THE TAXATION OF INSURANCE COMPANIES.
BANKS, AND BUILDING AND LOAN
ASSOCIATIONS IN MICHIGAN

Thesis for Ike Degree quh. D,
MICHIGAN STATE COLLEGE. ’
Arthur M. Taybr
' 19.54

 

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This is to certifg that the

thesis entitled

The Taxation of Insurance Companies, Banks,
and Building and Loan Associations in Michigan

presented b1]

Arthur Merle Taylor

has been accepted towards fulfillment

of the requirements for

_fl&._ degree in Economics

film CZM

alajor professor
Date AEI‘il l6! IESII

0169

 

 

Arthur Merle Taylor
candidate for the degree of

Doctor of PhilosOphy

Final examination,

Dissertation: The Taxation of Insurance Companies, Banks,
and Building and Loan Associations in
Michigan .

Outline of Studies

Major subject: Economics
Minor subjects: Public.Administration,.Agricultural
Economics

Biographical Items
Born, April 19, 1916, Zion, Illinois

Undergraduate Studies, North Central College, 1936-37,
cont. 1939-42

Graduate Studies, Michigan State College, 1946-50

Experience: Graduate.Assistant, Michigan State College,
1948-50, Special Research Assistant,
Michigan Department of Revenue, 1947-48,
Member united States Navy, 1942-46, cont.
1950-52, Research Administrator, Capehart-
Farnsworth Company, 1952-54

THE TAXATION OF INSURANCE COMPANIES, BANKS,
AND BUILDING AND LOAN'ASSOCIAIIONS IN”MICHIGAN

By
Arthur M. Tayl or,

AN ABSTRACT

Submitted to the School of Graduate Studies of
Michigan State College of.Agricu1ture and Applied Science
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Economics

Year 1954

/ L0.

 

  

3ni7vSV

ABSTRACT

From 1949 to 1953 the General Fund of the State of
Michigan incurred a mounting cumulative deficit. The result
was the enactment of more than six new tax measures in 1952
and 1953. The focus of attention has been and will continue
to be to an important degree upon financial institutions
because of their vast resources. The purpose of this in-
quiry is to evaluate the present tax system and propose
alternative courses of action to attain desired tax policy
objectives.

The procedure followed was to study the literature in
the field of state finance and, on the basis of the findings,
to set forth the premise that the Michigan tax system for
insurance companies, banks, and building and loan associ-
ations is inequitable and inefficient. Further research was
conducted by obtaining personal interviews with tax officials,
studying the files of administrative agencies and analyzing
compiled tax agency reports.

It was found that financial institutions enjoy special
tax privileges not extended to other types of businesses;
that inequities exist between the tax burdens on banks,
insurance companies and building and loan associations and;
that the problem of administering this tax system is compli-
cated by the number of tax bases and rates, the number of

administrative agencies and the frequency of exemptions.

338663

It is the hypothesis of this study that these deficien-
cies may be overcome by levying a franchise net income tax in
lieu of certain existing taxes, the rate to be equalized
between types of businesses and the revenue collected by one
central agency. The general characteristics of such a plan
are presented in the final chapter.

An alternate prOposal for reducing inefficiencies and
inequities is also outlined. This proposaltvould introduce
no taxes with which the state has had no experience but is

based on revising and extending existing tax statutes.

THE TAXATION OF INSURANCE COMPANIES, BANKS,
AND BUILDING.AND LOAN ASSOCIATIONS IN MICHIGAN

3:!
a“ '
Arthur M3 Taylor

A.THESIS

submitted to the School of Graduate Studies of
Michigan State College of Agriculture and Applied Science
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Economics

Year 1954

CHAPTER

TABLE OF CONTENTS

I . INTRODUC T ION O O O O O O O O O O O O O O O O

Problem of the Thesis
Premises o o e o e e e e e e e
Tentative Hypothesis . . . . .
Method of Procedure and Source of Data
Definition Of Terms 0 o e e e o e e 0
Statement of Organization into Chapters

11. THE MICHIGAN TAX SYSTEM . . . . . . . . . .

IflthdUCtion o e o e e e 0

Limitations Imposed by State Constitution
Relative Fiscal Importance of General
PrOperty and.A11 Other Taxes . . . . .
DiSposition of "Specific" Tax Receipts .
Summary 0 o e e e e e e». e e e e e e e 0

III. STATUTES GOVERNING THE TAXATION OF’INSURANCE
COMPANIES, BANKS, AND BUILDING AND LOAN

AS SOC IAT IONS O O O O O O O O O O O O O O

Introduction 0 e e e e e o o e 0

Governing StaLUtCS e e e e e e 0
General property tax . . . . .
Insurance company gross premium
Annual corporation privilege fe
Retail 58133 tax 0 o e e e e e
Intangibles tax 0 e o e e o 0
Domestic insurance company priv
Business receipts tax . . . o

1

0

0 Go 0100 e100

9

e an o Ntlo«00
e no ete¢+etee
o mete e Xe». e

0". 00 else 0

Iv. EVALUATION or THE TAX SYSTEM FOR FINANCIAL
INSTITWIONS O O O O O O O O O O O O O O O O

IflthdUCtion e e e o 0
Evaluation of Tax System
Tax bases . . . . . .
Tax burden o e e e o e
AdmIHISLTation e e o e

O O O O O
O O O O O
O O O O O
O O O O O
O O O O O
O O O O O
O O O O .
O O O O O
O O O O O

ii

OOOOOOOOO

PAGE

CHAPTER

V. TAXATION OF INSURANCE COMPANIES IN MICHIGAN

VI. THE TAXATION OF BANKS IN MICHIGAN e .

IflthdUCtIOfl o o o e o o e e e e 0
Types of Insurance Carriers . .
Origin of Present Taxes . . . . .
.Annual Corporation Franchise Tax .
Domestic Insurance Company Privilege
Foreign Insurance Company Premiums Tax
Retaliatory provisions . . .
"In lieu of" provision . .
Pattern for new companies‘
Insurance code . . . . . .
Deductions o o e e e e e e
Disposition of revenue . . . . .
Southeastern Underwriterserssoci
case 0 e e e e e e o e e e e 0
Exemption of domestic companies
Theory of Insurance Taxation . . .
Purpose of Taxing Insurance Compani
Evaluation of Insurance Tax Bases
Comparative Tax Yields . . . . . .
Summary and Conclusions . . . . e

OOOO
3’

ea OIDO eo but. 00 save @o oo o

t o

OOOI‘OOOOOO

eel. Ne ecpnleo else

Introduction . . . . . .

Federal Limitation of Bank Taxation

Historical DeveIOpment of Michigan Ba
Present Bank Taxes in Michigan . .
Theory of Bank Taxation . . . .
Comparison of States9 Practices
Summary and Conclusions . . . .

o oo o

e ee>e be e
x
p;

VII. TAXATION OF BUILDING AND LOAN.ASSOCIATIONS
MICHIGAN O O O O O O O O O O O O O O O O O

Introduction 0 e e e e e e

HiStOTICfll DeveIOpment o e e o e o e e 0
Present Michigan Practice . . . . . . .
Other States9 Practices . . . . . . .
Theory of Building and Loan Taxation . .
Summary and Conclusions . . . . . . . .

VIII. SUMMARY.AND PROPOSALS . . . . . . . . . .

B IBleR-APHY O O O O O O O O O O O O O O O O O O

APPENDIX

O O O O O O O O O O O O O O O O O O O O

e on». me e

e ee 0 Ge 0

134

137

137
140
144
147
147
152

156
I72
177

Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Figure I
Figure 11

Figure 111

LIST OF TABLES

General fund 0 o o o o o e e e o e e e o 0
State tax receipts in Michigan, 1913-1952.

Percentage distribution of non-general
prOperty tax revenues in Michigan . . . .

State tax receipts - selected taxes, 1939.

Tax system for financial institutions,

1953 O O O O O O O O O O O O O O O O O O O

Comparison of state tax revenues to net

income 0 e e e e o e e e e e o e e o o e 0

Methods used by states to tax national
banks” 1948 e e o e e e o e e e e e e o 0

Growth of building and loan associations
in Michigan 0 e o o e o o 0 eye 0 e e e 0

Tax burden of building and loan associ-
ations - Michigan, 1948 e e e o e e o e 0

Michigan general prcperty tax trends,
1900”].951oooeoeoeeoooooeo

LIST OF FIGURES

Michigan general property tax levies,
1900”].951 e O O O O O O O O O O O O O O O

Total Michigan "specific" and ad valorem
tax revenues, 1913“].952 . o o o o o o o 0

General property tax - assessed valuations
and average rates, 1900-1951 . . . . . . .

iv

PAGE

22

24
28

31

57

132

I38

146

178

21

36

CHAPTER I
INTRODUCTION

Problem of the Thesis

The Michigan tax system is an extremely complex madhine.
It has grown because of the need for revenue. The way it has
grown and the shape it has assumed have been determined to a
large measure by restrictions imposed by the state consti-
tution and federal regulation.

Primarily, the state legislature is bound by the con-
stitution to “provide by law for an annual tax sufficient
with other sources to pay the estimated expenses of the
state government, the interest of any state debt and such

deficiency as may occur in the resources."1

In the 33 years from 1920 through 1952 the system of
financing government in Michigan has undergone many signifi-
cant changes. Total annual disbursements of the state
government (excluding Federal aid) have risen from $35
million in 1920 to $593 million in 1952, indicating a net
increase of $558 million.2 This represents the cost of state

government to the Michigan taxpayer.3 The factors responsible

 

lMichigan constitution, 1908, Art. x, Sec. 2.

zAnnual'Re crts,.Auditor General, State of Michigan,
Lansing, ran lin DeKleine Co., 1920-1952.

3Cost of government includes state aid.

2
for this increase include the greater social responsibilities
of the state because of urbanization and industrialization,
the rise in the general price level, and the economic and
social changes brought about by the depression of the 1930's
and world War II.

To finance this higher level of expenditures, total
receipts of the state (excluding Federal aid) have increased
from $47 million in 1920 to $565 million in 1952, a net in-
crease of $518 million. From 1940 to 1947 operating revenue
each year exceeded expenditures and this resulted in an
accumulated surplus of $108 million in the funds of_the
state. However, in 1948 the trend was reversed and for the
next four years expenditures exceeded Operating revenues
and the balance of expenditures over receipts‘was provided
out of the reserves accumulated in previous years.

.Although accounting reports for fiscal year ending
1951 indicate a balance of $82 million for all funds further
investigation indicates (1) these funds were committed for
special purposes by legislative action, and (2) the General
Fund was overdrawn by approximately $41 million. By June
1952 the accumulated deficit had grown to $65 million. The
Auditor General's financial report for fiscal year ended
June 30, l952_has this to say:

"During the first three years of the pyramiding of

these General Fund deficits, a sizeable but

dwindling cash balance enabled the State to con-

tinue its Operations. In 1951 to 1952, however,
the depletion of cash balance has from time to

time caused delays in payment. Operations in the

coming year will be seriously impaired unless steps

are taken to return the budget to balance. THE RE-

ESTABLISHMENT OF SOUND FISCAL POLICIES IS NOT ONLY

EXPEDIENT, IT IS IMPERATIVE."

To understand the complex system Of'uichigaa state
finance it is necessary to have a clear concept of the
nature of the General Fund. There are seven state operating
funds of which the General Fund and the Highway Fund are byx

’;far the largest. ‘As indicated in the preceding paragraph
not all of the annual payments from the General Fund are
"apprOpriated" for expenditure (budget items) because there
are many restricted accounts within the General Fund. Since
the earmarked or restricted accounts within this fund enjoy
their own independent sources of income, actual budget cuts

xfflfall heavily upon the relatively small portion of the General

Fund which goes for Operation and capital outlay.

There are two types of deficits or surpluses to be dis-
tinguished: Operating and cumulative. Operating deficits
are those incurred when expenditures exceed revenues in any
one fiscal period. An operating deficit may or may'not
result in a cumulative deficit depending on whether the fund
has any surpluses carried over from the previous year, and
the size of such surpluses. This is illustrated in Table 1.

During the last twenty years General Fund balances have
gone through three stages. First, there was the depression

period during which heavy deficits were incurred.

The second period was one of prosperity beginning in

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5
fiscal year 1941. Revenues exceeded eXpenditures for several
years resulting in the replacement of the cumulative deficit
with a cumulative surplus. In 1943-45, $50 million of this
surplus was set aside in a Veteran's Benefit Trust Fund.

The post war period constitutes the third stage. This
was a period of state deficit financing in which the level of
expenditures continued to rise at a rapid rate while the
level of revenues began to level off. From 1949 to 1953 ex-
penditures exceeded revenues each year. .Accounting figures
indicate an actual deficit of $65 million in 1952.1

This trend in state finances precipitated the search for
new revenue sources and the agitation for tighter admini-
stration of existing sources. .At least six acts of legis-
lation were adopted in 1952 and 1953 raising tax rates and
creating new taxes. .Additional emergency steps were taken in
1953 to halt the deficit trend and provide Operating revenue.
First, the corporate franchise tax collection date was
changed from.August to May, thereby providing that the tax be
collected twice in fiscal year 1953. Second, eXpenditures
were reduced $6.5 million by the expedient of using Veteran's
Military Pay funds to apply on bond and interest payments.

The result of these combined actions was that the state

concluded the fiscal year 1953 with a General Fund Operating
surplus of $34 million. The accumulated General Fund deficit

1See Table 1.

was thus reduced from $65 million in 1952 to $31 million in
1953 (see Table I).

The advance collection of the corporation franchise tax
and the use of Veteran's Military Pay funds were of course
recognized to be non-recurring items and the legislature
enacted an important new "business activities tax" to main-
tain a high revenue level in 1954. This law expires in 1955.
The Michigan Department of Revenue concludes in its annual
report for fiscal year ended June 30, 1953 that ”.. it
appears that to date there has been no final or definite
solution to Michigan's "financial crisis", and future develOp-
ments will determine the General Fund balances in 1955 and
thereafter."1

This critical need for state revenue has brought
attention to bear upon the vast resources of financial in-
stitutions and the possible preferential tax treatment
tendered them in the past. It is therefore eXpedient that a
careful study be made of the manner and extent to which
financial businesses should be taxed. From both the tax-
payer's and administrator's point of view this reOpening of
the cOntroversial tax issues affords an Opportunity for
rectifying any inequalities in the existing system.

.A preliminary survey by the writer indicated that a

 

7

revision of the Michigan tax system affecting financial insti-

tutions was in order. It was found that:

1.

Z.

4.

In 1945 insurance company state and local taxes
were 5.5 percent of net income across the
country.~ Banks paid 11 percent. In contrast
trade associations paid 16.6 percent and manu-
facturing concerns paid 27.1 percent.

Due to tax exemptions and low rates Michigan
financial institutions appeared to carry a
lighter tax burden than the average of similar
institutions in other states.

Of the six major taxes relating to financial
institutions in Michigan none are uniformly
applicable to banks, building and loan
associations and insurance companies. Five
separate agencies are involved in administer-
ing these taxes.

Of the same six taxes only one is based on
percentage of net income and then only
partially so. Other bases include gross re-
ceipts, capital and surplus, and assessed
valuation of tangible prOperty.

Because of the pressure for new state revenues and the

suspicion that financial institutions are receiving favorable

tax treatment, it is important that study and recommendations

be made relating to the taxation of insurance companies,

banks and building and loan associations prior to the enact-

ment of further legislation.

Premises

.As a result of the findings enumerated above, the follow-

ing premises are set forth:

1.

Inequities of tax burden exist between finan-
cial institutions of various types within the
Michigan tax system.

2. The taxation of financial institutions bears
no relation to capacitybto-pay as measured by
net income.
3. The administration of taxes for financial
institutions is complex and inefficient.
Tentative Hypothesis
This study attempts to prove that a comprehensive re-
vision Of the present tax system for financial institutions
incorporating taxes measured by net income, equalized between
types of businesses and collected by one central agency can
result in greater equality in tax burden between the various

types of financial institutions, and simplified and more

efficient administration.

Method of Procedure and Source of Data

In order to test the three premises enumerated above and
to prove or disprove the hypothesis it was necessary to con-
duct a systematic inquiry into the subject of Michigan tax-
ation. Personal interviews were obtained with state and
local tax administrative officials including representatives
of the Corporation and Security Commission, the Banking
Commission, the Insurance Commission, the Department of Reve-
nue, and the city assessors' Offices of Detroit and Lansing.
In addition the writer attended Senate Finance Committee
hearings, and served as part time Special Research Assistant
for the Michigan Department of Revenue for two years under

Mk. Clarence Lock, Deputy Commissioner. Two years were spent

as graduate assistant in the Economics Department, Michigan
State College, under Dr. Denzel C. Cline, Professor of
Economics. Invaluable assistance was given by Dr. Cline and
Mr. Lock in suggesting sources of data and offering guidance
when most needed.

Published data in this specific field was found to be
limited and unintegrated. .After reviewing the general field
of state taxation, Michigan statutes and annual reports of
the various agencies were collected and analyzed. Personal
interviews, departmental files and court decisions provided

further facts and interpretations.

Definition of Terms
The term "financial institutions" has been variously

defined. In the banking act of 19371

it is narrowly defined
as any state chartered bank, trust company or small loan
company. The 1953 Business Receipts Tax lawz defines it as
a business in which ninety percent of its assets consist of
intangible personal prOperty, or at least ninety percent of
its gross income consists of interest and dividends.

Boehmler (1949) describes it as an agency or institution that

relates to, creates, or deals in money and promises to pay

 

1Act 341( Public Acts of the Michigan Legislature,

1937. Hereafter the Public Acts of Michigan will
be designated P.A.).

2Act 150, P.A. 1953.

10

fi)
{:43
all

money, in transactions affecting private business, individutrz
or the government.1 Insurance companies are included in
Boehmler's study since they engage in lending money to private
businesses and individuals. A similarly broad concept of the
term “financial institutions" shall be used in this study.
However, the term used hereafter shall refer only to the
general categories of banks, building and loan associations
and insurance companies.

The term "capacityato-pay" shall be construed as meaning
earnings or net income arising from the operation of a

business.

Statement of Organization into Chapters

In describing the taxation of financial institutions in
this study two approaches will be taken. The first is to
discuss taxes, their origin, fiscal importance and general
characteristics. This will be done in Chapters II, III and
IV. Chapter II will present a brief overall picture of the
growth and develOpment of the present Michigan tax system
noting constitutional limitations on legislating new tax
measures, the shift from "ad valorem" ta "specific" taxes,
and the restrictions placed on the use of funds derived from

these taxes. Chapter III will segregate taxes appiicable to

 

1Erwin W. Boehmler, editor, Financiai_lnstitutions,

Department of Finance, School of Commerce,
Northwestern University, September 1949, p. 1-2.

li
insurance companies, banks, and building and lean assusiations
from the main bcdy of Michigan taxes and will describe the
significant features of the taxes governing such in-titutions.
Chapter IV will be devoted to further evaluation of the
premises of this study, that inequalities and inefficiencies
exist in taxing the above iifléi financial institutions.

To more clearly under-tand the impact of these taxes and
the method in which they are administered on financial insti-
tutions the remaining chapters preceding the summary will
give consideration to the type of role played in the economy,
the business structure, and the tax problems of the various
classes of insurance companies, banks, and building and loan
associations in Michigan.

The final chapter will summarize the findings of this
study and prOpose revisions to the tax system for financial
institutions in Michigan which will result in more equitable

distribution of tax burden and better administration of

taxes.

CHAPTER II
THE MICHIGAN TAX SYSTEM

Introduction
Insurance company, bank, and building and loan associ-
ation taxes are a small but integral part of the total
Michigan tax structure. Before proceeding with a detailed
discussion of individual taxes applicable to such insti-
tutions the general aspects of the Michigan tax system will

be reviewed.

Limitations Imposed by State Constitution
The constitution of the State of Michigan prescribes
that the legislature enact tax measures to cover contingen-
cies of the state,as noted in Chapter I. It further pre-
scribes the method by which these taxes may be imposed.
Sections 3 and 4 of Article X of the Constitution of 1908
are as follows:

”Sec. 3. The legislature shall provide by law a
uniform rule of taxation, except on property pay-
ing specific taxes, and taxes shall be levied on
such prOperty as shall be prescribed by law:
Provided, That the legislature shall provide by
law a uniform rule of taxation for such prOperty
as shall be assessed by a state board of assessors,
and the rate of taxation on such prOperty shall be
the rate which the state board of assessors shall
a3certain and determine is the average rate levied
upon other preperty upon which ad valorem taxes
are assessed for state, county, township, school
and municipal purposes.

13
Sec. 4. The legislature may by law impose specific
taxes, which shall be uniform upon the classes upon
which they operate.”_
under the Michigan Constitution of 1908 then there are two
general methods of taxation which the state may employ, the
legal terminology for which are "ad valorem” and "specific".
.A great deal of litigation has resulted both before and
after the adeption of the present Michigan Constitution as to
the meaning of these two terms. .As early as 1899 the legali-
ty of a Public Act of Michigan was questioned which required
telephone and telegraph companies to pay, in lieu of all
other taxes, a specific tax levied upon the assessment of
telephone and telegraph lines at their true cash value at
average rates for preperty taxed elsewhere within the state.1
The Tecumseh Telephone Company contested payment of the tax
on the grounds that it was unconstitutional inasmuch as it
was not a specific tax but a tax on prOperty and as such, did
not conform to the uniform rule of taxation. Governor
Pingree2 also held that it was a prOperty tax and ordered
that the tax money under this Act which had been paid into
the Primary School Fund be transferred to the State General

Fund. The court ruled however, "It is not a specific tax and

it is not within the uniform rule of taxation prescribed for

1
Act 168, P.A. 188i.

ZPingree v. Auditor General, 120 Mich. 95 (1899).

other property, and the law providing for it must therefore
be held void." The court also stated that the constitution
authorized only two kinds of taxation, "one, Specific, imm
posed without regard to the value of the thing taxed; the
other, general, based upon assessed cash value and requiring
uniformity."

In the following year (1900) the Michigan Constitution
of 1850 was amended to permit imposing Specific taxes on
property. This was done by causing Section 3 to read in
part, "The legislature shall provide an uniform rule of taxu
ation, except on property paying specific taxes, ..." The
Michigan Constitution of 1908 included a similar provision,
as noted earlier.1

Since 1908 a controversy has been waged over whether a
tax according to value does not make it an ad valorem tax.
Due to the ambiguity of the taxing articles of the constim
tution tax measures have been susceptible to attack on this
point. Three instances relevant t3 the taxation of financial

institutions may be cited. In ggion Trust Compafiylvo DElTOlf

 

the court held that the mortgage tax was "specific" and not
"ad valorem", although the amount of tax was computed by

2 .
reference to the face value of the mortgage. In Union Steam

 

Pump Sales Company v. State it was held that the annual

 

93.883 p. 120
2170 Mich. 892 (1912).

15
corporation franchise fee is a "specific“ tax although
measured by the value of capital and surplus.1 In the case
of Shivel v. Kent County'TreasurerZ the constitutionality of
the intangibles tax was contested on the grounds that it im-
posed an ad valorem tax without the uniformity required by
Article X, Section 3 of the state constitution. The Michigan
Supreme Court found however that, "The tax is specific, being
levied directly ... upon ownership of designated personal
prOperty and cannot be held arbitrary, discriminatory or in-
equitable, and the rule of uniformity required by the consti-
tution in the case of an ad valorem tax, has no applicability
...“ The court did not give its reasons for holding the
intangibles tax to be specific.

Tax study groups have recognized the need for changes to
the tax article of the state constitution. The report of the
Tax Study Commission of 1939 states:

"The unsatisfactory and inequitable condition of

Michigan taxation is due in part to traditions

and ideas (or mere phraseology) now frozen into

the constitution in form to meet conditions that

were contemporary with their enactment. But

conditions change, as when this state passed from

an agricultural to an industrial economy. Tax

concepts change accordingly. Therefore it de-

volves upon the legislature to maintain that fine

adjustment between taxation and private economy

which the community demands. It follows that the
legislative powers should be broad rather than

 

1216 Mich. 261 (1921).

2295 Mich. 10 (1940).

l6
narrowly circumscribed. Tax statutes of Michigan

are written less often to conform to the consti-

tution than to avoid its restrictive provisions."

The Michigan Tax Study Advisory Committee recommended
in 1945 that voters be given the opportunity to eliminate the
tax uniformity clause from the constitution and substitute in
lieu of Sections 3 and 4 of Article X the following:1

"The legislature may provide by law for the levy

of taxes. It may confer by law upon units of

local government such authority to levy taxes as

the legislature may deem desirable. .All taxes

shall be uniform on the classes upon which they

are imposed."

