We Mean Business. Illinois Business.
 
 

Bankers, lobbyists successful in keeping state tax exemption
By KERRY L. SMITH

   SPRINGFIELD - A major piece of banking legislation that would have cost Illinois banks at least a $1 million each annually was defeated in the final days of the 93rd General Assembly, leaving Southwestern Illinois bankers relieved but cautious until next session.

   The omnibus bill, House Bill 848, which included five separate bills, was defeated May 26 by a vote of 81 to 23. Of the separate provisions specified in the five bills contained in HB 848, arguably the most damning clause was this: the proposed elimination of the state income tax exemption on interest income.

   Southwestern Illinois bankers and their lobbyist say it won't be a surprise if the bill resurfaces next session.

   "This was a far-reaching bill that would have cost Illinois' banking industry millions and millions of dollars each year," said Linda Koch, executive vice president of the Illinois Bankers Association. The association represents the interests of more than 400 banks and thrifts statewide. "If it passed, it would have disallowed the interest expense deduction for investments made by banks in federal bonds. And the legislation was retroactive; it would have gone back to any interest income earned since Jan. 1 of this year."

   Robert Wetzel, president of TheBANK of Edwardsville, said the retroactive provision in HB 848 would have seriously impacted banks because the institutions strategize and make day-to-day decisions based on factors such as liquidity, positioning and competitiveness.

   "For TheBANK, it would probably have cost us about $1 million annually by losing the state income tax exemption," Wetzel said.

   Koch said HB 848 completely changed the apportionment formula whereby banks in Illinois are taxed. As it stands today, banks are taxed based on where an account holder's income is received; if it is received in Illinois, banks are subject to Illinois' earnings tax. Any interest income paid to out-of-state earners, she said, normally is not applied to the standard apportionment formula.

   HB 848 would have changed that, said Koch, turning Illinois into a market state.

   "For example, if an Illinois bank has a branch that is located in Indiana and holds its mortgages there, the interest earned is taxed in Indiana but not in Illinois," she said. "The governor is trying to change that so Illinois taxes the earnings, too. Gov. Rod Blagojevich's office is pulling different pieces of tax schemes from other states and cobbling them together in a cumulative way that is very far-reaching. No other state has this."

   Terry Schaefer, president of West Pointe Bank & Trust in Belleville, said although HB 848 did not become law, banks are continuing to pay more than their fair share of taxes.

   "We in our lobby just resent these attacks on corporations and the banking industry, when we're already heavily subsidizing the credit unions and other bank-like entities," Schaefer said. "They don't pay a dime. The only tax they pay is on real estate. They hide behind their charters as they become more and more like banks in the way they're structured and in the services they offer."

   Schaefer said the solution to equalizing the tax treatment of all financial institutions in Illinois lies in the character of elected officials in Springfield.

   "None of our legislators have the stomach to raise the bar on credit unions," he said.

   Other mini-bills grouped with HB 848 included SB 833, SB 2206, SB 2209, SB 2210 and SB 2211.

   Koch said SB 833 touted taxing many of the 250 community banks in Illinois that are Subchapter S corporations and have fewer than 75 employees. Much of the cost of this bill, had it passed, would have come in the form of increased compliance requirements created by separate bookkeeping.

   SB 2206 contained the text specific to disallowing the interest expense deduction for investments made in U.S. notes and bonds.

   SB 2209 included the broad proposal to change Illinois banks' apportionment formula.

   SB 2210 would have altered the rules for inter-company interest, dividend and intangible deductions that today are permitted for non-Illinois affiliates. It would have also imposed taxes on funding vehicles for real estate investment trusts. REITs, Koch said, enable banks to retain real estate loans in their own portfolio while freeing up funds for further real estate lending.

   SB 2211 would have required banks and all other Illinois businesses to use a straight-line depreciation method rather than the accelerated depreciation method, which has been the standard.

   "Changing the rules midstream and requiring recalculations of assets already depreciated under existing rules would have been a recordkeeping nightmare and a costly compliance burden for financial institutions and businesses of all sizes," she said.

   Although HB 848 and the bills wrapped into it were defeated this session, Koch and Schaefer said bankers remain alert to possible legislation being reintroduced, particularly in Illinois' current budget climate.

   "Our governor is looking for any conceivable way to tax businesses," said Schaefer. "He is trying to roll back historically what have been standard exemptions. The primary reason any of us buys government notes and bonds is for security. For more than 150 years, banks and investors have had this exemption. HB 848 would have treated all forms of corporate income as business income, and it would have drastically impacted our investments and those of our customers."

   Koch said regardless of the regular session's completion, the fight is not over.

   "We have to continue to strongly voice our oppositions to a host of drastic tax proposals as they continue to roll out of the General Assembly," she said. "Any new tax burden on the banking industry will have a very significant effect on the way banks do business here, on their customers and on banks' decisions whether or not to keep their headquarters in Illinois."