Vanderbilt Law Review

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Forces at work in both public and private sectors may soon change the way state and local political subdivisions tax financial institutions. The market for financial services is changing dramatically. Governments have expanded substantially the scope of activities in which financial depositories may engage. The competitive environment for financial activities also is changing as general business corporations enter the financial services field, an area previously considered the exclusive domain of financial institutions. Financial institutions have increasing opportunities for interstate activity, which offers both risks and challenges. These changes have occurred during a period in which the extensive framework of state and federal governmental regulation and protection of financial activity has been curtailed substantially.

At the same time that financial institutions adjust to the changing market for their services, state and local governments are attempting to address increasing revenue needs. Although the budget difficulties that state and local governments face are mainly unrelated to the financial industry, the governments' financial crisis is magnified by an inability to collect taxes traditionally paid by financial depositories. Moreover, a series of Supreme Court and state court decisions have restricted the ability of the states to tax the principal or interest on federal obligations held by financial depositories.

Partly because of the general fiscal crisis and partly because of these court decisions, a number of states are searching for a revised basis on which to tax financial institutions. State legislatures should consider carefully the changing market forces affecting the financial industry to determine the appropriate basis for taxation.This Article examines the legal developments, both in financial industry regulation and in federal limitations on state taxation, that have helped to shape the current market for financial services.T his analysis and a review of relevant tax policy issues suggest that the states' interest in taxing the financial industry on a thorough but rational basis will be served best by a state income tax on financial institutions that is based on uniform jurisdictional rules and uniform apportionment standards.