It’s a rivalry nearly as contentious as Starbucks versus Dunkin’ Donuts: Banks and credit unions. Credit unions tout their members’ satisfaction compared with the customers of other types of financial institutions, but whenever they push for a little more leniency – say in small business lending – the banks push back. If you want to act like a bank, they say, then you should be taxed like a bank.
Now, with the credit union tax exemption potentially on the chopping block as Congress leaves no stone unturned in its quest for comprehensive tax reform, the Credit Union National Association (CUNA) is taking its message to the streets and the tweets. The nationwide trade association recently rolled out its “Don’t Tax My Credit Union!” campaign aimed at raising awareness of the issue and rousing credit union members to action, urging them to call their Congressional representatives and ask that the credit union tax exemption be preserved when Congress considers tax reform later this year.
Ryan Donovan, senior vice president of legislative affairs at CUNA, says the organization’s alarm bells went off for three reasons: first, the Simpson-Bowles report and its accompanying recommendation to eliminate all tax expenditures; second, a phone call in April from a representative of the Senate Ways and Means Committee’s financial services working group, asking CUNA to make the case for credit unions’ tax exempt status; and third, a recent tax options paper that mentioned elimination of the credit union tax exemption as a possible revenue source.
Any one of those on its own wouldn’t necessarily be cause for concern, but in an environment where Congress is looking toward comprehensive tax reform, Donovan says, “I think our threat level needs to be elevated.”
Rob Kimmett, spokesman for the Massachusetts Credit Union League, said the league is participating in CUNA’s campaign and stressed that “the consumer really needs an alternative to the for-profit banks.”
Credit unions and their advocates have long maintained that credit unions deserve their tax exempt status because they are not-for-profit and serve traditionally marginalized or disadvantaged communities.
But not so fast, counters the banking lobby.
According to Keith Leggett, vice president and senior economist at the American Bankers Association, credit unions have evolved and many no longer deserve the tax exempt status characteristic of the industry.
“Many of them are no longer small tight-knit groups, and what you’re seeing is an increasing number of credit unions that look like mutual savings banks when they lost their tax exemptions back in 1951,” he said.
Plus, Leggett adds, “They’re in active competition with tax-paying banks. The premise that you should have equal treatment would dictate that at least for the largest credit unions, they should be taxed just like mutual savings banks and also commercial banks.”
CUNA spokesman Paul Gentile contends that credit unions keep the banks on their toes, forcing them to offer competitive products to potential customers and that their tax-exempt status furthermore allows credit unions to return greater benefits worth $8 billion to their members, in the form of better interest rates and lower fees.
On the other hand, taxing credit unions, Gentile estimates, would only generate about $500 million in additional revenue for the government.
And without the tax exemption, he said, many credit unions may pursue conversion to a mutual bank charter because all the other restrictions placed on credit unions – caps on business lending or restrictions on raising extra capital, for example – might make some executives decide that it simply isn’t worth the trouble.
But that doesn’t quite square with Leggett. For one thing, he estimates taxing credit unions would bring in closer to $2 billion per year and cites a 2005 Tax Foundation study that showed much of the tax exemptions credit unions receive are not passed onto members but used rather for higher expenses or growth.
And secondly, he adds, credit union-to-bank conversions are often a long, drawn-out process, so any change in tax status is unlikely to set off a wave of charter conversions.
Unexpected Benefits
In Leggett’s view, eliminating the credit union tax exemption could actually produce a number of unexpected benefits for credit unions.
“Our viewpoint is, if credit unions were taxed, there would be no reason to oppose expansion of their business lending or access to supplemental capital. If you want to retain the privileges of having the tax exemption, you have to understand that there are limits to that,” he said.
Furthermore, Leggett points out that some credit unions are still subject to federal unrelated business income taxes and a corporate income tax on credit unions, and other not-for-profits and cooperatives, could ultimately simplify the tax code for all.
He added, “What I’ve heard from some of the larger credit unions is that they view it as just being a business expense. I understand why they want to preserve tax exemption. Why would you give it up if you don’t have to? But it would be phased in over time. This would not be like a light switch.”
Email: lalix@thewarrengroup.com
