AUSTIN — How Gov. Rick Perry’s tax plan would affect banks depends largely on their asset mix, their real estate holdings, and where and with whom they are doing business.

The proposal, currently being debated in a special session of the Texas Legislature, would create a new tax for banks, eliminate an old one, lower their property taxes, and exempt them from paying state taxes on interest income earned outside the state.

Bankers and trade group officials say that the effects could be negligible for many of the state’s banks, but that the proposal, as written, is too complicated for them to know for sure.

“We’re still working on whether or not banks are coming out OK in this deal,” said Steve Scurlock, the executive vice president of the Independent Bankers Association of Texas. “It’s very different for every bank. Some are coming out better, and some are coming out worse.”

Moreover, the final version of the bill, which the House passed Monday, could look very different when it emerges from the Senate, he said.

About the only thing that is certain for banks is that a new tax law, in whatever form, would create more paperwork.

Legislators are under the gun to fix the state’s tax structure, which the state Supreme Court ruled unconstitutional last year. The court has mandated a freeze on school spending if lawmakers do not devise a new funding system for it by June 1. Local taxes, the state, and the federal government supplied Texas’ schools with $34.9 billion last year.

Gov. Perry, a Republican, called the special session to chop property taxes and overhaul the franchise tax so that more businesses pay it.

The legislation would create a margins tax of 1% on gross revenue, minus either compensation costs or interest costs. That would replace the franchise tax of 4.5% of federal net taxable income, plus compensation paid to officers and directors.

The proposal would add about 50,000 more businesses to the tax rolls, according to the governor’s office. Doctors, lawyers, and architects, who do not pay the franchise tax because they work in partnerships, not corporations, would pay the margins tax. Only about 6% of businesses in Texas — including most banks — pay the franchise tax.

The legislation would also reduce taxes for all property owners by as much as a third, increase cigarette taxes by $1, to $1.41 a pack, and create a tax of 0.5% on the gross receipts of retailers.

Banks that own a lot of real estate, especially in areas where property values and taxes are high, may have their overall taxes reduced, as a result of the almost 30% cut in property taxes, bankers said.

But trade group officials say that the governor’s proposal, which would raise taxes on interest income, could increase tax bills for banks that have most of their assets in loans. (Income earned from federal and municipal securities outside Texas is already tax-exempt.)

J. Downey Bridgwater, the chairman, president, and chief executive officer of the $3.7 billion-asset Sterling Bancshares Inc. in Houston, said that he supports a broad-based margins tax as a way of reducing property taxes, but that the new law could create some accounting headaches.

Banks would not have to pay taxes on interest income earned on loans made outside Texas, but documenting where the income is coming from could be a challenge, Mr. Bridgwater said.

“We are going to have to go loan by loan by loan,” and the task would be especially difficult for multibank holding companies, he said.

Jim Goudge, the chairman and CEO for the $1.7 billion-asset Broadway National Bank in San Antonio, said he likes the idea of reducing property taxes and raising corporate taxes. The Broadway Bancshares Inc. subsidiary owns about 30 branches around San Antonio, where real estate values are generally high.

“I think when it is all said and done,” the proposal’s effect on Broadway National “is going to be neutral,” he said.

The legislation would reduce the property tax by 50 cents per $100 of value over the next three years.

John Heasley, the executive vice president and general counsel of the Texas Bankers Association, said that for every 10-cent reduction, $1.1 billion would have to be made up somewhere else.

Rep. Dan Flynn, R-Canton, said the proposal would provide property tax relief while closing loopholes that allowed many Texas businesses to escape paying the corporate franchise tax.

“We have a real problem with property taxes in Texas,” he said. “Property taxes are so high and expensive that we are getting close to destroying the American dream. People can’t afford their houses.”

 

 

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.