Interim Joint Committee on Banking and Insurance


Minutes of the<MeetNo1> 3rd Meeting

of the 2003 Interim


<MeetMDY1> August 26, 2003


The<MeetNo2> 3rd meeting of the Interim Joint Committee on Banking and Insurance was held on<Day> Tuesday,<MeetMDY2> August 26, 2003, at<MeetTime> 10:00 AM, at the Stockyards Bank in Louisville, Kentucky. Representative James Bruce and Senator Tom Buford, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Tom Buford, Co-Chair; Representative James Bruce, Co-Chair; Senators Lindy Casebier, Julie Denton, Ernie Harris, R.J. Palmer II,† Richard Sanders Jr, Dan Seum, and Tim Shaughnessy; Representatives John Adams, Sheldon Baugh, James Comer, Ron Crimm, Robert Damron, Mike Denham, Ted "Teddy" Edmonds, Joseph Fischer, Danny Ford, James Gooch, J. R. Gray, Dennis Horlander, Don Pasley, Steve Riggs, Arnold Simpson, Brandon Smith, Roger Thomas, Ken Upchurch, Susan Westrom, and Rob Wilkey.


Guests:† David Brooks, President, Stockyards Bank; and, Ballard Cassady, John Cooper, Debra Stamper, Kentucky Bankers Association.


LRC Staff:† Greg Freedman, Rhonda Franklin, Rhonda Carter.


The minutes from the July 28, 2003, meeting were approved.


Senator Tom Buford recognized David Brooks, President, Stockyards Bank, and Ella Robinson, Commissioner, Department of Financial Institutions.† He also introduced Ballard Cassady, Debra Stamper and John Cooper with Kentucky Bankers Association.† Mr. Brooks welcomed everyone and gave a history of the bank.


Debra Stamper, General Counsel, Kentucky Bankers Association, addressed the Committee regarding Illinois tool Works, Inc. et al v. Revenue Cabinet, et al, Civil Action No. 00-C1-00623,† and the corporate license tax.† She stated that banks are taxed at $.95 on each $100 dollars of the taxable fair cash value of shares and it is paid by the bank on behalf of its shareholders.† She stated that on December 1, 1986, the Revenue Cabinet issued 62P014 ruling that bank stock was not taxable to bank holding companies, if 75% is owned by the holding company.† She stated that the Interstate Banking Act was passed in 1994, reducing bank shares held in Kentucky and resulting in lost revenue for the state.† She stated that the Shares Tax was repealed in 1996.† She stated that regarding the bank franchise tax, the intent was revenue neutral but banks are paying more, in the aggregate, than under the old tax structure.† She stated that the franchise tax applies to all banking activity in Kentucky regardless of holding company location.† She stated that the bank franchise tax is applied to the capital of a bank at a rate of 1.1% of the net capital.† She stated that intangibles are taxed at a rate of .001%.† She stated that the Revenue Cabinet contends that Kentucky banks are paying their fair share.† In regard to the local application of the bank franchise tax it is deposited on demand and time deposits at a rate of .025% for city and .025% for county; or .050% for urban county governments.† She stated that additional taxes paid by banks include property, real estate, federal income, usage and payroll taxes, in addition to bank franchise tax.


John Cooper, Legislative Agent, Kentucky Bankers Association, addressed the committee regarding the Illinois Tool Works Decision.† He stated that the Franklin Circuit Court issued a ruling regarding the case in December 2002.† He stated that the corporate license tax deduction for majority owned subsidiary stock was held unconstitutional and in violation of the commerce clause.† He stated that the 2003 Legislature passed House Bill 390 to correct problems and it was line item vetoed by the Governor.† He stated that Chairman Bruce asked for an Attorney Generalís Opinion regarding the constitutionality of the veto based on line item.† The opinion ruled it was unconstitutional.† Mr. Cooper stated that the Illinois Tool Works decision has resulted in banks being double taxed, a .21% tax increase for bank capital.† He stated that on July 24, 2003,† based on the Attorney Generalís Opinion a lawsuit was filed challenging the line item veto in Franklin Circuit Court.


Debra Stamper gave a summary of bank level and bank holding company taxes.


Ballard Cassady, Executive Director, Kentucky Bankers Association, stated that due to the increased tax burden banks are currently evaluating several options; moving out of state, restructuring to a different corporate structure and eliminating holding companies.† He stated that the strength and continued vitality of Kentuckyís financial services industry is dependent upon equitable treatment of banks.


Senator Dan Seum asked if legislation could be presented to the General Assembly while this case is pending in court.† John Cooper stated that legislation could be introduced while the case is pending.


Senator Seum asked about the impact of such legislation on the budget.† Jim King, Revenue Secretary, stated it would be approximately $8 million dollars.


Representative Joe Fischer asked which Judge is assigned to the case.† John Cooper stated that it is Judge William Graham.


Senator Tom Buford recognized Ella Robinson, Commissioner, Department of Financial Institutions.† Ms. Robinson stated that there is no evidence of banks leaving Kentucky at this time, but potential banks are not coming to the state.


With no further business, the meeting adjourned at 11:00 a.m.