Last updated on 2013.01.07
For years I've enjoyed pointing out that, even though South Dakotans resist a state income tax harder than they resist allowing women to exercise their constitutional right to abortion, we impose an income tax on banks and a handful of other industries. I've thought the bank franchise tax argues compellingly against the primary argument that a state income tax would kill South Dakota's ability to recruit and retain business and jobs. After all, according to Bureau of Economic Analysis numbers, banking makes up 15% of our state Gross Domestic Product, compared with 8.4% of the national GDP. Banks generated an annual average of $5.5 billion in South Dakota GDP from 2007 to 2010. (The annual average over the same period for agriculture: $3.3 billion.) Banks locate more assets in South Dakota than in any other state: $2.5 trillion. Nearly one in every five dollars in American banks is technically in South Dakota.
The state banking association sees more harm than good in trying to do away with the bank franchise tax. But I suggest the real reason the bank franchise tax does not drive banks away from South Dakota because we have structured it as a Romney-Ryan regressive reverie. Check out the tax table on page 5 of the state bank franchise tax form:
| South Dakota Bank Franchise Tax (figures in millions of dollars) |
|||
| On bank income over... | but not over... | tax due is... | of the amount over... |
| 0 | 400 | 6% | 0 |
| 400 | 425 | 5% | 400 |
| 425 | 450 | 4% | 425 |
| 450 | 475 | 3% | 450 |
| 475 | 500 | 2% | 475 |
| 500 | 600 | 1% | 500 |
| 600 | 1200 | 0.50% | 600 |
| 1200 | 0.25% | 1200 | |
Suppose that $5.5 billion average annual income was made by one South Dakota bank. That megabank would pay $31.5 million on the first $1.2 billion. On the remaining $4.3 billion, Megabank would pay $10.9 million. That's $42.4 million total. (We were at $43.6 million in bank franchise tax one month shy of the end of the 2012 fiscal year.)
Obviously we have more than one bank in South Dakota. Our regressive bank franchise tax thus means the smaller community banks pay a higher percentage of their income to the state, while the jumbo banks that move here to take advantage of our lax usury laws pay a lower percentage.
Now suppose we made the bank franchise tax a flat rate of 6%. The recent annual average statewide bank income of $5.5 billion would have generated $334 million in tax revenue.
Not all of the bank franchise tax goes to the state; counties and schools get a cut. But consider that, at a flat rate of 6% generating $334 million, the bank franchise tax could have single-handedly covered the state's K-12 education budget in FY2012.
We have enormous wealth in South Dakota, yet we refuse to tap it for public purposes. Legislators like Rep. Jon Hansen (doing his best Christian Slater impression) brag that over the last two years, "we collected fewer tax dollars per person in South Dakota than any other state in the nation." Radical Ron Paulites like Rep. Hansen and South Dakota Republicans in general take that as a point of pride; the banks and other vulture capitalists take that as a sign that South Dakotans are chumps.
"But consider that, at a flat rate of 6% generating $334 million, the bank franchise tax could have single-handedly covered the state’s K-12 education budget in FY2012."
A flat rate of 100% on 5.5 billion would have generated 5.5 billion for the state.
Any idea of where the failure in logic is?
Yes, in your comment. On one level, I'm talking about the fairness of a flat tax rate over a regressive rate that punishes smaller banks and favors big banks. I'm not talking about the merits of raising tax rates ad infinitum. Your comment is thus irrelevant to my argument.
Heck, I could even argue for lowering the bank franchise tax rate to 3%, but applying it to all bank income. Small banks would pay half their current tax... but the state would get $167 million, more than triple its current take. Fair and fiscally effective: Yum!
"Our regressive bank franchise tax thus means the smaller community banks pay a higher percentage of their income to the state, while the jumbo banks that move here to take advantage of our lax usury laws pay a lower percentage."
Are there any smaller community banks any more?
"Heck, I could even argue for lowering the bank franchise tax rate to 3%, but applying it to all bank income."
Soyou would agree that the Federal Income Tax should be a flat rate applied to all income. Unless there is a failure in logic?
"Fair and fiscally effective: Yum!"
Or repeal the Credit Card act of 2009 that led to the massive decline of the bank franchise fees paid to SD.
"On one level, I’m talking about the fairness of a flat tax rate over a regressive rate that punishes smaller banks and favors big banks. "
And you assumed that a flat rate of ______ would bring in a certain and predictable amount of revenue based on what a regressive schedule would bring in. It does not work that way.
"I’m not talking about the merits of raising tax rates ad infinitum. "
neither was I.
"Soyou would agree that the Federal Income Tax should be a flat rate applied to all income. Unless there is a failure in logic?"
Bingo--theres the lack of logic in thinking that simple changes in rates or regressive/progressive schemes leads to predictable revenues.
Romneycare
"We have enormous wealth in South Dakota, yet we refuse to tap it for public purposes."
We do? Where? Maybe on that hill that I see to the right of I-90 as I drive west from the Lead/Deadwood exit to make my weekly soujourn to Wal Mart ... I still can't get over how weird those houses look up there, like they're trying to outdo each other in the garishness department, or something.
Tap them, okay, tap them into the gutter and see how many tears I shed.
Seems to me that our sales and property taxes do a pretty good job of tapping what wealth we actually have among the widdo peepo here. Didn't we have a surplus this past year for "public purposes"? We could do a lot worse, especially if we try to fix what ain't broken.
Just heard on Dakota Midday today (Tuesday) that South Dakota has been ranked (by somebody reasonable enough to get air time on SDPB) as the No. 2 state in the nation for 20-to-24-year-olds. (North Dakota is No. 1.)
