Bank Assets – Part 1

Abolish corporate income tax on financial institutions

Credit unions do not pay corporate tax.  So, before you pass philosophic or political judgment, review this study to see the effect in Arizona of putting financial institutions on a tax par with credit unions.

The heart of any economic growth is a strong, robust financial sector.  By consistently bowing to lobbyists on financial reform, our legislature has created a national and global disadvantage that has crippled Arizona’s economic competitiveness.  Among the worst hurt by legislative inaction are lower-income families and small businesses.

This series of studies address how we can regain our competitiveness, but begins with some illuminating and alarming facts. On December 31, 2004 Arizona had $58.6 billion in bank assets with 7,228 bank jobs whereas Nevada had $54.4 billion with 6,662 jobs.  By March 2010, Arizona had shed $44 billion and 3,389 bank-related jobs while Nevada’s bank assets surged by $1.2 trillion and 170,997 jobs.

Arizona now ranks 45^th among the 50 states with a shameful $14.6 billion in banking assets and also ranks 45^th in banking jobs.  Nevada, a smaller state, ranks 3^rd nationally with $1.2 trillion. South Dakota, a much smaller state, is 4^th with $1.2 trillion and tied to 222,600 banking jobs.  Tiny Delaware is 5^th with $971.2 billion and 126,499 banking jobs.

This has happened while some of our legislators either remain unfocused, unconcerned or overly influenced by lobbyists. Information is available to them since it derives directly from the Federal Deposit Insurance Corporation. See http://www.fdic.gov/bank/analytical/stateprofile/index.html.

While there appears to be a bank on every corner in Arizona, the FDIC has determined that we are actually moderately-banked. Their figures prove it.

Gross neglect has caused Arizona to lose much of the money multiplier effect that usually ranges from 4 to 10 times for every dollar invested locally. We can regain our economic competitiveness and take full advantage of this multiplier effect by taking one legislative action — eliminating the state corporate income tax on financial institutions.

There’s compelling precedence for taking such action. Seven states in our nation collect no state income tax from their citizens: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Based on results achieved in those states, I estimate that by abolishing the state corporate income tax on financial institutions, banks would hasten to move or create corporate headquarters in Arizona precipitating an increase in annual per capita income of $4,000 to $6,000 or more.  The annual increase in total per capita personal income would range from of $19 to $38 billion.

State personal income tax revenue would thus increase annually by $248 million to $525 million. This is equal to from 25% to 50% of the revenue expected from the new one cent sales tax.  However, unlike the sales tax that will end in a year, this income to the state would continue and increase year after year.

Some might label such action as Arizona’s version of a bank bailout. Not only would that be shortsighted but it would fly in the face of established practice. It is common course of action for public jurisdictions to offer financial incentives to entice, retain, or encourage businesses such as manufacturing, high-tech and research & development oriented companies, clean energy, green building, sport ventures and resort facilities.

Recognizing the enormous economic net value to citizens, businesses and the state by eliminating income taxes on financial institutions, and considering the past history for such action, I requested that Senator Thayer Verschoor introduce a bill for the 2010 session. He filed SB 1332 to exempt in-state financial institutions that have their home office located in Arizona. The bill was assigned to the Senate Finance Committee.

Only Senators Russell Pearce and Jack Harper had the courage and foresight to vote for the bill. It died when Senators Barbara Leff, Ed Bunch, Ken Cheuvront, Ron Gould, Debbie McCune Davis and Richard Miranda voted against it.

Changing outdated laws that determine the flow of bank assets in and out of Arizona will help balance our state budget and transfer wealth to our citizens. Our failure to recognize today’s financial realities has reduced tax revenues, stunted per capita income growth, eliminated job opportunities, halted economic potential and stifled capital availability for small businesses in Arizona.

We live in a competitive world!

States that recognized the effect of corporate income tax on financial institutions and made provisions have far outstripped economic growth in Arizona.

Wyoming is 6^th in the U.S. in per capita income at $45,705; Washington is 12^th at $41,751; Delaware is 17^th at $39,817; Nevada is 20^th at $38,578; South Dakota is 25^th with $36,935. Arizona ranks a sickly 40^th with $32,935.

Wyoming beats us by $12,770 per person; Washington by $8,816; Delaware by $6,882; Nevada by $5,543; and South Dakota by $4,000. These are real dollar differences that affect Arizonans’ standard of living and purchasing power. We can give the effect of an annual pay raise to nearly every Arizonan if we eliminate all corporate income tax on financial institutions.

It is not a stretch to suggest that financial institutions will flock here if we put them on a level playing field with credit unions. The evidence is clear from the astronomical growth in a brief 5 years in the states cited above.

Credit unions do not pay income tax in Arizona or elsewhere. Arizona chartered banks do. By repealing corporate income tax on all financial institutions, the net gain in personal state income taxes could be enormous.

Because none of the big banks are headquartered here, our local banks paid a scanty $20 million in state income tax in 2008 and very little if at all for 2009 towards our $9.6 billion budget. As a practical matter the corporate tax revenue lost to the state from financial institutions would be infinitesimal.

In the next installment in this series, I’ll describe the dramatic effect eliminating corporate tax on financial institutions has on bank deposits housed in Arizona compared to Nevada, South Dakota and Delaware.

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Copyright, Jul 4, 2010