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IF RACETRACK = RIVERBOAT, DOES BANK = CREDIT UNION?

February 06, 2004

From the Iowa Supreme Court opinion striking down the differential tax on casinos:

In the end, we return to the fact that the item taxed—gambling revenue—is identical. The higher tax rate is triggered by the location where such revenues are earned. Yet there is no legitimate purpose supported by fact that justifies treating one gambling enterprise differently than another based on where the gambling takes place, other than an arbitrary decision to favor excursion boats.

With this decision (Racing Association of Central Iowa v. Fitzgerald), the Iowa Court has taken upon itself the obligation to decide whether the purposes of tax laws are "legitimate," or whether distinctions in the law are "arbitrary."

But why would a decision relating to casinos and gamblers affect a prudent, risk-averse Iowa banker? Let's play a little game. We will substitute one of our favorite words - "lending" - for "gambling" in the paragraph quoted above:

In the end, we return to the fact that the item taxed—lending revenue—is identical. The higher tax rate is triggered by the location where such revenues are earned. Yet there is no legitimate purpose supported by fact that justifies treating one lending enterprise differently than another based on where the lending takes place, other than an arbitrary decision to favor...

Iowa banks pay a 5% "franchise tax" for the privelege of doing business in Iowa. The state collected $31,378,000 via the Franchise tax in the 6/30/2002 fiscal year. Credit Unions are exempt from the franchise tax; they instead pay a "monies and credits tax," a form of property tax; the receipts from this tax are so small that they are lumped into a "miscellaneous" category that totaled $1,432,000 for the 6/30/2002 year.

Banks have long chafed over this tax differential; an attempt to subject the largest Iowa credit unions to the franchise tax failed in the last legislative session. With the Racing Association decision, a new approach may be available to address the issue.

IS THE FRANCHISE TAX "RATIONAL?"

No one would suggest that banks simply stop paying franchise tax. Still, the Iowa Court decision sheds new light on how Iowa taxes credit unions vs. banks.

The standard for an "equal protection" violation of the Iowa Constitution now is not whether the legislature can come up with a reason for a tax law distinction; it now must be a reason that four Iowa Supreme Court justices find persuasive. While the distinction between a riverboat and a racetrack may not be decisive, that between a bank and a credit union might be.

LONG ODDS? YOU BET!

The odds remain against the banks here. While the Court has opened the door to reconsideration of many tax law distinctions, if they are swamped with "equal protection" tax cases, they may start to find the legislature's distinctions more rational.

Still, the possibility of an ornery, or very large, bank deciding to bear the costs of a long "equal protection" legal fight might give the state pause. Continuing to treat large credit unions more favorably than banks might, at some point, seem too risky for the legislature.

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