New Jersey community banks are battling bills supported by the governor that would add millions of dollars to state taxes on their investment portfolios and let out-of-state banks branch into the state.

Lawmakers are debating a bill that would require the Garden State's banks to report combined taxable income from all subsidiaries, regardless of what state they're located in. That means the banks could no longer avoid New Jersey's 9% corporate tax on securities earnings by chartering investment subsidiaries to manage them.

Currently, these subsidiaries are considered investment companies in New Jersey, with their income reported separately and taxed at one-fourth the corporate rate. Some banks have even chartered subsidiaries in neighboring states with lower tax rates, such as Delaware.

"It's going to add to the tax burden of our institution," said Thomas C. Gregor, president and chief executive of United National Bancorp in Bridgewater, which has an in-state subsidiary. "We are concerned about that. We would really rather not see it come to play."

According to the state Banking Department, there are at least 135 investment subsidiaries linked to state-chartered banks.

The bill would affect at least three-fourth's of the state's financial institutions, said Robert Janukowicz, a partner at Arthur Andersen specializing in financial institutions. He couldn't estimate the total cost to the banks, but several sources have cited one unidentified large community bank that is expecting added taxes of more than $1.5 million a year.

"This is a desperation attempt to try to salvage the state's budget," said Anthony S. Abbate, president and chief executive of Interchange Financial Services Corp. in Saddle Brook. "The revenues are not there and they think this is going to help. It's not going to happen."

Banking Department spokeswoman Gabrielle G. Charette said, "I've not heard anyone in the banking industry support it. I don't know what kind of chance that's going to have when you have an entire industry that's completely in opposition."

The bill, a companion piece to legislation to opt in to interstate branching, would also hit out-of-state banks by lowering the minimum requirements for an institution to be subject to taxation.

Under the proposal, a financial institution could be taxed by New Jersey if it has deposits of $5 million or more in the state, receipts of at least $25,000 from within the state, or transactions with at least 20 New Jersey residents.

"Clearly, if you set up a branch in the state, you're subject to tax," Mr. Janukowicz said. "What this (bill) was supposed to do was deal with banks branching into New Jersey for the first time and these thresholds really go beyond that."

Community bankers are worried that if out-of-state banks can enter New Jersey without first buying an institution, the value of their franchises will be diminished.

"We're very concerned about protecting the franchise value of banks that have been here all along as well as those that have paid a hefty price to come into New Jersey," said Kurt E. Schaub, spokesman for the New Jersey Bankers Association.

Bankers are also concerned that out-of-state and foreign banks won't serve Garden State communities as well as in-state banks.

"An out-of-state bank would be able to gobble up New Jersey deposits without a meaningful presence in the state and possibly with very little interest in our communities," said John R. Feeney, chief financial officer of Chatham-based Summit Bancorp. "They should be able to make a meaningful investment in the state if they want to do business here."

And bankers see the tax bill as counterproductive to the state's efforts to jump start the economy and draw businesses back into New Jersey.

"If it goes through in its present form, the administration's desire to make the state attractive to out-of-state and foreign institutions will probably not be achieved," said Mr. Schaub.

The state Department of the Treasury is reviewing bankers' concerns about the tax bill and is considering whether to make changes to the legislation, said spokeswoman Lisa R. Kruse. That bill is being held in committee, but the opt-in legislation is expected to pass this year.

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