As of 1954 these recommended changes have not been made
and new tax measures run the risk of being attacked on grounds
of being unconstitutional.

various attempts have been made to contrast "specific"
and "ad valorem" taxes and to distinguish Special types of
"specific" taxes to provide a basis for classifying the
various imposts levied in Michigan. Usually the result
obtained is an arbitrary classification. Dexterz states that:

"It is generally held that a Specific tax is the

same as an excise tax. The main difference be-

tween an excise and a prOperty tax is that the

latter is a tax on ownership as such and is conm
sidered a tax levied against prOperty; while an

 

lMiChigan Tax Study Advisory Committee, "Preliminary
Report, January 1945", p. 8.

2William D. Dexter, ”Some Problems in Revising the Tax
Article of the Michigan Constitution, Papers in Pub.
Adm. No. 2, Bureau of Government, University of
Michigan, Ann Arbor, Michigan 1948, p. 179.

 

l7

excise or specific tax is a tax imposed on certain
incidents of ownershipmusales, transfers, use,
disposal, or receipt of property or claims to
prOperty."

A recent study by Ford and Waxman defines Specific taxes as

including the following types:

"... (1) taxes on certain types of prOperty that
have been removed from the SCOpe of the general
property tax, such as automobiles and intangible
personal property; (2) taxes based on various
privileges, of which the following are represen-
tative: (a) sales tax--the privilege of en a ing
in the business of making sales at retail, €b§
inheritance tax--the privilege of transferring
property at time of death, and (c) annual privi-
lege fee on corporations-othe privilege of exer-
cising the corporate franchise; and (3) the
specific tax on the Operative prOperty of certain

public utilities."1

It will be assumed for the purpose of this study that
"ad valorem" taxes include only taxes on preperty not paying
“specific" taxes as interpreted by the courts-~thus, the
general prOperty tax. The term "specific" describes all
other existing state and local taxes.

Relative Fiscal Importance of General PrOperty
and All Other Taxes

The general property tax has for years been, and conm

tinues to be, the major single source of revenue for local

governments. Trends in the annual levy of the general

 

1Robert 8. Ford and Albert Waxman, "Financing Govern-
ment in Michigan", Michigan Governmental Studies,
No. 9, Bureau of Government, Ann Arbor, Michigan,
1942, p. 40.

18
property tax in Michigan since 1900 are shown in Figure I.
Three distinct trends are indicated; first, an increase in
taxes levied in the period 1900-1930; second, a decrease from
1930 to 1936; third, an increase from 1936 to 1950.

The most significant outcome of the period of declining
prOperty tax levies (1930-1936) was the adOption of a new
source of revenue by the state. Upon the realization that
the general property tax was no longer able to carry the
burden of both state and local government financing, the
state relinquished this source in 1934 in favor of a three
percent retail sales tax.1

The growth in importance of "Specific" taxes in the
total revenue picture in Michigan can be readily seen by re-
ferring to Figure 11. Of total taxes collected in the years
prior to 1922 "specific" taxes never accounted for more than
15 percent. By 1930 they had at no time exceeded 25 percent
of total tax collections. However, as new taxes were added
and existing ones were revised, "specific" taxes replaced the
general-prOperty tax as the primary source of revenue in
Michigan. In 1949 "specific" tax revenues exceeded "ad
valorem" revenues by $76 million or 26.5 percent. (See
Figure.ll).

As with "ad valorem" taxes, three well defined trends in

1
Act 167, P.A. 1933.

 

 

 

1
8
9:

 

 

 

 

 

1 cl 111M111-1fi 11 11 1 1 «11 A 1 11 .fi 11 11 “1 1 111.<1 1J 1_< 1411 w 4111 11.11 A A“ I.
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s 1 _ . 11 _ .
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.

 

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.-.._.. ...—.... .. -
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i 1 1
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1515

FIGI MICHIGAN GENERAL PROPERTY TAX LEVIES, 1900 - 1951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_ . .
_, . . W .... _ . - 7 -. -..
. . . . L. . . . __ . .
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. _ # ~ _ . w ., u w .. . . m . 1.. .
.- - .1 -1. .1 . ... .E-..-.. .q . . _ 1 1 .1. 1-T 1..- -.q- 1111.-.;1- .
. _ _ . . . .. MT. _ . . .. .. . ... ....
. 1T11-.1 1 W 1. 1 .1W1T1L . L AQTDUTT
H ~ .. . _ . W . NS . .. . M f. . U
...- ”-....-” 4.: - 41.-.- .--. ..;.- .... .--- ........... -n 1 -..-1.: ..--r1 1.
.111111w11L . .. - .11L «1.1 1 1 - - H . -1
. N . . H1 . l
-. . ... -. ..e. . .:..;. . . .
. g t 1 ~ 4 . . L11 . - a m w _ com—11
H . _ . _ _ . .. a . ... ..
. e-_ .-e; .MW; w.r .-w-Ia. Lwi1sz-AY:;% :_---
. E y _ w or . 2 . at no . n . A? . 4L . v . . ..
M _ . . 11' . I." . Lrl . 1r . 1" . _
w1 -.1--1111u11111117-11T111::1.:11. . - _ 1111. .1T111
.. _ _ . . — _ u . .
~ -.+,- . . - . . m . ., .mgquuoe.:um 20 ta:1 ;-.;- 1%.»
n _ . _ _ . . _ _ . . . .
- 1. W a _ 11.1.1-1... 1 1 -..: t. 11 r - . L.u1 . .

 

 

 

 

20
total "specific" tax receipts may be noted in the first half
of the century (Figure 11). First, there was a marked upward
trend in yields in the years prior to 1931. In 1913 revenues
received from this source were $6.4 million and in 1930 had
increased to $77.6 million (Table 2). Second, there was a
pronounced downward trend in the depression years of the
1930's. Receipts fell $24.2 million in the period 1931-33.
It may be observed that fluctuations in the annual yield of
"specific" taxes in these first two stages paralleled the
changes in prOperty tax levies. The productivity of both
methods of taxation is influenced by changes in economic con-
ditions such as levels of prices and incomes and employment.1
However, as will be noted for the following period, other
factors may affect the trend in "specific" tax receipts. The
third general trend (1933,1950) was induced by levying new
taxes. Adverse economic conditions had created a serious
fiscal problem for the state. Unable to wait for "better
times" to raise the necessary revenue for financing govern-
ment, the legislature introduced substantial new taxes. This
caused the upsurge in total "specific" tax receipts to pre-
cede the upward trend in general property tax levies by four

years.

For particular "specific" taxes the fluctuations in

 

Inheritance tax receipts excepted.

 

 

 

 

 

 

 

 

 

0 ——~—--1 -¢—-—¢—q~-—- m-IL—u -0 —— «7 ~I

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vuv

 

 

 

 

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H

FIG.II TOTAL MICHIGAN SPECIFIC 8 AD VALOREM TAX REVENUES, l9l2—l952

‘\

 

 

 

 

 

 

 

 

 

 

 

n.¢- 0.00 0.0¢ m.¢ N.0 m.m 000”
0.00 0.o¢ 0.00 0.¢ 0.0 ¢.m 000“
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H.~0 N.~0 0.0 m.~ 0.H~ puma
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$.50 0.0a ~.0 $.N 0.0a 0~mH
0.00 0.0“ ¢.0 ~.~ ~.m wmmg
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0.0N 0.m 0.0 a.“ 5.0 Nmma
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ughmomam oauaowam mmanqm was 0:0 umoqu>flum maafisuum hunduuz
”mack guano Icmucn mafimm :oHumpoapoo hamaeou Ouagsm
~H< wocmusmca
Aooo.oooa.

AX<H >Hmmm0mm A<mmzmc deh mmmhov

*Nnmfianflmfl

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z¢deUHE 2H mHmHmomm X<H mydfiw

23

.00»& unanocmum conumuudm0uo aamoxu .0000080

moon 0:0 munceofiq .u::o>um mo ucwauumamo cwmanofifi 0:0 mo wagon»;
”macaw as» Scum 00H~aaoo mmxmu mm~n~0cmpca 0:0 mvflmw .flmpocoo
poaficsd.cm0~:002 0:» 00 wupoamp «macaw 0:0 Bonn uwfluaaoo mmxwu
o0m~u>qua couumpoapoo 0cm hcaaaoo uocmpamcm :0fimuom .hpuflmus vuannm

.3.

 

 

 

 

 

 

 

 

 

~.¢0¢ 0.05” 0.N~ 0.000 5.00 H.NH 0.0a NO0H
0.000 0.00" 0.0a 0.00M nugfl 0.0g ~.¢H ~00H
0.050 0.50” 0.- N.¢ON 5.0" 0.0 0.00 000“
~.~00 o.-~ 5.0g N.OON 5.0 0.0 0.00 0000
0.000 0.0““ 5.0 0.00” 0.0 ~.0 5.0“ 000”
0.00m 0.00 0.0 0.00“ 0.5 0.0 0.0a 500d
“.0NN 0.05 0.0 0.0gfi N.5 0.0 0.0 000"
5.00“ 0.00 5.0 0.00 0.0 N.0 5.0 000”
0.05H 0.00 0.0 0.00 5.0 0.0 0.0 000"
0.050 0.00 “.0 0.00 0.0 0.0 0.0 000”
0.05“ 0.00 0.0 0.00 0.0 0.0 0.0 N¢0H
0.00” 0.00 0.0 0.05 0.0 N.¢ ~.o~ H¢0H
0.00H 0.00 0.00 0.0 0.0 0.0 000“
0.0m“ 5.00 0.~0 0.0 5.0 5.0 000d
0.00“ 0.00 0.N0 0.0 0.0 0.0 000”
0.5N~ 0.50 0.00 ~.0 0.0 0.5 500a
00000000 oauuooam wo~0~0 om: 0cm ~00~0>~p0 m8508000 hguduus
“much guano IcwuaH mofimw scandaoauoo hangaoo 000030
H~< occupanca

 

QMDZHPZOU N MAm<H

24
revenue produced may be caused by changes in the base or rate
of the tax, or both. The "specific" taxes considered in this
study without exception, but depending upon time of enactment,
indicate a general rise in revenue from 1913 to 1930 or 1931,
a decrease from this date until 1934 or 1935, followed by a
secondrise continuing until 1950 (Table 2).

In this same 37-year period, however, the relative im-
‘portance of individual taxes varied (See Table 3). Only the
sales tax accounted for a higher percent of total "specific"

tax receipts in 1949 than in previous years.

TABLE 3

PERCENTAGE DISTRIBUTION OF NON-GENERAL
EBQBERIXWE5§;B§VENUES IN MICHIGAN*

 

 

 

 

 

 

 

 

1919 1929 1939 1949

Public Utility 52.2 18.6 6.8 3.1
Insurance Premium 9.8 5.0 2.8 2.6
Corporation Privilege -- 9.9 4.2 2.7
Sales and Use -- -- 40.0 55.3
Intangibles -- -- -- 2.9
All Other 38.0 66.5 46.2 33.4
Total 100.0 100.0 100.0 100.0

fiComputed from Table 2.

 

Since the adeption of the sales tax in 1933, this tax has

been the largest single producer of Specific tax revenue in

25
Michigan. By 1949, it was producing more than all other
"specific" taxes combined and was second in productivity only

to the general prOperty tax in the total tax structure.

Disposition of "Specific" Tax Receipts

One additional factor contributing to the inflexibility
and complexity of the Michigan tax structure is the consti-
tutional limitation on the distribution of “specific" tax
revenues. It was noted in Chapter I that these restrictions
have created need for additional revenues for general fund
purposes.

The revenue resulting from particular taxes is paid into
the Primary School Fund of the state. The Censtitution of
1850 required that,

"All specific state taxes, except those received

from the mining companies of the upper peninsula,

shall be applied in paying the interest upon the

primary school, university and other educational

funds and the interest and principal of the state

debt in the order herein recited, until the ex-

tinguishment of the state debt, other than the

amounts due to educational funds, when such

Specific taxes shall be added to, and constitute

a part of the primary school interest fund."

The Supreme Court declared the state debt paid in 1881.2
From that time until 1900, all "specific" taxes necessarily

became part of the Primary School Interest Fund. In 1900 the

 

1Michigan Constitution of 1850, Art. XIV, Sec. 1.

2Auditor General v. State Treasurer, 45 Mich. 161,
7 N°W97160

26
constitution was amended to provide that,
"All taxes hereafter levied on the property of
such classes of corporations as are paying
Specific taxes under the laws in force on

November sixth, A.D. 1900 shall be applied as
provided .... in section one of this article."

1

These revenues continued to be restricted by a provision
of the Constitutirn of I908 requiring that, "all subjects of
taxation now contributing to the Primary School Interest Fund
under present laws shall continue to contribute to that
fund ...."Z

In accordance with the above provisions, revenue from
the foreign insurance company gross premiums tax is paid

into the Primary School Interest Fund of the state. Taxes

resulting from the retaliatory paovisions of the act are

1')

called fees and, with other insuranse ii enses and fees, are
paid into the State General Fund.

Revenues collected under the Annuai Corporation Priviu
lege Fee Act are credited to the State General Fund. The law
was enacted in 1921 and there has been no subsequent re-
striction of revenues.

The retail sales and use taxes also have been until a
recent date credited to the State Generai Fund as general

purpose revenue. However, an amendment to the Michigan

Constitution of 1908 adopted in 1946 diverted over 78 percent

 

lMichigan Constitution of 1850, Art. XIV, Sec. 10.

2Michigan Constitution of 1908, Art. X, Sec. 1.

2?
of the revenue from the sales tax to local governments and
school districts.1 The use tax continues to provide general
purpose revenue.

The revenue from the intangible personal property tax
is collected by the Department of Revenue and distributed to
the cities, townships and villages in proportion to their
population.2 This allocation is made to recompense local
governments for curtailment of theis tax base due to the
transfer of intangible personal prOperty from the locally—
administered general property tax to the stateocollected inn
tangibles tax in 1939. In 1951 the legislature placed a
limit on the amount to be distributed. The limit specified
was $11 million a year for two years, decreasing to $9.5
million a year beginning in fiscal 1953.3

The taxes in Table 4 accounted for 94 percent of Specific
tax receipts in 1949. This table illustrates the extent to
which receipts from selected "specific" taxes have been rem
stricted. Approximately 25 percent of these "specific" tax
funds were paid into the ftate General Fund to be used for
general purposes. The remainder were restricted to special

purposes.

 

1Ibid.,.Art. X, Sec. 23.

2An amendment adOpted in 1949 permits the state to
deduct three percent of gross collections for the
cost of collecting the tax.

3Act 76, P.A. 1951.

28

TABLE 4

STATE TAX RECEIPTS - SELECTED TAXEs*
($000,000 omitted)

 

 

 

==-_=; 1949
7 Tax _ General Purpose Restricted
Public ut111ty (other than i 11.3
Sleeping Car Companies)
Insurance Premium 9.3
Corporation Privilege $ 9.7
Retail Sales 47.6 147.0
Use 5.3
Intangibles 10.7
.Automobile Weight 34.2
Gasoline 42.9
Cigarette 22.6 _
Total $85.2 4 $255.4

 

 

 

"Computed from Table 1 and State of Michigan Budget,
l949~50. Restricted amount for retail sales tax
includes 33.3 percent of 1949 receipts plus 44.77
percent of 1948 receipts.

29
SUMMARY

The state constitution prescribes two general methods of
taxation. namely, "specific" and "ad valorem". The "ad
valorem" method requires that preperty be taxed at a uniform
rate per dollar of assessed valuation. The "specific" method
allows more latitude to taxing bodies and requires only that
taxes be uniform upon the classes upon which they operate.
All taxes other than the general prOperty tax fall within
this legal category.

"Specific" taxes have played an increasingly important
role in the total tax structure. This is largely due to the
introduction of the sales tax in 1933 at a time when general
prOperty tax revenues were declining. ther "specific" taxes
made their introduction as, (1) the limitations of the
general prOperty tax were recognized, (2) the revenue needs
of the government became greater and. (3) sales tax revenues
were diverted to local governments.

General preperty tax receipts are retained by local
governments and approximately 75 percent of "specific" tax
receipts are restricted for special purposes or returned to
local governments. Only the remainder of the "specific" tax
receipts is credited to the State General Fund. This factor
has been responsible for the search for new revenues and has
focused attention on financial institutions as a possible

source.

CHAPTER III

STATUTES GOVERNING THE TAXATION OF INSURANCE COMPANIES,
BANKS, AND BUILDING AND LOAN.ASSOCIATIONS
Introduction

The preceding chapter has described the general charac-
teristics of the Michigan tax and revenue system and the
factors influencing the enactment of new tax measures. With
this as a background the purpose of the present chapter is
to segregate all taxes paid by insurance companies, banks,
and building and loan associations from the main body of
state taxes. This is done to permit a more detailed

analysis of governing statutes and the extent to which they

apply.

Governing Statutes

As will be noted in Table 5, there are six Michigan
taxes applicable to financial institutions. The table
indicates the categories of business to which these taxes
apply and the statutes governing them. .A seventh tax has
been omitted because of its relatively light incidence on
financial institutions. This is the retail sales tax. The
paragraphs which follow will trace the historical develOpment
of each of these taxes and outline the significant features

of the present statutes.

TABLE 5

TAX SYSTEM FOR FINANCIAL

1953

INSTITUTIONS

 

 

General Property Tax

 

 

 

 

 

 

 

 

 

 

vision, reduced
baseo
ACt 2359 POAO

Act 180, P.A. 1952

Tangible Annual Corporation
Real PrOperty Personal PrOperty ’ Privilege Fee
Banks +
I
National I Exempt Exempt
| National Banking National Banking
I Act of 1863 as Act of 1863 as
I amended Sec. 5219 amended Sec. 5219
I
State ' Exempt Exempt
I Act 206, P.A. Act 182, P.A. 1952
I 1893, Sec. 9 as
I amended by Act
I 261, P.A. 1949
I
J
Building I
an Loan |
.Associations |
I
Federal Applicable Applicable Permitted
C.L. 1929 C.L. I929 Title 12,
Sec. 3389 Sec. 3389 Fed. Code.Ann.
I Para 1464(h)
State —1» Applicable Applicable
' C.L. 1929 Act 193, P.A. 1952
1 Sec. 3399
Insurance ' f
Companies I I
|
Foreign I | Exempt
' C.L. 1929
' : Sec. 10240
! .
T l
Domestic I Special pro- Exempt
l
l
I
Y

 

 

1903

 

 

 

32
TABLE 5 CONTINUED

 

*—

 

 

 

 

 

___T____________________T______ #fi—r
Foreign Insurance Domestic Insurance
Company Company

Intangibles Tax Gross Premiums Tax Privilege Fee

I

: Not applicable Not applicable

I

I

I
Tax paid in Not applicable Not applicable
behalf of
shareholders

and depositors.
Act 301, Pon

 

 

 

 

 

 

1939 as
amended.
l
|
l
= Not applicable Not applicable
I
l
: Not applicable Not applicable
I
. l
Exempt Applicable Not applicable
.Act 301, Pon (except fraternal)
~1939, as ,Act 154, Pon 1929
amended Sec. 3
| Not applicable Applicable
I Act 180,
l PaAe 1952
I

 

33
General property tax. The first comprehensive general
property tax law in Michigan was enacted in 18171 and many
steps were taken toward the present form of property tax by

1927.2

The prOperty tax did not become a source of state or
territorial revenue until 18353 when it was used to defray
the expenses of holding a convention to form a constitution
and state government. It then continued to be the chief
revenue producer for both state and local government until
1933.

The law provides that the general property tax be levied
against the assessed valuation of all real and personal
prOperty except that specifically exempted by law. Property
is to be assessed at its cash value as equalized and the rate
determined by dividing the amount of the tax levy by the
assessed valuation.

.The total annual levy of the general property tax
sharply declined from 1930 to 1936. .This decline may be
attributed to the economic depression of the 1930’s. Incomes
and prOperty values dropped precipitously. For two years tax

rates continued to increase but many prOperty owners were

either unable or refused to pay their taxes out of their

 

l
Territorial Laws, Vbl. II, p. 109.

2F. M. Thrun, Handbook of Michigan Tax Laws, Circular
Bulletin No. 153, Agricultural Experiment Station,

East Lansing, Michigan, 1934, p. 14.
3Territorial Laws, Vol. III, p. 1410.

34
reduced incomes. The wideSpread Opposition that developed
was instrumental in causing the peOple to adapt a consti-
tutional amendment in 1932 limiting the rate of general
property taxation to 15 mills per dollar, or $15 per $1,000
of assessed valuation.1

.As interpreted by the Michigan Supreme Court in 1935,
this limitation did not apply to incorporated cities and
villages unless they voted to place themselves under it.2
Only eleven cities voted to do so. It is estimated that from
one-half to two-thirds of the total general prOperty tax
levied in Michigan was levied by cities and villages not
subject to the lS-mill limitation.3 The l5-mill limitation
became effective in 1933. {After I933, reductions in tax
levies were made in certain municipalities in the absence of
the limitation.4

The average property tax rate for all local assessment
Jurisdictions in the state continued to be higher than 15
mills after 1932 (see Figure 111). There were two important

reasons for this. First, as mentioned above, a large share

 

1Michigan Constitution, Art. X, Sec. 21.

2City of Pontiac v. Simonton, 271 Mich. 647 (1935).

3Denzel C. Cline, Michigan Tax Trends as Related to

gfiriculture, SpecialBulletin No. 30f, Michigan
ate College Agricultural Experiment Station,

East Lansing, 1940, p. 11.

4Loc. cit.

35
of taxable prOperty in the state was not subject to the 15-
mill limitation amendment. Second, such property as was
included under this amendment could exceed the limitation for
servicing debt contracted prior to December 8, 1932, the
effective date of the amendment. Many local governments were
deeply in debt and this accounted for much millage outside

the limitation.1

Although it has not been effective in re-
ducing the average rate at any time below 25 mills, the
lS-mill limitation has resulted in an average tax rate lower
than might otherwise have prevailed. This is because large
areas of the tax base considered in computing the average do
have this limitation.

In Spite of an increase in assessed valuations, cities
which had voted themselves under the 15mmill limitation found
they had insufficient finances to carry on the necessary
functions of local governments. Nor were they able to
acquire the two-thirds majority vote of the electorate to levy
extra taxes above the limitation. Several factors Operated
to alleviate this situation. In 1946 the sales tax diversion

amendment to the constitution was adopted. The effect of

,this was to require the return of nearly four-fifths of sales

 

1The constitution also provided that extra millage
could be voted but this had little effect because
the provision allowed too short a time period (5
years) and needed a twouthirds vote of the
electorate to confirm it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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FIG.III GENERAL PROPERTY TAX,-ASSESSED VALUATION 81 AVERAGE RATES. I900-I95I

37

tax revenues to local governments.1
In 1948 the Michigan Constitution of 1908 was again

amended to permit those cities which had voted themselves
under the lS-mill limitation to raise the limit by five per-
cent of the assessed valuation for a period not to exceed
twenty years. This could be done by a majority of the
electors in any assessing district.2 Finally, in 1948, the
legislature passed a law that there were no more l5-mill

3 This removed such cities from the financial strin-

cities.
gency which they had imposed on themselves fifteen years
earlier.

The taxation of real property under the general prOperty
tax law applies to all financial institutions considered in
this study. The coverage of the tangible personal prOperty tax
however is much less broad. Under the National Banking Act
of 1863. national banks are exempt. Until 1949 no effort
was made to assess the tangible personal property of state
banks. To avoid discrimination against them the personal
property tax was not invoked. Howeverg in 1949 the state tax

law was amended to specifically exempt the tangible personal

prOperty of state banks from taxation.

 

1Michigan Constitution, Art. X9 Sec. 23.
21b1d., Art. x, Sec. 21, ratified November 2, 1948.
3Act 44, P.A. 194a.

38

.All savings and loan associations must pay the personal
preperty tax.

Insurance companies are taxed under a Special provision
in the law which permits them to be assessed on a much re-
duced base.

Insurance companyggross premiums tax. ‘A premiums tax
payable by insurance companies chartered in other states (but
doing business in Michigan) was introduced in 1861.1 The
occasion for the premiums tax was the inadequacy of the
general property tax in levying upon insurance companies.
Out-of-state companies had their home office buildings in
other states and they paid no real estate taxes on them in
Michigan. In addition, the bulk of their assets were held in
the form of intangible property such as cash and investments.
To tax such prOperty at general prOperty tax rates would have
been prohibitive. As a result the state adopted a form of a
gross receipts taxo Foreign companies were directed to pay
the state treasury a specific tax of one percent on the gross
amount of all premiums received on Michigan policies written
during the year. This rate was increased to three percent
in 1865.2 Ten years later the tax rate on life companies was

reduced from three to two percent which was the average rate

 

1
Act 54, P.A. 1861.

ZAct 153, PoA. 1865.

39
for other states.1 However, the rate for fire companies re-
mained three percent.

In 1875, twelve years after the insurance premiums tax
was enacted, the legislature enacted a second law stipulating
that this tax "shall be in lieu of all other taxes in this
state."2 This, of course, nullified the effect of the
general property tax entirely until 1917 when real estate
owned and securities deposited in Michigan were again tax—

31313.3

The gross premiums tax is applicable only to foreign
insurance companies, except fraternal organizations. Domestic
insurance companies are not taxed under this law.

