Mayor Marion Barry yesterday proposed major changes in the way the District of Columbia taxes banks and savings and loan associations. The revisions would reduce the taxes paid by financial institutions by $800,000 a year by 1984.
The major sent the city council a bill that would repeal the present D.C. gross receipts taxes on banks and S&Ls and make them pay the same D.C. franchise tax paid by other businesses.
Washington financial institutions have complained for years that they pay higher taxes than other District of Columbia businesses, and higher taxes than competing financial institutions in Maryland or Virginia.
Savings and loan associations pay higher taxes than banks of the same size and small financial institutions pay proportionately more local taxes than big ones, critics of the present tax system contend.
Unlike other businesses which are taxed by the District of their net profits, financial institutions pay a tax on their gross earnings. The tax rate is 2 percent for savings associations and 6 percent for banks, but banks are permitted to deduct more expenses and often end up paying comparatively less.
Under the major's bill all financial institutions would pay the same 9.9 percent tax on their net profits and the same personal property tax is paid by other District businesses.
The old tax would be phased out and the new one phased in over a three year period. During the transition, taxes paid by financial institutions would go up temporarily.
The short term bulge would bring the city an additional $2.6 million in taxes in 1980, an extra $3.5 million in 1981 and $1.2 million more in 1982. By 1983, however, the city's take in taxes on financial institutions would decline by $120,000 a eyar and by 1984, when the transition is completed, the banks and S&Ls would pay $800,000 a year less than if the present tax system were maintained, city money managers estimate.
Rewriting of the District's tax on financial institutions was recommended in 1977 by the D.C. Tax Revision Commission, which agreed with industry complaints that the tax is inequitable.
"The commission found that taxing financial institutions on the basis of their gross earnings at the current rates results in tax burdens much greater than those imposed by the District on non-financial businesses entities," the Mayor said in his letter recommending the changes.
The bill sent to the council by the mayor generally follows the Commission's recommendations, but calls for a faster phase-in than sought by the industry, which had recommended a five-year phase-in.
Barry said the changes in taxes would "foster the growth of the increasingly important District financial industry."
"Continuing to tax banks and savings and loan associations on the basis of their gross earnings would, therefore, continue to put these institutions at a competitive disadvantage vis-a-vis like institutions in other states," the mayor said.
District financial executives have claimed the lower taxes imposed by Virginia and Maryland on suburban financial institutions are costing the District business.
In one recent year one small District savings and loan association paid a gross receipts tax equivalent to 150 percent of its net profits for the year, the Metropolitan Washington Savings & Loan League has said in arguing for the change.
The financial institutions have complained that their district taxes usually go up during periods when interest rates are rising, even if bank profits are not increasing.
The tax based on gross receipts tends to penalize lenders by taxing the interest they receive from borrowers, even though most of that interest is paid out to savers, the S&L group claimed.