A five-year-old, $15 million tax credit for a group of Pennsylvania start-up banks is in limbo, as bankers and state officials look to avoid a court battle.
The credit became ensnared in a lawsuit by First Fidelity Bancorp., which claimed the state's 1989 bank shares tax on capital was unconstitutional.
The tax credit, part of that law, was designed to protect 49 startup banks from being affected by a one-time tax hike in 1989.
In July, the state's Commonwealth Court upheld the tax, but in a surprise move, overturned the tax credits, without specifying if the state has to collect them.
The court's decision has bankers and state officials unsure what to do next with the $15 million in credits that have largely been used.
Both rulings are being appealed to the state supreme court, but bankers and state officials want to negotiate privately before they go before the bench.
"The Commonwealth would like to get on with things, and so would I," said Owen "Chip" O. Freeman Jr., chairman of the New Bank Group, which represents the 49 institutions chartered from 1979 to 1989.
"No one wants to try this thing again with the supreme court" agreed a state official familiar with the history of the tax litigation. "Everybody's trying to find a fair and equitable way to settle it so it'll be put to bed once and for all. Nobody wants to hurt the new banks."
Pennsylvania faces potential refunds ranging from $1 billion to $1.5 billion if the ruling is overturned. Officials at the Pennsylvania Association of Community Bankers estimated First Fidelity's share at about $30 million. Only $15 million is owed to the trade group's members.
First Fidelity declined to comment because the case is pending.
Secretary of Banking Sarah Hargrove said the state is negotiating with First Fidelity, but didn't know what kind of settlement might be reached with the Lawrenceville, N.J.-based corporation.
One possible solution for the new banks is for the state to enact a new tax credit, separate from the bill challenged by First Fidelity, said Ms. Hargrove.
"The bankers say nobody will challenge it, but who knows?" said the state official. "They said that before."
Community bankers and some state officials are irritated at First Fidelity, accusing it of including the tax credit in its case solely to "beef up their challenge of the tax" according to the state official.
"It was very self-serving," the state official said. First Fidelity officials "thought that they would either be both overturned or not. They didn't realize that the court would split them like this."
The legal wranglings started after a 1983 state supreme court ruling that the state cannot tax U.S. government securities as part of a tax on capital.
Since then, "there have been these almost patchwork kind of fixes to comply with the ruling and yet not create a significant budget hole from the Commonwealth standpoint" said Ms. Hargrove.
The state issued a tax credit to banks following the ruling, but used a banker-supported proposal for a one-time excise tax equal to the credit.
But the excise tax was ruled unconstitutional by the state court in 1989.
"They just thought it was a recapture tax," Ms. Hargrove said.
Again, the state revised the tax to use a six-year average capital base and' issued refunds. But it also raised the tax rate for the one year to 10.77% from 1.075% to offset the refunds, and passed the tax credit to protect the 49 community banks.