Digging back to the 1920s in our Archives: The Bank Taxation crisis and California’s swift response

Often we may characterize our government as being slow to react to various needs. Well, we have an example in 1928 of this not being the case. On August 16, 1928, California Governor C.C. Young convened a special session of the Legislature due to “a most serious fiscal problem which involves [the state’s] financial stability…” The issue came about through the Tax Commission’s discovery that California’s method of bank taxation from 1910 had become a “dead letter” due to its conflict with recent United States Supreme Court decisions. Governor Young concluded that the only way to remedy this situation quickly was through a constitutional amendment at the upcoming November election – less than 3 months away. He warned that though the Supreme Court decisions specifically applied to national banks:

. . . it practically applies to state banks as well, since it is easily seen that a taxed state banking system can not exist in competition with tax-free national banks, and that if national banks should escape taxation our state banks would speedily nationalize.

The Assembly Journal from September 4, 1928, which we have readily available in our archives along with multitudes of other Assembly and Senate Journal entries, contains Governor Young’s proposals for why California’s banking system must be changed, how it may be changed and why it must be changed imminently rather than at the next regular session. We even have the Study and the Special Report of the Tax Commission which prompted the Governor’s quick response.

So did Governor Young’s emergency request come to fruition by way of the ballot? It certainly did. And we have archived materials on Proposition 3 of 1928, which enacted Assembly Constitutional Amendment No. 1.

The summary in favor of Proposition 3 in the 1928 ballot pamphlet provided:

This is an emergency measure, to save for the people some $22,000,000 in bank taxes, which otherwise the general taxpayer would have to make up. It will not increase total state taxes or revenues. It is submitted by unanimous vote of the Legislature to meet a crisis resulting from recent decisions of the United States Supreme Court.
These decisions practically nullify our present method of taxing banks and relieve banks from all taxes until that method is changed. This measure makes the only possible change, adopting the method already used in New York and other states, and meeting the requirement of federal law that national banks be taxed according to net income and at a rate no higher than is applied to other corporations. It is made sufficiently flexible to allow changes of rates or method whenever permitted by amendments in federal laws.

We frequently provide our clients with research on the intent in ballot measures and their accompanying constitutional amendments. If you are interested in knowing more about the background of a particular initiative or proposition, please contact us today!