Kentucky will likely adopt an entirely new way of taxing its banks this year in a move prompted primarily by the approach of interstate branching.
The Kentucky Bankers Association intends to push a bill in the state's new legislative session, which began last week, that would abolish the state's current bank shares tax system, in favor of the more common franchise tax structure.
"As a result of Riegle-Neal, we believe there would be a substantial drop in tax revenue if something is not done to the bank shares tax," said M. Brooks Senn, vice president and general counsel of the trade group.
Under interstate branching, which begins in June 1997, out-of-state banks with operations in Kentucky could convert those entities to branches and avoid being taxed at all.
In Kentucky, nearly two-thirds of the state's deposits are controlled by out-of-state banks. Regionals have acquired many of the state's largest banks in recent years - the regionals range from PNC Bank Corp. of Pittsburgh to Banc One Corp. and Fifth Third Bancorp of Columbus, Ohio, and National City Corp. of Cleveland.
The other motivation behind scrapping the bank-shares tax is to make bank taxation in Kentucky more uniform, bankers and analysts said.
"The current formula is less than exact," said George Freibert, president of Professional Bank Services Inc., in Louisville. "Many feel that it's arbitrary and subject to a lot of negotiating with the revenue department. What Kentucky is striving to do is to bring some rationale to the tax situation and treat all banks the same."
Banks in the state are now taxed based on the value of their outstanding shares, a tax system that many states have abandoned in recent years in favor of franchise taxes - based on net worth - or similar structures.
A Kentucky bank's tax can be determined in part by its share price to book value, a valuation that can vary widely based on the location and market perception of a bank's performance.
The new system would tax banks based on a projected 1.1% of a bank's average five-year equity capital as reported in call reports. A local tax would also be assessed based on a projected 0.04% of a bank's deposits in each city and county. The total revenue from the new system is expected to remain unchanged.
The majority of bankers in the state appear to favor the reform, though some of the smaller banks believe they would be hit relatively harder than the larger institutions under the proposed bill. That's because the amount of taxation would be determined largely by a bank's equity, and the equity of smaller banks normally is said to make up a higher percentage of their total value, some said.
"The KBA has drafted a proposal that really favors the bigger banks, which generally are highly leveraged compared with the smaller banks that have higher equity," said Orson Oliver, president of Mid-America Bank of Louisville and Trust Co. "I think the smaller banks would like to have it more equitably divided between the larger and smaller banks."
William A. Stinnett 3d, president of the Kentucky Bankers Association and chief executive of the Bank of Ashland, acknowledged that the few highly capitalized banks - those in the 15% to 20% capital-level range - "might be paying a little bit more," but he said he believes the ones hardest hit will be the big regionals.
