Opinion ID: 2604202
Heading Depth: 1
Heading Rank: 1

Heading: history of the state taxation of financial institutions

Text: The first significant controversy involving taxation of banks arose in McCulloch v. Maryland, 17 U.S. (4 Wheat) 316, 4 L.Ed. 579 (1819) when the state of Maryland attempted to tax bank notes issued by the Second Bank of the United States. The United States Supreme Court held that the bank was an instrumentality of the federal government, [8] that taxation of the banks operation would substantially burden governmental activities, [9] that the bank was a necessary and proper incident of the congressional power to lay and collect taxes and to borrow money, that the tax violated the supremacy clause of the United States Constitution, [10] and that the supremacy clause vested Congress with the ability to override state laws in conflict with the exercise of constitutionally delegated congressional powers. In 1819, the federal reserve system was non-existent, it was uncertain whether the federal government could issue money, [11] and the Second Bank played a major role in the federal government's fiscal and monetary affairs. Nevertheless, the Court recognized that the general power of taxation by the states extends to certain aspects of federal instrumentalities: [12] This opinion does not deprive the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the state. But this (tax on note issuance) is a tax on the operations of the bank, and is, consequently, a tax on the operations of an instrument employed by the government of the Union to carry its powers into execution. The Borrowing [13] and Supremacy clauses of the Constitution do not prohibit the states from taxing personal property representing an interest in a federal instrumentality as long as the property interest is not taxed in a discriminatory manner when compared to similar investment property. This balancing of state and federal powers was the reason for the subsequent enactment of 12 U.S.C. § 548 in 1864, which allowed a bank share tax on national bank stock held in the hands of individuals to be taxed. Even so, the tax could not be levied at a greater rate than that applied to state-chartered banks or other moneyed capital. [14] In recent years, it has been recognized by Congress that national banks are no longer significant federal instrumentalities, and that the general taxation of their activities has little effect on the operation of the federal government's fiscal and monetary affairs. [15] Congress amended § 548 [16] in 1969, to permit the general taxation of national banks  limited only by the nondiscrimination requirement relative to state-chartered banks, and possible constitutional requirements under the supremacy and borrowing clauses. The Federal Home Loan Bank Board was established in 1932 by the Federal Home Loan Bank Act. [17] In 1933, the Board was authorized to charter and supervise federal savings and loan associations, local mutual thrift institutions in which people could invest funds to provide financing for homes. [18] The protestants argue, and correctly so, that the borrowing clause of the United States Constitution [19] as well as 31 U.S.C. § 3124, [20] prohibit the state from directly taxing interest on federal obligations. However, the question posed here is whether the assets subjected to taxation qualify for an exemption from state tax under either specific statutory or general constitutional principles. Title 12 U.S.C. § 1464(h) [21] allows states to tax federal savings and loan associations, their franchises, reserves, surplus, loans, and income if the taxation is not greater than that imposed on similar local mutual or cooperative thrift and home financing institutions. In Sooner Federal Savings and Loan Assoc. v. Oklahoma Tax Commission, 662 P.2d 1366, 1369 (Okla. 1982) app. dism'd April 18, 1983, 460 U.S. 1075, 103 S.Ct. 1760, 76 L.Ed.2d 337, this Court, after reviewing § 1464(h) and the case law emanating therefrom, held that the statute supported non-discriminatory state taxation of all the income of federal savings and loans.