One small District of Columbia savings and loan association paid D.C. gross receipts taxes equivalent to 150 percent of its net income during one recent year, says one of the few people outside the Internal Revenue Service who has seen the tax returns of local financial institutions.
"I've heard of The Beatles paying taxes like that, but never anybody else," says Dr. Kenneth Biederman, a savings and loan industry economist.
A consultant to the D.C. Tax Revision Commision, Biederman cites the 150 percent of profits tax as an argument in favour of changing the way the District of Columbia taxes banks and savings and loans association.
Most businesses in Washington pay aD.C. franchise tax, based on their profits - the local equivalent of an income tax. Banks and savings and loan associations, however, are taxed on their gross receipts, not their net earnings.
The city council is expected to receive shortly a bill that would appeal the gross receipts tax on financial institutions and subject them to the franchise tax, at the same rates paid by other businesses.
Council member Marion Barry has said will introduce the bill, which is recommended by the Tax Revision Commission and backed by the D.C. Bankers Association and the Metro-politan Washington Savings and Loans League.
The bill would attack what the financial community regards as inequities in the D.C. tax system , in the process reducing the taxes paid to the city by banks and savings and loans by 20 to 25 percent a year, said Biederman.
He outlined details of the proposal and its imapct on Washington financial institutions over the weekend at the Savings and Loan League's 70th annual meeting at the Homestead in Hot Springs, va.
"No one disputes that the present system in inherently unfair," said Biederman, who is senior vice president and chief economist for City Federal Savings and Loan Association of Elizabeth, N.J.
He said Washington's financial institutions not only pay more of their earnings in taxes than do other businesses but also pay a tax that is not based on their ability to pay.
The small S&L that one year paid 150 percent of its profits in D.C.: taxes is a case in point. Biederman said that happened during a recent credit crunch, when soaring interest rates tightened the usual spread between the rate of interest paid on savings and the rate charged on borrowings.
Profits in the whole industry were hurt, he noted, but because the total volume of business remained high, so did the D.C. taxes.
To analyze the impact of switching financial institutions to the franchise tax, Biederman was given copies of tax returns by most Washington banks and savings and loans for a six-year period.
"In really good years you'll pay more" to the city under a franchise tax then under the gross receipts tax, he told the S&L executives.
But over the long run, the taxes paid by financial insitutions would go down, so they would pay only about 75 to 80 percent as much he estimated.
Although the bankers and savings and loans executives say they are over-taxed, they acknowledge it is unrealistic to expect the city council to pass a "tax reform" that would cut their taxes by that much.
To keep the District of Columbia from losing revenues, they are proposing a five-year phase-in of the franchise tax. During those five years, financial institutions would figure their taxes under both the gross receipts and franchise methods, and pat the bigger amount. By the end of the fifth year, it is estimated, the franchise tax would be bringing in at least as much money as the gross receipts tax in now.
The phase-in is criticized by some savings and loans officials, who say they are being locked into the gross receipts tax for five years. The only way to the tax will go down is if gross receipts go down, and that it not likely, the critics contend. "We're putting up with five more years of inequity in return for getting out of it in the future," said one S&L officer.
Biederman indicated he too, is no fan of the phase-in. He said the city should immediately switch financial institutions to the franchise tax, but charge them a higher rate than other businesses. The rate could gradually be reduced to keep the city's revenues up.
Other businesses pay a franchise rate of 9.9 percent. Biederman said the rate onbanks would have to be about 14 to 15 percent to produce the same revenues now being raised by the gross receipts tax.
Financial community policy makers, however, are afraid that if they come under the franchise tax at a higher rate, they will remain at a higher rate, permanent victims of the city's budget squeeze.