Abolish State Corporate Income Tax on Financial Institutions

Abolishing state corporate income tax on financial institutions would be viewed wrongly!  Opponents would label it as Arizona’s version of a bank bailout. 

Yet, the cost would be negligible and every Arizonan would benefit financially!  Each of us would get an annual pay raise ranging from $4,000 to $6,000 or more – an increase in total per capita personal income annually of $19 to $38 billion.  State personal income tax revenue would increase by $248 million to $525 million.

Changing out-dated laws that determine the flow of bank deposits in and out of Arizona will help balance our state budget and transfer wealth to our citizens!  Our neglect to recognize today’s financial realities because of political fear has reduced tax revenues, stunted per capita income growth, eliminated job opportunities, halted economic potential and stifled capital availability for small businesses in Arizona.

States that recognize the effect of corporate income tax on financial institutions and make provisions have outstripped economic growth in Arizona.  We live in a competitive world!

Wyoming is 6^th in the U.S. in per capita income at $45,705; Washington is 12^th at $41,751; Delaware is 17^th at $39,817; Nevada is 20^th at $38,578; South Dakota is 25^th with $36,935; and Arizona is 40^th with $32,935. 

Wyoming beats us by $12,770 per person; Washington by $8,816; Delaware by $6,882; Nevada by $5,543; and South Dakota by $4,000.  These are real dollar differences that affect Arizonans’ standard of living and purchasing power.  We can give an annual pay raise to every Arizonan if we eliminate all corporate income tax on financial institutions. 

Financial institutions, as an example, will flock here if we put banks on a level playing field with credit unions.  Credit unions do not pay Arizona income tax.  Arizona chartered banks do.  But believe it or not, because none of the big banks are headquartered here, our local banks paid a scanty $20 million in state income tax in 2008 and very little if at all is due for 2009 towards our $9.6 budget.   

Compare the differences in the amounts of bank assets housed in Arizona, Nevada and South Dakota to see the effect if we abolish the tax!  Banks in Arizona held a combined $61.8 billion in deposits as of June 30, 2004.  Five years later, June 2009, the growth reached only $82.3 billion, a 25% increase, in spite of one of the greatest economic booms ever experienced by Arizona.  During this same period of time Nevada banks grew from $40.7 billion in deposits to $195 billion, a growth of more than 479%. 

Nevada, population 2,495,529, a much smaller state than Arizona, altered its corporate income tax so financial institutions raced to set up subsidiaries and headquarters in a tax haven.  They took their wealth and high paying jobs with them to Nevada.

As of June 2009 Arizona had only 2 locally chartered banks (both owned by out-of-state interests) with branches out of state.  The 2 banks had 21 out-of-state branches that controlled $741 million out-of-state deposits. 

Nevada by comparison had 4 banks with 1,040 out-of-state branches that controlled more than $180 billion out-of-state deposits.

South Dakota, with a population of 781,919 enticed a Citibank subsidiary to move there.  Subsequently, South Dakota went from $15.7 billion in deposits in 2003 to $86.8 billion in 2009, a 553% increase.  Their deposits increased by $12 billion from 2008 to 2009.   A much, much smaller state than Arizona now has more in deposits than does Arizona.  An added bonus is that South Dakota has 6 banks with 3,495 branches that control $304.7 billion out-of-state deposits.

Both South Dakota and Nevada have developed extensive information about the value financial institutions bring to their respective states in the way of economic dynamics, including added taxable wages from job creation.  These states have benefited from favorable tax treatment that is an attraction to major financial institutions.  Even tiny Delaware, with a population of 853,904, has $170.6 billion in deposits and 5 banks with 1,045 out-of-state branches that control another $77.3 billion out-of-state deposits.   

The wealth controlled in the states of Nevada, South Dakota and Delaware is a phenomenal amount on a per capita basis.

Yes, we can blame some of our per capita lag on our immigration issue!  But, our problem stems more from legislative neglect of the power of receptive finance laws.  This forces our citizens to earn such a small income.  Further, our local control of bank assets has gone from 95% at the time I was Arizona State Treasurer down to about 4% to 5%. 

We need to keep Arizona money in Arizona!  Here our money will generate greater sales tax revenues.  Our deposit growth is currently limited and Arizona deposits are sucked out of state.  We no longer control our own economic destiny in Arizona.  Decisions are made for us by out-of-state money centers.  We can reverse this trend by providing a statutory environment that will encourage businesses and banks to headquarter here or to move subsidiaries to our state.

We formed the Arizona Financial Institutions Task Force in 2006 to help State Senate Majority Leader Chuck Gray address bank related economic solutions for Arizona.  Senator Jim Waring has been a regular attendee.  I am chairman of the Task Force. Candace Wiest, President & CEO of West Valley National Bank, a former member of the San Francisco Federal Reserve is our Vice-chair.  Our members are highly successful local business people and community bank presidents.  Our mission:  To provide an independent assessment of opportunities for financial institutions to improve the business climate in Arizona.

Our Task Force believes we will act as a magnet to major global financial firms that want to locate to the U.S. as well as to out-of-state banks and their subsidiaries if we eliminate state income tax as an obligation for locally headquartered businesses.  Financial institutions with sizable state corporate income tax expenses would trip over themselves to move their headquarters to Arizona because this change would increase the value of their charters and therefore the value of their stock.

Can you imagine the money multiplier effect we are losing by not retaining control over our own deposits?  Each dollar reproduces itself by 4 to 10 times when loaned locally.  It is like giving Arizona our own printing press.  Our state is losing out on the maximum multiplier effect that bank dollars can create while other states benefit from what should be ours.

In addition, without charging state corporate income tax, we may encourage some of the big guys that Congress is bailing out of their holes with billions of our dollars to move here.  I believe we can capture some of that money for Arizona.

Per Capita Personal Income

	2009	State		2008	State		2007	State		2006	State		2005	State
		Rank			Rank			Rank			Rank			Rank
Arizona	32,935	43		34,339	41		34,365	36		33,423	36		31,491	36
Delaware	39,817	17		40,375	18		39,932	18		39,046	15		37,001	14
Nevada	38,578	20		40,936	17		40,930	15		39,231	14		38,117	11
South Dakota	36,935	25		38,644	25		36,428	27		33,718	31		33,117	26
Washington	41,751	12		42,747	13		41,919	11		39,550	13		36,734	16
Wyoming	45,705	6		48,580	5		46,726	6		44,677	5		39,446	6
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis.  Released March 2010.