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Statement of George W. Mitchell

M e m b e r , B o a r d of G o v e r n o r s of the Fe d e r a l R e s e r v e S y s t e m

before the

C o m m i t t e e on Banking, Housing and U r b a n Affairs

United States Senate

A u g u s t 1, I972

I appreciate this opportunity to testify on behalf of the B o a r d
of G o v e r n o r s on legislation clarifying the p o w e r s of the States to tax
banks.

Legislation is n e e d e d for three reasons.

intangibles o w n e d b y banks should be prohibited.

First, taxation of
Second, the

imposition outside the h o m e State of taxes m e a s u r e d b y net income,
capital stock, or gross receipts, an d other "doing business" taxes,
should be deferred until suc h time as u n i f o r m a n d equitable m e t h o d s
m a y be devised to de te r m i n e jurisdiction to tax an d to divide the tax
base a m o n g States.

Third, discriminatory f o r m s of taxation that

m i g h t discourage interstate and interregional credit m o v e m e n t s should
be avoided.

T o a c c o m p l i s h these three b r o a d objectives, the B o a r d

r e c o m m e n d s e n a c t m e n t of the provisions incorporated in title II of
H . R . 15656.
While I hav e m e n t i o n e d three b r o a d objectives, the r e c o m m e n d a t i o n s
in the Board's report to Congress, submitted M a y 4, 1971, w e r e m o r e
detailed.

Let m e turn n o w to those r e c o m m e n d a t i o n s a n d their relation

to H. R. 15656.
At the outset, the Board's report suggested that "it w o u l d be
desirable that the restrictions p r o p o s e d in our r e c o m m e n d a t i o n s apply
to all c o m m e r c i a l ba nk s (national and State) an d all other depositary
institutions (savings banks, savings a n d loan associations, an d




-2 -

credit unions). " H. R. 15656 applies only to c o m m e r c i a l banks
insured b y the F ed er al Deposit Insurance Corporation.

T h e Boar d' s

r e c o m m e n d a t i o n of b r o a d e r c o ve ra ge w a s b a s e d o n the p r e m i s e that
an y statutory protections a c c o r d e d to c o m m e r c i a l ban ks should, as
a m a t t e r of equity, be extended to their close competitors.

I

recognize, ho w e v e r , that in s o m e cases these competitors have
looked u p o n this suggestion as reflecting a n intention to expo se t h e m
to n ew tax b u r d e n s rather than protect the m.

C o n g r e s s therefore m a y

prefer to restrict this legislation to c o m m e r c i a l banks, as H. R. 15656
w o u l d do.

Taxation of Intangibles
T h e B o a r d ' s report r e c o m m e n d e d that C o n g r e s s m a k e
p e r m a n e n t "the present denial of authority for States a n d their
subdivisions to i m p o s e taxes o n intangible personal p roperty o w n e d
b y national b a n k s and extend that denial to intangible personal
property o w n e d b y State ba nk s axid other depositary institutions. "
This r e c o m m e n d a t i o n related to a d v a l o r e m taxation of
intangible pers ona l property o w n e d by banks.

It does not c o n c e r n

taxes o n b a n k shares or deposits or franchise taxes o n capital stock.
T h e r e c o m m e n d a t i o n rests o n gr ou n d s of equity a n d e c o n o m i c impact.
A d v a l o r e m taxes o n intangible property n o w yield little
rev en ue to the States.




T h e n u m b e r of States i m p o s i n g s u c h taxes

-3has b e e n diminishing, reflecting the fact that intangibles taxes are
e x t r e m e l y difficult to enforce effectively and have strongly adve rs e
e c o n o m i c impacts w h e n they are enforced.