Annual corporationAprivilege fee. The annual corporation
privilege fee was adepted in 1921. Although amended in 1923,
1951 and 1952 this fee has provided the basis for taxing
corporations until the present time.

At one time the practice in Michigan as in other states
was to issue charters by special grant of legislature and
then levy a charge against such corporations in an amount
sufficient to cover costs involved in the procedure. These

charges were not for production of revenue but were primarily

 

lAct 223, P.A. 1875.

zAct 223, Sec. 16, P.A. 1875.
3Act 256, Pt. 2, Ch. 1, Sec. 19, P.A. 1917.

40
in the nature of fixed fees to cover expenses of providing
services to corporations. Corporations at this time usually
operated locally in the state in which they were chartered.

As the corporate form of business organization grew in
importance and it no longer took a special act of legislature
to obtain a charter, corporations were recognized as a con-
venient and lucrative source of revenue for the state. An
organization tax was substituted for the fixed fee in 1891.1
It provided that a fee of one-half mill be paid upon the
capital stock of every corporation organized thereafter and
upon the additional amount of stock of any corporation subse-
quently expanded.

This act was superseded in 1921 by an act intended to
revise, consolidate, and simplify the laws relating to
corporations.2 This latter act added the annual privilege
fee in addition to the organization franchise fee.

The annual privilege fee provided that every corporation
organized or doing business under the laws of Michigan, ex-
cept public utilities and foreign insurance companies, pay to
the Secretary of State an annual fee of two and one-half

mills on each dollar of its paid-up capital and surplus for

the privilege of exercising its corporate franchise.

 

1Act 182, P.A. 1891.

2Act 85, P.A. 1921.

41
Building and loan associations were taxed at a special low
rate. The portion of taxable capital and surplus was com-
puted by using the ratio of the Corporation's prOperty owned
or used in Michigan to the entire property of the corpo-

1

ration. In no case was the fee to be less than $10 or more

than $50,000.2
The annual corporation privilege fee remained practical-
ly unchanged from 1921 to 1951. It was in its desperate
effort to increase state revenues in 1951 that the legis-
lature finally reviewed the corporation tax law. Legislation
was enacted to increase the rate from two and one-half to
three and one-half mills on each dollar of paid—up capital
and surplus and the $50,000 tax ceiling was removed.3
The corporation annual franchise tax was again reviewed
in 1952. The result was a revision of the law touching on

the following points:4

1. The rate of the annual fee was increased from
three and one-half mills to four mills on each
dollar of paid-up capital and surplus.

 

{Act 85, Sec. 4 and 5, P.A. 1921.

2

Sec. 10140, Compiled Laws of Michigan (hereafter
referred to as C.L.),.1929; Am..Act 13, (Extra
Session) 1933. °

3Act 277, P.A. 1951.

éAct 183, P.A. 1952, Sec. 3, 4 and 5.

42

2. The term "corporation" was defined as includ-

ing "partnership associations, limited, co:
Operative associations, all joint associations
having any of the powers of corporations,
and .. trust ..., whether domestic or foreign".
3. The allocation formula for measuring the
annual franchise fee for companies engaged in
business in Michigan as well as other states
was changed. Instead of using prOperty owner»
ship as the only factor, other factors were
included to more closely reflect the volume of
business done.
Banks and insurance companies are not taxable under the corpo-
ration annual franchise tax law. State chartered building
and loan associations are taxed at a special low rate.

Retail sales tax. In general recognition of the fact
that prOperty could not continue to support the previous high
level of taxes, and that local government would be called
upon to maintain or exceed the then prevailing levels of
health, welfare and education eXpenditures, the state was
forced to relinquish its claim on the general prOperty tax.

To support the General Fund in the absence of this
source, the state adopted a three percent retail sales tax.
This was a "specific" tax to be paid to the state for the
privilege of engaging in certain business activities. The

act provided;

"There is ... levied upon and ... collected from
all persons engaged in the business of making
sales at retail, ... an annual tax for the
privilege of engaging in such business equal to
3 per cent of the gross proceeds there of ...."

 

1Act 167, P.A. 1933, Sec. 2.

43
The intent was clearly to make this a "specific" tax. It was
not on property itself, as the general prOperty ad valorem
tax:wbut on the privilege of selling prOperty.

The sales tax proved to be a bountiful source of revenue
for the State General Fund. In the first year it produced
more than the state general prOperty tax had ever produced in
any one year, and receipts continued to mount until in 1946
they were four times the highest annual intake from the state
general prOperty tax. It was inevitable that less fortunate-
ly situated units of government should try to divert a part
of this stream of money into their own treasuries.

.As a result of the prodigious returns from the retail
sales tax, the State General Fund experienced a cumulative
surplus of $7 million in 1942.1 .As this surplus grew, 15-
mill cities turned their attention to the sales tax as a
possible solution to their dilemma.

The sales tax diversion amendment to the constitution
was adOpted in 1946.2 The amendment has two distinct parts.
The first part required the direct sharing of the sales tax

with local governments and specified the formulae for dis-

tribution:

 

v—f

1State of Michigan Budget, for fiscal year ending
June 30, 1944, Lansing, Franklin DeKleine Co.,
1943.

2Art. x, Sec. 23.

44

"There shall be returned to local governmental

units and school districts by the method herein-

after set forth, one cent of a state sales tax

levy on each dollar of sales of tangible personal

property on the present statutory base. (not

rate).

Since the sales tax rate is three percent, the amount which
must be distributed directly as a shared tax has been equal
to one-third of the total revenue from the tax.

The second part of the sales tax diversion amendment
states that the legislature shall apprOpriate as additional
aid to school districts an annual grant equal to a certain
fixed part of the entire sales tax collected in the pr3ceding
year:

"The legislature shall hereafter make annual

grants to school districts out of general funds,

over and above all constitutional allocations

heretofore and herein provided, in at least

amounts which bear the same ratio to total state

sales tax revenues of the preceding year which

the legislative grants in the fiscal year 1945-

1946 bore to said revenues of the preceding

year. "2

In effect this provision of the amendment meant that the
school districts would be assured of as large a proportion of
the sales tax revenues as they had received in 1945. The
state supreme court determined this proportion to be 44.77

percent of total sales tax collections in the preceding

 

l

h

oc. cit.

2

t—d

oc. ci

45
fiscal year.1 This in addition to the 33.33 percent included
under the shared tax provision would divert 78.1 percent of
the entire revenue from the three percent retail sales tax to
local governments, leaving approximately 22 percent to the
state for general purposes. This divergence has made it
necessary for the state to seek out new sources of revenue to
support the General Fund.

The sales tax underwent extensive revisions in 1949 in
an attempt to curb tax evasion and eliminate obvious 100p-
holes.2 The result was a clarification of the acts which
permitted better administration by the Department of Revenue
and closer compliance by the taXpayers.

Intangibles tax. The adoption of the Intangibles Tax
.Act is recognized as the greatest step forward in modernizing
the Michigan tax system compatible with legal and consti-
tutional restrictions.

Until 1939, most classes of intangible prOperty, such as
stocks, bonds, and bank deposits, were subject to the general
prOperty tax law. The law provided that they be valued by
the local assessing officer and be taxed at the same rates as
were applied to real estate. The result was unsatisfactory

for two reasons. First, the rate was confiscatory. The

 

1Detroit Board of Education v. Elliott (1947).

2Act 272, P.A. 1949.

46
average prOperty tax rate in Michigan since 1920 has ranged
from $25 to $32.80 per $1,000 of assessed valuation (see
Figure 111). This was equivalent to 2.5 to 3.28 percent.
Intangible property’with average earnings only slightly in
excess of this rate could not carry the burden. Second,
certain classes of intangible prOperty could easily evade
taxation by local assessors, while such prOperty of banks and
insurance companies could be listed in full resulting in a
higher effective tax rate for these institutions. Conse-
quently, most local assessing officers ignored the law in
this regard and did not carry bank and insurance company
preperty on the tax rolls.

The purpose of the Intangibles Tax Act adOpted in 1939
was to subject intangible prOperty to a special low tax rate,
exempt it from other types of local taxation, and provide for
state administration to reduce the possibility of such
property escaping taxation.1

The act also expressly repealed two other taxes; namely,
the "mortgage tax" which imposed a specific tax on mortgages
and land contracts in lieu of all other general property

2

taxes in Michigan, and the "secured debts tax" which imposed

 

lACt 301, Per 19390

ZAct 91, PoA. 1911 as amended, Secs. 3640-3649 incl.
of the Compiled Laws of 1929.

47
a specific tax on certain secured evidences of indebtedness
and non-Michigan government bonds, also in lieu of all other
general prOperty taxes in Michigan.1 These two taxes served
as precedents for the intangibles tax in the matter of
classifying prOperty for tax purposes and removing special
classes of prOperty from the realm of the general preperty
tax.

The Intangibles Tax Act of 1939 as amended in 19452 pro-
vided for the imposition and the collection of a specific tax
upon the ownership of intangible personal preperty’which had
a business situs in.Michigan. For persons subject to the
intangibles tax there were two bases for computing the tax.
For non-income producing preperty, the rate was one-tenth of

one percent of face value.3

On income producing property,
the tax was three percent of the income but not less than
one-tenth of one percent of face value. Certain owners were
exempt. Among them were benevolent, charitable and religious
organizations, public utilities, insurance companies, banks,

and savings and-loan associations. The latter two paid the

intangibles tax on shares and deposits in their institutions.

 

1Act 142, P.A. 1913, 8808. 3654-3658 incl. of the

Compiled Laws of 1929.
2Act 165, P.A. 1945.
3On stock which does not have a par value the rate was

applied to "contributed value"--the average per share
contribution to capital, surplus and other funds.

48
They in turn were permitted to charge the tax to their deposi-
tors and shareholders or assume the tax. .A special low rate
of one twenty-fifth of one percent applied to bank deposits
and shares or deposits in building and loan associations.

At the time that the corporate franchise tax rate was
increased in 1952, measures were also taken to increase the
productivity of the intangibles tax. The law was amended to:

1. Increase the tax rate on income producing in-

tangible personal prOperty to three and one-
half percent.

2. Add a tax of four mills per dollar of book

value on shares of stock of state and national
banks and trust companies located inMichigan.2

In 1953 a five and one-half mill capital account tax re»
placed both the four mill bank tax and the basic three and
one-half percent tax on share dividends.3

The introduction of the Intangibles Tax Act into the
Michigan tax structure gives recognition to the fact that
representative prOperty does not in itself create any new tax
paying capacity but that its income is dependent upon the
productiveness of the tangible property which it represents.
To levy a prOperty tax, as distinct from a business tax, on

intangible property at general preperty tax rates would be

difficult to Justify on grounds of equity.

 

LAct 318, P.A. 1952.

2Act 320, P.A. 1952. This tax was in lieu of the
annual corporate franchise tax on state banks.

3Act 9, P.A. 1953.

49

Domestic insurance company privilege fee. Until 1952
domestic insurance corporations paid the annual corporation
franchise tax at the rate of three and onemhalf mills on each
dollar of their paiduup capital and surplus. This rate was
increased in 1952 to four mills. Mutual domestic insurance
companies were exempt under these laws.

In 1952 all domestic insurance companies whether stock
or mutual, profit or non-profit, came under the provisions of
a new domestic insurance company privilege fee.1 The law
states that any such company shall:

"for the privilege of exercising its franchise and

of transacting its business within this state pay

annually to the treasurer ... a fee of 5 mills upon

each dollar of its paid-up capital, if any, surplus

and unassigned funds, .... but in no case shall such

privilege fee be less than $10.00 or more than

$50,000.00."2
The proportion of taxable capital and surplus for companies
doing outmof-state business is based on the ratio of premiums
written in Michigan to total premiums written. Provision is
also made to relieve domestic corporations taxable under the

insurance privilege fee from paying the annual corporation

franchise fee.

 

lACt 180, Pvo 1952.

zIbid., Sec. 1(a). At the time of the enactment of this
law only the Standard.Accident Assurance Company of
Detroit was large enough to benefit by the upward
limitation of $50,000. The law permits this company to
pay the fee at a much reduced effective rate.

50

Business receipts tax. A recent addition to the cate-
gory of "specific" taxes is a business receipts tax which
became law on June 2, 1953.1 This introduced a new type of
tax in Michigan. Furthermore, it has no counterpart in the
existing tax structures of other states. It has adapted many
features of a gross income tax and is similar in other ways
to net income and sales taxes.

The tax is imposed on persons engaged in business, in-
cluding service occupations but not on wage earners or
salaried employees. The tax is not on the ultimate trans-
action or on the final sale to the consumer, as a sales tax,
but is imposed at each step along the line. The manufacturer,
the wholesaler or jobber, and the retailer are each required
to pay the tax.

.A tax of 4 mills per dollar is imposed on adjusted re-
ceipts (or income) over $10,000. Utilities are subject to
a special low rate of 1 mill per dollar. Certain items are
deductable from gross receipts in computing adjusted receipts,
such as taxes, materials, rents and interest. If the total
of the statutory deductions does not exceed fifty percent of
gross receipts, the adjusted receipts on which the tax is
imposed will be reduced to fifty percent of the gross re-
ceipts.

fir

1
AC1. 150, Pvo 1953.

51

Banks, building and loan associations, and insurance
companies are specifically exempt from payment of the
business receipts tax.

This tax which became effective on July 1, 1953 will
expire on March 15, 1955. Adapted as an emergency measure
to provide Operating revenues for the state it nevertheless
has introduced a new method of business taxation which cannot

be ignored in formulating future state fiscal policies.

CHAPTER IV

EVALUATION OF THE TAX SYSTEM
FOR FINANCIAL INSTITUTIONS
Introduction

It has been noted in the previous chapter that a multi-
plicity of taxes and exemptions are characteristic of the
present system of taxing financial institutions in Michigan.
It is reasonable to expect that this will result in inequi-
table tax burdens and inefficiency. (Before determining
whether or not this is true, it is necessary to clarify the
meaning of the concepts "abilityato-pay" and "tax burden"
as employed in this study. I

Welch (1934) states:

"The art of taxation consists principally of two

things: first, the securing of an adequate in-

come to meet the eXpenses incurred by the governm

ment, and second, the distribution of the burden

of tax payments in an equitable and economical

manner. 1
In attempting to accomplish the above objectives, three
theories of tax apportionment have been developed. The

"benefit" theory is based on the belief that taXpayers should

contribute in preportion to benefits they receive. The

 

1Ronald B. Welch, State and Local Taxation of Banks in
the United States, Special Report of the State Tax
Commission, State of New York, Albany, J. B. Lyon Co.,
1934, No. 7, p. 63.

53

"cost" theory is closely related to the benefit theory.
Advocates believe that a firm should pay taxes equal to the
cost of the government activities which it has incurred. The
"ability" theory states that taxes should be levied according
to some measure of the taxpayer‘s ability~to~pay. The
ability-toupay theory, measured either by prOperty or income,
has been the most widely accepted for many years. Largely
this has been because of the difficulty in determining exact
prOportioning of benefits received or exact costs incurred.1

Much has been written on the limitations of using proper-
ty values as a measure of ability~to~pay. Difficulties are
caused by inequality of assessments, double taxation caused
when intangibles are included in the tax base, and inability
to reach income from services and other wealth creating actiu
vities. The most serious criticism is that property may have
past or future taXpaying ability rather than present. A
franchise tax measured by net income is able to avoid these

difficulties.2

It has been stated that: "One of the more troublesome

 

1By a narrowing of the definition of taxes, fees are
now used where contributions are measured by cost or
benefit.

2It is true that under the net income basis the large
unprofitable concern, which absorbs benefits and inc
curs government costs, would pay no business tax.
However, in Michigan this concern would pay a prOperu
.ty tax on its realty and tangible personal property.

54
matters in business taxation is incidence .... Thus what is
first thought to be a business tax may turn out, with further
analysis, to be a tax upon the consumer."1 Recent studies
have indicated that confusion exists as to the actual incidence
of business taxes and little will be known about this problem
until analytical techniques are further develOped and ad-
ditional statistical data are obtained.2 Business taxes may
in spme instances be shifted forward to the consumer or
backward to other producers. However, they must initially be
paid by the peOple who are responsible for the Operation of
the business. Therefore, as used herein, the term "tax
burden" will refer to the initial incidence of the tax, ex-
cept as qualified in the discussions of individual types of

companies, and is defined as a percentage of net income.

Evaluation of Tax System
It is now possible to examine in greater detail the
premises on which this study is based.
Tax bases. It has been held that existing taxes on
financial institutions have been levied without regard to

ability-to-pay as measured by net income. Reference to the

 

1Harold M. Groves, "Financing Government", New York:
Henry'Holt 8 Company, 1946, p. 252.

2Richard A. Musgrave, "General Equilibrium.Aspects of
Incidence Theory“, Papers and Proceedings of the
Sixtyafifth Annual Meetiggof the American Economic
.Associatidn, Chicago, DEcember 1952, p. 504.

55
following tabulation of taxes applicable to insurance compa~

nies, banks, and building and loan associations will bear

this out:
Tax Tax Base
General PrOperty Tax Tangible Property -
assessed value
Corporate Privilege Fee Capital and Surplus
Intangibles Tax Intangible PrOperty -
income, face value and
book value
Gross Premiums Tax Gross Premiums Receipts
Domestic Insurance Company Capital, Surplus, and
Privilege Fee Unassigned Funds

The above taxes can be levied in the absence of net income or
earnings.

Tax burden. .A second premise to be evaluated is that
inequities of tax burden exist between financial institutions
of various types within the Michigan tax system.

It was noted in Chapter I that in the united States in
1945 manufacturing concerns paid 27.1 percent of their net
profit before federal taxes in state and local taxes, trade
associations paid 16.6 percent, banks and trust companies

paid 11.0 percent, and insurance companies paid 5.5 percent.1

 

1Computed from "Corporation Income Tax Data", U. S.
Bureau of the Census, Statistical Abstract of the
United States, Seventh Edition, Washington, D. C.,
1949, p. 364=372.

56
NO comparable data were available for building and loan
associations.

The number of exemptions and low tax rates applicable
to financial institutions illustrated in Chapter III suggests
that the tax burden for such companies in Michigan is also
low and also inequitably distributed. Investigation further
justifies this conclusion. Table 6 indicates that the
different types of financial institutions carry varying pro-
portions of the tax burden with insurance companies and
building and loan associations carrying the least. By com-
parison with state and local tax figures for the United
States the conclusion can be drawn that Michigan taxes for
financial institutions appear lower than the average for
similar companies elsewhere in the United States.

The tax data listed in Table 6 cannot be directly com-
pared with the rates for the United States. In the first
place, fees and local taxes, though minor, are not included.
In the second place, insurance companies chartered in
Michigan which do business in other states are subject to
taxation in those states. Only taxes paid to Michigan by
Michigan insurance companies are considered. Lastly, the
figures in Table 6 are for the year 1948 while the figures
for the nation as a whole are for 1945.

Administration. A third premise of this study is that
due to the complexity of the tax system for financial insti-

tutions, this system is difficult to administer, difficult

57

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58
to comply with, and therefore inefficient. Six taxes relating
to financial institutions are administered by five different
agencies and governed by more than ten different statutes.

Agencies responsible for administering these taxes are:

 

Tax Administrative Am
1. General PrOperty (Real) Local.Assessor
2. General Property (Personal) Local.Assessor
3. Corporate Privilege
a. Building and Loan Secretary of State
b. All Others Corporation and Securities
Commission
4. Intangibles Department of Revenue
5. Gross Premiums Department of Insurance
6. Domestic Insurance Company' Department of Insurance
Privilege

Disregarding the general property tax, which may be con-
sidered a local tax in contrast to a state tax, the above
state agencies by statute, are involved in some phase of the
process of business tax collection. The "Little Hoover
Group" has found that the results of these confused respon-

sibilities are:

"a. to magnify administrative collection costs

b. to increase potentialities for tax revenue
loss through evasion, through insufficient
post auditing of taxpayers' accounts, and
through looseness in collection admini-
stration that stems largely from.statutory
reasons;

59
c. not minor factors are the points of inequity
and hagassment that rezplt from the tax-
payers point of view.

The extent of the loss of revenue cannot be determined.
However, it has been found that substantial amounts of reve-
nue are overlooked each year from the lack of a unified
system for collecting the above taxes. The ”Little HoOver
Group” cites one example.2 Uncollected corporation privilege
taxes for the two year period 1950-51 were estimated, on the
basis of records of the Corporation and Securities Commission,
to be close to $150,000. .After careful study the Commission
on Reorganization of State Government feels that the revenue
expected from tax laws enacted in 1952 could probably have
been found within the prior tax structure through more
stringent enforcement of tax laws and streamlining of admini-
strative function.

To combine all regulatory functions into a single de-
partment has not always resulted in satisfactory Operations
and other states are not generally following the practice. .A
single department does not satisfactorily represent the inter-
ests which separate groups have in the policies relating to

their control. For this reason tax "determination" should

 

1Michigan Regulatory.Agencies, Staff Report No. 28 -
Part 1 to the Michigan Joint Legislative Committee on
Reorganization of State Government, Detroit, Michigan,
May 1953, p. 28-31.

ZLoc. cit.

60
remain with the specific agency which exercises regulatory
control. In order to reduce some of the duplication of
effort that exists between the four state agencies the
function of tax "collection" could be centralized in one
agency with resulting economy and productivity. The first
steps have been taken in this direction. The Michigan De-
partment of Revenue was organized in 1941 to unify state tax
administration, to coordinate the collection of taxes desig»
nated by law, to provide special service for tax enforcement,
to avoid duplication in state facilities and to offer adu
visory service on fiscal matters.1 By act of legis.atur
the responsibility for the collection of delinquent corpOa
ration franchise and privilege fees is now centered in this

department.

 

1Act 122, P.A. 1941.

2Act 7, P.A. 1953.

CHAPTER V
TAXATION OF INSURANCE COMPANIES IN MICHIGAN

Introduction
. The taxes applicable to financial institutions have been
reviewed in the preceding chapters. In this chapter special
attention will be directed to the problems involved in taxing

insurance companies.

Types of Insurance Carriers

There are over eight hundred insurance carriers author-
ized to transact business in Michigan. They may be classi-
fied for tax purposes into companies chartered by other
states, referred to as "foreign companies", and companies
chartered by the state of Michigan referred to as "domestic
companies". Domestic companies comprise approximately 17
percent of the total number.

.A further clarification in terminology may be made by
differentiating between stock and mutual companies. Stock
companies are stock-issuing corporations operated for the
purpose of making a profit and paying dividends to stock-
holders. Mutual companies on the other hand are of various
types, the degree of mutuality being dependent upon the ex-
tent to which each is owned and operated by the participants

in its particular plan. .A reciprocal exchange is a type of

62
mutual organization in.which subscribers engaged in the same
line of business are authorized to carry inter-insurance
contracts with each other to provide indemnity among them-
selves against any legally insurable loss except life, health
and accident. These contracts may be executed by an attorney

or representative who is retained on an expense basis.

Qgigin of Present Taxes

The records showing the history of insurance company
taxation in Michigan prior to the year 1861 are incomplete.
Shares of stock of insurance companies and other corporations
were specifically listed as liable for taxes as early as
1821 but the effectiveness of this act is questionable. .At
that time corporations were a new form.of business in
Michigan. They were granted special charters by the legis-
lative council of the Territory of Michigan and the state
legislature, and whatever taxes were due from them were
specified in their charters. Many secured tax immune charters
and paid taxes at will or not at all. NO annual statements
were required of these companies and it is impossible to know .
the success they attained or how many were in operation at
any one time.

With the adoption of the Michigan Constitution of 1850,
special charters for business companies were forbidden and it

was decreed that the taxing of their property should be under

63
the general property tax, the same as other businesses.1
Since insurance companies and other financial institutions
had a large proportion of their assets in intangible prOperty,
they paid correspondingly less tax on real property than
industrial concerns. They were also treated favorably under
the personal prOperty tax because of the general laxity in
the enforcement of this law. Much of the intangible property
in Michigan was not being declared and in order not to penal-
ize banks and insurance companies whose assets were listed,
it was the practice to assess them on a very low percentage
of their value.

.An act was passed in 1882 to provide for more adequate
taxation of corporate prOperty. Taxable situs was defined
and provision was made to exempt the prOperty of corporations
on which Specific taxes had been paid. .A Special formula was
employed in 1882 for computing the taxable prOperty of do«
mestic insurance companies which is as follows:

"The value of the real prOperty on which a company

pays taxes shall be deducted from its net assets

above liabilities........, and the remainder shall

be the amount of personal pgoperty for which the
company shall be assessed.

 

1‘W. O. Hedrick, "Financial and Tax History of Michigan",

Michigan History Magazine, 1938, VOl. 22, No. l,
p. 80.

2Act 9, P.A. 1882. Act 206, P.A. 1893, Sec. 7.11
stipulated that the legal reserve required by the
state was to be included in such liabilities but this
has been the only change to date.

