Tax changes for banks expected to boost lending

Business Courier by Adrian Burns, Columbus Business First
Date: Friday, March 23, 2012, 6:00am EDT

Banks in Ohio could soon be getting a break on their taxes. Most banks, anyway.

As part of a broader reform plan, Gov. John Kasich has proposed a new tax structure that would squeeze about $30 million a year more out of some loophole-exploiting big banks, while saving the rest of the state’s banks about 39 percent annually. The plan isn’t expected to change the state’s total tax collections from banks operating in the state, Tax Commissioner Joe Testa said, but is seen by the administration as an approach that keeps money in the state that rightfully belongs here, and that levels the playing field between small, Ohio-based banks and larger national and online institutions.

“This is particularly good for community banks out there in the small towns across the entire state,” he said. “They’re making loans and helping to create jobs.”

The change is being hailed by many bankers in Ohio. A tax cut will help spur further lending in the state, said Jerry Caldwell, CEO of Gahanna-based Benchmark Bank.

“This money goes right back into Ohio,” he said.


Leveling the Field

Kasich’s reforms seek to finally put an end to the practice by some big banks of paying barely any taxes in Ohio, Testa said. Under the state’s corporate franchise tax, which banks use despite being phased out for most other businesses starting in 2005, banks pay a tax based on their equity – assets minus liabilities.

Most Ohio banks are based in Ohio and do all their business in the state, so they paid taxes as the state intended, Testa said. But some big institutions with affiliates in other states have figured out ways to avoid the tax, he said.

“Most banks aren’t doing it and even many of the largest are not,” he said. “But there are a few who have been very aggressive using these opportunities to move assets and equity essentially out of Ohio.”

That results in those institutions paying about $30 million less than they should each year, Testa said.

“Since there is a $1,000 floor on the corporate franchise tax, they become $1,000-a-year filers,” he said. “It’s really incredible.”

Testa would not name the banks employing the practice.

The state’s plan would essentially keep institutions from avoiding taxes by moving equity to other affiliates. Instead, the state would examine whether a bank’s business originated in Ohio and tax the bank equity that comes from that, Testa said.

The change also will affect online banks with little or no physical presence in Ohio. The current code assesses taxes for out-of-state banks based on the institution’s property, payroll and income in the state, which favors online banks that have little to no payroll or property here.


Leveraging into lending

Benchmark could see its annual state tax bill drop from about $120,000 to about $70,000 a year, Caldwell said. Banks typically keep capital on their books representing about 10 percent of their loans. That means the $50,000 saved could support about $500,000 in lending each year – or $5 million over 10 years, Caldwell said. Those loans generate interest income well beyond the original tax savings, he said.

“The benefits are going to be huge,” Caldwell said.

“You could put me in favor of that one,” agreed Dan DeLawder, CEO of Park National Corp. in Newark, which operates 10 offices in Greater Cincinnati.

It’s not just the smaller banks that support the measure. The $2.3 trillion-asset JPMorgan Chase & Co., which has 292 branches in Ohio, is in favor, spokesman Jeff Lyttle said. It paid $71.9 million in corporate franchise, payroll and real estate taxes in Ohio last year, he said.

Tax reform for banks has yet to work its way through the Ohio Statehouse, said Michael Adelman, vice president for state government relations at the Ohio Bankers League, which remains neutral on the tax plan.

“This is going to create some winners and losers based on what we know,” he said.