In a n authoritative study

a f e w years ago of the e c o n o m i c s of the property tax, Professor Dick
N e tz er of N e w Y o r k University ob s erv ed that
T h e progressive withdrawal of particular classes
of personal property f r o m the scope of the general
property tax represents
a surrender to reality. T h e
pr oc es s of e x e m p t i o n has gone furthest for those
classes w h i c h pos e the greatest difficulties in r e g a r d
to discovery a n d valuation of the assets a n d in r eg ar d
to the e c o n o m i c cons eq ue nc es of un if o r m valuation
an d taxation ev e n w h e r e these are possible.
Intangibles present the e x t r e m e case, for they are
either readily concealed or highly m o b i l e (or both) a n d
thus h a r d to locate on a s s e s s m e n t day; m o r e o v e r , the
incentive to evade or avoid the a s s e s s o r is substantial,
since investment in the f o r m of intangibles frequently
yields considerably l ower rates of return than
c o m p a r a b l e investment in tangible assets. H e n c e a
u n i f o r m ar ea - w i d e property tax rate is likely to absorb
a substantially larger part of the (realized or imputed)
return f r o m intangibles than of the return f r o m other
assets, especially w h e n one considers that the a ss e s s o r
cannot as readily u n d e r as se ss fixed value claims, such
as b an k deposits,as he can other assets. (Netzer,
E c o n o m i c s of the P r o p e r t y Tax, 1966, pp. 140-41. )
Netzer w e n t on to describe the large shifts of ba n k deposits
out of C hicago b anks just before the annual a s s e s s e m e n t date,
April 1 --shifts so large that they hav e a discernible i m p a c t o n
T r e a s u r y bill yields.




T h e s e a s s e s s m e n t - d a y disturbances in the

-4 -

m o n e y m a r k e t s of C hicago w e r e described again in the W al l Street
Journal of July 18 this year:

"April 1 is a s s e s s m e n t day, a n d only

that c a s h on deposit that d a y in Illinois banks is considered taxable
b y the state.

Therefore, shortly before April 1, m a n y big c o m p a n i e s

convert their c a s h balances into g o v e r n m e n t securities, w h i c h are
tax-exempt, or s i m p l y transfer their funds ac ro s s the b o r d e r and
b e y o n d the r e a c h of the Illinois tax m a n . "
If Public L a w 91- 15 6 h a d b e e n in effect w h e n he wrote,
Netzer m i g h t h a v e a d d e d that the difficulties that prevent effective
e n f o r c e m e n t as to n o n b a n k businesses m i g h t not confront the tax
a s s e s s o r in applying these taxes to intangibles o w n e d by banks.
B a n k s cannot m o v e their b a s e of operations f r o m one taxing
jurisdiction to another; they are closely supervised, with published
balance sheets; a n d tax a s s e s s o r s cannot readily undervalue the
fixed c l aim s that m a k e u p b a n k assets to the d e g re e that they
generally undervalue other types of assets.
B ut application of intangibles taxes to banks w o u l d be
inequitable, a n d w o u l d hav e undesirable e c o n o m i c effects.
Virtually all the assets of b an ks are in the f o r m of intangibles,
w h e r e a s this class of property is m u c h less important for nonfinancial businesses.

So e v e n though intangibles taxes w e r e to

be levied o n all corporations they w o u l d bea r far m o r e heavily on
banks than o n general business firms.




-5-

M o r e o v e r , such a tax w o u l d tend to distort financial flows,
with s o m e consequent loss in e c o n o m i c efficiency.

F o r example,

banks m i g h t then invest less in taxable assets s uc h as loans to
businesses and c o n s u m e r s , an d m o r e in t a x - e x e m p t municipal bonds.
O r flows of savings m i g h t be diverted f r o m banks in States that
i m p o s e d such a tax and into banks in States that did not.

T h e process

of financial intermediation p e r f o r m e d b y banks a n d other depositary
institutions is particularly vulnerable to an intangibles tax since the
duplication of financial assets that is inherent in the flow of savings,
first into deposits of these institutions a nd then into c u s t o m e r loans,
w o u l d expose savings flowing through intermediaries to a n additional
layer of taxation.

This extra e xposure does not oc cu r w h e r e funds

flow directly f r o m savers to ultimate bor row er s.
T h e staff study submitted with the B o a r d report included
a section s u m m a r i z i n g a r g u m e n t s against allowing States to tax banko w n e d intangible assets.

B e c a u s e a full quotation w o u l d involve

repetition of s o m e of the points I have already presented, I shall
s i mp ly submit that section of the report for the record, as follows:




(1)
The territorial immobility of banks and the fact that they are
closely regulated probably would lead to considerably heavier taxation
of their intangibles than of similar assets of nonfinancial corporations.
Intangibles in nature and in form are mobile, and opportunities to
choose the business situs of such assets on the basis of tax considera­
tions ordinarily are available to most firms conducting dispersed op­
erations. However equal they might be under the law, in practice
banks and some otlier classes of financial institutions would be at a
relative disadvantage compared to firms in nonfinancial business, espe­
cially large firms, if barriers to State taxation of intangibles were
eliminated.




