Opinion ID: 1386714
Heading Depth: 2
Heading Rank: 4

Heading: Resolving the Issue in This Case

Text: As suggested near the outset of this opinion, ante, at page 8, legislative efforts to achieve tax rate parity, between federal and state commercial banks, between commercial banks and financial corporations (including savings banks), and between banks and financial corporations and nonfinancial corporations, have been a theme of California corporate tax law for over 60 years. The genesis of those efforts was a series of federal high court decisions in the 1920's, interpreting the National Bank Act, which threatened to nullify entirely state taxation of national banks on federal supremacy grounds. [14] (7) In California, these decisions culminated in the addition to the Constitution of article XIII, section 27, as the means of achieving the federally required tax equality between state and federally chartered commercial banks and nonfinancial corporations  a condition for any state taxation at all of national banks. The statutory scheme implementing the constitutional provision sought to achieve tax parity between these three kinds of corporations, and provided for an exclusive net income tax on commercial banks, in lieu of all municipal income taxes. [15] As a matter of historical fact, then, since 1928 the taxation of commercial banks has been  de jure  exclusively a topic of statewide concern, albeit one imposed externally by requirements of federal-state relations bottomed on the supremacy clause of the federal Constitution. Contemporaneously with the imposition of the exclusive bank tax in lieu shield, as it is sometimes called, of section 23182, savings banks were accorded indirect tax parity with commercial banks by means of the statutory offset system of tax credits described above. ( Ante, at p. 8.) Whether the existence of the offset credit beginning in 1928 supports the cognate conclusion that the taxation of savings banks has likewise had a statewide dimension since that time is a question we need not decide. For the historical thread of tax rate parity surfacing in the 1920's intersects with economic and regulatory forces affecting state and federal savings banks loosed in the 1970's. It is the existence of these forces, of even greater contemporary urgency, that underlie and sustain the Legislature's decision to widen the bank tax in lieu shield to encompass financial corporations such as petitioner.
The antecedents behind the severe problems plaguing the nation's savings and loan industry have been extensively documented in a series of congressional reports, studies and recommendations. [16] Financial, regulatory, and economic experts for the most part agree that the present savings crisis originated in the inflationary and interest rate spirals of the 1970's. Since savings banks have for most of this century been the chief source of long-term, mortgage-backed residential lending, rapid increases in short-term interest rates had a devastating effect on their historical borrow short, lend long position. Locked into long-term, low-yield, fixed-rate mortgages, savings banks were forced to compete for funds  mainly savings deposits  in the newly volatile short-term market of the 1970's, and to pay a commensurately high interest rate to attract such funds. This interest rate differential led to the phenomena of disintermediation  massive withdrawals by savings depositors who sought higher interest rates in new consumer investment instruments such as money market funds, for example  and a negative interest rate mismatch  the difference between the high cost of funds borrowed by savings banks from depositors and loaned at low rates of interest. These problems were considered to be compounded by a Depression-era regulatory system that one congressional committee report described as an incredibly complex inter-locking arrangement of federal and state statutes, regulations, and agencies. (H.R.Rep. No. 98-692, 98th Cong., 2d Sess., p. 7 (1984).) In brief, the regulatory arrangement confined each species of financial services provider to one functional (and in some cases, geographical) theater of specialization; commercial banks, for example, took demand, passbook, and time deposits and made loans to businesses; savings banks took passbook and time deposits and provided housing-related credit; insurance companies collected premiums and paid annunities, and casualty and property claims; and investment banks and brokers underwrote debt and equity issues. As a result of an ongoing policy debate conducted through much of the latter half of the decade, [17] the decision was taken by regulatory authorities to relieve the pressures on savings banks by pursuing a strategy of deregulation designed to restructure the industry, and dismantling legal barriers to enlarged competition between savings banks and other financial services providers, including commercial banks. In a series of recommendations implemented in the late 1970's and early 1980's, the investment powers and the ability of savings banks to compete for deposits were substantially expanded. [18] Federal ceilings on interest paid to depositors were phased out and savings banks were permitted to invest in consumer and educational loans, commercial paper, commercial real estate, corporate debt securities, and local government obligations, diversifying their investment portfolios. In addition, federally insured savings banks were authorized to offer credit card, overdraft, and trust and fiduciary services, increasing their competitiveness in the financial markets. Among the array of measures proposed, a federal interagency task force appointed by the President to study the problems facing the savings and loan industry and to submit recommendations to Congress urged state legislatures in 1980 to consider lifting taxes on savings banks based directly or indirectly on deposits, noting that such taxes are applicable even when the institution has a loss for the year and can compound serious earnings problems. [19] We need not further tally these transforming legislative changes to the savings and loan regulatory environment. It is enough to note that partially as a result of them, savings banks increasingly have come to resemble commercial banks in both form and function, competing in the same sector of the consumer market for deposits and