Alternatives to the current structure of bank taxation in New Jersey: An analysis of the distribution of tax liabilities among bank groups

Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)




Michael J. Wasylenko


Economics, Finance, Banking

Subject Categories



This dissertation examines whether New Jersey's current taxation of banking remains consistent with modern banking practices. The research focuses primarily on state tax issues created by interstate banking developments. A review of the existing bank tax structure in New Jersey shows that it is incompatible with recent developments in banking and requires fundamental reforms.

Two distinct reform alternatives are examined for New Jersey. Under the first alternative, the apportionment mechanism would be restructured, and New Jersey would continue to tax banks using a source-based tax. A four-factor formula with payroll, property, receipts, and deposits appears to be the most viable formula for New Jersey.

The second alternative is based on a dual-tax framework, with an excise tax, under which source-based taxation is not used for New Jersey-based banks. Tax avoidance opportunities which are of major concern in the area of bank taxation is significantly reduced under this alternative. Further, major sourcing problems inherent under the source-based approach would not arise. One of the limitations under this alternative, however, is the reduction in inter-industry neutrality between banking and general business corporations.

The study also recommends several essential reform measures for New Jersey. These include: broadening the definition of taxable entities; moving to an "economic presence" basis; changing the NOL provision; adopting alternative tax bases; raising the minimum tax rate; adopting combined reporting; and creating interstate compacts.

Simulations were run to examine the implications of the proposed reform alternatives on the distribution of tax liabilities by bank asset-size groups. The simulations show that the distribution of the tax liabilities among bank groups would tend to depend on, inter alia, the extent of interstate banking activities of these groups. Under the second alternative, New Jersey tax liabilities for banks would depend on any tax credits they may get for other state taxes paid. Major policy issues were mentioned but it was not possible to address each of them separately given the scope of the present study. Enforcement and administrative issues are important policy concerns that need to be examined in greater detail.


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