64

For over 65 years this formula has succeeded in keeping most
of the personal prOperty of domestic companies Off the local
“tax rolls. Of 42 companies in one Michigan city studied,
only two paid a personal property tax in 1948 and for these
two the assessed valuation was less than $100,000. In 1940
the four insurance companies in another Michigan city submit-
ted financial statements to the city assessor's Office and
indicated that they were paying, previously, no personal
prOperty taxes because the formula when applied resulted in a
negative amount of taxable property. Thereupon an agreement
was made between the insurance companies and assessor's
office whereby the companies would pay a nominal arbitrary
amount each year. This figure was usually arrived at by
taking 85 percent of furniture and fixtures reported and
applying the tax rate. In one case when a company which was
known to be much larger than another paid a lesser tax, the
smaller company was arbitrarily limited to the same amount.
Insurance companies, by being a party to such an agree-
ment, may be able to divert legislative attention from the
problem, but by so doing they Show that they are apprehensive
of the result should an inquiry be made. The report of the
‘Michigan Committee of Inquiry into Taxation in 1923 gave the
Opinion that "this provision of the law granting this special
privilege to insurance companies Should be repealed and that
they Should be required to pay taxes on the same basis as

other corporations.“ This would result in domestic companies

'65
assuming their share of the personal property tax burden and

would place all cities on a uniform basis.

Annual Corporation Franchise Tax

0n the state level there are three important specific
taxes to be considered--the annual corporation privilege fee,
the foreign insurance company premiums tax, and the domestic
insurance company privilege fee. The corporation tax ad-
ministered by the Michigan Corporation and Securities Com-
mission is for the privilege of exercising a franchise and
transacting business within this state. The law was origi-

1

nally enacted in 1921. In 1923, the rate of the fee was

reduced and the maximum and minimum.limits were changed.2
The law which was effective until 1951 provided that "a
domestic insurance corporation doing business under the laws
of this state shall, at the time of filing its annual report
with the Secretary of State, pay a fee of two and one-half
mills upon each dollar of its paid-up capital and surplus,
but in no case less than $10.00 nor more than $50,000." The

portion of taxable capital and surplus was computed by using

the ratio of the corporation's prOperty owned or used in

 

iAct 85, P.A. 1921.

ZAct 233, P.A. 1923. Originally the fee had been three
and one-half mills upon each dollar of its paid-up
capital and surplus with a minimum privilege fee of
$50.00 and a maximum of $10,000.

66
Michigan to the entire prOperty of the corporation.1 Foreign
insurance corporations were Specifically exempted. In order
to raise revenue the rate was increased in 1951 from two and
one-half mills to three and one-half mills,2 and again in
1952 to four mills.3
In 1952 domestic insurance corporations were exempted
from paying the annual corporation privilege fee when they
became subject to a new tax law referred to as the domestic
insurance company privilege fee.4 The former tax was elimi-

nated entirely from the list of taxes applicable to insurance

companies.

Domestic Insurance Company Privilege Fee

The domestic insurance company tax applies not only to
corporations but to mutuals as well. This in effect is the
first state tax which has been levied on mutual insurance
companies in the state of Michigan and is in response to the
cry of discrimination against foreign companies discussed
later in this chapter. This new annual fee on domestic
companies is for the privilege of exercising a franchise and

transacting business in this state. The law states that such

 

1Act 85, P.A. 1921, Sec. 4 and 5.

2Act 277, P.A. 1951.
3Act 183, P.A. 1952.
4Act 180, P.A. 1952.

6.
a company shall pay "... a fee of five mills upon each dollar
of its paid-up capital, if any, surplus and unassigned

funds..."

Foreign Insurance Company Premiums Tax

The most important insurance company tax in Michigan
from the revenue standpoint is the premiums tax payable by
foreign insurance companies.1 This tax was introduced in the
year 18612 and has continued, though extensively modified,
until the present date. Previous to the enactment of the tax
law in 1861, foreign insurance companies had been required to
file an annual report with the state in order to obtain
authorization to do business in this state. In that year,
however, such companies were also required to file with the
state annually, for tax purposes, a statement of the number
of policies issued and the amount of premiums received during
the year just terminated. Based on these reports, foreign
companies were directed to pay to the state treasurer a speci-
fic tax Of one percent (increased in 1865 to three percents)
on the gross amount of all premiums on Michigan policies re-
ceived in money or securities during the year.

DiSposition of Specific tax receipts received much

 

1Act 256, P.A. 1917, Sec. 17.

2Act 54, P.A. 1861.
3Act 153, P.A. 1865.

68
attention from state legislatures in these early years. By
1850 it had become a fixed practice to use railroad taxes to
pay the interest on borrowed Primary School Funds and the
constitutional convention in that year provided that not only
railroad but all Specific taxes1 Should be used, first, to
pay the interest on educational funds, second, the interest
and principal on the state debt, and third, the residue to
increase the assets of the Primary School Fund. Therefore,
it is interesting to note that the Premiums Tax.Act of 1861
stipulated that tax receipts be “apprOpriated to the same
uses and purposes as the specific taxes on railroad corpo-
rations are or hereafter may be."2

Following upon the affirmation in 1869 of exclusive
state regulation of insurance companies by the Supreme Court
decision in the case of Paul v.‘Virginia3 the states broadened
their insurance codes. The court held in this case that
"issuing a policy of insurance is not a transaction of
commerce", and for that reason policies issued by a company
incorporated in one state to persons residing in another
state are "local transactions and are governed by the local

law." This necessarily meant that the powers of taxation

 

1
Except those received from the mining companies of
the upper peninsula.

ZAct 54, P.A. 1861, Sec. 9.
34 Wall. 168 (1868).

69
and regulation as they then existed belonged to the states

rather than to the national government. The decision in
this case was followed by the courts for more than 75 years
until 1944.1

That Michigan insurance company'laws came under the im-
pact of extensive revision is evident from the report re-
lating to insurance submitted by the Secretary of State in

Z in which it is stated that the Acts of 18693 "very

1870
materially raise the standard of excellence required of stock
companies.” These acts provided specifically for the taxa-
tion and increased regulation of life, fire and marine in-
surance companies. The tax rate for foreign companies was
“continued at three percent of premium.receipts on.Michigan
business and provisions were made for examinations and larger
deposits with this state for the security of policyholders.
On the other hand, an exaction was made of domestic life
companies in the form of a policy valuation fee of one cent
for each thousand dollars insured to insure their solvency.
This levy is still in effect.

The duties and responsibilities of administering the

gross premiums tax became more cumbersome as regulation of

 

1United States v. Southeastern Underwriters Association,

322 U. S. 533 (1944).

2FirstAnnual Report of the Secretary of State of the
State of Michigan, Relating to Insurance, 1870, p. 7.

3Acts 77 and 136, P.A. 1869.

70
insurance companies increased. It therefore became necessary
in 1871 to establish an insurance bureau under a commissioner
of insurance.1 Taxes continued to be paid to the State
Treasurer. However, all receipts were kept as a separate and
distinct fund for the maintenance of the Insurance Bureau,
upon which the Auditor General was authorized to draw warrants
for salaries and other expenses. The act further stipulated
that "in case of any balance to the credit of said fund, in
excess of the necessary expenses of such bureau, it shall be
transferred, at the end of the fiscal year, to the General
Fund of the state."2

From this it would appear that the primary purpose of
the insurance company premiums tax now was to provide reve-
nue to cover the expense of the Operation of the Insurance
Bureau. However, an extract from a financial report of the
Commissioner of Insurance in 1872 indicates that there may

have been another purpose:3

FINANCIAL REPORT
Year Ending December 31, 1871

 

Fire Companies $44,522.23
Life Companies 51,172.99

Total Receipts 95,695.22
Total expenses of Bureau and Salaries 6,034.35
Net Revenue to State $89,660.87

 

lAct 108, P.A. 1871.
21bid.

3Second Annual Report of the Commissioner of Insurance
of the State of Michigan for the year ending Dec. 3T,
1871, p. xlcTi.

 

 

71

This conclusion is further substantiated by the fact that
while insurance laws were still being administered by the
Secretary of State in 1870, the total receipts from the
Specific tax on premiums totaled $89,098.82 and expenses were
estimated at $2,000.l

. The law of 1871 also expanded the definition of gross
premiums from “all premiums received in cash or otherwise" to
include "all premiums agreed to be paid", the validity of
which was later verified by the courts.2 Thus it was deter-
mined that the amount upon which the specific tax should be
calculated is the sum of the maximum annual premiums as set
down in the policies on which premiums have been collected,
and not merely the cash balance actually paid over to the
company.

Retaliatorygprovisions. The next few years saw im-
portant changes made in life insurance premiums taxation,
most of which were later incorporated into the laws of fire
and casualty insurance companies. Each state was allowed to
dictate the rates at which they would tax foreign insurance
companies, and Since there was no way of enforcing uniformity

of rates between states, a Situation was created whereby

 

1First Annual Report of the Secretary Of State of the

State of Michigan, Relating_to Insurance, 1870,
p. xlix.

ZConnecticut Mutual Life Insurance Company v. The
State Treasurer. 31 Mich. 6,7 (1875).

72
Michigan and other states thought it expedient to adopt the
so-called "retaliatory provision".1 This required that a
foreign insurance company pay to the Commissioner of Insur-
ance of the State of Michigan, an amount equal to the charges
imposed by the laws of its own state upon similar insurance
companies of this state, provided that the charges of the
foreign state were greater than those imposed byVMichigan.
. .Actually, this type of retaliation means higher revenues
for the states utilizing it. It assures the state of a
definite minimum tax upon outside concerns and at the same
time provides penalties against companies located in states
imposing high rates on foreign companies. .As a consequence,
the taxation of foreign companies is governed by the legis-
lation of other states, and not by the revenue needs of the
retaliating state or by the comparative tax burden upon other
businesses in that state. The taxes therefore are inde-
pendent either of fiscal or equity considerations.

Further disadvantages of the retaliatory provision are
that it imposes an administrative burden on the taxing offim
.cials of assessing foreign companies on the various bases
prevailing in other states, and the burden of interpreting
laws, rulings and court decisions. The matter of relations

between states must also be considered. The National Tax

 

1
ACt 80, Pvo 1871,, SCCo 28.

73
Association in 1909 passed a resolution to the effect that
"all retaliatory legislation (as to insurance taxation) be
abandoned as contrary to interstate comity."1

Over oneuhalf the states, however, have such provisions
included in their premiums tax laws. There is small likeli-
hood that such states will voluntarily relinquish the right
to this income simply on the grounds of equity or other
theoretical tax considerations. Retaliation can only be
eliminated when all states have uniform tax rates and uniform
deductions, and this is only conceivable under a system of
federal regulation of insurance companies.

In 1943 the phrase "in the aggregate" was included in
the retaliatory provisions of this state.2 It made it
possible to compare for tax purposes the combined amounts of
licenses, fees, taxes, and deductions rather than comparing
individual amounts, as for instance filing fees of one state
against filing fees of the other. This counteracted the_
tendency of states to raise specific fees or taxes in rem
taliation to like increases by other states. It was a

definite step forward in achieving more uniform taxation of

 

1Proceedings of the National Tax.Association, Third
National Tax Conference, V01. 3 (1909), p. 29.

ZAct 155, 15.15.. 1943.

74

foreign companies.1

"In lieu of" provision. In 1875 the tax rate on life
insurance company premiums was reduced from three to two per-
cent to conform more closely to the average rate of other
states. The act also made the very Significant stipulation
that "the Specific tax herein provided for shall be in lieu
of all other taxes in this state."2 This has been responsible
for much litigation in Michigan tax history. The provision
was successfully contested in the case of Metropolitan.Life
Insurance Company v. Stoll where suit was brought against the

insurance company to pay a county mortgage recording fee.3

 

1For an example of the use of the "greater in the ag-

gregate" provision, assume that Michigan and Indiana
each charge three fees or taxes. .An Indiana insurance
company would pay on the Indiana basis for foreign
companies, Sixty, one hundred, and twenty dollars
reSpectively, and on the Michigan basis for foreign
companies, one hundred twenty, fifty, and twenty
dollars respectively. Then if Michigan were to
figure each tax individually, the Indiana company
would have to pay the larger sum in each case and the
total would be two hundred forty dollars. If, how~
ever, the fees were figured in the aggregate, the tax
paid would be one hundred ninety dollars, the larger
of the two state totals. Credit is given at the time
of filing the annual report for fees paid in excess
during the year.

2'Act 223, PaA. 1875, Sec. 16. Later the words "except
for real estate owned and securities deposited herein
unless exempted under the general tax laws of the
State" were addedmaAct 256 P.A. 1917, Pt. 2, Ch. 1,
Sec. 19. In 1941 (Act 229 the law was again amended
to provide for the taxation of tangible personal
property owned or held for investment purposes by
such companies within this state.

3276 Mich. 637 (1936).

75
The court ruled that where two laws are in conflict, the one
last enacted will control, and the exemption of foreign in-
surance companies from all other taxes did not extend to the
mortgage recordation tax. Rather than enjoying complete pro-
tection under the law, insurance companies must now examine
each new piece of prOposed tax legislation to ascertain their
tax status.1 Since the "in lieu of" provision in its present
form does not tie the hands of future legislatures, it has
lost some of its fearful aspects. It may conceivably be
used as a tool in better administration of taxes.

Pattern for new companies. From time to time as the
state became more industrialized, as insurance business or-
ganizations became more complex, and they enlarged their
sc0pe of activity, new companies were allowed to organize and
do business under the laws of Michigan. It was recommended
in the report of the Secretary of State as far back as 1870
that a law be passed giving him authority over cooperative
and mutual benefit associations and health and accident
companies "to eliminate discrimination against stock insurance
companies paying the tax on gross premium receipts."z In 1877
accident insurance companies of other states were permitted to

do business in Michigan upon compliance with all laws in force

 

1The corporation franchise tax Specifically exempted
foreign stock companies.

2First Annual Report of the Secretary of State of the
State of Michigan, Relating to Insurance, 1870, p. 5.

76

1

relative to life insurance companies. In 1883 mutual fire

insurance companies were given the same privilege upon com—
pliance with the laws applicable to stock fire insurance com-
panies of other states transacting business in Michigan.

Thus a pattern had been set and new companies were fitting
-into it.

However, it was not until June 1947 that cooperative and
assessment associations were forced to conform.2 .At the 1943
session of the state legislature a bill was introduced to
subject c00perative and assessment associations to the pro-
visions of the premiums tax law but the bill died in com-

3 The following year the Commissioner of Insurance

mittee.
wrote to the Tax Study.Advisory Committee that he could see
no reason why foreign c00perative or assessment associations
should not be required to pay a premiums tax as well as stock

and mutual casualty companies.4 The saving to these compa-

nies in tax payments has been considerable. In the first

year after the 1947 amendment was adopted three foreign .

companies, one each in Nebraska, Illinois, and Ohio, added

 

tAct 42, P.A. l877.

ZAct 195, P.A. 1947.

sMichigan Senate 9111 29 (1943).

4Letter from the Commissioner of Insurance dated May 24,
1944 to Dr. Denzel C. Cline, Research Staff, Municipal
Finance Commission and Tax Study.Advisory Committee,
Lansing, Michigan.

77

approximately $100,000 revenue to the state of Michigan.1

Insurance code. The Insurance Code which is now in
force was compiled under Public.Act 256 of 1917. This was
more than a mere collection of existing laws. It was a com-
plete revision and consolidation of the laws of the State of
‘Michigan relating to the inSurance business. All foreign
insurance companies were required to pay a $25.00 annual
filing fee, subject to retaliatory provisions, to the Com-
missioner of Insurance of this state.2 .Although it is not so
stated in the law, it was understood at the time that these
fees were to be used for the expenses of conducting the
Insurance Department. In 1944, however, the department col-
lected approximately $350,000 in fees and operated on a
budget of approximately $130,000.3 In 1947, revenues from
fees were $311,443 and department expenditures were $141,629.4
All excess is covered into the State General Fund as general
purpose revenue.

Deductions. The Insurance Code further provided a

system of deductions from the premiums tax base in order to

 

1Information obtained from Insurance Department, State
of Michigan.

2Act 256, P.A. 191?, Sec. 4. Fraternal organizations
pay only an annual license fee of $5.00.

3Letter from the Commissioner of Insurance, 23. cit.

4State Finances, U. S. Department of Commerce, Bureau
of Census, 1946 Compendium.

 

provide for what was considered more equitable operation of

the law. .As amended, the law now reads that "every foreign

insurance company admitted to do business in this state

shall pay a tax upon its business written in this state, coma

puted as follows:

"First, Life insurance companies, a tax of 2 per
centum on the gross premiums, excluding consideru
ations for original annuities;

Second, All casualty companies whether stock,
mutual, c00perative, or assessment associations,
a tax of 2 per centum on all premiums, deducting
for premiums returned on cancelled policies, and
reinsurance premiums received when the tax has
been paid on the original premiums, and in
mutuals, also deducting for dividends paid to
members;

Third, Fire, marine and strictly automobile in—
surance companies, whether stock or mutual, 3 per
centum, on all premiums, deducting for return
premiums on cancelled policies and reinsurance
when the tax has been paid on the original pre-
miums; and in mutuals also deducting for divia
dends paid to members."1

Dividends paid to members of mutual companies (except

life) were considered repayment of excessive premiums rem

ceived.

Disposition of revenue. At the time fees were adepted

to cover the expense of operating the insurance department

the revenue from the gross premiums tax was turned back into

the General Fund of the state to be credited to the Primary

School Interest Fund, the purpose for which it is still being

 

lACt 2569 Pvo 19179 SCCo 17o

79
used.

6

Southeastern Underwriters“.Association case. The system
of taxing insurance companies was tremendously shaken in many
states with the advent of the Southeastern Underwriters'
.Association decision.1 For 75 years the states had developed
their own systems of taxation and regulation of insurance
companies. In l944, however, the Supreme Court held that
Pinsurance transactions which stretch across state lines con-
stitute interstate commerce so as to make them subject to
regulation by Congress under the Commerce Clause."2 The Come
missioner of Insurance of this state and tax administrators
of other states interpreted this to mean that state taxation
of insurance companies must not place a burden on interstate
commerce. If it did so, the regulation and taxation of in-
surance companies would transfer to the federal government
with subsequent loss of revenue to the states.

Michigan at this time was one of ten states having a
preferential system of insurance taxation which exempted
domestic companies from the premiums tax levy. The

Prudential Life Insurance Company of America filed its annual

 

1United States v. Southeastern Underwriters'.Associ=

ation, 322 U. s. 533 (1944).

2The Constitution of the United States provides that
Congress shall have power to regulate commerce with
foreign nations and among the several states. Art. 1,
$890 80

80

report with the Commissioner of Insurance on February 8, 1945
but refused to pay the tax because it claimed that the
Southeastern decision had made the tax unconstitutional.
When the Department of Insurance threatened to revoke all
authority to do business in Michigan if the tax were not
paid» an injunction was obtained enjoining the state from
attempting to collect this tax. The Prudential Insurance
Company was ordered to make a deposit equal to the amount of
the premiums tax with the State Treasurer and the deposit was
made. .The amount of the tax deposited was $470,160 for 1944
and $504,559 for 1945.1

p The Southeastern decision was having far reaching rem
suits in state tax systems. During this period eighteen
states equalized rates between foreign and domestic companies
and thirteen states repealed their retaliatory provisions.
In Michigan two bills were introduced into the Senate embodyw
ing these changes. The first bill proposed to equalize rates
between fire and marine and other insurance companies at a
flat two percent. It also imposed a tax on domestic inw
surance companies at the same rate.2 The second bill pro»

posed to repeal the retaliatory provisions of the premiums

 

W

1Report of the Treasurer of the State of Michigan,
fiscal year ending June 309 194?. fi

ZMichigan Senate Bill 248 (1945).

81
tax law.1 Both bills were strongly lobbied against by do»
mestic companies.

Following the Southeastern Underwriters” Association
case finding, Congress was asked to affirm by statute the
right of states .0 regulate insurance. Apparently it had no
desire to supersede the laws then in force in the states and
it had no plan for taxing and regulating the insurance
business. It therefore enacted a measure commonly referred
to as the McCarran Ath, in which is stated:

"The Congress hereby declares that the continued

regulation and taxation by the several states of

the business of insurance is in the public in-

terest. and that silence on the part of the

Congress shall not be construed to impose any

barrier to the regulation or taxation of such

business by the several States."

This eliminates any doubt as to the constitutional power of
states to regulate and tax insurance companies. Neither of
the revisionary tax bills introduced in the Michigan Senate
were passed; andg as the validity of the McCarran Act was
later determinedsg the Prudential Life Insurance case then
before the Michigan Supreme Court was allowed to be withu

drawn.

 

1Michigan Senate ill 249 (1945}.

2Public Law No. 159 79th Congress. approved March 9,
1945.

3Prudential Insurance Company of America v. Benjamin.

328 U. s. 408 (1945).

82

Exemption of domestic companies. Michigan in l947 was
one of eight states which did not tax the premiums received
by domestic insurance companies. Thirtyaeight states had
equalized rates between domestic and foreign companies, and
two states taxed domestic companies at a lower rate than
foreign.l In the Prudential Life Insurance Company case,
referred to above, it was established that in the year 1944 a
domestic life insurance company of Michigan was required to
pay aggregate taxes amounting to less than one-half of one
percent of the premiums collected by it, whereas, all compa-
nies organized outside the state of Michigan were required to
pay two percent of the gross amount of premiums received by
them from policies covering risks within the state. If the
domestic life insurance company had been required to pay on
the same basis as a foreign company doing business in
Michigan, the domestic company would have been required to
pay approximately $31,000, whereas, the amount actually paid
on Michigan business was $2,75l.

The loss of revenue sustained by Michigan because of
this discrimination is tremendous. It is estimated that in

1946 the tax payable by domestic companies on the premiums

 

1State of New York, Insurance Department, Fees and

Iaxes Charged Insurance Companies, Albany,‘Wi11iams
Press Inc., 1947.

 

83
tax basis would have been approximately $l,032,822,i whereas,
the corresponding tax paid was $53,723.2 This resulted in a
net loss to the state of about $979,099, or 15 percent of the
present premiums tax income. .Actually, this amount may be
considered as a loading factor allowed domestic companies
when their rates are established even though the tax is not
actually paid. Hence, the effect of the discrimination is
not to save money for Michigan residents who transact
business with the domestic companies, but rather to increase
the profits of the domestic companies. These companies have
made the claim that by being subsidized in this manner they
have been able to compete with the larger eastern companies
and keep their rates down but this cannot be substantiated in

such a highly controlled industry.

Theory of Insurance Taxation
Insurance companies present an unusual problem in the
field of state taxation. .As suggested earlier they have
vast resources and a large variety of assets. The unique

economic position they have due to the type of service they

 

1Computed at l94l rates from the Seventy-eighth Annual
Report of the Commissioner of Insurance of the State
of Michigan, Lansing, Franklin DeKleine Co., 1948.
*CAssessment farm mutuals exempted).

zCompiled from individual annual statements of all
domestic insurance companies filed with the
Corporations and Securities Commission.

perform has often caused them to be treated as a Special
privileged class of corporations. .Additional complications
have been introduced by the difference in ownership between
stock companies and mutuals, the difference in types of risks
undertaken, and the difference in reserve liabilities whiCh
arise.

The techniques used in setting prices from which the
assets and income result, and which in turn become the
source for taxes, have been well described by'Howard

Berolzheimer.1

.A resume of these techniques will prepare a
background for the better understanding of tax issues dis-
cussed at a later point in this chapter.

Emphasis in all insurance is upon the loss which is
shifted to the group. To make insurance work many partici-
pants are needed-~the law of large numbers must operate.

'For life insurance, eXperience has shown over a number
of years what can be eXpected so far as mortality per 1,000
of population is concerned. Statistical measurements have
been compiled for each age so that the chance of any person
living through any year can be predicted. From observation
of the past of a large number of persons, and of the frequen-
cy of death at all ages, mathematical probabilities are ex-

tracted. For expediency, these probabilities are then

 

1Howard Berolzheimer, The Development of Principles
in Insurance CompanyTagation. An unpublishe h
thesis, Yale University, September, 1943.

85
transposed to a base table, starting at a given age with
100,000 lives, and a derived mortality table is the result.

In develOping the premium it is necessary to assume
(1) a mortality table, (2) the amount of the contract or
obligation which the insurer is assuming, and (3) the age of
the insured.

Another assumption must now be made in calculating the
first yearls insurance cost. The premium is paid to the in-
surer at the beginning of the year. No claims are paid
until the end of the first year. Funds are invested and
earn interest. Interest is fairly predictable. Thus, in-
surance companies operating on a "legal reserve basis" have
established the practice of discounting the premiums giving
the benefit of any interest earnings to the insured-~even
before such earnings accrue.