offering much the same financial products. In light of that clear trend, the considered regulatory impetus driving it, and underlying structural anxieties, the Legislature could speak meaningfully in 1979 of a desire to ensure competitive parity between commercial banks and savings banks; even more could it find a need to promote a comparable income tax burden between commercial and savings banks, given historical efforts in California to maintain tax parity between the two types of institutions. Finally, the increasingly vulnerable financial condition of the savings and loan industry throughout the decade of the 1970's and beyond supports the Legislature's decision to tighten control over the aggregate intrastate tax burden on savings banks by including them within the bank tax in lieu shield. Given an emerging parity of function between savings banks and commercial banks in the market place, the case was strengthened for a more exacting parity in the income tax treatment of the two types of institutions. By the same token, expert testimony before the trial court confirmed that in the face of increasingly worrisome economic conditions affecting the savings and loan industry, the aggregate tax burden on savings banks has assumed a new and more worrisome dimension. [20] (8a) Centralized command over the intrastate tax burden on savings banks thus provides an additional and increasingly important regulatory lever, one of several ways by which government can exert heightened control over conditions affecting the failing financial health of a critical segment of the state's economy. Aggregate taxes  including those imposed under the Los Angeles and like municipal tax schemes  have thus acquired a regulatory dimension they might not possess under different economic and competitive conditions affecting the savings and loan industry. And because the comprehensive regulation of savings banks takes place almost entirely at state and federal levels, these regulatory aspects of taxation necessarily transcend local interests; they become, in other words, a subject of statewide concern. To counter this line of reasoning, the City argues at length that the offset system worked well for over 60 years and that persuasive justification is lacking for the statutory amendment that led to its discard. The evidence before the trial court, however, belies this view and supports the amendment as a rational response to perceived difficulties with the offset system, especially under adverse economic conditions. Testimony before the trial court and legislative findings in support of the amendment to section 23182 both noted inefficiencies in the offset system, especially under difficult economic circumstances. For example, as the federal task force report (see, ante, fn. 19) pointed out, tax levies calculated on the basis of gross receipts, such as the City's business license tax, apply even when the taxpayer has no net income for the tax year; they thus threaten to reduce the net worth of already vulnerable savings banks. In addition, the offset formula applied only to the so-called add-on component of the state franchise tax; where local taxes exceeded that sum, the credit was unavailable. Finally, the offset credit was only available if the taxpayer had taxable income. In any event, the City's argument proves too much. The question is not whether the amendment of section 23182 was prudent public policy or whether the municipal tax burden on savings banks has sufficient impact on the industry's financial health to make the change to a net income tax system an advisable or effective measure. The issue is whether the income tax burden on financial corporations, especially savings banks  including the component imposed by municipalities  is of sufficient extramural dimension to support legislative measures reasonably related to its resolution. We conclude that it is, ending the inquiry. In so holding, we resort to a principle of deference analogous to that invoked in Baggett v. Gates, supra, 32 Cal.3d at page 140. There we said that [t]here must always be doubt whether a matter which is of concern to both municipalities and the state is of sufficient statewide concern to justify a new legislative intrusion into an area traditionally regarded as `strictly a municipal affair.' Such doubt, however, `must be resolved in favor of the legislative authority of the state.' [Citations.] A similar principle applies here. In this area of complex financial and economic regulation, we defer to legislative estimates regarding the significance of a given problem and the responsive measures that should be taken toward its resolution. (9)(See fn. 21.), (8b) It is enough for the purpose of deciding the issue before us that the Legislature's decision to modify the tax system by eliminating local taxes on savings banks finds substantial support in the regulatory and historical context summarized above, including specific recommendations of financial and regulatory experts, and is narrowly tailored to resolve the problem at hand. ( Cf. D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 16-17 [112 Cal. Rptr. 786, 520 P.2d 10].) [21] Support for the conclusion that the local taxation of savings banks is at present a subject of statewide concern is strengthened by the limited extent of the incursion made by section 23182. Among the universe of municipal taxpayers subject to the City's business license tax, only a small number of corporations are affected by the Legislature's amendment of section 23182 and our decision upholding it. As noted, these taxpayers collectively contribute a comparatively small sum to the City's annual budget revenues; the loss of that revenue as a result of the statutory amendment leaves the City's taxing authority fundamentally intact. Although we decline for pragmatic and intellectual reasons to adopt the view urged by Justice Richardson in his concurring opinion in Weekes v. City of Oakland, supra, 21 Cal.3d 386, requiring a comparative weighing of the competing interests of the state and charter cities in a given area, we are mindful of his caveat that the sweep of the state's protective measures may be no broader than its interest. ( Id., at p. 407.) Here, the limited interference with municipal taxation wrought by section 23182 is substantially coextensive with the state's underlying regulatory interest.