-6 (2) A general tax on intangibles would have a discriminatory imact against the process of intermediation as distinguished from
( irect market financing, since the layering of financial assets that is
inherent in intermediation would expose savings that flow through
intermediaries to double or multiple taxation, whereas those placed
directly with borrowers would be taxed only once. Moreover, a tax on
intangible assets would be easily enforceable against institutions but
the holdings of individuals would largely escape assessment and
taxation.
(3) Unless most intangibles are taxed practically everywhere and to
all businesses, and with substantially equal effectiveness in all juris­
dictions, the intangible personal property tax has distinctly unneutral
effects upon geographic and inter-industry movements of capital. If
the intangibles tax were imposed in only a few States, or if admini­
stration was more vigorous and effective in some States than in others,
the taxed banks’ market power to recoup the tax by obtaining higher
interest rates on loans and securities would be severely limited. Bank­
ing capital would tend to migrate toward non-taxing States or lowrate States.
(4) An intangibles tax would fall more heavily on Federal Reserve
member banks than non-member banks and would constitute an addi­
tional cost of membership. This is because member banks are required
to hold all their legal reserves in a form that earns no interest (vault
cash or balances at the Reserve banks), whereas non-member banks
generally may hold their reserves in earning forms or in balances with
other banks lor which correspondent bank services are received. The
nearly universal practice of determining assessments on a single pre­
determined date each year might enable member banks to mitigate this
difference by acting to reduce reserves on the assessment date. How­
ever, such adjustments would not remain possible if pressures to mini­
mize market disruptions and tax avoidance impelled States to assess
on the basis of averages.
' (5) Exclusion of tax-exempt obligations from the tax base means
that an intangibles tax would apply unevenly to individual banks,
rather than in a uniform relationship to the volume of their intangible
assets. Moreover, a tax-induced preference for tax-exempt holdings
might have incidental effects, such as a tendency to divert banks from
helping to finance the private sector since this would involve acquisi­
tion of taxable assets. If a State taxed public debt instruments issued
by other States and their subdivisions, this might narrow the market
for out-of-State obligations while strengthening the market for homeState securities, since they are usually exempt.
(6) The possibility that intangibles might be subjected to taxation
in States other than the home State of the bank—that is, by the State
of the debtor—might create apprehensions and protective reactions
on the-part of banks. For example, concern about compliance burdens
and uncertainty about potential increases in the rate or coverage of
such taxes might lead to limitation of credit operations in the foreign
taxing States; any such impediments to tlie interstate flow of credit
and commerce would hamper the efficient utilization of resources.
(7) Denial of authority to tax bank intangibles would not be a
major limitation on the States, or a major loss to them, for several
reasons:
(a) They never have had this authority with respect to national
banks and therefore have applied it only in rare instances to State
banks. In calling for amendment of section 5219, States did not
make a special point of this prohibition, as they did with respect
to sales, documentary, and some other types of taxes.

S

( b) Many States exempt all personal property or all intangibles
and the trend toward exemption is continuing. Some States exempt
designated classes of intangibles and tax selected categories at
special low rates in recognition ol problems of double taxation,
the confiscatory potentials of property tax rates when related to
yields on intangibles, difficulties of enforcement and administra­
tion, and the geographic shifts of investment that might be in­
duced by full-rate taxation. It is doubtful that taxes on intangibles
other than bank deposits and shares currently contribute as much
as one-third of 1 percent of all State-local tax revenues.
(o) In any event, a significant portion of bank-held intan­
gibles is not available for State taxation because of the exclusion
of Federal government obligations from the property tax base.
On balance, it appears that the prospective removal of the prohibi­
tion on taxing intangibles owned by national banks could have substan­
tial effects, concentrated in that sector of the economy which is engaged
in the basic economic function of financial intermediation. Thé inter­
state flow of credit and commerce might be hindered. In practice such
a tax would be discriminatory against banks and other financial instituhe State
O v e r the years the n u m b e r of States retaining a n intangibles
tax has b e e n diminishing, reflecting dissatisfaction with the tax as
inequitable a n d difficult to enforce.

This trend is continuing as

indicated by the 1970 repeal of the a d v a l o r e m intangibles tax in Iowa,
conversion f r o m a n a d v a l o r e m to a gross earnings tax in K a n s a s ,
a n d adoption of a constitutional a m e n d m e n t in Illinois providing for
the elimination of all personal property taxation b y 1979.