For any given group--given the above assumptions-~the
insurer is able to calculate the amount which will enable
him to pay all losses contracted for. Yearly balances will
be invested at such a rate of interest that the insurer will
have the money necessary to pay future contracts as they
mature.

It is customary for insurance to be sold on a level
premium basis with the same premium paid each year rather
than on a single premium basis. .As a result, if a person
dies, his contribution to the common fund is much less than

if the total is paid at the outset. .Also, since insurance

86
is purchased to supplant income lost in the case of premature
death, and premiums are to be paid out of income earned, it
is more expedient to pay periodically.

There is a problem regarding the loading factor and
reserves: In the Operation of life insurance companies the
great bulk of expenses in issuing a policy occurs the first
year of the contract. .A large part of the agent's commission,
costs of medical examinations, issuance of policy, etc., do
not recur. The insurance carrier must add to net premiums
enough to recapture these expenses over the life of the
policy. Well established companies are able to furnish funds
out of surplus to write this new business. They then rely on
gross premiums, i.e., net premiums and loading, to repay them
for the initial costs of establishing the insurance pro-
tection. Other companies, both stock and mutual, are not
able to furnish funds out of surplus. Since each policy is
supposed to pay its own way the commissioners of insurance
in the various states permit companies to apply for the privi-
lege of "valuing the reserves" in such a way that borrowing
is permitted from the policyholders” reserves in order to pay
for these heavy first year eXpenses. The process of "valuing
reserves" is important in the taxation of life insurance
companies. Bach premium in level premium insurance is thus
composed of loading factors, mortality costs and reserves.

There are two forms of organization--stock and mutual.

Stock companies issue non-participating policies. Mutuals

87
distribute a part of their "earnings" each year to policy-
holders in the form of dividends. .A large part of life in-
surance issued by Michigan companies is written by'mutuals.
Dividends are returned to their respective policyholders.

The dividends which are paid to policyholders are subject to
scrutiny since they may arise from.savings on loadings, ex-
cess interest, or savings in mortality. They may also arise
under practical conditions from terminations, sale or rec
valuation of assets and other sources.

Regardless of size, age or form of organization the cost
of insurance to the insured is developed by using the above
principles. Gross premiums may vary but they depend upon
assumptions as to interest, mortality and loading.

These underlying ideas also hold for all types of proper-
ty insurance. Funds are accumulated to meet uncertain losses,
risks are transferred or combined, asset accounts are built
up by premiums and from investment income. However, in other
aSpects prOperty insurance is much different than life in-
surance.

In fire insurance no two risks are exactly alike and
consequently every detail of every risk must be examined.
Many, if not most, risks undergo frequent changes so must be
re-examined and rerated from time to time. ‘Many factors
enter into making a fair assessment of fire costs such as
construction costs, location, eXposure, methods of heating

and lighting, and extent of fire protection for every class

88
of risk and every individual of every class. Therefore the
price to charge cannot be measured with the same degree of
accuracy as in life insurance. .Adequate rates are necessary
both for the security of the underwriter and the insured.
Rates for fire insurance and other classifications are pub-
lished by rating bureaus. Uniformity is achieved by the use
of a schedule. When the base rate is determined from the
schedule, additions and deductions may be made in individual
cases.

Rates in all fields other than life insurance are based
upon the attempt to measure the hazard of an individual risk
and the premium charged is not a measurement of known losses,
for fire losses vary widely from year to year.

There is more predictability of loss in the case of life
insurance than other types of insurance. It is not unusual
for an insurer of fire and casualty lines to eXperience under-
writing losses for a series of years. Usually such losses
do not mean the underwriter is financially insolvent, for
investment income is usually sufficient to balance these
losses and even show a profit. However, if losses continue
it would indicate that the company is actuarially insolvent.
In such a case, the Insurance Commissioner in the state where
the company is domiciled would immediately take over and
supervise the business for the protection of policyholders.
These losses mean taxing fire and casualty companies is a

different problem from taxing life insurance companies.

89

Life insurance companies must at sometime use premium
income to pay the claims on a particular risk. Fire and
casualty coverage is for short periods of time. The majority
of the policies are of one or three years duration. As the
contract runs out, the insured has received his service and
all premiums are considered “earned" by the companies.

The distinction between "stock“ and ”mutual" fire and
casualty insurance companies is that the fund of assets must
be analyzed as well as income. Overcharges may appear which
if not returned to the policyholder may result in a loss of
mutuality. In a truly mutual situation when all overcharges
are returned there can be no business profit in the economic
sense.

Since the underlying principles for setting prices of
insurance policies can be applied to all type of risks and
carriers, net income for tax purposes may now be formmlated
as total income less total disbursements with the balance
adjusted for additions or deductions to policyholders' re-
serves.

Before concluding that any one system will provide for
equitable taxation of all insurance companies it will be
necessary to review the tax system as it now exists and the

problems associated with it.

Burpose of Taxing Insurance Companies

There has for many years been a point of contention

90
between those who have insisted upon heavier taxes for the
insurance business and those who have taken the view that no
taxes whatever should be placed against such companies. In
brief, legislatures have argued that large funds were accumu-
lating in the treasuries of the life insurance companies and
it was both politically and economically expedient to tax
them. Proponents of the special privilege tax theory
generally advance the following arguments:

1. Such taxes are a tax on thrift.

2. The insured unselfishly provides for the future
of his beneficiary.

Most economists will not contest the first argument. Capital
can be accumulated only through the process of saving. Mbst
state taxes penalize thrift or reduce savings regardless of
the type of business upon which they are levied.

The second argument, that the insured unselfishly pro-
vides for the future of his beneficiary, does not altogether
conform to thefacts. Policyholders are entitled to borrow
on their policies and in a large percentage of cases avail
themselves of this privilege. In 1932 policy loans repre-
sented 17.9 percent of total admitted assets.1 In the period
1928-37 only 7.65 percent of life insurance written fulfilled

the acclaimed purpose of providing for beneficiaries. The

 

v

1Proceedings, 35th.Annual Meeting of.Association of
Life Insurance Presidents, New York, 1941, p. 111.

91
balance was lapsed, surrendered, decreased, or expired.1 The
period considered is, of course, unique. But the fact rea
mains that the unselfish motive is Open to question. The in=
sured frequently uses his cash value as he would a deposit in
a bank and draws upon it for his own purposes when necessary.

The altruistic motive may even be questioned when the
beneficiary does ultimately receive insurance. An individual
may create an estate by having a life insurance company in-
vest his money in stocks and bonds rather than his doing it
directly. In this way he avoids payment of income taxes while
his funds are being improved at compound interest.

It may be concluded that neither of the above arguments
substantiate the principle that life insurance companies
should be excused from paying taxes. These companies are
productive in the sense that they do offer a service. From
the operation of their business they produce an appreciable
amount of income.

‘. An equally hard fought controversy is whether mutual
companies should be taxed. .Advocates of the nomtax principle
contend that there is a basic economic difference between
stock and mutual companies: specifically, that mutuals do
not earn profits. However, as illustrated earlier, policy»

holders in a mutual company receive dividends that have

 

1Temporary National Economic Committee, Concentration
of Economic Power, Hearings, Vol. 10, p. 47 7.

92
elements of economic profit derived from investment of surplus
funds. .A policyholder has no contractual claim to these
funds. Control of distribution of earnings rests in the hands
of directors and paid managers as in the case of a stock‘
company. Therefore, there is little economic difference be-
tween the two forms of organization.

Many former stock companies have now become mutuals thus
avoiding payment of corporation taxes and in many states
benefiting by reduced gross premiums taxes. Included in this
group are (1) The Metropolitan Life InsuranCe Company, (2)
The Prudential Life Insurance Company and (3) The Equitable
Assurance Society of the united States. No essential change
took place in the basic economic structures of these corpo-
rations. In fact before their mutualization they'were also
paying dividends to policyholders in order to remain competi-
tive. Both stock and mutual organizations Operate in com-
petitive fields, give similar services, have assets of a like
kind, and derive income from similar sources.

Based upon the above analysis the conclusion is drawn
that neither stock nor mutual insurance companies should
carry a lighter tax burden than other types of business
simply on the grounds that they perform a different type of

service.

Evaluation of Insurance Tax Bases

Historically insurance companies have been taxed on an

93
Opportunistic basis. Since insurance was held not to be an

1 states have followed the rule Of ex-

article Of commerce
pediency in taxing such companies with an Obvious lack Of
uniformity resulting. It has been established that the
methods Of taxing insurance companies in Michigan has had
very little correlation with the capacitybto-pay Of such
companies.

The gross premiums tax levied on foreign companies is
basically a gross receipts tax which, as has been stated
beforez, has little actual relationship tO the earnings of a
company and does not differentiate between efficient and in-
efficient management. It has the advantage Of ease Of ad-
ministration and high, stable tax yield. Certain deductions
have been allowed by'Michigan and other states with the re-
sult that the present tax may more correctly be classified as
a "net” receipts tax.

The domestic insurance company privilege fee now levied
in Michigan is fundamentally a form of book value tax. Book
value is the excess Of assets over liabilities and is repre»
sented in the balance sheet by the accounts called capital,
surplus, and undivided funds. Book value is easily asceru
tained from the regular reports Of insurance companies and

provides a steady source of revenue. But there are numerous

 

1568 p. 680

ZCho 19 po 60

94
objections to this method Of taxing. First, a company's
assets may be undervalued on its balance sheet. Second,
mutual companies are taxed more lightly than stock companies.
Through the device of obtaining excess premiums and the
issuing of dividends, surplus accounts may be kept smaller.1
Third, book values do not represent earning power.

It may be concluded that taxes levied upon insurance
companies by the state Of Michigan have these two points in
commOn. First, they are easily administered and fairly
stable; second, they are economically undesirable inasmuch as
they are not based on capacityeto-pay.

Gamble (1937) states that the net income tax "is prob-
ably theoretically the best of all possibilities for in-
surance taxation."2 Berolzheimer concludes that ”The state
tax on insurance carriers, both stock and mutual, on life
insurance and those carriers other than life, should use net

taxable income as a base."3 This tax, though not in the

Michigan statutes is well established in other states'

 

1Philip L. Gamble, Taxation of Insurance Companies,
Special Report of the New York State Tax Commiss on,
Albany, New York, 1937, No. 12, p. 34.

zlbidg, p. 40.

393. cit., p. 143.

95

1 3

practices. Minnesota , South.Dakotaz, Pennsylvania and

Louisiana4

all use the federal income tax report as a base
for computing state income taxes on insurance companies.
North Dakota5 has set up its own income tax. Other states
use combinations of receipts taxes and income taxes.

The Objections most frequently voiced to the net income
tax are that it produces too little revenue, the yield is
unstable, and net income is difficult to determine, particua
larly in the case of mutual insurance companies.

The first Objection is indefensible inasmuch as the
yield Of a net income tax is dependent upon the rate of the
tax itself and is limited only by the amount of profit in-
surance companies realize from their Operations and "what
the traffic will bear".

Stability of revenue is an important concern of the
state. However, insurance taxes are a very minor part of the
total state revenue received in Michigan each year. In 1952
total specific tax receipts were $484.2 million. The gross

premiums tax receipts were $12.1 million.6 Corporation taxes

 

1Sec. 5973 Code (Minnesota).
257. 3501-10 Code (South Dakota).

3Sec. P.L. 212, May 1939 (Pennsylvania).

4Art. 47, Laws 1940 (Louisiana).
5cn. 312, Laws 1923 (North Dakota).

6See Table 2.

96

on domestic stock companies were approximately $60,000.
Thus, taxes on insurance companies were only 2.5 percent of
the total state revenue from specific taxes. It is true that
a well established company may sustain losses for one or more
years without actually becoming insolvent. During this
period it has no tax paying capacity. Recognizing this fact
it becomes all important that the tax system be flexible
enough to avoid working an undue hardship on this company.

The most significant objection to using net income as
the tax base for insurance companies is that net income it-
self is difficult to determine. Williamson (1934) concludes
that this is sufficient reason for discarding this base in
favor of a combination net receipts and investment income
base.1 Gamble states that although the net income tax is
probably theoretically the best of all possibilities for in-
surance taxation it suffers from serious practical difficulty
and strongly recommended the taxation of investment income as
an alternative.2 Berolzheimer while admitting the diffi-
culties of determining net income concludes that the problem
is one of account keeping and should not stand in the way of

a sound economical tax system.3 His thesis is that with

 

1K. M. Williamson» "Some Problems in the State Taxation
of Insurance“, Proceedings of the National Tax
.Association. 1934, p. 401.

292, cit., p. 40.
38erolzheimer9 92° cit.. p. il4~116.

97
proper reporting by insurance companies net income may be
determined for all types of companies, whether stodk or
mutual, life, accident or property, by applying the following
formula:

"the income subject to taxation should be total
income .... less capital funds assigned to
policyholders° reserves, less expenses of oper-
ation, less the actual return 0 capital to the
policyholder termed dividends."
That part of the dividend paid by mutuals which represents
interest, rents, dividends on investments and profit on sale
of assets is income to the company and cannot prOperly be

allowed as a deduction from net income when paid out to the

policyholder.

Comparative Tax Yields
As has_been stated, the revenue from insurance company
taxes in Michigan in 1953 was $13.4 million. .Actual receipts
from the gross premiums tax in that year were $13.06 million.2
The domestic insurance company fee enacted into law in 1952
produced $339,726 in 1953.3 It is virtually impossible to

state what this would be in terms of net income since domestic

companies are also carriers of insurance in other states and

 

1Italics have been supplied.

2State of Michigan.Auditor General, Financial Report,
Fiscal year ended June 30, 1953, Part I.

SState of Michigan Budget for Fiscal Year Ended
June 30, 1955, p. 4.

98
foreign companies are taxed by Michigan only on the premiums
written in this state. It may be said, however, that the
average insurance carrier in the united States pays only 5.5

1 and since

percent of net income in state and local taxes
Michigan is one of eight states which does not tax local
companies at as high a rate as foreign companies, in fact at
less than 0.2 percent of net income (see Table 6), it may be
concluded that Michigan companies pay less than the average
rate. The saving appears to be considerable inasmuch as the

majority of the premiums written by domestic companies are

written in this state.

 

1883 Che 1119 po 560

99
SUMMARY.AND CONCLUSIONS

Summary

In this chapter insurance companies were compared as to
type of organization and type of risks covered.

The origin of present Michigan insurance taxes was
traced and the operation of these taxes described.

The techniques for setting prices, determining net inc
come and net worth were illustrated.

Pepular arguments for not taxing insurance companies
were analyzed.

The various tax bases presently employed in Michigan and
other states were evaluated.

Finally an estimate was made of comparative tax yields

for present and proposed tax bases. \

\
\,

It was found that:

l. The McCarran Act eliminated any doubt as to the
power of states to regulate and tax insurance
companies.

2. Michigan insurance taxes were adopted on that
basis of political expediency rather than
equity or other econcmic considerations.

3. Michigan is one of eight states remaining which
discriminate against foreign insurance compau
nies in their taxing policies.

4. There is no economic justification for not tax»
ing insurance companies while other financial
companies are taxed, or for distinguishing
between stock and mutual insurance companies as
to extent of tax burden.

100

\

5. .Although requiring a more intricate system of
account keeping it is possible to determine
net income for all types of insurance compa-
nies.

6. .A net income tax is theoretically the best tax
for insurance companies.

7. The theoretic yield of a net income tax is
limited only by the rate of the tax and the
earnings of the companies concerned.
Conclusions

It is the tentative hypothesis of this study that a re-
vision of the present tax system incorporating taxes based
upon capacitywthpay, equalized between types of companies,
and collected by one central agency can result in greater
equality in tax burden and simplified and more efficient
administration. In this chapter an effort has been made to
form a basis for testing this hypothesis with respect to
insurance company taxation. Based on the findings of this
chapter it is concluded that the desired results may best be
accomplished by adepting a franchise tax based upon net in-
come in lieu of all other state business taxes for insurance
companies writing insurance policies in Michigan. Inequitles
such as discrimination in favor of domestic and mutual compaa
nies would thereby be lessened.

In order to make such a system Operative a formula must
be adopted to allocate for tax purposes a percentage of net
income of any company which is equal to the ratio of premiums

written in Michigan to total premiums written averaged with

101
the ratio of investment income earned in Michigan to total
investment income. It is also desirable that the tax be
levied against net income based on a moving average of more
than one year in order to allow the company to protect
reserves.

It is recommended that the tax rate be set at a level
compatible with tax burdens borne by other types of finan-
cial institutions in Michigan as discussed in the final
chapter of this study.

It has been mentioned that authority for the regulation
of insurance companies is vested in the Department of In-
surance. For efficient administration, it is desirable that
the tax collection function be segregated from Uhat of in-
surance regulation and be transferred to the Michigan De-
partment of Revenue which is staffed and equipped to
standardize reporting procedures, audit accounts of taxpayers

and collect taxes.

CHAPTER NH
THE TAXATION OF BANKS IN MICHIGAN

Introduction

There are approximately 435 banks and trust companies
operating in the State of Michigan including 78 national
banks, 346 state commercial banks, 3 industrial banks and
8 trust companies.1 In 1949 these banks had deposits total-
ing $4,879,222,425 and total resources of slightly over five
billion dollars. ‘Michigan ranks twelfth highest among the
states in the number of banks and eighth highest in the
amount of deposits and total resources.2 I

The distinction between types of banks is largely in
name only. The primary function of commercial banks is to
accept demand deposits, to pay out these deposits by checks,
and to lend funds at interest to commercial and other
borrowers. In addition, they accept savings deposits, invest
in nonacommercial paper which is a function of investment
banking, take orders from customers to buy securities which

is a function of brokers, and act as trustees for individuals

 

1State Banking Department, Fiftyhninth Annual Re ort of
the Commissioner, for year ended December 31, 1837,

Lansing, Franklin DeKleine Co., 1948.
zStates ranking higher in amount of deposits are New

York, California, Illinois, Pennsylvania, Massachusetts,
Ohio, Texas.

103
and corporations which are the usual legal functions of trust
companies.l Duplication of functions is further evidenced by
the fact that by 1945, 280 banks had been granted industrial
loan powers and 74 banks had been granted full or limited
trust powers.2

The state and local taxation.of banks in Michigan has
been greatly complicated by the circumstances which surround
their operation. In the first place, banks differ from non-
financial institutions in the respect that they carry a stock
of intangible assets consisting mainly of promises to pay,
such as mortgages, bonds, notes and paper money. Secondly,
they possess the monetary power of creating credit by loaning
beyond their capital and reserves. The third circumstance
adding to the complexity of the bank tax picture is that the
78 national banks operating in Michigan are chartered by the
Federal government, and, as federal instrumentalities cannot
be taxed by the states except by permission of the Federal
government. The implications of this federal intervention in
state taxing policy are widely felt in their effect on state
banks and other financial institutions.

 

1Charles L. Prather, Mone and Bankin , Chicago,
Richard D. Irwin, Inc., ¥§Z6, p. 382.

2State Banking Department, Fiftyeseventh.Annual Report

of the Commissioner, Lansing, 1946.

104
Federal Limitation of Bank Taxation

The subject of the historical development of federal
restrictions on bank taxation has been ably treated in many
recent studies.1 Only the laws and court decisions of signi-
ficance to the tax structure in Michigan shall be mentioned
here.

The first legal case of historical importance in the
taxation of banks dates back to 1819. .At that time the State
of Maryland was attempting to impose a stamp duty on the note
issues of the Second Bank of the United States. The issue
finally reached the U. 8. Supreme Court, and in the case
known as McCulloch v.Marylandz the court held that this
action by the state was unconstitutional. Chief Justice
Marshall proclaimed that “the power to tax is the power to
destroy", and that the constitution could not be interpreted
in any manner which would permit any of its instruments to be
taxed out of existence. This decision established the legal
principle that states could not tax the Operations of agencies

and instrumentalities of the Federal government. They

 

1Among the sources of information used in the prepar-
ation of this section are: H. K. Allen and Constance
C. Einhorn, Taxation of Banks, 1949; Harold M. Groves,
Financing Government, 1945; Edward H. Saier, un-
published Masterls thesis, State and Local Taxation

of Banks in Michigan, 1937; Ronald B. Welch, State

and Local Taxation of Banks in the United States, 1934.

24 Wheaton 316 (1819).

105
could, however, tax the real prOperty of national banks, and
also the interest which citizens held in these banks, pro-
vided such taxes were at the same rate as like property of
the same description in that state.

Up until the time of the Civil War, the states and
Federal government were apparently satisfied with this
decision. Both methods were employed, the first quite uni-
versally. I

With the onset of the war, the Federal government was
faced with a serious problem of financing through the sale of
government bonds. Consequently under the National Banking
Act of 1863 a series of privately owned national banks were
set up. There was no provision made for the state taxation
of these national banks and the.Act was inadequate in other
respects. The Act was therefore revised in 1864 giving the
states the right to tax national banks as follows: (1) all
real property of national banks could be taxed, according to
its value, but at the same rate as other real property in
that state, and (Z) shares of national banks could be taxed
if (a) shares were assessed where the bank was located and
(b) they were not assessed at a higher rate than “other
‘moneyed capital" in the hands of individual citizens or

higher than state bank shares.1 The Act of 1864 provided

__4¥ A

1Sec. 41, Act of June 3, 1864, Ch. 106, 13 Stat. 99,
111-112.

106
that national banks should have lists of their stockholders
open for inspection by tax officials. Ease of collection
and assessment was further assured when the Supreme Court upu
held a Kentucky statute requiring that the tax levied upon
its shares be paid by the bank, acting as the legal represenm
tative of the shareholders.1 .Actually the share tax was on
the shareholder rather than on the bank, but since collection
was at the bank, it has always been classified as a bank tax.

The Banking Act was amended again in 1868. The new
statute provided that in addition to taxing real estate,
state and local governments could also tax bank shares as
personal prOperty to the shareholders subject to two re-
strictions, namely, “that the taxation should not be at a
greater rate than is assessed upon other moneyed capital in
the hands of individual citizens of such state, and that the
shares of any national banking association owned by non-
residents of any state shall be taxed in the city or town

"2 Two changes

where the bank is located, and not elsewhere.
from the 1864 law are noted. First, no mention was made of
the limitation that national bank shares were to be taxed at
no higher rate than state bank shares. Second, the legism

lature of each state may determine whether the shares of

 

1National Bank v. Commonwealth, 9 Wall 353 (1870).
ZAct Feb. 10, 1868. c.7: 15 U. s. Stat. L. 34.

107
resident owners shall be taxed where the bank is located or
at the residence of the owner. This amendment was later
fused with the Act of 1864 into the now famous Section 5219
as it appeared in the Revised Statutes prior to 1923.

The law was further defined by an interpretation of the

1 In this decision it was

Supreme Court a few years later.
declared that the taxing provision in the National Banking
Act was required to authorize the states to impose any tax
whatever on national banks.

The effect of the statutory limitation, Section 5219,
was to bring about a high degree of uniformity in bank tax-
ation among the states and between state and national banks.
The form of the tax was as important as the rate. While the
federal law did not require that the same tax apply both to
national and state banks, it did encourage such action. The
states were free to tax their own chartered banks more
heavily than national banks if they chose to do so, but they
did not generally discriminate against them in this manner
until around 1929 when the increasing pressure for revenue
resulted in supplementary taxes.

The problem of most importance in national bank taxation
since 1868 has been centered around the interpretation of the

phrase ”other moneyed capital”. Before 1921 the general

opinion was that other moneyed capital consisted of other

 

lPeOple v. Weaver, 100 U. s. 539, 543 (1880).

108
banking capital; in other words, that the states could tax

the shares of national banks at any rate not higher than the
rate on state bank shares. Many states in an effort to modify
or improve the general property tax, adOpted a classified
property tax where bank shares were taxed at general property
tax rates and other intangibles at a lower rate. "It was
felt that this tax (share) was well administered and that
banks were generally prosperous businesses quite able to pay
taxes upon their intangible prOperty."1 In 1921, however,
the U. 5. Supreme Court in the Richmond Bank Decision held
that "other moneyed capital” included ”not only money in-
vested in banking, but investments of individuals in securim
ties that represent money at interest and other evidences of
indebtedness such as normally enter into the business of
banking."2 This decision proved embarrassing for states
using the classified property tax with a higher tax on bank
shares than other intangibles. It left them with but two
alternatives: (1) to tax bank shares at the lower rate, or
(2) go back to including all intangibles in the general
prOperty tax base. Either choice meant a loss of revenue.

In the case of reverting to the lower rate the reason is

 

1Harold M. Groves, Financin Government, New'York,

Henry Holt and Company, 1946, p. 279.

zMerchants National Bank v. City of Richmond, 256
U. s. 635 (1921).

 

Inn? . d I [...-u. illlv'lr.‘

 

109
obvious. But by lifting all intangibles to the higher rate a
loss of revenue would also be eXperienced as a result of
driving intangible personal property from the tax rolls. Such
was the case in several states prior to the enactment of
classified prOperty taxes with special low rates for certain
classes of intangibles. PrOperty'holders tended not to
declare their intangibles and the assessors were not always
successful in discovering them.

