Wisconsin is considering a change in state tax law that would eliminate the ability of corporations, including community banks, to shift tax burdens to lower-cost states.
To avoid taxes imposed by some states on investments such as U.S. Treasury securities, many companies - including banks, which hold a lot of this sort of investment - create subsidiaries in low-tax havens such as Delaware and Nevada.
However, Wisconsin lawmakers and government officials have talked about eliminating such tax advantages for some time, and some say legislation to do so could evolve in next year's session.
In particular, lawmakers have floated the idea of requiring so-called combined reporting, in which companies would have to report all of their subsidiaries' income, regardless of where it was earned. That would thwart companies' ability to use such subsidiaries to gain tax advantages.
"This investment subsidiary approach is a significant tool" for banks, said William A. Raabe, a professor specializing in taxation at the University of Wisconsin-Milwaukee. Last month, Mr. Raabe released a paper opposing tax changes that would render investment subsidiaries ineffective.
Mr. Raabe predicted that requiring combined reporting would drive some businesses out of the state, but community banks don't have that option.
"In some ways, the kind of burden that we're talking about falls on community banks the hardest," Mr. Raabe said.
Five other states, he said, tax the interest on U.S. Treasuries but do not require combined reporting: Florida, Massachusetts, New Jersey, Oregon, and Utah.
Meanwhile, banks in other states have seen their investment subsidiary advantages vanish in recent years.
For instance, the Iowa Legislature in 1995 changed the tax law so "banks that had investment subsidiaries would be penalized to a degree that it was a disadvantage for a bank to continue to maintain an investment subsidiary," said Kip Albertson, senior financial officer at $550 million- asset Bankers Trust Co., Des Moines, which previously had two such subsidiaries.
"They basically found a way to tell the banking industry, 'We don't like your creative tax planning,'" said Suku Radia, managing partner of KPMG Peat Marwick in Des Moines.
In Wisconsin, many community banks followed the lead of larger banks by establishing investment subsidiaries in recent years in tax-friendly states such as Nevada and Delaware, said Helge S. Christensen, president of Bankers Bank, Madison.
Eliminating banks' tax shelters "would be the reimposition of a burden. It would call attention to the fact that the Wisconsin franchise tax is in need of revision," he said.
John "Gof" Thomson, president of $59 million-asset Bank of New Glarus, is considering forming a Nevada corporation as his bank's investment volume rises. Doing so would boost income by about 3%, he said. "But that's not insignificant. It's another 3% we can gain."