It w o u l d

be unfortunate if Public L a w 91 *1 5 6 should lead to a reversal of this
trend b y encouraging States to focus u p o n b a n k - o w n e d assets si mpl y
b e c a u s e they are compar ati ve ly e a s y to assess.

Taxation b y States other than the H o m e State
T h e s e c on d r e c o m m e n d a t i o n in the B o a r d ' s report related
to taxation outside the h o m e State.

T h e r e c o m m e n d a t i o n w a s to "limit

the c i r c u m s t a n c e s in w h i c h national banks, State banks, a n d other




-8depositary institutions m a y be subject to State or local g o v e r n m e n t
taxes on or m e a s u r e d by net income, gross receipts, or capital
stock, or to other 'doing business' taxes in a State other than the
State of the principal office, a nd prescribe rules for such taxation. "
F o r national banks, the l a w n o w in effect confers exclusive
taxing authority on the domiciliary State.

That limitation w o u l d

terminate D e c e m b e r 31, 1972, if the " p e r m a n e n t a m e n d m e n t " of
section 5219 b e c o m e s effective, as it will unless C o n g r e s s takes
action at this session.

U n d e r the " p e r m a n e n t a m e n d m e n t " an d u n d er

the B oard's r e c o m m e n d a t i o n , the h o m e State m i g h t be required to
divide the tax base of its domiciliary banks, both State a n d national,
with other States in w h i c h the b anks are "doing business. "
H.

R. 15656 w o u l d continue the present exclusive juris­

diction in the domiciliary State and extend this F e d e r a l statutory
provision to all insured c o m m e r c i a l banks.

T h e section on policy

includes a declaration that "doing business" taxes outside the h o m e
State should be deferred until uni f o r m and equitable m e t h o d s m a y be
developed for determining jurisdiction to tax a n d for dividing the tax
base a m o n g States.

W e consider this a realistic a p p r o a c h to a

complicated p ro blem.




-9T h e B o a r d report recognized that its r e c o m m e n d a t i o n
p r e s u p p o s e s the formulation of clear jurisdictional principles for
determining w h e n a State m a y tax a n out-of-State b a n k a n d standard
rules for m e a s u r i n g w h a t part of the base is subject to tax in an y
given State.

T h e underlying objective w a s "to forestall the develop­

m e n t of significant i m p e d i m e n t s to . . . mobility [of funds] while
safeguarding the authority of the States to collect taxes in ci rcu ms t a n c e s
w h e r e a n outside b a n k . . . has established a clear relationship to
the taxing State . . . through a physical p r e s e n c e or a pattern of
sustained a n d substantial operations. " M e r e occasional an d transitory
business activities in a State should not subject a b a n k to "doing
business" taxes in that State.

It s e e m s prudent to suggest that if banks

ar e n o w to be e x p o s e d for the first t i m e to multistate taxation (as they
w o u l d be u n d e r the " p e r m a n e n t a m e n d m e n t " in Public L a w 91-156),
they should f r o m the v e r y outset be given s o m e d e g r e e of statutory
protection f r o m the kinds of unsettling diversities a n d uncertainties
that characterize State taxation of interstate m a n u f a ct ur in g a n d
me rcantile businesses.
T h e r e is at present n o c on se n s u s a m o n g State taxing authorities
or in the banking c o m m u n i t y about the precise m e t h o d s for providing
s u c h protection, particularly as to rules for division of the tax base.




-1 0 Equitable division requires either separate accounting or
apportionment of the tax base b y a standard formula.

Separate

accounting is a p r o c e d u r e for n o m i n a l separation of affiliated enter­
prises w h i c h the States generally have found difficult to police a n d
evaluate.

O n the other hand, w h e r e States use a f o r m u l a to apportion

the tax bas e of n o n b a n k businesses, they c o m m o n l y use one or m o r e of
three basic factors: property, payrolls, a n d sales.
are not particularly suited to the banking business.

T h e s e factors
M o r e o v e r , as

the B o a r d report indicated, if interstate division of the taxable net
i n c o m e of banks w e r e to c o n f o r m closely to pro c e d u r e s applied to
other businesses b y m o s t States, there w o u l d be--with present lending
practices--comparatively little allocation of the tax ba s e to States other
than the h o m e State of the banks.

In a fo r ma l sense, virtually all

business of c o m m e r c i a l banks is conducted in the domiciliary State.
Ba n k i n g practices m a y change, of course.

