THE CORPORATE ALTERNATIVE MINIMUM TAX: TAX BURDENS AND INVESTMENT AND FINANCING DECISIONS OF COMMERCIAL BANKS

This study examines the relationship between alternative minimum tax (AMT) enacted in the Tax Reform Act of 1986 (TRA86) and the tax burdens and investment and financing decisions of banks. Because tax-exempt income is effectively taxable under AMT, its value as a tax shield is reduced for AMT-paying firms. As well, because the marginal AMT tax rate is lower than the regular tax rate, the tax benefit of the debt tax shield is diminished under AMT.; Descriptive evidence reveals that in post-TRA86 years, banks' explicit tax burdens increased while their implicit tax burdens decreased. AMT plays an important role: post-TRA86, AMT accounts for 4 percent of the explicit tax burden and significantly increases effective tax rate measures.; Empirical results provide evidence that banks exposed to AMT invest less in tax-exempt securities relative to regular tax-paying banks. Other tax factors also prove important. Carryovers of foreign tax credits and investment tax credits are negatively related to tax-exempt investment. Finally, net operating loss carryovers are negatively associated with tax-exempt investment.; No significant difference is found between the leverage changes of regular taxpayers and taxpayers exposed to AMT. There is evidence that net operating loss carryovers are associated with leverage decreases.; The findings of this study are important for three reasons. First, evidence that banks' explicit tax burdens increased post-TRA86 is consistent with the intended effects of TRA86 "field-leveling" provisions. Second, the investment policy analysis demonstrates that AMT is negatively associated with tax-exempt holdings. This extends the findings of prior AMT studies to a focus on financial responses. Evidence of a reaction beyond the timing level informs policy makers of permanent effects of AMT.; Finally, the significant negative association between AMT exposure and tax-exempt investment suggests that in addition to its direct tax revenue effect, AMT may have an indirect effect. The indirect effect is seen in the shift banks have made toward payment of a greater proportion of their total tax burden in explicit form. To the degree AMT played a role in this shift by discouraging investment in tax-exempt securities, AMT has an indirect role in increasing tax revenues.