WASHINGTON -- The right of states to tax branches of out-of-state banks was affirmed this week in the Senate as lawmakers began consideration of an interstate branching bill.

However, even if the Senate provision is enacted into law, the states will be left with a number of delicate questions about the tax treatment of branches.

"There's a lot of apportionment issues," said James B. Watt, president of the Conference of State Bank Supervisors. "If you look at the branch, you have to decide how much income was earned there.

"What do you do with the guy who uses a credit card issued by a Delaware bank to buy new tires in Illinois?" he asked. "Where is that income taxed?"

While Sen. William V. Roth, R-Del., and others pointed out that the bill does not guarantee that state tax revenues will not be reduced by branching, Mr. Watt said his members were generally happy with the amendment.

"It doesn't answer all state problems," he added. "The states still have to pass laws on their own."

A separate amendment taking shape Tuesday could give states time to do that by delaying branching until mid-1997.

The Senate continued debate Tuesday, but most of the action on the bill took place behind the scenes as senators negotiated on several key issues.

With the Senate in recess on Wednesday for former President Nixon's funeral, Senate Banking Committee chairman Donald W. Riegle, D-Mich., hoped to pass the bill before the end of the legislative day.

However, after a short morning session, the Senate broke for the party lunches held each Tuesday by Democrats and Republicans, and did not resume work until 3 p.m.

It was unclear late Tuesday whether the Senate would be able to complete action on the bill by day's end, though it is expected to clear the chamber eventually without difficulty.

Among the most controversial amendments was one sponsored by Sen. Robert Graham, D-Fla., that would subject branches of out-of-state national banks to the laws of the state in which they are located.

It was expected Tuesday afternoon that Sen. Graham would drop his amendment, but engage in a colloquy with Sen. Riegle to set the stage for consideration of the provision in House-Senate conference. The House bill contains a provision similar to Sen. Graham's amendment.

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