2016 LEGISLATIVE SESSIONS REPORT JULY 2016 0 Dear LBA Members: 2016 is a year that will not soon be forgotten by those involved with the state legislative process in Louisiana. With a new legislature and governor, and a large budget shortfall to contend with, lawmakers convened for three consecutive legislative sessions between February and June. The First Extraordinary Session of the 2016 Legislature ended on March 9 and the Second Extraordinary Session ended on June 23. During these two special sessions over $1.5 billion dollars of new revenues were reportedly raised by the legislature. No bills specifically targeting banks for tax increases were introduced or passed during the special sessions. However, like with other businesses, there will be an impact from the laws passed, the full extent which can only be known with the passage of time. LBA worked diligently to detect and minimize impacts to banks and their shareholders. We appreciate the feedback of the tax professionals and bankers we consulted with during this process, who helped us tremendously in our work. More details about the tax-related Legislative Acts that passed during the specials sessions are included on page 4 of this report. Of particular note, was the passage of HB 7 (Act 1) by Rep. Katrina Jackson during the first special session. Act 1 restored the full corporate tax exclusion for dividend income received by certain bank holding companies from their bank subsidiaries. This remedied the unfair and harmful double-taxation situation created for some C-Corp bank holding companies by Act 123 of the 2015 Regular Session. We thank Rep. Jackson for authoring Act 1, the legislature for their overwhelming support on this issue, and Governor John Bel Edwards for putting this item in the call of the special session and making it the first Act of his gubernatorial career. Between the two special sessions was a very busy three-month regular session. During the regular session, LBA sponsored seven bills that were eventually passed into law, which will be helpful to Louisiana banks and thrifts. See page 8 of the following report for more information on these Acts. We also were successful in protecting the banking industry from harmful legislation by either stopping or favorably amending numerous bills of concern throughout the process. The legislation we pursued at the state capitol was approved by your Government Relations Council (GRC) and LBA Board of Directors at our GRC Meeting in January. Of note, our GRC has recently been renamed as the Government Relations and Grassroots Council (GRGC) to emphasize the importance and renewed focus on grassroots activity. Member bank participation on the GRGC is extremely important. Please contact us if you are unsure about your bank’s representation on the GRGC. The LBA government relations team (including Joe Gendron, Director of Government Relations, David Boneno, General Counsel, Ginger Laurent, Chief Operating Officer and myself) stands committed to fervently protecting your interests at the state capitol, and we hope this report of the 2016 Legislative Sessions is helpful to your bank in becoming familiar with recent legislative developments. To view or print an Act, simply click on the link above the description of each Act throughout the report (the links show the Act number and effective date). You can also go to the Louisiana State Legislature’s website at www.legis.la.gov to access Legislative Acts. 1 Thanks to the bankers and bank counsel around Louisiana who helped us in our work. Sincerely, Robert T. Taylor Chief Executive Officer 2 CONTENTS Bills Enacted Into Law during the First and Second Extraordinary Sessions of 2016 Tax Measures-----------------------------------------------------------------4 Bills Enacted Into Law during the Regular Session of 2016 LBA Initiatives, Banking & OFI Regulated Activity-----------------8 Lending & Collateral------------------------------------------------------11 Insurance---------------------------------------------------------------------12 Other Bills of Interest-----------------------------------------------------13 3 BILLS ENACTED INTO LAW DURING THE FIRST AND SECOND EXTRAORDINARY SESSIONS OF 2016 TAX MEASURES Legislative Acts of Interest from the First Extraordinary Session of 2016: Bank Holding Company Dividend Income View Act 1; Effective 3/03/16 HB 7 (Act 1) by Rep. Katrina Jackson restored the full corporate tax exclusion (the exclusion was increased from 72% to 100%) for amounts received as dividend income from banking corporations organized under the laws of Louisiana, from national banking corporations doing business in Louisiana, and from capital stock associations whose stock is subject to ad valorem taxation. During the 2015 