New York banks oppose Gov. George E. Pataki's move to eliminate a tax break on income from real estate investment trusts that are owned by corporations.
As many as 30% of the 210 banks headquartered in the state own REITs, and Michael P. Smith, the president of the New York Bankers Association, said they would face "a considerable increase" in their tax liability if the measure became law.
Individual bankers were reluctant to discuss for attribution what effect the plan would have, but Mr. Smith said his trade group would lobby against it.
"Banks are already paying their fair share," he said. "Any change has to be considered in the context of the whole tax code so that one industry doesn't bear a disproportionate burden."
When the fiscal year ends on March 31, New York banks will have paid roughly $666 million in state taxes, Mr. Smith said.
By law, the state must adopt a budget by the start of its fiscal year, but the Legislature rarely meets the April 1 deadline.
Gov. Pataki, a two-term Republican, included an end to the REIT tax break in his $105 billion budget for 2005-06, introduced last month. It would do away with the tax deduction that corporate parents may take on dividends paid by REIT subsidiaries. (Currently, firms pay state taxes on only 40% of the dividend income they receive from their REITs; the rest is exempt.)
Officials in the New York budget office project that the move would generate $50 million of income.
Several other states, including Connecticut, Hawaii, California, and Massachusetts, have also taken aim at the dividend income stream flowing to banks from their REITs.
Massachusetts adopted a law in 2003 that abolished retroactively to 1999 a 95% tax break banks had received on REIT dividends. The change Gov. Pataki has proposed would apply only to dividend income received after Jan. 1, 2005.
A spokesman for state Sen. Hugh T. Farley, the chairman of the Senate Committee on Banks, said some lawmakers are concerned that increasing the tax burden would place banks headquartered in New York at a competitive disadvantage. But he said it is too early in the budget process to predict an outcome.
Congress created REITs in 1960 to spur residential and commercial real estate projects. They do not pay federal or state income tax, but companies receiving dividends from their REITs must pay federal taxes on that income.
Many states, however, provide substantial tax breaks on REIT-related income as part of an exemption for income that subsidiaries pay their corporate parents. The theory behind those broad exemptions is that the income has already been taxed at the subsidiary level, so taxing it again at the parent level amounts to double taxation.
Gregory J. Lyons, the chairman of the financial services group at Goodwin Procter LP in Boston, said that some Massachusetts banks dissolved their REIT subsidiaries after the state amended its tax code, but that owning a REIT has benefits apart from the tax considerations.
Banks' ability to sell shares of their REITs makes them a potential source of capital.