Nine Banks Not Taxed

Chuck Sheketoff

Under a tax loophole passed in 1999, nine banks that are plainly doing business in Oregon enjoy a legal fiction that allows them to escape Oregon's corporate income tax. The loophole transforms a bank that is doing business in Oregon into a bank that is “not doing business” in Oregon.

How big is the loophole? Apparently it is broad enough to exempt from corporate income taxes a Texas bank called T Bank that set up a "loan production office" in Clackamas County (PDF) for mail, telephone and internet solicitation and processing of "conventional real estate loans originated under the SBA 504 program" and "loans originated under the SBA 7(a) Loan Program."

Under the relevant banking statute (ORS 713.300), these out-of-state banks can, among other things, "take, acquire, hold and enforce notes secured by mortgages or trust deeds and make commitments to purchase such notes" and "foreclose the mortgages or trust deeds in the courts of this state."

Essentially, the loophole says: "Out-of-state banks, while you look like, walk like and talk like you are doing business in Oregon, thanks to your lobbyists you are technically not doing business, so you don't have to pay Oregon's corporate income tax on your profits."

This end run around corporate income taxes — a "tax expenditure" in wonk terms — has no sunset date and was not evaluated in the latest report to the legislature (PDF excerpt).

The lack of an evaluation should be reason enough for the legislature to take action to close the loophole. Just as agencies cannot spend $100,000 without Ways and Means Committee review and legislative approval, banks shouldn't get away with what the Department of Revenue estimates will cost taxpayers up to $100,000 under the cloak of the corporate tax code.

The lack of a sunset date is also problematic. Without a date by which the loophole automatically ends, the legislature must take affirmative action to stop the tax code end run.

If lawmakers do indeed move to close or put a sunset on the loophole and the Oregon Bankers Association puts up a fight, it will raise the question, "Why does the Oregon banking lobby want to exempt out-of-state banks from paying state taxes?" Objections from the bankers' loophole lobby should be a signal to lawmakers of the need to dig deeper into the amount of revenues that we're losing from the tax dodge.

Who are the "out-of-state" banks are that are doing business in Oregon but using a loophole to avoid taxation. Here's the current list:

• Darien Rowayton Bank (Darien, CT 06820)
• Fifth Third Bank (Cincinnati, OH 45263)
• First Bank (Chesterfield, MO 63141)
• Fremont Bank (Fremont, CA 94538)
• Opus Bank (Irvine, CA 92612)
• Pacific Enterprise Bank (Irvine, CA 92614)
• Pacific Trust Bank (Irvine, CA 92612)
• PNC Bank, National Association (Pittsburgh, PA 15222-2707)
• T Bank, N.A. (Dallas, TX 75248)

Instead of paying taxes like others doing business in Oregon, these out-of-state banks paid a filing fee of $200 to apply to get this special treatment, and then paid a $200 a year fee to maintain their loophole. The $200 annual charge is $50 more than the minimum corporate minimum income tax and, presumably, less than the amount they'd pay each year if subject to Oregon's corporate income tax.

The loophole's history lends credence to the old adage that “the two things you don't want to see made are laws and sausage.” Notably, when the Oregon Bankers Association’s lobbyists secured the loophole in 1999, they shepherded the bill through the legislature without it ever stopping in the House or Senate revenue committees for review (scroll down to SB 26). Among other things, that end run by the banking lobby means the legislature never received a “revenue impact statement” from the Legislative Revenue Office estimating the cost of the loophole. The Senate Judicary Committee and the House Committee on Business and Consumer Affairs, which did review the bill, were not equipped to make a reliable estimate of its cost.

According to the one staff bill summary from the 1999 legislation that created the loophole (PDF), the bill was sold as a housekeeping measure to fix an alleged inadvertent error by the 1997 Legislative Assembly and the loophole was made retroactive to January 1 1997.

The error, however, was in granting out-of-state banks doing business in Oregon a loophole to avoid Oregon’s corporate income tax. It’s time for lawmakers to correct that error.

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Chuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org.

By Chuck Sheketoff March 01, 2013 Posted in open discussion.