State allocation p r o c e d u r e s

also m a y change in a variety of w a y s unless Federal statutory
limitations are enacted to assu re uniformity.
F o r m u l a t i o n of satisfactory u n i f o r m standards for multiple
State taxation will be a t i m e - c o n s u m i n g a nd difficult process,
requiring a m a j o r coordinated effort by State tax authorities, in
consultation with representatives of the banking industry.

H. R. 15656

provides for a study b y the B o a r d of G o v e r n o r s to develop su ch




-1 1 -

standards.

T h e B o a r d is hopeful that this provision will be

a m e n d e d to place responsibility for the study in the T r e a s u r y
D e p a r t m e n t or the A d v i s o r y C o m m i s s i o n on Intergovernmental
Relations.

T h e s e t w o agencies are well qualified to deal with

the technical complexities a n d the consultative aspects of the
p r o b l e m , a n d the B o a r d is not.

Di s c r i m i n a t o r y Taxation
T h e third r e c o m m e n d a t i o n in the B oar d ' s report w a s
to prohibit "imposition of discriminatory or m o r e o n e rou s
license, privilege, or other similar 'doing business' taxes
u p o n out-of-state depositary institutions than w o u l d be i m p o s e d
u p o n these institutions if chartered by the taxing State. " This
particular f o r m of discriminatory taxation w o u l d not be allowed
v m d e r H. R. 15656, since it w o u l d authorize "doing business"
taxes only in the domiciliary State.

M o r e broadly, H. R.

15656 w o u l d expressly prohibit discrimination against out-of-State
ba nk s in a n y f o r m of taxation, a n d w o u l d require equal treatment
of national ba nks a n d State banks.
It is difficult to f r a m e a statutory prohibition against other
f o r m s of discrimination that w o u l d a d d substance to the protections




-1 2 -

n o w incorporated in the F ed er al an d State constitutions.

Uniformity is not

the an swer, since s o m e kinds of nominally u n i f o r m taxes, such as ad
v a l o r e m taxes on intangibles, if applied equally to banks and n o n b a n k
businesses, w o u l d hit banks unduly hard.

Therefore, as w a s pointed

out in the staff study that a c c o m p a n i e d the B oard's report, "it m a y be
n e c e s s a r y in the interests of equity an d e c o n o m i c neutrality to classify
banks a n d other financial institutions, particularly depositary institutions,
separately f r o m other businesses in order that tax provisions m a y be
adjusted to their special characteristics. " Accordingly, the B o a r d
r e c o m m e n d s continuation of the general standard against discrimination
established in Public L a w 91-156, without the addition of specific
statutory standards intended to assu re u n i f o r m treatment for bank s
a n d n o n b a n k businesses.

H. R. 15656 adopts this a p p r o a c h b y

authorizing taxation of insured banks only w h e r e the tax is i m p o s e d
generally throughout the taxing jurisdiction o n a nondiscriminatory
basis.

I n c o m e o n U. S. Obligations; T r e a t m e n t of Coin an d C u r r e n c y
T h e fourth a n d fifth r e c o m m e n d a t i o n s in the B oa rd's report
involved n a r r o w e r questions.

R e c o m m e n d a t i o n 4 w a s that States should

be authorized "to include, in the m e a s u r e of otherwise valid direct net
i n c o m e taxes, the i n c o m e realized b y banks an d other depositary




-13-

institutions f r o m F e d e r a l G o v e r n m e n t obligations. " U n d e r present
l a w (31 U. S. C. 742), States m a y include s u c h i n c o m e in the tax b ase
for a franchise or excise tax m e a s u r e d b y net in c o m e , but not for a
direct tax o n i nc o m e .

T h e r e is n o e c o n o m i c difference b e t w e e n these

t w o types of taxes, a n d the present e x e m p t i o n restricts the choice
domiciliary States should ha v e in taxing ba n k inc om e.

H o w e v e r , the

St G e r m a i n S u b c o m m i t t e e of the H o u s e C o m m i t t e e on B a n k i n g and
C u r r e n c y decided not to include provisions carrying out this
r e c o m m e n d a t i o n in H. R. 15656.

1 understand that this decision

reflects questions of c o m m i t t e e jurisdiction.
R e c o m m e n d a t i o n 5 w a s that "coins a n d p a p e r c u r r e n c y
[should] be considered intangible personal property for State a n d
local tax purposes. " This r e c o m m e n d a t i o n is incorporated in the
definition of "intangible personal property" in H. R. 15656.