Among the attractions: low cost of living, e.g., auto insurance rates, housing costs, and (although they didn't specifically mention it) the lack of a personal income tax. (Yet, North Dakota with its sales and income and property taxes still beat us out, so obviously taxes are not the only factor in the equation.)
Still, I can't see how suddenly imposing an income tax on ourselves, thereby reducing all our disposable incomes, would produce any benefit to this state. Since when do governments make people better off by taking stuff away from them? Most of the folks I see every day are scrimping on food and clothing and heating and gasoline just to survive as things are right now.
Our tax structure here in South Dakota is regressive, and we could probably do better in that department, but not, hopefully, by making everybody poorer.
If you, dear reader, can make sense out of what I just said, may the Lord bless you and keep you and give you peace, now and forever.
I really do not understand regressive taxation - really, what is the intellectual argument that those with the most should pay the least? Is this purely the celebration of Ayn Rand at its most obscene? I can defend the idea of progressive taxation and point to our nations history where we flourished under progressive taxation with a top income tax rate more than double what is asked now; I understand the point of view of the flat tax proponents (even if I do not agree), but a reduction for the those at the top?
Similar arguments can be made for the raft of sales tax exemptions I suppose, but the real argument to me is does this profit to those biggest banks help SD as much as the lost tax revenue? Others here will be quick to say that I cannot know what the revenues will be - the threat of banks pulling out to save that extra 0.25% seems hollow. After we repealed usurer laws to allow most any reprehensible lending practices (or maybe the proliferation of dollar loan centers was just a coincidence) I thought we had done enough to earn their business in our boarders. That and providing a mass of minimum wage workers for them as well.
We should face the fact that we made it easier for them to profit, and we did that for THEM - not for US.
Rasmussen's 'likely' voters: "Just 16% See A Better Future for Today's Children:" doom-n-gloom r us.
@ Stan Gibilisco:
One reason I will argue we rank so well for 20-24 year olds is that they will not yet be concerned with having children in public education at that point in their lives. When you can create a window that blocks out our state's largest downfalls, we do shine more brightly. When I want my children to have better education opportunities, THEN I start thinking about that tax-base.
Stan, I suggest that the bank franchise tax hits regular South Dakotans the least, since it allows us to tap the nationwide business these SD_based companies do. It's like the sales tax deal Custom Touch has with Madison: charge local sales tax, even on purchases made by folks getting the houses delivered out of town... or like making sales tax on tourism. Tap the wealth, import the dollars!
Robert, that's a good question about how many small community banks remain. There must be a few... might FDIC have data on that?
Steve O.:
Good points ...
We could probably find someone who would rank our state among the worst places for a young person age 20-24. When I was that age, I wanted to live in Florida, California, or Hawaii -- because of the weather. I couldn't have cared less about taxes, and South Dakota wasn't even on my radar.
Eventually I did live in Florida, then California, then Hawaii. Taxes mattered more to me then than they did at age 20-24. But I still went to Hawaii and did all right there, despite their massive taxes and high prices. (Sometimes I think about going back there ... no need for a car, no heating bills, no need to own a lot of hardware to deal with adverse weather. Heck, I'll pay for the privilege of not having to own anything! Seriously!)
In retrospect, and as a bit of an aside (among many), I'll tell you that the "spirit of Aloha" is just about as mythical as the endless sunshine on the beaches of L.A. Go ahead and believe in Baywatch fantasies if you like, you young people out there. Go ahead and believe in them and then go see for yourself how true they are. We'll leave the light on for ya up here in the boondocks.
When it comes to schools and education, I pay pretty good money for that right now in the form of property tax, and I don't have any kinds, and I never will have any kids. (Again in passing: Larrry, I'm surprised that anyone at all believes our kids will have a better future! I think the future of this country positively sucks.) I don't resent paying for schools that my family does not use; I'm happy to be able to own a home. I suspect that most 20-to-24-year-olds rent rather than own; when they decide to have kids they'll more likely buy homes, and then they'll contribute to the schools through their property taxes. (Renters don't pay property tax, in my opinion; rents depend on what the market will bear, and in this state they're rock-bottom low.) So in a way, the current system is actually more fair than one that includes a personal income tax, insofar as education goes, because people who use the system are more likely to end up paying for it, with lone-eagle exceptions such as myself, who pay for it even though they don't use it.
I might also note that our schools are pretty good right now. I'd rather have a kid in school here than in California or New Jersey, both of which have significant income taxes as well as massive property and sales taxes (and aggressive, vicious tax departments to boot).
As for bank franchise tax, I have nothing against it. Nor would I necessarily oppose a corporate income tax, should a true need for additional revenue be demonstrated. I'm not convinced, though, that we need more revenue at this point. I wish some enterprising companies would come here and start exploiting our wind and solar electric-generating capabilities, however. By that I mean the private sector, not the public sector.
I prefer to live here also because of the low crime rates. On the downside, though, I sometimes miss the cultural diversity and literary scenes of places like Minneapolis (yeah, I did Minnesota too), or the vivacity of those Cubans down in Miami (and their coffee!). But I have grown up at least enough to know that I cannot "have my cake and eat it too" (although I might have nothing but cake to eat if we elect Mitt Romney and Paul Ryan to run this country).
So in summary, I would not want to see this state adopt a personal income tax without getting rid of the sales tax at all levels. I do not think we need new taxes right now. We're going to see a value-added tax at the federal level soon enough, probably in the 10-percent range; let's see how people feel then about imposing new taxes at the state level on top of that, when they can't even afford to feed, house, or clothe themselves any more at all.
Yes, Larry, the future of this country sucks, and sucks hard. South Dakota, hopefully, not so much.
Much like with the uber-rich, a large bank can run a credit card operation out of SD through a shell BHC in another state and avoid the tax completely.