These states exerted great pressure on Congress to
change the law and in 1923, Section 5219 was amended to
liberalize the taxation of national banks. Under this amend-
ment the states could use one of three methods of taxing
national banks. They could

1.1 Retain the old share tax, provided the rate

of taxation was not higher than that assessed
upon other moneyed capital in the hands of
individual citizens of that state coming into
competition with the business of national
banks.

2. Tax net income, if the rate was not higher
than that imposed on other financial corpo-
rations nor higher than the highest rate
levied on business or manufacturing corpo»

rations.

3. Tax dividends on shares if the rate did not
exceed that on other moneyed capital.

The tax on net income did not prove as satisfactory to
the states as had been anticipated primarily because interest
on tax exempt bonds was excluded from income and inadequate
revenue could be derived. Consequently most states adhered

to the share tax method. For reasons stated this method was

110
onerous to banks and taxing authorities. The states united
in 1926 to obtain the adOption by Congress of a fourth method
of taxing national banks.1 ‘This method allowed the imposition
by states of an excise tax upon the franchise of a bank, the
value of the franchise to be measured by or according to
entire net income from all sources.2 Nichols (1950) after
analyzing the litigation caused by the adoption of this pro-
vision stated:

"There is now no question of the validity of a tax

under the fourth method which includes interest on

United States bonds which the state has no power

to tax, as well as on its own (tax exempt) bonds."3

These four alternative methods of bank taxation under
Section 5219 seemingly give the system a certain flexibility.
The fact remains, however, that national banks, as distinct
from other financial institutions are given special tax pro-
tection by the Federal government. The original National
Banking.Act was designed to protect national banks from

discriminatory treatment and not to protect the banking

business as a whole. Groves (1946) states:

 

1Code of Laws of the U. S. in force January 3, 1985,

Sec. 548, Ch. 4, Title 12.
2See Appendix B for provisions of this section.

3Pn111p Nichols, "The Interpretation of So Much of
Section 5219 as Relates to the Taxation of National
Banks Under the Fourth or Excise Method", Bank Tax
Symposium, Committee on State Legislation, American
Bankers Association, New York, 1950, p. 10.

 

111
"It is questionable whether the Federal government
needs to protect national banks now that opposition
to the system of national banking has ceased:
certainly the government would be taking no chances
by confining its control to the requirement that
states may not discriminate in favor of their own
banking institutions. The states have no dispo-
sition to do away with banking as a whole. The
question of what taxes banks should pay might well
be left to legislative discretion of the states.
In effect the Federal government has been pro-
tecting not national banks but the banking business,

from such taxes as state legislatures might see fit
to impose."

There has been considerable agitation for the relaxation of
federal limitations on bank taxation in recent years but

Section 5219 still dictates state policy in these matters.

Historical Development of Michigan Bank Taxes

The history of banks and bank taxes during the early
years of Michigan's statehood reflect the turbulence of that
period. The number of settlers grew r... 87,000 in 1834 to
almost exactly double that number in 1837. More land was
bought and sold in Michigan during 1836 than had been bought
and sold during the entire previous history of the territory.2
This boom resulted in bringing bankruptcy upon the new state
and with it many changes in Michigan's fiscal agencies and
many changes in the tax system as will be noted.

The false prosperity of the land boom period (1834-36)

 

193,. 315., p. 281-2.

2W. O. Hedrick, IFinancial and Tax History of Michigan",
Michigan History’Ma azine, 1938, Vol. 22, No. l, p. 35.

112
was made possible by banks of the note-issue type. Transfers
of realty made large money demands on these banks and they
issued money to the extent of three times their capital stock.
The profits from bank money issues were so large that more
than sixty banks were chartered by the new state in its first
year. During this same year the ”safety fund" banking law was
enacted.1 This plan required the payment of periodic dues to
the State Auditor as a safety fund for the use of creditors in
the event of a bank failure. .A second provision of the 1aW’was
the provision for a State Banking Commissioner to supervise
banks as to their business methods and enforce the safety fund
law. L

This period of bank prosperity did not go unnoticed by
the State Legislature. In 1838 a Specific tax of one-half
percent upon state bank capital stock was imposed.2 This law
appears to have been badly applied. Hedrick states that under
this tax law "bank tax receipts never exceeded a few hundred
dollars per year, while bank capital stock at one time was in
excess of forty thousand shares and many'millions of dollars."3

From 1836 to 1843 a severe business depression swept

over the country which caused most of the banks to go out of

 

1AC1; 139 PeAe 18370

ZRevised'Statutes of Mich., Ch. 8, Sec. 1 (1838).

392. cit., p. 101.

113
existence and in 1842 only six banks remained. It was not
until 1845 that a tax upon the real property of banks made
its appearance.1 Local units were granted the privilege of
taxing the real estate of banks where the banks were situated
but the new tax produced little revenue due to the limited
number of banks. The feeling against banks remained so
strong that the 1850 constitutional convention adopted a pro-
vision which ruled out any further special charters and for-
bade the enactment of any new Michigan banking law until a
referendum of the pe0ple gave approval. This approval was
finally secured in 1857 and banks were again lawful in
Michigan.2

During the Civil war the enactment of the National Bank-
ing.Act of 1863 was responsible for all but one state bank
changing over to the new system of national banks. Since
there was no provision for taxing these national banks other
than a tax on real estate, Michigan tax receipts again fell.
The former capital stock tax was ruled unlawful by the new
banking act. The taxation of share values to stockholders as
personal prOperty, however, was allowed in 18643 and after a

period of four years when national banks enjoyed almost

 

1Revised Statutes of Mich. (1846), Ch. 20.
ZAct 135, P.A. 1857.
3Aot of June 3, 1864, Ch. 106, 13 Stat. 99.

114
complete tax immunity the Michigan Bank.Act of 1867 was
passed.1 This new law provided for the taxing of bank shares
to stockholders as personal property but further provided for
collection at source. The tax on real estate remained as
before.

The general property tax principle in this new law can
be plainly seen. The same rate was used upon bank shares and
bank realty as was used upon other local property in the bank
vicinity.

Always present in the ad valorem.method of taxation is
the problem of pr0per assessment. Finding market values for
stock shares which were seldom listed on the stock markets
presented an insurmountable problem to tax assessors. In
early practice this resulted in the assessor accepting the
evaluation placed on bank shares by the bank itself. When
thedifficulties in this system.were recognized the State Tax
Commission endeavored to assist local assessors by providing
them with valuations of bank stock shares computed by so-
called experts.

Refinements continued to be made in administration until
in 1929 it was written into the law that "shares in banks and
trust companies ... doing business in this state ... shall be

assessed at the cash value of each after deducting the per

 

1not 122, P.A. 1867.

115
share portion of (a) the assessed value of all real proper-
ty ... and (b) the value of all securities ... which repre-
sent the investment of capital,surplus or undivided profits“,
but not deducting securities which are otherwise tax exempt.1
This provision remained in effect until 1939.

As was noted earlier, state banks were not generally
discriminated against although states were free to tax their
own chartered banks at higher rates than national banks if
they chose to do so. In the period 1927 to 1934 increasing
pressure for revenues caused many state legislatures to levy
supplementary taxes against state banks. By 1934 thirtyhtwo
states had levied one or more supplementary taxes on their

own banks.2

In 1929 Michigan included banks under the corpo-
ration privilege tax of two and one-half mills per one dollar
book value of capital and surplus with a minimum tax of
$10.00 and a maximum of $50,000.3 This was imposed upon both
national and state banks and trust companies but was unen-
forceable except for state banks.

In order to alleviate the difficulties of assessment in-
herent in the ad valorem tax on intangible personal property

at general prOperty tax rates several attempts were made

 

1C.L. 1929, Sec. 3396, p. 8.

ZWelch, op. cit., Table 11, p. 19, 20.
36.1.1929, Sec. 10140.

116
prior to 1939 to introduce a "specific" tax on such prOperty.
Bills providing for the low-rate taxation of intangibles were

introduced in the Michigan legislature in 19351 and 1937.2

Both were defeated. The second bill was strongly Opposed by
small loan companies because it was in the nature of a tax
upOn gross interest which in their case allowed no deduction
for Operating expenses or to cover delinquencies. Domestic
business corporations also objected because it had been a
practice to exempt stock of domestic corporations held by
Michigan residents. The new provisions placed shares Of
foreign and domestic corporations on a parity for taxation
purposes. Another factor contributing to the defeat of the
1937 bill was that municipalities desired to have all pro-
ceeds from the tax returned tO them instead Of the proposed
two-thirds.

However strong the objections were, this bill formed the
basis for the first Michigan Intangibles Tax which was en-
acted into law in 1939.3

The constitutionality Of the new law was established in
1940 when it was upheld by the Supreme Court of Michigan in

the case of Shivel v. Kent County Treasurer. In this case

 

1Michigan House Bill, No. 566, Regular Session,

ZMichigan Senate Bill, No. 246, Regular Session, 1937.

3Act 301, P.A. 1939.

117
the court stated, "The tax is specific, being levied directly
by legislative enactment upon ownership of designated per-
sonal property and cannot be held arbitrary, discriminatory
or inequitable, and the rule of uniformity required by the
_Constitution in the case of ad valorem tax, has no applica-
bility ... The tax in question is uniform upon the classes

upon which is Operates ... The act is valid ....'l The
Intangibles Tax.Act adOpted in 1939 provides that intangibles

taxed as income producing or non-income producing prOperty,
0r expressly exempt from the intangibles tax, are exempt from
all general prOperty taxes.2 .All banks and trust companies
were exempt from the Michigan intangibles tax on their own
intangible personal prOperty.3 The.Act, however, provided
that such banks should pay the tax in behalf of their share-
holders and depositors and the tax so paid could be charged
to the shareholder for whom it was paid or could be assumed
by the bank.

With the introduction of a tax law as revolutionary as
this one a provinguin period followed by changes to make the
law more equitable and more clearly defined for administra-

tive purposes was inevitable. The first amendment came in

 

1Shivel v. Kent County Treasurer, 295 Mich. 10 (1940).
2Act 301, P.A. 1939, Sec. 2.
3Aot 301, 13.11. 1939, Sec. 3, Subd. 11.

118
1941 and provided among other things that the tax be adminis;
tered by the Michigan Department Of Revenue instead of the
State Tax Commission.1 Further changes were made in 19452 as
the result of study and recommendations made by the Michigan
Tax Study.Advisory Committee.3 This study found that the
intangibles tax law was generally unsatisfactory on many
scores. It caused unfair discrimination in the treatment of
taxpayers, it was a complex law and hard to administer, and
it produced an unduly small amount of revenue. In 1943-44
the amount of tax contributed from all the intangible per-
sonal prOperty owned in Michigan was less than two percent of
the amount contributed from the tax on real estate and
tangible prOperty. Consequently, the 1945 revision incorpo-
rated many of the changes which the.Advisory Committee pro-
posed. .A specific formula was included for the allocation of
intangibles belonging to corporations doing business in other
states as well as in Michigan. The $3,000 exemption on bank
deposits and building and loan shares was eliminated. In
addition, the entire proceeds of the intangibles tax were
earmarked to be returned to local units of government on a

pOpulation basis. Cities and villages were to use the

 

1Act 233, P.A. 1941.
ZAct 165, P..A. 1945.

3Michigan Tax Study.Advis0ry Committee, Preliminary
Report, Lansing, 1945, p. 27.

119
receipts for general fund purposes: townships for capital
improvements and maintainance of roads.

The condition of state finances following adoption of
the sales tax diversion amendment resulted in legislation for
the recovery of some or all of this intangibles tax money.

In 1951 the legislature limited the amount that could be disa

1

tributed to any one year to 11 million dollars. This was

later reduced to 9.5 million dollars beginning in fiscal

year 1953.2

The excess was earmarked for payment of state
bonds issued for improvement of mental hOSpitals. In 1953
the intangibles tax produced $16,112.001. The effect of the
1953 limitation was to recover for the state approximately
$6.6 million.

In 1952 measures were also taken to increase the pro»
ductivity of the Michigan intangibles tax. The law was
amended to increase the tax rate on income producing intangi-
ble personal prOperty from three to three and one-half per-
cent.3 _There was also added a tax of four mills per dollar

of book value on shares Of stock of state and national banks

in Michigan.4 This tax was in lieu of the annual corporate

 

1

.Act 76, PaA. 1951.
2Act 181, P.A. 1952.
31bid.

4

Act 182, P.A. 1952.

120
franchise tax. The four mill tax was repealed in 1953 and a
new tax substituted which increased the rate to 5.5 mills on
capital account and exempted bank stock from the three and

oneuhalf percent tax on dividends.1

Present Bank Taxes in Michigan

Banks now doing business in Michigan are exempt from all
major taxes except the general prOperty, sales, and intangi-
bles tax.

The real prOperty of banks is assessed by local govern-
ments as other real prOperty is assessed. The Sales Tax Act
(Section 4) was amended in 1949 to permit sales to national
banks to be taxed.2 This was done to equalize taxes between
state and national banks. The amendment made it clear that
since national banks were not wholly owned by the United
States a tax on them could not be considered a tax on the
Federal government. This eliminated to some extent the dis-
crimination between state and national banks.

.As has been described in the preceding paragraphs the
intangibles tax has gradually evolved into a major source of
revenue for state and local governments. It has also become
a major state impost on state and national banks displacing

the corporation franchise tax on the capital and surplus of

 

iAct 9, PaA. 1953.

3Aots 272, 273, PaA. 1949.

 

 

fries. ...-III;
- ._ .q
. at.

121
state banks and creating a new tax on national banks.

The operation of this law as relates to banks, warrants
a detailed description. Banks doing business in this state
now pay intangibles taxes under two separate provisions of
the law.

The first provision is that all banks shall pay the in-
tangible personal property tax in behalf of their depositors
either assuming payment or collecting payment from the de-
positor. The rate of this tax is one twentybfifth of one
percent of the face value of money on deposit.1

It has been mentioned that banks may assume the tax paid
in behalf of their depositors or may charge their accounts
for the amount of the tax. A.study made in 1945 indicates
that 91.4 percent of the banks in Michigan assumed payment of
the tax on deposits. Only thirtyeeight banks charged back

the amount of the tax to the owners.2

It now is general
practice for banks to assume this tax.
The second provision, adopted in 1952, is that a tax

shall be levied upon bank shares. The law reads:

 

1
This rate also applies to the individuals who have
money on hand or in transit.

Source a Michigan Department of Revenue.

122

"The tax on shares of stock of state and national

banks and trust companies located in Michigan

shall be 4 mills per dollar of book value, in

addition to the tax payable under section 2 of

this act. Such additional tax shall be in lieu

of any annual corporate privilege fee or other

annual franchise tax upon such banks and trust

companies. "Book value” as referred to herein

shall mean that prOpertion of total capitalg

surplus and undivided profits as of December Slst

of each year represented by each share of stock

outstanding as of that date."

The purpose of this levy was to alleviate the discrimination
between state chartered and national banks. It has been
noted that the corporation franchise tax applied only to
state banks since national banks are not chartered by the
State of Michigan. By the eXpedient of adapting the four
mill intangibles tax on the book value of shares in lieu of
the corporate franchise tax the shares of all banks were
taxed at an equal rate.

This is the second instance in four years that steps
.have been taken to equalize taxes between state and national
banks, the first being the levy of taxes on sales to national
banks in 1949.

In 1952 when the four mill bank tax was adopted banks
were also being assessed under a third provision of the in»
tangibles tax; that all banks pay in behalf of their share-
holders a tax of three and onemhalf percent of income pro»

duced by shares but not less than onemtenth of one percent of

 

lAct 182,, P.A. 19529 Sec. 2a.

123
the face, par, or contributed value of such shares. However,
this provision was eliminated in 1953 when a five and one-
half mill capital account tax was levied replacing the four
mill levy and exempting bank stock of the basic three and
oneahalf percent income tax on dividends. There are there-
fore now only two provisions of the intangibles tax appli-
cable directly or indirectly to banks; the deposits tax and
the capital account tax. These taxes are assessed on both
state and national banks.

.At the time of the adoption of the Intangibles Tax Act,
one problem was that of devising a method of taxing banks
that would yield approximately the same amount of revenue as
was obtained by taxing bank shares at the general property
tax rate. From 1939 to 1945 the revenue from banks fell far
below the general prOperty tax yield of prior years. Be-
ginning in 1945, bank intangibles tax receipts were increased
by providing that the tax on bank deposits be collected at
source. Of $2,388,659 of intangibles taxes paid by banks in
1951, $328,974 was paid on shares and $2,060,771 was paid on
deposits.1 In 1951 state banks also paid a corporate

franchise tax. In an address befOre the American Bankers”

 

1State of Michigan, Department of Revenue, as reported
in Michigan Tax Survey - 1952. .A report from the
Michigan TaxSurvey.Advisory Committee, submitted to
the Legislative Interim Tax and Revenue Committee,
February 21, 1952, Table 42, p. 92.

4—1.” v.7: .Hlulflm .I11 I3!“

 

124

Association, Cudlip (l950) stated:

"An intangible personal prOperty tax is clumsy, but

the difficulties presented can well be suffered so

long as the tax rate is as low as it is in Michigan.

I know most bankers prefer this system to an ad

valorem tax. Further, the financial burden is less

than if an excise tax were levied measured by bank

earnings."1

In March of l954 the five and oneahalf mill share tax
has been in effect less than one year and no revenue figures
are available. However, since the four mill share tax was
levied at approximately the same rate as the corporation
franchise tax which it replaced and the increase in millage
to five and onemhalf was intended to replace the revenue
from the income tax on share dividends it may be concluded
that the effective tax rate on state chartered banks has not
increased through recent changes in tax legislation.

‘Some indication of the burden of business taxes on
Michigan banks may be gained by referring to the base year of
1951 and applying present (1953) rates. Only the intangibles
tax applies since the corporation franchise tax has now been
eliminated from the list of taxes applicable to banks. It
has been noted that the tax on deposits produced $2.06
million in 1951. To this must be added the revenue that

would have been produced by a five and onemhalf mill share

 

1William B. Cudlip, "Michigan", Bank Tax_§ymposium,

Committee on State Legislation, American BankersT
Association, New York, 1950, p. 63.

125
tax on capital account, or $2.78 million. Total revenue
would therefore have been $3.59 million. In the same year
(1951) Michigan banks showed a net profit before federal
taxes of $47.7 million.1 The conclusion is that business tax
levies would have resulted in a tax burden of 7.5 percent of
net income before federal taxes. .Assuming that earnings have
kept pace with deposits and share values, 7.5 percent of net
income is approximately the business tax burden now carried
by state and national banks in Michigan.

Payment of the capital account tax on national bank
shares has been contested by the Michigan National Bank of
Detroit on the grounds that the ”other moneyed capital" pro-
vision of Section 521.9 of the Banking Act of 1863 has been
violated.2 The claim made is that shares of national banks
in Michigan are assessed at a higher rate than upon other
moneyed capital coming into competition with the business of
national banks. It was noted earlier3 that “other moneyed
capital" includes not only money invested in banking but
investments of individuals in securities and other evidences

of indebtedness that normally enter into the business of

 

1Data on Income, Taxes and C_pital Accounts, F.D. I.C.,
as compiled in the Michigan Tax Survey, l952,
Table 23, p. 60.

2Source a Michigan Department of Revenue.

3pc 1080

“of. 71130319. ...KN

l26
banking. If the law is successfully contested the state will
be left with the alternative of taxing shares at a lower rate
with consequent loss of revenue or levying an excise tax
measured by bank earnings. Cudlip (1950) speaking for
‘Michigan bankers feels that this would result in a heavier

financial burden for banks.

Theory of Bank Taxation

.A large percentage of the assets of banks is in the form
of intangible or representative prOperty. In theory, the
principle of a lower tax rate for intangible property than
for real prOperty has been supported by economists since inn
tangible prOperty is generally considered to be representa-
tive prOpertyaarepresentative of real propertya-and equal
rates could result in excessive taxation. Welch (1934) says
that "Except the (bank assets) tax be upon the business of
banking rather than an ordinary prOperty tax, .... exemptions
should be extended to all such securities in the hands of

financial institutions.”2

This principle has been followed
in taxing bank deposits at the low rate of one twentymfifth
of one percent of their face value. Whether it is a business
tax or not is a matter of intent. The law provides that the

tax initially be paid by the bank. In very few cases does

 

1See p. l24.
%’815h9 92’.) Citog po 770

127
the bank pass the deposit tax directly on to the depositor.
The intangibles tax on the capital account of banks is more
clearly a business tax since it was enacted as a substitute
measure for the corporation franchise tax in 1952.

The disadvantages of book value (or capital account)
taxation have been frequently extolled in the literature of
economics. In the first place, book value may be altered
considerably by charging off real estate and losses on loans
making assessment difficult. Secondly, book value does not
represent earning power. There is, however, one advantage to
this type of tax in that it may be used to complement a divi-
dends tax and reach undivided profits.

The principal advantage of the intangibles tax on de-
posits from the fiscal point of view is expediency. It is
collected at source and produces a sizeable amount of revenue.
An inducement is offered to banks to assume this tax by
adopting a special low rate of one twenty-fifth of one perm
cent of face value. Certain inequities are apparent in this
method of taxation. In the first place, derivative deposits
are taxed at the same rate as primary deposits. This results
in excessive multiple taxation. The second criticism is that
the amount of deposits bears only an indirect relationship to
abilitywto-payo

There are other methods of bank taxation employed by
states. They are (l) a tax on, or according to, net income,

(2) a share tax at general property tax rates, and (3) a tax

128
on dividends. History has shown that the taxation of bank '
shares at general prOperty tax rates leaves much to be de-
sired. The problem evolves around difficulty of assessment,
double taxation and inequality of tax burden.

Michigan experienced a tax on bank share dividends under
the Intangibles Tax.Act prior to 1953. Dividends may or may
not be a satisfactory measure of abilityhto-pay depending on
the individual bankls policy with regard to distribution of
profit. .A recent study shows that the undistributed profits
for all banks amounted to 53.3 percent of net income after
taxes in 1950.1 .A tax on dividends if not used in conjunction
with a tax on undistributed profit encourages an increase in
surplus accounts and permits savings to escape taxation where
bank stock is closely held and stockholders are recipients of
large incomes.

One advantage of the dividends tax is that it provides a
‘lmore stable revenue than a tax on or according to net income
[due to the efforts of corporations to stabilize dividends by
alternately adding to or deducting from surplus. States witha
out an income tax on corporations have been reluctant to adapt
the dividends tax since it meant abandoning the share tax in

accordance with limitations set forth in Section 5219 for

 

l
U. S. Department of Commerce, National Income, 1951

Ed., pp. 171, 175.

129
national banks.

.A lower limit was set on the Michigan dividends tax.
Simply expressed, the law stated that the tax shall be three
and oneuhalf percent of income, or one-tenth of one percent
of face, par, or contributed value. It is readily apparent
that this latter base,m-face or contributed value-dwill
seldom bear any relation to what the stock is worth particu-
larly after a corporation has been in business any length of
time. When earned surplus is omitted from the tax base
business policies concerning the distribution of corporate
income are affected. V

The advantages of a net income tax for financial corpo-
rations have been described in Chapter‘V. Section 5219 of
the Revised Statutes, however, makes an important distinction
between a tax on net income and a tax according to or
measured by net income. Both are permissible under the
federal statutes, but the tax measured by net income permits
taxation of what would otherwise be taxoexempt interest on
government bonds. Many states use this second method.
Nichols (1950) states that Section 5219 will not be con-
sidered violated unless it can be definitely seen that the
tax is on receipts and not on gain, or that the definition of
net income in the case of national banks is less liberal than

' l
in the case of other corporations. .A p0pular and valid

lPhilip NiChOng $3 Citog p. 80

130
criticism of corporate net income taxes is that exemptions
often create inequities in tax burdens. This criticism.is
avoided under the provision for taxing according to net in-

come and including tax-exempt securities in the tax base.

Comparison of States' Practices

To summarize, Section 5219 of the Revised Statutes of
the United States provides four methods by which the several
states may tax national banks. They may in addition to tax-
ing the real estate of national banks,

1. tax said shares, or

2. include diVidends derived therefrom in the

taxable income of an owner or holder thereof,

or,

3. tax such associations on their net income,
or

4. according to or measured by their net in-
come,

provided certain conditions are complied with. States may
also employ the dividends method with either form of income
tax.

From 1864 to 1923 the ad valorem share tax was the only
method authorized for taxing national banks, and states with
few exceptions did not discriminate against their own banks
by levying supplemental taxes. Nine states still tax shares
at general prOperty tax rates while seventeen states have
adOpted a special low rate property tax for intangible
prOperty (Table 7).

131

Since 1923 when other methods were authorized by federal
statute twelve states have adOpted the net income tax on

banks, nine states have applied a tax measured by net income
and fifteen states have used a tax on dividends in combi»

nation with one of the two forms of income tax.

