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Indiana banks continue quest for tax consistency

August 6, 2011

Banks were left out of the celebration earlier this year when Indiana legislators voted to cut the state corporate income tax rate nearly 25 percent over the next four years.

But they hope to eventually join in.

They’ll start a push this summer to get a similar tax break, which gradually reduces the corporate rate from the current 8.5 percent to 6.5 percent in 2015.

The full tax credit is estimated to reduce state tax collections about $80 million a year, but could lead to more tax collections if the cut spurs more business. Legislators expect to make up that revenue by starting to tax interest on out-of-state bonds held by Indiana companies and residents.

In a compromise, lawmakers last session agreed to leave the banks’ treasured public deposit insurance fund, or PDIF, intact if the banks ended their pursuit of a tax credit.

The $250 million fund was built over decades through payments from banks and interest earnings to replenish public deposits in the event of a bank failure. Gov. Mitch Daniels’ original budget proposed transferring most of that money to the state’s general fund.

Some argue that the PDIF has outlived its use in light of new, higher collateralization requirements for banks.

Despite last session’s deal, the banks aren’t about to give up on seeking a credit. Banks don’t pay a corporate income tax; rather, they’re saddled with an equivalent levy, known as the financial institutions tax.

Tax rates for both the corporate and financial institutions tax historically have been the same. But now that the corporate income tax rate will drop over the next four years, banks think it’s only fair the rate they pay declines, too.

“It doesn’t make any sense that the financial institutions tax wouldn’t be lowered with the corporate income tax,” said Amber Van Til, vice president of government relations for the Indiana Bankers Association. “In most states, there is no financial institutions tax.”

Van Til said she can “guarantee” that a supporting lawmaker will introduce a bill next legislative session to make both tax rates equal. The issue is bound to arise during meetings of the Tax & Fiscal Policy Summer Study Committee, which is expected to convene late this month.

Sen. Brandt Hershman, R-Buck Creek and co-chairman of the committee, said it’s open for debate.

“I think that the General Assembly has been very willing to listen to businesses that can make a case that tax policy is affecting their ability to create jobs,” he said.

That’s a no-brainer for Van Til, who argued that she’s fielded calls from a few out-of-state banks considering adding branches or a corporate office in Indiana but are hesitant because of the tax rate.

“The absolute first pass of the smell test is, what is the financial institutions tax?” she said.

But Hershman countered that the General Assembly, in order to pass a banking tax cut, would need to identify a source of revenue to replace lost funds from the decrease.

The most logical option is to allow the state to avoid paying back $50 million it borrowed from the PDIF in 2003. That loan comes due in 2013.

Rep. Mark Messmer, R-Jasper, and co-chairman of the Economic Development Summer Study Committee, supports the proposal.

“Keep PDIF intact and relinquish the $50 million,” he said. “I think there’s some agreement from the bankers to do that.”

Morris Maurer, president and CEO of the National Bank of Indianapolis, is upbeat that a compromise can be reached. He and Michael S. Maurer, who co-owns IBJ Media, founded the bank.

“I think the [summer] study group is a great idea,” he said. “It’s complicated.”•

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