Meadville Tribune

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May 11, 2014

Code changes at heart of tax break for banks

HARRISBURG — An unintended 18 percent tax break for banks isn’t helping the state’s looming budget shortfall.

Banks paid $87 million less than expected this spring in a tax on the value of bank shares, said Erik Arneson, director of policy for Senate Majority Leader Dominic Pileggi, R-Chester County.

The uncollected taxes have legislative staff scratching their heads and hoping the Department of Revenue can coax more money from banks.

Some of the shortfall is due to banks’ “misinterpretation” of recent tax code changes, said Revenue Department spokeswoman Elizabeth Brassell.

But industry lobbyists believe banks read the rules correctly, said Jill Gingrich, a spokeswoman for the Pennsylvania Bankers Association. The group doesn’t know how individual banks will respond to a Revenue Department attempt last month to clarify the rule and spur banks to recalculate the tax, she said.

The drop in collections represents nearly one-fifth of a $500 million shortfall in overall tax revenue for 2013-14. That gap builds on itself and will be used to adjust revenue expected for 2014-15. That means the state now needs to figure out how to close a $1 billion hole in a plan laid out by Gov. Tom Corbett just three months ago.

Banks had been pushing for a rewrite of the stock shares tax since federal rules changed in the wake of the financial crisis. Those rules encouraged banks to add capital, effectively increasing their state taxes.

Gingrich said industry lobbyists had no reason to suspect revising the code would lead to a substantial drop in taxes.

But receipts have indeed fallen.

In 2011-12, the shares tax yielded $258 million to the state. A year later that ballooned to $337 million. With the recent change, the state estimated it would get $362 million. Instead it came up $87 million short of the target — and $63 million less than what the tax took in last year.

Before recent changes, the tax was based on a six-year average of a bank’s equity capital. Problems arose in mergers between Pennsylvania banks and those out of state. Courts held an out-of-state bank’s pre-merger holdings shouldn’t be considered in tax calculations.

Subsequent lawsuits suggested the tax could be unconstitutional because it advantaged banks that merged with out-of-state partners, and penalized those merging with banks in-state.

To get out of that quagmire, lawmakers eliminated the six-year average, said Drew Crompton, chief of staff and legal counsel for Senate President Pro Tem Joseph Scarnati, R-Jefferson County.

They also lowered the tax rate. In addition, the state moved to cover more out-of-state banks that do business in Pennsylvania but had previously avoided the tax.

Why the bottom-line take was almost $90 million short remains a mystery, Crompton said.

“We’re still not clear why there was a miss,” he said.

Payments based on the Revenue Department’s clarification aren’t due until next week, he said. Not until then will lawmakers know the full scope of the problem.

A spokeswoman for PNC, Pennsylvania’s biggest bank, said she wouldn’t speculate about whether it needs to make an additional payment.

“I can say that we are confident we have interpreted the statute correctly,” said Marcey Zwiebel, vice president of external communications for PNC Financial Services Group.

She said the bank would not disclose how much it paid in bank shares tax.

A spokesman for Susquehanna Bank, based in central Pennsylvania, said there’s no reason to believe the bank will pay more based on the Department of Revenue’s clarification.

“Our bank shares tax liability was already significantly greater in 2014 than it had been in 2013,” said Stephen Trapnell, director of corporate communications for Susquehanna Bancshares Inc.

John Finnerty reports from the CNHI Harrisburg Bureau for The Meadville Tribune and other Pennsylvania newspapers owned by Community Newspaper Holdings Inc. Email him at jfinnerty@cnhi.com and follow him on Twitter @cnhipa.

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