Regular Session, Act 123 by Rep. Jackson reduced the exclusion from 100% to 72% for a three-year period (this reduction was to sunset in 2018). Act 123 created a tax on transfers of income from some C- Corp banks to their holding companies. This created a double-taxation situation where a portion of the same income could be taxed twice at the corporate level, by being taxed first at the bank subsidiary level (through bank shares tax) and then again at the holding company level (through state corporate income tax). We thank Rep. Jackson for authoring this Act to correct the issue. The provisions of this Act shall apply to all exclusions from taxable income as provided for in R.S. 47:287.71(B)(6) claimed on any return filed for any taxable year beginning on or after January 1, 2015. This Act amends La. R.S. 47:287.71(B)(6). Expansion of Franchise Tax View Act 12; Effective 3/10/16 HB 19 (Act 12) by Rep. Ted James expands the franchise tax to apply to certain limited liability companies (LLCs). The Act provides that for franchise tax purposes, a LLC shall be treated and taxed in the same manner that it is treated for federal income tax purposes. See R.S. 12:1368. The Act amends provisions to add an additional type of incident where the franchise tax would be levied against a corporation. The Act changed the tax from applying to the owning or using any part or all of its capital, plant or other property in this state in a “corporate capacity” to the owning or using any part or all of its capital, plant, or other property in this state “whether owned directly or indirectly by or through a partnership, joint venture or any other business organization of which the domestic or foreign corporation is a related party as defined in R.S. 47:605.1.” See R.S. 47:601(A)(3). The Act expands the definition of a “domestic corporation” to include all entities taxed as corporations pursuant to 26 U.S.C. Subtitle A, Chapter 1, Subchapter C for federal income tax purposes, notwithstanding any law to the contrary. It also provides that such entities shall be treated and taxed in the same manner that such entities are treated and taxed for federal income tax purposes. See R.S. 47:601(C)(1)(b). The Act also provides that nothing in R.S. 47:601(C) shall extend franchise tax liability to any LLC qualified and eligible to make an election to be taxed in accordance with the provisions of 26 U.S.C. Subtitle A, Chapter 1, Subchapter S on the first day of its fiscal or annual year or to any other entity that was acquired before January 1, 2014, but not earlier than January 1, 2012, by an entity that was taxed pursuant to 26 U.S.C. Subtitle A, Chapter 1, Subchapter S. See R.S. 47:601(C)(1)(c). 4 The Act provides that for purposes of this Chapter of law, “corporation” shall mean a domestic corporation or a foreign corporation as provided for in R.S. 47:601. See R.S. 47:601(C)(3). The Act provides for holding company deductions from taxable capital for certain investments. See R.S. 47:602(G). The Act also increases the rate of the initial franchise tax from $10 to $110. See R.S. 47:611. The provisions of this Act shall be applicable to taxable periods beginning on or after January 1, 2017, and do not have a sunset date. Our understanding is that the Act’s primary purpose was to get at larger corporations that used the LLC as a way to avoid the franchise tax liability. It is understood that many depository financial institutions operating in Louisiana use the LLC form of entity for their subsidiaries. For example, financial institutions may be using LLCs for the purposes of operating insurance agencies, holding repossessed property, making specialized loans involving tax credits, or for other purposes. The feedback we have received from our tax consultants is that most LLC subsidiaries of banks will not be impacted by this change. However, we have learned of a few banks with LLC subsidiaries that will be, or could be, impacted. Financial institutions with LLC subsidiaries should check with their accountants and tax attorneys to determine whether the changes in Act 12 relative to franchise tax impacts them and whether certain actions can be taken to manage the impact of the franchise tax change. This Act amends La. R.S. 12:1368 and R.S. 47:601(A)(3) and (C)(1), 602(G), and 611 and enacts La. R.S. 47:601(C)(3) and 602(H). NOL Deduction Amount View Act 6; Effective 1/01/16 HB 20 (Act 6) by Rep. Chris Broadwater prohibits the amount of the net operating loss (NOL) deduction from exceeding 72 percent of Louisiana net income, effective January 1, 2016. The Act also repeals the three-year sunset of the previous 28% reduction to the NOL deduction provided for in Act 123 of the 2015 Regular Session, making the reduction permanent.