold.  Many were blinded by growth to the termites in our foundation.

Per Capita Personal Income

I have spoken to Arizona economists over the years, but many don’t seem to grasp the importance of banking assets and the money multiplier effect.  Many seem hung up on conventional criteria that seems to analyze the effect rather than the cause.

Some of our legislators have returned to the good-old-boy days.  They and the lobbyist depend on each other for political reasons.  This makes it unlikely in some cases that the lobbyist will be challenged.   Harsh words, but I have witnessed it.  I will explain my experiences in the next section in this series.

Any volunteers to help do research work and contact legislators will be appreciated!

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Copyright July 4, 2010