Community banks have long bemoaned the inequities they face as the industry's little guys. In Ohio, they could soon get a reprieve.

Ohio Governor John R. Kasich has proposed overhauling the way the state taxes banks. The revenue-neutral change would aim to lessen the tax burden on the state's smaller banks by $30 million by closing loopholes used by larger banks.

Not surprisingly, the roughly 230 community banks based in Ohio are welcoming the potential overhaul.

"The governor is trying to make the Ohio banking system more competitive," says Stephen Wilson, the chairman and chief executive of $791 million-asset LCNB Corp. (LCNB) in Lebanon.

"This would be real dollars to my bottom line," adds Wilson, who is also the immediate past chairman of the American Bankers Association. "It would allow us to build up more capital and make more loans. I'm a happy guy."

The proposal would eliminate the corporate franchise tax and the dealers-in-intangibles tax, replacing them with a financial institutions tax that would be based on the bank's equity related to Ohio.

Banks would be taxed 0.8 cent per dollar on the first $500 million of equity and a rate of 0.25 cent for the remaining equity. The governor's office said in a press release that community banks could see their state tax burden reduced by as much as 39%.

"By replacing Ohio's current, two-prong bank tax system with a single, simple system that isn't riddled with loopholes, a few big banks will now pay their fair share, and almost every other bank will see their taxes go down a combined total of $30 million annually," the release said.

The governor's office did not respond to a request for an interview, so it is unclear which "big banks" could be harmed by the proposed changes.

JPMorgan Chase (JPM) is the largest institution doing business in Ohio; its bank is domiciled there. A call to the New York company was not returned, but local Ohio press has quoted the company as being in favor of the proposal. U.S. Bancorp (USB), which also has its bank headquartered in Ohio, also supports the proposal.

"We support the Governor's efforts to restructure taxes for our state's financial institutions," Lisa H. Clark, a U.S. Bank spokesperson, wrote in an email. "We pay millions of dollars in corporate franchise tax each year in Ohio, as well as millions more in property tax, sales tax and payroll taxes. We also employ more than 5,200 employees who contribute to Ohio's economy."

Calls to KeyCorp (KEY) in Cleveland and Huntington Bancshares (HBAN) in Columbus, Ohio, were not returned. A spokeswoman for Fifth Third Bancorp (FITB) in Cincinnati declined to comment. At $6.5 billion in assets, First Financial Bancorp (FFBC) is among the largest banks based in the state. Claude Davis, the Cincinnati company's president and chief executive, says he sees the proposal as "slightly advantageous" for First Financial, but a positive for his brethren.

"It simplifies the tax system and is more balanced in who pays and how they pay," Davis says. "It levels the playing field."

Davis, however, says he is particularly interested in the proposed changes to the apportionment, or the determination of how much business comes from a particular state for a company that operates in more than one. Beyond Ohio, First Financial conducts business in Indiana and Kentucky. The current methodology discourages hiring additional people.

"It is currently determined on your property, payroll and sales in Ohio," Davis says. "So the more people you employ, the more taxes you pay in Ohio."

The governor's office said in its release that it wants to spur job creation, not stunt it.

Of course, the proposal is in legislation and there are still wrinkles that must be ironed out, says Mike Van Buskirk, the president and chief executive of the Ohio Bankers League, a state banking association and lobbyist group. Van Buskirk testified on the issue during a hearing last week.

"We need to get this right, for sure," Van Buskirk says. "Naturally, we need to vet the language carefully to make sure there are no unintended consequences."

Van Buskirk says he is worried about politics and re-election campaigns delaying the legislation. "It is an election year and there are members that are running for re-election so there could be multiple agendas overlaying the normal deliberative process," Van Buskirk says. "A vote could happen by May, or it could last until after the election."

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