132
TABLE 7

METHODS USED BY STATES TO TAX NATIONAL BANKS1
S
, Shares ‘ ' Franchise Dividends
Regular Low Net Tax Based On On

Rate Rate Income Net Income Shares

 

.Alabama x
Arizona x x
Arkansas x
California x x
Colorado x x
Connecticut x
Delaware
Florida
Georgia
Idaho x x
Illinois x
Indiana
Iowa
Kansas
Kentucky
Louisiana x
Maine
Maryland x
‘Massachusetts x x
Michigan x
Minnesota x x
Mississippi x
‘Missouri x x
Montana x
Nebraska x
Nevada x
New Hampshire x
New Jersey x
New Mexico x
New York x x
North Carolina x
North Dakota . x
Ohio . x
Oklahoma x x
Oregon x x
Pennsylvania x '
Rhode Island x
South Carolina” x x
South Dakota x
Tennessee 1 x = x
Texas x

xxx

xxxx

X

 

 

 

 

 

 

133
TABLE 7 CONTINDED

-‘

 

 

Shares Franchise Dividends
Regular Low Net Tax Based On On
Rate Rate Income Net Income Shares

Utah x x
vermont x x
Virginia x
Washington x
west Virginia "x ,
'Wisconsin x x
Wyoming ‘ x

 

 

 

 

 

 

l
.Adapted from Tax Systems, Eleventh Edition, Commerce
Clearing House, Inc., by H. R. Allen and Constance

C. Einhorn, ”Taxation of Banks", Report of the
Revenue Laws-Commission of the State of l inois,
Springfield, 1949:5hapter XII, Table l, p. 223.

Louisiana ”net income tax" is five percent of gross
interest earned.

‘Washington ”net income tax" is an adjusted gross
income tax.. .

134
SUMMARY.AND CONCLUSIONS

Summary
In this chapter the historical development of federal,
restrictions on the taxing of national banks was traced.
With this as a background, the origin and history of
Michigan bank taxes was develOped emphasizing the influence
of federal limitations upon state bank tax legislation.
Present bank taxes in.Michigan were described with
special attention given to the intangibles tax, its Oper~
ation, yield and relative tax burden.
'Various bank tax bases were evaluated including those
presently employed in Michigan and others permitted by
federal statute.
Finally, other states" practices were noted illustrating
the diversification of taxing methods used.
It was found that:
l. As confirmed by court decisions, states may
not tax national banks without the express
permission of the Federal government and then
only at no higher rate than other moneyed
capital coming into competition with the
banks 0

2.‘.As prescribed in Section 52l9 of the Revised
Statutes of the United States there are four
basic methods allowed for states to tax
national banks in addition to an ad valorem
tax on real property. These are (I) an ad
valorem tax on shares, (2) a tax on shares
and dividends, (3) a tax on net income, and
(4)a franchise tax measured by net income.

.A tax on dividends may be used in combination
with a tax on or measured by net income.

3.

4.

5.

7.

135

.A comparison of statesi practices indicates
that all prescribed methods are used. The
most common practice is to levy an ad

valorem tax on bank shares either at prOperty
tax rates or at a Special low rate.

In Michigan, provision is made for collection
at source of bank taxes on capital account
and on deposits at face value.

The tax on deposits is a low rate ad valorem
tax based upon the face value of such den
posits. For the purpose of evaluation this
tax is considered to be a bank tax since
collection is at source and little effort is
made to collect the tax from depositors.

The yield of the intangibles tax paid by
Michigan banks in 1951 was $2,388,659. State
banks also paid a corporation franchise tax.

At 1953 rates the total business tax burden
carried by state and national banks in
Michigan in 1951 would have been 7.5 percent
of net income before federal taxes.

Conclusions

It is the tentative hypothesis of this study that a re-

vision of the present tax system incorporating taxes based

upon capacitymtompay, equalized between types of companies

and collected by one central agency can result in greater

equality in tax burden and simplified and more efficient

administration.

It may be stated at the outset that tax inequality be-

tween types of banks does not present nearly as important a

problem as inequality between types of insurance companies.

There did exist discrimination between state and national

banks under the sales tax and corporate franchise tax when

136
this study was begun, but this has been eliminated. What in-
equality does exist is due to the type of taxes levied rather
than to the uniformity of coverage. For example, it has been
pointed out that deposit taxes produced approximately seven
times as much revenue as share taxes in 1951. Yet banks
which perform primarily as trust companies will have few de—
posits and a lower tax burden. Based on the findings of this
chapter it is concluded that only by adopting a franchise tax
measured by net income in lieu of all other state taxes on
banks doing business in Michigan can the desired equity be-
tween taxpayers be accomplished and taxes be based on
capacityato=pay. The adOption of such a tax will also result
in simplified administrative and reporting procedures by sub»
stituting one base for the present multiple base system.

It is recommended that the tax rate be set at a level
compatible with tax burdens borne by other types of financial
institutions in Michigan, to be discussed in Chapter VIII.

Authority for the regulation of banks and trust compa-
nies is vested in State Banking Department. The collection
function is administered by the Michigan Department of
Revenue which also administers the collection of other major
state taxes. This dual responsibility has resulted in maxi-

mum efficiency in administering present taxes.

CHAPTER VII

TAXATION OF BUILDING.AND LOAN ASSOCIATIONS
IN’MICHIGAN
Introduction
Building and loan associations are located in every
state and present an unusual problem in the field of state

1 They have grown tremendously in size and imp

taxation.
portance as savings institutions in recent years and thus
have come into competition with savings banks and savings
departments of commercial banks in this field. In 1947,

of nearly nine billion dollars saved, 13.5 percent was
placed in building and loan associations.z They are also

in direct competition with banks and insurance companies

in the real estate loan business. In 1949 there were 69
such institutions in Michigan with total assets of approxi-
mately $320 million.3 Some indication of their rapid growth

is illustrated in Table 8.

 

The term."building and loan association" shall be
used in this chapter wherever reference is made
to building and loan associations, savings and
loan associations, building and homestead associ-
ations, and c00perative banks.

1

2Unpublished report, Grant Aw Longenecker, Executive
Mane er, Michi an Savings and Loan League, October
I, l 49, p. l Addendum A).

3Boehmler, 9g. cit., 1:. 172-12.

138
TABLE 8

GROWTH OF BUILDING.AND (1)
LOAN.ASSOCIATIONS IN MICHIGAN

 

 

 

 

, Number of
‘Year .Assets Associations
1910 3 18,124,731 63
1915 27,696,545 65
1920 50,976,796 75
1925 96,302,276 90
1930 167,199,813 67
1949 319,923,688 69

 

 

 

(1)Data from.1910-1930 from.1rving B. Rich,
“"Michigan“, History of Buildin and Loan in
the United States, p. 444, able 1: and
data for 1949 from unpublished report comp
piled by Grant.A. Longenecker, Executive
Manager, Michigan Savings and Loan League.

This table shows that assets of Michigan building and
loan associations approximately doubled between the years
1930 and 1949 while the number of associations remained at a
fairly constant level.

Building and loan associations operate under a dual
system of charters similar to the system for banks. .Associ-
ations are either federally chartered or state chartered.
Approximately one-fourth, or 1,500, of the 6,000 building and
loan associations in the nation are federally chartered.1
In.Michigan this ratio is somewhat higher with 33 of the 69

associations having federal charters, or 48 percent.2

 

1Boehmler, 92, cit., p. 12-11..

Ziongenecker, Loc. cit.

139

Federal building and loan associations have depositors'
accounts insured with the Federal Savings and Loan Insurance
Corporation up to a maximum amount of $5,000 per member
savings account. They also have membership in the Federal
Home Loan Bank, designed to provide a reserve fund in the
event of heavy withdrawals of savings from any association
which is a member.

.A state chartered building and loan association on the
other hand, may elect to become a member of the Federal Home
Loan Bank. If it does so it has the further option of insur-
ing members' accounts with the Federal Savings and Loan In-
surance Corporation by paying the required premium. Neither
of these affiliations are compulsory for state chartered
associations. However, 25 of the 36 Michigan associations
are now members of the Federal Home Loan Bank and 14 have
purchased share insurance from the Federal Savings and Loan
Insurance Corporation.1

In the case of either federal or state charters the
governmental authority that grants the charter to the insti-
tution also supervises it. This involves an annual exami-
nation of accounts and loan security and of compliance with
the code or charter governing the association.

The handling of savings is done in much the same manner

 

1Longenecker, Loc. ci .

140

as with the savings department of a commercial bank or a
savings bank. However, depositors are considered shareholders
and the earnings of the institution accrue to them in the form
of dividends. Policy is determined by the board of directors
elected at an annual meeting of the shareholders. Profession-
al management and a staff trained in the operation of a
savings institution are engaged to conduct the daybto-day
affairs of the association. Earnings accrue to shareholders
through the expedient of investing their shares in mortgage
loans and other investments.

The problem of taxing building and loan associations is
a difficult issue in most state legislatures. The issue
hinges on the mutuality of such associations and the socio-

logical aspects of the type of service which they perform.

Historical Development

The first Michigan building and loan association was
organized in Jackson in 1868 as the Germania Savings and Loan
.Association No. 1.1 This organization as well as others
formed during the 1880's was of the terminating plan type.
They were organized to provide the members with funds for
building purposes. ‘When the original purpose had been ful-
filled the association was dissolved. However, the practice

used by many associations, including Germania, was to

 

llrving B. Rich, "Michigan“, Histor of Buildin
and Loan in the united States, Chicago, 1931.

141
reorganize with a new name or number each time the existing
bonds matured.

By 1890 a serial type organization was being adopted by
building and loan associations to eliminate the waste of re-
peated reorganizations. The method employed was to issue new
series of bonds at regular intervals of three or six months
so that there were always unmatured bonds and the association
could exist indefinitely.

The first Michigan law applicable to building and loan
associations was passed in 1887. These organizations were
defined as:

"... any association or corporation heretofore or
hereafter organized or incorporated under any
building and loan association law for the purpose
of acquiring, building, and improving homesteads,
removing incummerances therefrom, accumulating
‘money to be loaned to its members or as herein-
after provided, or assisting its members to
accumulate and invest their savings, and which
association accumulates the funds thus loaned or
otherwise invested, in part, through the issuance
or sale of its own stock or shares."

This definition has remained unaltered in the statutes
since 1887. The act also provided special tax exemptions:

"The shares held by any member of any such
association incorporated under the provisions
of this act, and all mortgages or other securiu
ties held by such associations, shall be ex-
empted from all municipal or other tax under
the laws of this state."2

 

1Act 50, P.A. 1887, Sec. 1.
21bid., Sec. 17.

142

The constitutionality of this provision was upheld by
the courts in the case of National Loan_gnd Investment Company
v. Detroit (136 Mich. 451,452). In this case the courts found
that:

"Legislature has powers to exempt from taxation

the stock and mortgages of building and loan

associations; the object of the law is sufficient-

ly expressed in the title, and this section is not

repealed by the general tax laws."

.At the end of 1896, Governor Rich who had been hampered
through two terms of office by large treasury deficits urged
the levy of a tax upon building and loan associations.1 No
action was taken however and in 1911 a mortgage tax levied
at the rate of fifty cents for each $100 of the remaining
principal debt secured by a mortgage on prOperty located in
Michigan applied to banks but exempted building and loan
associations.2

In 1921 an annual fee of one-quarter mill upon each
dollar of its paid-in capital and legal reserve was levied on
each state chartered building and loan association.3 This
was a specific tax for the privilege of exercising its

franchise and transacting its business in Michigan and thus

did not violate or repeal the tax exemption previously

 

lHQdPiCkg as Citep' p. 70e
ZAct 91, P.A. 1911.
3Act 85, P.A. 1921, Sec. 4a.

143
mentioned. Shares, mortgages and securities of building and
loan associations remained exempt from any form of ad valorem
prOperty taxation.

The l921.Act provided for an annual fee of two and one-
half mills upon each dollar of paid-up capital and surplus
for corporations other than building and IOan associations.

This fee increased to three and one-half mills in 19511, and

four mills in 19522, but the rate for Michigan building and
loan associations remained at onecquarter mill per dollar of
paid-in capital and legal reserve. Federal associations were
not taxed.

The tax exemption on member shares in building and loan
associations remained effective until 1939 when such shares
became taxable under the Intangible TaxAct.3 This was valid
inasmuch as the new act provided for a specific tax upon the
”ownership” of intangible personal prOperty and not an ad
valorem tax on shares. The rate was established at six per-
cent of income derived but not less than one-tenth of one
percent nor more than threeatenths of one percent of face or
par value. The rate for non-income producing intangibles was

set at oneotenth of one percent of face, par or contributed

value. An exemption of $3,000 of share value was permitted

 

1Act 277, P.A. 1951.
2Act 183, P.A. 1952.
3Act 301, P.A. 1939.

144
for each taXpayer. Building and loan associations as con-
trasted with their shareholders were exempt from.payment of
the tax on the ownership of intangible personal prOperty.

This law was amended in 1945 eliminating the $3,000
exemption and providing for a fixed rate of one twentybfifth
of one percent on paid-in shares in building and loan associa

l Associations

ations, the same rate as for deposits in banks.
were given the Option of paying the tax in behalf of their

shareholders. In all but a few cases this was done.

Present Michigan Practice

In summary of the above it may be stated that a state
chartered building and loan association Operating in Michigan
pays two taxes to the state. The first is the annual corpo-
ration privilege fee of one-quarter mill per dollar of paid-
in capital and legal reserve. The second is the intangible
personal prOperty tax in behalf of its shareholders at the
rate of one twentyufifth of one percent of paid-in membership
shares. Federal associations pay only the intangibles tax
although federal law permits taxation of these aesociations
under the corporation franchise tax at the same rate as
similar state institutions.2 ‘All building and loan associa

ations are subject to the general property tax on their real

 

1Act 165, P.A. 1945.

zTitle 12, Fed. Code Ann. Par. 1464(h).

145
estate and tangible personal prOperty.

Taxes are remitted by building and loan associations in
the following manner (1) the annual corporation franchise tax
is paid to the Secretary of State, (2) the intangible personal
prOperty tax is paid to the Department of Revenue.

Revenues produced by the annual corporation franchise tax
on state chartered building and loan associations have in-
creased slightly in the past few years from $21,118 in 1945 to
$27,667 in 1951.1 Intangibles tax collections from state and
federally chartered associations have grown from $70,0262 to
$130,7113 in the same period of time. The additional revenue
from these taxes was largely the result of the growth in the
volume of deposits by shareholders.

The tax burden borne by building and loan associations
in Michigan is illustrated in Table 9. Data in this table
indicates that building and loan associations carry a lighter
tax burden than banks, discussed in Chapter VI. It also
emphasizes the discrepancy in tax burdens borne by federal

and state chartered institutions.

 

1Financial Report of the State of Michigan,.Auditor
General,‘Lansing, Michigan, 1 4 , 5 .

2Figure obtained from State of Michigan, Department
of Revenue.

3Michigan Tax Survey, 1952, Table 42, p. 92.

146
TABLE 9

TAX BURDEN OF BUILDING AND LOAN ASSOCIATIONS< 7‘)

Michigan a 1948

 

 

Federal State Total

1. Number of 32 38 70
Associations

2. Net Income $4,360,150 $3,464,377 $7,824,527

3. Corporate mm 27,405 27,405
Franchise Tax

4. Percent above tax u- 0.8 0.3
to net income

5. Intan ibles Tax 59,438 42,530 101,968
(est.

6. Percent above tax 1.3 1.2 1.3
to net income

7. Total Taxes 59,438 69,935 129,373
(Items 3 and 5)

8. Percent total I 1.3 2.0 1.7

taxes to net inm
come

 

 

 

 

(1)

Sources Of data are as follows:

Net Income (Federal) - Statement of Opera
ation a Michigan Associations for year
ending December 31, 1948, FHLB, Indianapolis.

Net Income (State) a Report on B a L Associ-
ation, Secretary of State, 1948.

Corporate Franchise Tax a Financial Report of
the State of Michigan, Auditor General,
Lansing, Michigan, 1948.

Intangibles Tax m Estimate based on one
twentwaifth Of one percent Of share values.

147
Other States? Practices

The practices Of the various states in taxing building
and loan associations differ widely. .A quotation from‘Welch
may serve to illustrate the problem of interpreting state
tax statutes.1

“Any attempt to tabulate the taxable status of

building and loan associations in the fortyb

eight states involves one in a task Of great

magnitude. Besides the difficulty of distin-

guishing between taxes and fees, one is con-

fronted with a host of poorly drafted statutes,

conflicting laws, and vague applications of

general tax statutes. ... Even more difficult

to interpret are the statutes which make no

specific mention of the taxation of building

associations."

An examination of the comparison compiled by Dr.‘Welch,
however, indicates that the tax systems of other states are
replete with exemptions and low rates for building and loan
associations. The most common form Of tax found is a tax on

various assets at very low rates.

Theory of Building and Loan Taxation
Since their inception, building and loan associations
have received Special tax consideration or immunity under
Federal and many state tax laws by virtue of their claim to
being mutual, nonuprofit institutions organized to promote
thrift and to permit poor peOple to own homes. This thinking

has been perpetuated by building and loan associations and

 

1l'lelch, Q. cit., p. 199.

148

has been effective in preventing adjustment Of tax rates with

competing firms.

The point Of view that building and loan associations

perform a unique service to society has also been prOpounded

by the courts. In an early case it was stated:

"The primary purpose Of these organizations is
to encourage peOple of limited means to pro»
cure homes and to make it possible for them to
build their hpmes, secured by their stock and
real estate."

.A year later there appeared to be some question as to

the reality Of benefits derived in the following court find«

ings:

"Building and loan associations are peculiar
institutions and from some real or imaginary
benefit that they are supposed to afford the
poorer classes Of society, are frequently given
exceptional advantages over other corporations
and private persons such as immunity from tax-
ation and usury laws."2

In 1904 it became evident that the courts1 stand on tax

measures was based on precedent and not a thorough exami-

nation of the issues involved:

“The law gives special favors to such associations
as these. It permits them to charge high rates of
interest and to escape the payment Of taxes, -
privileges denied to banks and other similar

 

1Myers v. Alpena Loan and Building Association,
117 Mich. 389,392. (1898).

zPhelps v. American Savingand Loan.Association,
121 Mich. 343,354. (1899).

149

institutions. This is upon the theory that the
poorer classes may be able to obtain homes."1

The special benefit to home owners so frequently re-
ferred to may have been present in the earliest types Of
building and loan associations. Shareholders in these insti-
tutions loaned money tO themselves and only for the express
purpose Of building or improving their homes or removing
encumberances from existing homes. The plan made possible
the pooling Of resources of peOple Of limited means in a
mutual type of arrangement.

There are now two classes of shareholders-~those who
borrow and those who do not. Loans are made for purposes
other than home building and improvement, and rates are adu
justed when possible to reflect maximum profit for the as-
sociation. State chartered building and loan associations
in Michigan had total assets valued at $171 million in 1944.
Of this amount $107 million or 62.7 percent was in mortgage
loans and real estate contracts. $51.4 million or thirty
percent was in nonureal estate investments.2 Of the mortgage
loans, many were made on owned homes to be used for purposes
other than improvement.

Building and loan associations under present-day methods

 

1Stoddard v. Saginaw Building and Loan Association,
138 Mich. 73,79. (1904).

2The Economic Almanac, 1946-1947, p. 416. Source:
Federal Reserve.

150
of operation may no longer be classified as mutual, non-
profit organizations and there is little Justification for
believing that lower income groups benefit materially by
financing their homes through these associations rather than
banks or insurance companies.

There is a further argument that is often advanced by
associations supporting the special privilege theory. It is
that building and loan associations promote thrift, the imp
plication being that this is a sound economic policy and that
a tax on such associations will discourage savings. This
would be difficult to prove or disprove. .An increase in
taxes could conceivably result in increased loan rates, re-
duced dividends, or streamlining Of Operations. If the
effect is a reduction in dividends to shareholders there prob-
ably would be little reduction in volume of savings unless the
tax discriminated against building and loan associations in
which case savings would shift to institutions which offered
a higher rate Of return. There is little likelihood of such
a shift occurring with a mOderate increase in taxes since the
average dividend paid by state chartered Michigan building
and loan associations in 1949 was 2.8 percent1 while savings

banks paid no more than two percent on deposits and commercial

 

1Report on Building,and Loan and Savin s and Loan
.Associations, Michigan Department of tate,
Eansing, Michigan, 1949, pp. 9-44 incl.

151
banks generally paid none and Often charged depositors for
services. The total volume of savings is dependent upon many
more factors than the expected rate of return; factors such
as availability of consumer goods, government price re-
strictions, individual desires, and real income levels. In
general, taxes reduce the amount Of money available for
savings. Government utilization of tax proceeds may however
increase investment Opportunities and raise income levels,

thereby encouraging savings.

152
SUMMARY AND CONCLUSIONS

Summary

In this chapter the size, nature of Operation, and types

of charters Of Michigan building and loan associations have

been described.

The historical development Of the tax system for these

associations was traced.

The present tax system.was outlined noting taxes levied,

tax bases and rates, methods Of remitting, revenues produced,

and tax burdens.

Finally, arguments advanced by building and loan associ-

ations supporting the special tax privilege theory were

analyzed and evaluated.

It was found that:

1.

Z.

3.

The volume Of assets and savings has increased
materially in the past few years and that
building and loan associations now compete
vigorously with savings banks and savings de-
partments for the savings of individuals.

They also compete with banks and insurance
companies for real estate loans.

.A dual system Of charters exists with state
chartered associations being extended the
privileges Of federally chartered insti-
tutions such as membership in the Federal

Home Loan Bank and share insurance in the
Federal Savings and Loan Insurance Corporation
by paying the necessary fees and premiums.

Depositors are considered shareholders and
elect a board of directors to determine policy.
Earnings, called dividends, accrue to the
shareholders through the investment of their
shares in mortgage loans, land contracts and
non-real estate loans.

4.

5.

7.

8.

9.

10.

153

The first building and loan association law

in Michigan was passed in 1887 defining the
purpose and nature Of such associations and
exempting shares, securities and mortgages
from taxation. The latter provision succeeded
in keeping building and loan association
shares Off the general prOperty tax rolls.

The first state tax on building and loan
associations was levied in l921,u-a specific
tax on paid-in capital and legal reserves at
a special low rate. This was the annual
corporation privilege fee. Federally
chartered associations were not taxed.

The intangibles tax on shares was added in
1939. This was not considered a tax on
building and loan associations until the law
was amended in 1945 providing collection at
source and eliminating exemptions. The rate
Of tax on such institutions is the same as
for bank deposits. Building and loan associ-
ations are exempt from taxation on all other
intangible property which they hold.

.All associations operating in Michigan are
under the supervision of the Department of
State. Examination of federally chartered
associations are made Jointly by state and
federal auditors. Reports are required of
member associations by the regional Office

of the Federal Home Loan Bank. Corporate
franchise taxes are remitted to the Secretary
of State. Intangibles taxes are paid to the
Department of Revenue.

The state tax burden imposed on federal as-
sociations in Michigan in 1948 was 1.3 percent
of net income. State chartered associations
carried a tax burden Of two percent. The
average for all associations was 1.7 percent.

There is no uniformity in other states'
practices in taxing building and loan associ-
ations. The most common practice is to tax
one or more of the various assets at a very
low rate.

Building and loan associations are no longer
mutual, nonaprofit‘organizations.

154
11. The claim that such associations promote thrift
and permit poor peOple to own homes has been
overuemphasized in the light of present
practices of building and loan associations.
Conclusions

.As stated earlier, it is the tentative hypothesis of
this study that a revision of the present tax system incorpo-
rating taxes based upon capacity-tO-pay, equalized between
types of companies and collected by one central agency can
result in greater equality in tax burden and simplified and
more efficient administration.

It has been pointed out that inequalities of tax burden
do exist between state and federal associations in.Michigan
and between building and loan associations and other types of
financial institutions. To extend coverage and increase
rates of present taxes is not an acceptable solution to the
problem of inequality since these taxes do not meet the
criteria Of a good business tax as defined in Chapter IV. A
franchise tax measured by net income has been evaluated in .
previous chapters as well as the corporate franchise tax,
the intangibles tax, and tax practices employed by other
states with the conclusion that a franchise tax measured by
net income best meets the requirements of a business tax on
financial institutions. This is true also of building and

loan associations.

Building and loan associations in Michigan carry

155
approximately oneufourth as much state tax burden as banks.
To equalize tax loads at the bank rate would result in in-
creased revenue to the state. Equitable rates for a fi-
nancial institution tax system will be discussed in Chapter
VIII.

The efficiency Of the tax collection function is imp
paired by having each tax collected by a different state
agency. This may be eliminated by having all taxes collected

by one agency such as the Michigan Department of Revenue.