Cash

an d c u r r e n c y are treated as intangibles u n d e r section 5219 of the
R e v i s e d Statutes as n o w in effect, but the specification w o u l d lapse
at the end of 1972 if there w e r e n o further legislation.

Relative T a x B u r d e n s
It m a y be useful to m e n t i o n briefly a question that is
s o m e t i m e s raised in discussions of State taxation of banks.

The

question is w h e t h e r banks p a y their fair share of taxes, as c o m p a r e d




-14-

with other businesses.

This question w a s e x a m i n e d in detail in

appendix 9 of the Board's report.

F o r reasons s u m m a r i z e d at pages

18 an d 19 of Part II of the B oard's report, the report does not include
a c o m p a r i s o n of tax treatment of banks with that of other businesses.
W e k n o w of n o w a y to m a k e su c h c o m p a r i s o n s in a meaningful an d
objective fashion on the basis of available data.
A s far as the pending legislation is concerned, the relevant
point is that H. R. 15656 w o u l d not take a w a y a n y existing source of
re ve nu e n o r w o u l d it i m p o s e significant Fe deral limits on future
taxation.

T h e continued prohibition of taxes o n b a n k - o w n e d intangible

personal property w o u l d b e c o m e important in t e r m s of the revenues
involved only if States w e r e to r everse the long-continued trend a w a y
f r o m taxation of intangibles.

T h e provisions relating to taxation of

out-of-State banks w o u l d not necessarily reduce total taxes b e l o w
w h a t they w o u l d otherwise be.

In fact, they m i g h t p r o d u c e the

opposite result for reasons that w e r e pointed out in the B o a r d
report:




The aggregate of taxes paid by any individual bank or other depos­
itary institution probably would be reduced by multiple State taxa­
tion as compared with taxation confined to the headquarters State be­
cause applicable tax rates in the home State (especially in the major
banking center States) may be higher than in other States, and some
States may not tax the out-of-State institution. (P ages 4 -5 . )

-15-

T h e i m p o r t a n c e of the multistate taxation issues lies in the fact, also
noted in the B o a r d report, that -in some in­
stances the added costs of acquiring technical competence regarding
the differing tax laws and procedures of all States where business is
done, maintaining records needed to determine which taxes are appli­
cable and the amount of liability, and preparing and filing returns m
all affected States m ay be even greater than the taxes. (Page 5. )
T h e objective of H. R. 15656 is not to relieve ban ks of a n y taxes
c o m p a r a b l e to those b o r n e b y other enterprises, but rather to avoid
excessive c o m p l i a n c e costs a n d the erection of avoidable barriers to
interstate credit flows.

A s the B o a r d said in its report,

Such bar­
riers^would be raised not only by the imposition of the tax itself but
also if there ensued uncertainty, controversy, and litigation of the sort
that for decades have characterized taxation of interstate mercantile
and manufacturing businesses. Uncertainties about potential tax lia­
bilities and concern about compliance burdens could become material
factors in decisions to make particular loans or investment». (Page 5.)

Summary:

State Taxation of B a n k s
Admittedly, the central questions involved in F e d er al

legislation pertaining to State a n d local taxation of b a n k s a re quite
technical a n d c o m p lex .

B ut they are important for the industry a n d

for s o m e State a n d local g ov er n m e n t s .

T h e B o a r d ' s report a n d the

staff studies w h i c h p r e c e d e d it h a v e b e e n furnished to the H o u s e an d
Senate C o m m i t t e e s .
in greater detail.

T h e s e d o c u m e n t s explore the underlying issues

T h e point that I w o u l d stress today is that the

restraints o n the taxing p o w e r s of the States incorporated in H. R. 15656




-16will not, in m y judgment, cut off important potential sources of
revenue, but they do offer a ssu ra nc e against imposition of taxes
that m i g h t i m p ai r the ability of the banking s y s t e m to contribute
to the efficient allocation of the Nation's credit resources.

Full Insurance of Public Deposits
T h e bulk of m y statement has dealt with taxation of
banks, since I h a d un derstood that w o u l d be the subject m a t t e r of the
hearing.

I have since b e e n i n f o r m e d that the hearing w o u l d be

b r o a d e n e d to cover t w o additional subjects incorporated in an a m e n d ­
m e n t intended to be p r o p o s e d b y Senator P r o x m i r e , introduced
July 26.

Title III of the P r o x m i r e a m e n d m e n t provides that deposits

by Federal, State, or local g o v e r n m e n t s in institutions insured b y
the F e d e r a l Deposit Insurance Corporation or the Fe de ral Savings
a n d L o a n Insurance Corporation shall be fully c o v e r e d b y deposit
insurance, notwithstanding the $20, 000 limit generally applicable to
other deposits.

T h e F D I C a n d the FSL.IC w o u l d be authorized to

limit the aggregate a m o u n t of such deposits in a n y individual
institution on the basis of the size of the institution in t e r m s of its
assets.

T h e B o a r d r e c o m m e n d s against e n a c t m e n t of title III.
C o m m e r c i a l banks invest heavily in T r e a s u r y a n d

municipal securities.




A t the e n d of last year they held $160 billion

-1 7 of U. S. T r e a su ry, Federal agency, a nd munici pa l securities.

An

estimated $70 billion of these w e r e pledged as security against $59
billion in public deposits.

Full insurance w o u l d eventually lead to

r e m o v a l of pledging req uir em en ts a n d redu ce b a n k d e m a n d s for
these securities.

B o r r o w i n g costs to the T r e a s u r y a n d to State

a n d local g o v e r n m e n t s w o u l d thereby be raised.
M o r e o v e r , if the principle of full insurance w e r e later
extended to c o v e r private as well as public deposits, incentives for
g o o d b a n k m a n a g e m e n t could be significantly w e a k e n e d .

Finally, the

B o a r d believes it w o u l d be u n w i s e to divert active or s h o r t - t e r m time
deposits f r o m b a n k s to savings a n d loan associations, as could result
if title III w e r e enacted.

Public deposits are m a d e u p of funds n e e d e d

for operating purposes, and of t e m p o r a r y o v e rr uns or surpluses.

Public

policy should not e n c o ur ag e investment of funds of this kind in l o n g - t e r m
illiquid assets s u c h as mo r t g a g e s .

Cashing of G o v e r n m e n t Checks
Title II of the P r o x m i r e a m e n d m e n t w o u l d prohibit an y
institution insured b y F D I C a n d F S L I C f r o m refushing to c a s h a
G o v e r n m e n t c h e c k u p o n presentation b y the p a y e e on the g r o u n d
that he does not h av e a n account at the institution, provided he
furnishes adequate identification.

It w o u l d also prohibit s u c h

institutions f r o m charging the pa ye e for cashing the check.

The

T r e a s u r y w o u l d prescribe regulations to c a r r y out these provisions.




-18T w o e lements of cost w o u l d be involved in providing such
check-cashing services: losses on checks c a s h e d for people w h o are
not entitled to payment, a n d routine handling costs.

L o s s e s due to

false identification could be min i m i z e d , but not entirely eliminated,
if identification pr oc e d u r e s w e r e carefully w o r k e d out.

Routine

handling costs, however, cannot be readily absorbed, particularly
if the identification p r o c e d u r e s p r o v e d to be ti me - c o n s u m i n g .
Financial institutions w o u l d ha v e to absor b these costs or p ass t h e m
on to their customers, unless s o m e a r r a n g e m e n t s c an be m a d e for
the G o v e r n m e n t to r e i m b u r s e t h e m for their a d d e d expense.
In a n analogous situation, w h e n business payrolls result
in a large n u m b e r of checks being presented for c a s h at local banks,
e m p l o y e r fir ms maintain balances at the ba nk s at levels that will
c o m p e n s a t e t h e m for the check-cashing service.

I under st an d that in

a f e w instances c o m p e n s a t i o n has taken the f o r m of fees rather than
m a i n t e n a n c e of deposit b al an ce s— a practice that m a y b e c o m e m o r e
w i d e s p r e a d as cost accounting techniques a re perfected.
If ba nk s are required to c a s h G o v e r n m e n t checks free of
charge, the i m p a c t will v a r y a m o n g individual banks; in s o m e cases
the a d d e d costs could be substantial.

W e w o u l d h ope that a r r a n g e m e n t s

could be m a d e , including guarantees against liability w h e r e the
Tr ea s u r y ' s identification p r o c e d u r e s are c o m p l i e d with, to avoid
i m p o s i n g unfair cost bur d e n s o n particular institutions.




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