CHAPTER VIII

SUMMARY.AND PROPOSALS

Evidence has been compiled in the foregoing chapters to
prove that: V

l. inequities Of tax burden exist between fi-

nancial institutions of various types within
the Michigan tax system,

2. the taxation Of financial institutions bears

no direct relation to capacityato—pay as
measured by net income and,

3. the administration Of the tax system for fin

nancial institutions is complex and ineffi-
cient.

The findings Of this study relating to the above points
may nOw be summarized.

It has been seen that financial institutions have
throughout their history been considered a special category
of business for tax purposes. Insurance companies and build=
ing and loan associations have claimed immunity or special
tax privilege by virtue of the service which they perform,
the claSses Of peOple which they serve, or the type of
business organization under which they operate. Banks have
found refuge in the tax restrictions imposed by the Federal
government to prevent discrimination against national banks
by the states in which they are located. The result, as
indicated in Chapter I, has been that financial institutions

now carry a prOportionately lighter share Of the tax burden

157
than do nonofinancial businesses.

Of more significance to this study is the fact that tax
discrimination exists between financial institutions compet-
ing in identical fields. It was found that all three major
institutions treated in this study are in direct competition
for savings and mortgage loans. However, the state tax
burden measured by net income ranges from approximately 0.2
percent for insurance companies to 7.3 percent for banks,
with building and loan associations paying 1.7 percent. The
low rate for insurance companies is influenced to some extent
by the fact that gross'premiums taxes paid to other states
for outstate business written are not reported. It has been
further found that tax burden discrepancies arise between
insurance carriers and between state chartered and federal
building and loan associations.

In the past, expediency'has been the guiding force in
determining what business taxes shall be added to the
Michigan tax structure. This is exemplified in the tax
system for financial institutions. There are four dissimilar
specific taxes in this system (see Chapter IV) none of which
are uniformly applicable to all financial institutions. The
base for each tax is different and none meet the requirements
of a business tax based on capacity-to-pay as measured by net
income.

An adjunct to the multiple-tax system for financial in-

stitutions is the diversification of responsibility for

158
administering and collecting the taxes. There has been no
proof that efficiency is not best served by the Department of
Insurance supervising insurance companies, the Savings and
Loan branch Of the Department of State supervising building
and loan associations, and the State Banking Department over-
seeing the Operations Of banks. However, it has been shown
that efficiency Of administration and economy result when the
tax collection function is centralized in one agency. .At
present the annual corporate franchise tax on state chartered
building and loan associations is collected by the Department
of State, insurance taxes are collected by the Department of
Insurance, and the intangibles tax is collected by the De-
partment of Revenue. It was found that of these agencies,
the Department of Revenue was best equipped to perform the
function Of tax collection. Complexity and inefficiency of
tax administration result also from tax exemptions and
special tax rates.

It is prOposed that these problems be corrected through
a maJOr revision of the tax system. Two methods of aca
complishing this, permitting more equitable tax burden,
higher revenues, and more efficient administration are outo
lined in the following paragraphs.

The first plan prOposed is to adopt a tax system in-
corporating a business franchise tax measured by net income
as reported to the Federal government, levied at a uniform

rate, in lieu Of the annual corporate franchise tax, the

In .I E 1 llllll

159
intangibles tax, the domestic insurance company privilege fee
and the business receipts tax (due to terminate in.March,
1955), the authority for the collection of such tax to be
vested in the Michigan Department Of Revenue. This tax would
be applicable tO national as well as state banks, as provided
in Section 5219 Of the Federal Statutes, and has the advantage
of reaching otherwise taxmexempt bank securities.

.As has been stated in Chapter II the ambiguity Of the
taxing article Of the Michigan Constitution of 1908 introduces
the uncertainty that a tax not hitherto imposed in Michigan
may be found to be unconstitutional. Such is true in the case
Of imposing a franchise tax based upon corporate net income.
.A careful investigation Of the legality of a Michigan
franchise tax measured by net income has been made by Buckley
(1950) with the following findings:l ‘

1. .An income tax may be said to be so different in

form, nature, and purpose from the real prOper-
ty tax as to fall completely outside the pro-
visions Of the uniformity clause.

2. Income is taxed under a provision of the in-

tangibles tax and this provision is held valid.
The tax is classified as a "specific" tax.

 

1Frederick J. Buckley, State Income Taxesgignalysis

g: anstitutional onblems and Statutory Provisigns
in Michigan and Selected States, unpublished report,
sponsored by the Michigan Department Of Revenue and
the Institute Of Public.Administration, University
of Michigan, 1950, pp. 37.

3.

4.

5.

6.

7.

160

"It is well established that a state may impose
a nondiscriminatory tax on net income derived
from transactions in interstate commerce as
well as from other sources without violating
the commfrce clause Of the federal consti-
tUtione"

“An allocation formula must have some logical
relation to the production of income within
the state in order not to be in conflict with
the due process clause Of the federal consti-
tution. To this end the state legislatures
have devised various allocation formulas which
have in general been held constitutional."

"Both the federal district court and the state
supreme court have ruled that a franchise tax
is valid under the constitution and statutes
of Michigan."2

On the question of basing a state income tax
on corporate net income as reported to the
federal government: "... a state is free to
adOpt portions Of a federal law insofar as it
incorporates by reference existing law but any
attempt to adOpt prospective changes or amend-
ments to the law made by the Congress is an
unconstitutional delegation of power."

"In the following states the corporation in-
come tax is linked to some extent with the
federal law: New York, Connecticut,
Massachusetts, Pennsylvania, Rhode Island,
Tennessee, Vermont, Idaho, and Kentucky,“
although no state ties into the federal law
completely.

The rate of a business franchise net income tax for

Michigan cannot be prOposed at this point since non-financial

 

1

92. cit., p. 32.

€92, 33;,, p. 32. Cases cited are: Republic
Acceptance Corporation v. DeLand, 275 Fed. 632 (1921):
Union Steam Pump Sales Company v. Secretary of State,
216 Mich., 261; N.W. 353 (1921).

161
enterprises are not within the sc0pe Of this study. It is
recommended, however, that the minimum rate considered be
seven percent Of net income which is approximately equal to
the state tax burden carried by banks. This rate is the
highest of those paid by financial institutions and would
permit greater equality Of tax burden between banks, in-
surance companies and building and loan associations with a
consequent increase in revenue produced by the last two in-
stitutions named.

In 1948 thirtybtwo states and the District of Columbia
levied taxes measured by corporate net income. Of this
number, twenty-eight employed uniform.rates, the rates

1 The

ranging from two to eight percent of net income.
average rate for these states was above four percent with
most states levying other types of corporation taxes in
addition to the net income tax.

Evidence presented in this study has shown that mutual
organizations are not inherently different from corporations
in mode of operation and realization Of profit. It is there-

fore suggested that in setting up the formula for deductions

from gross income to determine net income the burden of proof

 

1Report prepared by United States Treasury Department,
Division of Tax Research, as published in Governor's
Taxation Message, delivered by Governor G. Mennen
Williams at a Joint convention of the Michigan Legis-
lature, February 2, 1949.

162
Of mutuality be the responsibility of the organization claim-
ing it.

.Administratively there are many advantages to adOpting
this prOposed tax system. The tax collection function would
be greatly simplified. .As a result Of reducing the number
Of taxes and employing a uniform tax rate greater speciali-
zation would be possible with resulting economies. The
Department of State and Department of Insurance would be reu
lieved Of tax collection duties, thereby reducing wasteful
duplication Of effort. In adOpting this system however the
problem of administering a net income tax on insurance compa-
nies arises. It has been shown that the question Of re-
serves and determination of net income is difficult but with
prOper accounting procedures and reporting does not present
an insurmountable barrier to adopting a net income tax.

The actual revenue received from state tax levies on
insurance companies, banks, and building and loan associations
in 1948 was $2,640,204fl(refer to Table 6) or 3.6 percent of
net income. .A seven percent franchise tax on net income
would have produced in that year approximately $5,060,000.
.Assuming that earnings have increased in prOportion to de-
posits and capital values in the years 1948-54 the franchise
tax proposed above is capable Of producing materially greater
revenue than is produced by existing taxes on financial
institutions.

(I) (MHTING c.1633 (’REMWMS “PM ON FLREICN Comp/irvvé‘i‘

163

In view of the Opposition which was accorded the corpo-
rate franchise tax program prOposed by Governor Williams in
1949 and the natural reluctance of state legislatures to
relinquish known sources of revenue for untried sources, an
alternate prOposal will be set forth. Recommendations will
be made for reducing inefficiencies and inequities in present
taxes and administrative machinery.

The taxation of financial institutions has received con«
siderable attention since this study was undertaken. Two
new taxes have been added in lieu of the corporate franchise
tax on state banks and domestic insurance companies elimia
nating inequality of tax burden between state and national
banks, and lessening the inequality of burden between corpo-
rate and mutual domestic insurance companies in this area of
taxation. .A trend toward centralization of the tax col-
lection function was begun with the transference of responu
sibility for collecting delinquent taxes to the Michigan
Department of Revenue.

From the nature of the changes that have been made it
appears that two problems of taxing financial institutions
have been recognized. Resulting action has been taken toward
centralizing the tax collection function and eliminating tax
discrimination within groups. Nothing that has been done
however indicates that tax loads are to be equalized between
banks, insurance companies, and building and loan associ-

ations or that corporate franchise excise taxes are to be

164
replaced by francise taxes measured by net income.

It has been noted that "specific" taxes are now levied
equally upon state and national banks. These taxes are
administered by the Michigan Department of Revenue. The
business tax burden borne by'Michigan banks is approximately
equal to 7.3 percent of net income for all banks in.Michigan.
This rate is higher than for insurance companies but lower
than for non-financial businesses. In 1951, Michigan ranked
twenty-fifth among the states in the amount of total state
and local tax burden on insured commercial banks measured by
net income.1 The tax system.for Michigan banks appears
therefore to have much to recommend it--centralized tax ad-
ministration, equality of tax burden between state and
national banks and, a normal tax load in comparison to other
states.

Previous chapters have indicated that little Justifi-
cation exists for discriminating between banks, which pay
over seven percent of net income in business tax levies, and
insurance companies or building and loan associations which
pay considerably less. The method of taxing banks in
Michigan therefore offers a pattern for taxing the other two
named institutions if a franchise tax based upon net income

is not to be adOpted.

 

1
Michigan Tax Survey - 1952, Table 23.

165

State chartered building and loan associations in
Michigan now pay the annual corporate franchise tax at the
rate of one-quarter mill per dollar of paiduin capital and
legal reserve for the privilege of exercising a franchise and
doing business in Michigan. Federal statute permits federal-
ly chartered associations to be taxed in a like manner but
this is not done.

Both state and federal associations assume payment for
members of the intangibles tax of one twenty-fifth of one
percent on paid-in shares. This rate is equivalent to the
rate levied on bank deposits.

.As a result of the above taxes the tax burden on build-
ing‘and loan associations in Michigan in 1948 was equivalent
to approximately 1.3 percent of the net income of federal
associations and 2.0 percent of the net income of state
chartered associations.

The corporate franchise tax on state associations is
paid to the Secretary of State and the intangibles tax is
paid to the Michigan Department of Revenue, as in the case of
banks. -

In order to equalize rates between federal and state
associations it is recommended that an intangibles tax be
levied on the paid-in capital and legal reserves of building
and loan associations in lieu of the corporate franchise tax.
Based on 1948 figures this tax would have had to be levied

at the rate of 1.7 mills per dollar of paid-in capital and

166
legal reserve to have resulted in a tax burden of seven per-
cent of net income when combined with the intangibles tax on
member shares. This action would result in equalized rates
between state and federal associations, equalized burdens
between banks and building and loan associations, centrali-
zation of tax collection functions (since the Michigan Den
partment of Revenue is the authorized agency for collecting
intangibles taxes) and increased revenues amounting to
approximately $418,000 in one year.

Domestic insurance companies now pay an annual privilege
fee to Michigan of five mills per dollar of paid-up capital,
if any, surplus, and unassigned funds. In addition they pay
retaliatory fees in some cases to other states for outstate
insurance written. No figures are available on the amount
of retaliatory fees paid. Foreign insurance companies pay a
gross premiums tax to Michigan on the premiums written in
this state. The rate for fire, marine, and automobile in-
surance companies is three percent. The rate for all other
companies is two percent.

It has been established that unlike banks, insurance
companies are not protected by the federal government and
the state taxation of such companies is left to the dis-
cretion of the various states. There is therefore a lack of
uniformity in the taxation of insurance companies. Because
of the interstate nature of insurance business this diversity

of taxes has created an intergovernmental problem of sizeable

167
prOportions. Each state dictates its own tax policies.
Prior to 1944 more than one-half of the fortyueight states
taxed foreign insurance companies at a higher rate than
domestic companies. Approximately the same number of states
adopted a retaliatory provision penalizing foreign companies.1

With the advent of the Southeastern Underwriterse case
(1944) eighteen states equalized rates between foreign and
domestic companies and thirteen states repealed their retail:
atory provisions.” Michigan did neither. .As of 1945 there
were only ten states including Michigan which did not impose
a gross premiums tax on domestic companies at as high a rate
as on foreign companies. The average rates imposed by taxing
states were as follmusg

Life .. 2.l6 67'0
Fire and marine V - 2,2170
Casualty, surety, accident and health u 2.23‘7‘

Since the average state and local tax burden on in»
surance companies in the United States in 1945 was 5.5 para
cent and Michigan taxed domestic companies at a far lower
rate than foreign companies it is apparent that the burden on
Michigan companies is not only lower than on banks and other
financial institutions but is lower than on insurance compaa

nies of other states as well.

 

1
See pg 730

168

One measure may be suggested for increasing the efficien=
cy of the taxation of insurance companies and reducing dis»
crimination in tax burdens. This is to adopt a two percent
gross premiums tax on foreign and domestic companies in lieu
of the domestic insurance company privilege fee. This would
represent the average rate imposed by all states, equalize
rates between fire and marine and other types of carriers,
eliminate the discrimination between mutual and corporate
domestic insurance companies, reduce the number of taxes and
rates, and alleviate the discrepancy in tax burdens imposed
on insurance companies and banks in Michigan. It is proposed
that this tax be administered by the Michigan Department of
Revenue in order to centralize the tax collection function
and to correlate tax information.

It has been noted that a gross premiums tax at foreign
company rates levied in lieu of the corporate franchise tax
on domestic insurance companies in 1945 would have resulted
in increased revenue of approximately one million dollars.

No proposal for revising the tax system would be coma
plete without appraising the adaptability of the recently
enacted business receipts tax as a possible measure for taxu
ing financial institutions. This "emergency" tax was adopted
in l953 to provide revenue for balancing the budget of the
General Fund and is due to eXpire in 1955. It provides for a
levy of four mills per dollar on the adjusted receipts or

income (over $l0,000) of all activities, incorporated or

169
unincorporated. operated for gain, benefit or advantage.
Banks, building and loan associations, insurance companies
and intangible personal prOperty subject to the intangible
tax are exempt. Excluded from gross receipts are wages and
salaries received by an employee, proceeds from the sale of
capital assets, and amounts used to repay debts. Deductions
which are allowable to gross receipts in determining adjusted
receipts are the greater of (l) fifty percent of gross rec
ceipts or, (2) the sum of itemized deductions which include
taxes, materials purchased from vendor who is subject to the
business receipts tax, amounts paid for interest and rents,
cash discounts, and returned goods. An allocation formuia
is provided for taxing activities engaged in muitistate
business.

.A comprehensive study of the Michigan business receipts
tax has been made by Firmin (1953) in which he states that
"the deductibility of various charges is justified on the
ground that the particular expenditure (see above} does not
constitute part of the "value added" by the taxpayer."1
Thus, the intent of the law is apparently to impose a "value

added" tax. Firmin adds further:

 

lPeterA. Firmin, "The Michigan Business Receipts Tax",
Michigan Business Report No. 2%. Bureau of Business
Research, University of Michigan, Ann.Arbor, 1953,

pp. 149.

170

"... the Business Receipts Tax is not merely
another gross receipts tax with certain de-
ductions allowed by statute. Its basis is not
gross receipts, but adjusted receipts as de-
fined in the statute. It differs from the many
varieties of sales taxes both general and
specific, that are imposed by many states, in
that it is neither a transactions tax nor a tax
imposed upon the consumer either by implication
or by Specification in the statute. Neither is
the Business Receipts Tax a quasi-net income tax
measure. Only if the deductions permitted by
the statute were equal in amount to costs and
expenses, including cost of sales and all other
eXpenses related to the business activity, would
the tax be a net income tax. ... Perhaps the
most significant point of dissimilarity, however,
is that the Business Receipts Tax, like a gross
receipts tax, is assessed even in cases where
there is no net income, i.e., where the results
of the business activity have resulted in a loss."

The theoretical reason for granting tax immunity to fi-
nancial institutions in general is not known. There has been
a strong reluctance however, as evidenced by the removal of
intangible prOperty from the scope of the general property
tax to tax intangibles at more than moderate rates since the
prOperty which they represent is also taxed. The same
principle has carried over to businesses dealing in intanu
gibles. It may be said however that value is added through
the activity of financial institutions by investing money at
interest for others and performing unique services. This is
evidenced by the fact that the sale of such services produces
profit or net income to the taxpayer. Considered as a
business tax and not as an extension to the general prOperty
tax there appears to be little justification for exempting

financial institutions from the scope of the Michigan

171
business receipts tax.

There is a valid reason for exempting banks from this
tax however. National banks may be taxed only according to
certain methods prescribed by the National Banking.Act of
1863 as amended. The business receipts tax (value added) is
not one of these methods and is therefore prohibited. The
levy of such a tax on state banks would result in discrimi-
nation in tax burden between state and national banks in

Michigan.

B IBLIOGRAPHY

173

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Census, Washington, Government Printing ffice, July 19,
1950.

, State Finances, Bureau of Census, Washington,
Government Printing Office, 1946.

 

Welch, Ronald B,, 3*a*¢ and Local Talation of Bar .ks in tre
United States. Spe-c ial Report No. 7 uf the State Tax
Commission of the State of New York. .Albany: J. B. Lyon
Co., 1934. 256 pp.

Williamson, K. M., 'Some Problems in the State Taxation of
Insurance , Proceedings of the National Tax Association,
Washington, l934. 395u408 pp.

APPEND IX

178

 

 

 

 

 

APPENDIX.A
TABLE 10
MICHIGAN GENERAL PROPERTY TAX TRENDSI
_w__ 1900-1951 _

Tax Rate

Per $1,000

Assessed Total State .Assessed

valuation Tax Levies Levy valuation
1900 1,317,450,028 20,380,533 2,908,802 15.47
1901 1,335,109,918 23,350,404 3,835,888 17.49

1902 1,418,251,858 23,476,734 - 2,669,875 16.55 '

1903 1,537,355,738 25,999,018 4,003,255 16.91
1904 1,529,969,350 25,891,584 2,958,005 16.92
1905 1,574,422,770 27,402,199 3,871,080 17.40
1906 1,598,935,606 26,330,650 3,384,065 16.47
1907 1,654,371,892 29,153,970 4,886,742 17.62.
1908 1,648,671,411 ' 29,689,332 4,194,334 18.01
1909 1,687,155,697 34,879,093 5,929,305 20.67
1910 1,739,652,458 35,710,510 4,730,417 20.53
1911 1,898,057,358 39,315,699 6,523,013 20.71
1912 2,078,694,409 43, 242,968 5,451,853 20.80
1913 2,345,695,709 50,569,766 8,591,275 21.56
1914 2,765,439,636 50, 811, 961 6,130,120 18.37
1915 2,968,236,813 60, 596, 921 9,509,462 20.42
1916 3,625,142,971 61, 815, 004 7,221,843 17.05
1917 4,027,364,717 73,612,698 9,610,533 18.28
1918 4,218,781,678 85,132, 657 9,109,653 20.18
1919 4,503,980,981 110,776,106 17,432,512 24.60
1920 5,319,702,886 140, 438, 983 17,379,244 26.40
1921 5,483,535,114 158,388,567 20,452,380 28.88
1922 5,622,913,389 160,222,825 17,305,384 28.49
1923 5,933,301,772 170,094,458 16,000,000 28.67
1924 6,470,614,422 178,756,981 14,500,000 27.63
1925 6,954,262,131 191,660,043 17,800,000 27.56
1926 7,558,802,199 220 ,002, 608 17,800,000 29.11
1927 7,896,374,986 242, 158, 137 24,500,000 30.67
1928 8,168,069,289 248,511, 398 20,500,000 30.42
1929 8,362,913,114 264,611,569 29,500,000 31.64
1930 8,460,234,945 266,777,083 29,500,000 31.53
1931 7,854,628,979 254,180,521 29,000,000 32.36
1932 6,603,821,037 216,580,601 23,487,979 32.80
1933 5,821,072,389 159,459,990 3,500,000 27.39
1934 5,685,263,349 ‘ 158,030,435 3,500,000 27.79

 

TABLE 10 CONTINUED

179

 

 

 

 

 

 

Tax Rate
Per $1,000
.Assessed Total State .Assessed
valuation Tax Levies Levy valuation
1935 5,652,288,256 147,493,887 -- 26.09
1936 5,720,274,670 146,301,493 -~ 25.57
1937 5,912,306,455 154,809,906 -- 26.18
1938 6,054,858,530 166,453,538 -- 27.49
1939 6,120,089,325 167,296,253 -- 27.34
1940 6,028,028,754 166,766,516 27.66
1941 6,268,830,279 170,944,380 27.28
1942 6,623,578,978 183,197,021 27.65
1943 6,825,977,942 187,813,295 27.51
1944 6,956,197,603 192,620,072 27.69
1945 7,187,197,422 205,306,643 27.92
1946 7,557,770,730 232,221,040 29.15
1947 8,463,550,743 247,204,202 27.38
1948 9,139,645,231 4 286,213,287 29.16
1949 9,729,449,214 T 329,417,780 31.63
1950 9,940,547,423 342,117,946 32.00
1951 10,704,742,678 l 375,314,891 32.61

 

1State Tax Commission, Biennial Reports.

180

APPENDIX,B

THE PROVISIONS OF SECTION 5219 OF THE
REVISED STATUTES OF THE UNITED STATES

”Be it enacted by the Senate and House of Representa-
tives of the United States of America in.Congress assembled,
That Section 5219 of the Revised Statutes of the United
States be, and the same is hereby, amended so as to read as
follows:

"Sec. 5219. The legislature of each State may de-
termine and direct, subject to the provisions of this section,
the manner and place of taxing all the shares of national
banking associations located within its limits. The several
States may (1) tax said shares, or (2) include dividends de-
rived therefrom in the taxable income of an owner or holder
thereof, or (3) tax such associations on their net income,
or (4) according to or measured by their net income, provided
the following conditions are complied with:

"1. (a) The imposition by any State of any one of the
above four forms of taxation shall be in lieu of the others,
except as hereinafter provided in subdivision (c) of this
clause.

'(b) In the case of a tax on said shares the tax
imposed shall not be at a greater rate than is assessed upon
other moneyed capital in the hands of individual citizens of
such State coming into competition with the business of
national banks: Provided, that bonds, notes, or other
evidences of indebtedness in the hands of individual citizens
not employed or engaged in the banking or investment business
and representing merely personal investments not made in comp
petition with such business, shall not be deemed moneyed
capital within the meaning of this section.

"(c) In case of a tax on or according to or measured
by the net income of an association, the taxing State may,
except in case of a tax on net income, include the entire net
income received from all sources, but the rate shall not be
higher than the rate assessed upon other financial corpo-
rations nor higher than the highest of the rates assessed by
the taxing State upon mercantile, manufacturing, and business
corporations doing business within its limits: Provided,
however, That a State which imposes a tax on or according to
or measured by the net income of, or a franchise or excise
tax on, financial, mercantile, manufacturing, and business
corporations organized under its own laws or laws of other

181

States and also imposes a tax upon the income of individuals,
may include in such individual income dividends from national
banking associations located within the State on condition
that it also includes dividends from domestic corporations
and may likewise include dividends from national banking
asSociations located without the State on condition that it
also includes dividends from foreign corporations, but at

no higher rate than is imposed on dividends from such other
corporations.

'(d) In'case the dividends derived from the said
Shares are taxed, the tax shall not be at a greater rate than
is assessed upon the net income from other moneyed capital.

"2. The shares of any national banking association
owned_by nonresidents of any State, shall be taxed by the
taxing district or by the State where the association is
located and not elsewhere; and such association shall make
return of such shares and pay the tax thereon as agent of
such nonresident shareholders.

"3.' Nothing herein shall be construed to exempt the
real property of associations from taxation in any State or
in any subdivision thereof, to the same extent, according to
its value, as other real prOperty is taxed.

’ "4. The provisions of section 5219 of the Revised
Statutes of the United States as heretofore in force shall
not prevent the legalizing, ratifying, or confirming by the
States or any tax heretofore paid, levied, or assessed upon
the shares of national banks, or the collecting thereof, to
the extent that such tax would be valid under said section."
(Act March 25,1926. 0. 88344 Stat. L. 223).

 

 

I. flirty-“ii! 7 I

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