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Back Down, Bankers – Credit Union Tax Exemption Has Merit

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The bankers are up to their same old shenanigans when it comes to their attacks on credit unions, as is evidenced in a recent BankThink editorial.

As Congress begins the process of reviewing and rewriting the nation's tax code, the banking industry is crying foul against the nation's credit unions for myriad reasons – all without merit.

They claim the "Blank Slate" tax reform approach being talked about on Capitol Hill should threaten the credit union tax exemption, yet over the district work period in August a number of key lawmakers from across the country threw their support behind credit unions and their 96 million members.  

Bankers claim that credit unions' federal income tax-exempt status provides an unfair advantage. They also claim that credit unions are getting in the way of their lending and say credit unions don't need access to more capital for their members.

Let's set the record straight.

Credit unions do pay taxes. Though credit unions are exempt from federal income taxes, they still pay many taxes, like payroll and other state and local taxes. What the bankers aren't telling you is that over one-third of banks are Subchapter S corporations and don't pay federal income tax at the corporate level either.

Bankers complain that credit unions have an unfair advantage – if so, why have only two banks converted to credit unions, while over 30 credit unions have converted to banks just in the past 15 years

Furthermore, while the bankers complain that credit unions are affecting their lending, the truth is far different. A study commissioned by the Small Business Administration's Office of Advocacy in 2011 found that bank business lending was largely unaffected by changes in credit unions' business lending, and credit unions' business lending can actually help offset declines in bank business lending during a recession. The study shows that during the 2007-2010 financial crisis, while banks' small business lending decreased, credit union business lending increased as a percentage of their assets. Clearly, credit unions continued to serve Main Street as banks turned people away.

A report released by the Special Inspector General for the Troubled Asset Relief Program found that of the 332 banks that participated in the Treasury's small business lending fund program, 137 of them used more than half of the $4 billion disbursed by the program to help fund their exits from Tarp, not to provide much needed small business loans. One community banker described it as "…a bit of a shell game" in a 2011 Wall Street Journal article.

Credit unions benefit all Americans. A 2012 independent study released by the National Association of Federal Credit Unions shows all Americans would lose if the credit union federal income tax exemption were eliminated: There would be 150,000 lost jobs per year, higher loan rates and lower deposit rates for all consumers (not just credit union members) and a net loss of $15 billion over the next decade in federal income tax revenue.

The reality is that the credit union federal income tax exemption benefits credit union members and bank customers. Credit unions provide a check on banks through their competitive rates and fees. In fact, the exemption results in more than $10 billion in economic benefits annually for all Americans according to NAFCU's landmark study on the value of the credit union tax exemption.

Furthermore, any effort to strip credit unions of their federal income tax exemption will have a drastic and immediate negative impact on more than 5.5 million current and former military members, their families and survivors. As noted in a 2013 letter to Congress by The Military Coalition, any change in the credit union tax exemption "…would be to the detriment of our armed forces members and their families and, in the long term, to military readiness." 

Credit unions exist to serve their members. While credit union membership has certainly grown since the passage of the Federal Credit Union Act in 1934, the credit union business model used then is the same one in use today. Credit unions aren't in business for profit. They are run by their members, for their members – not shareholders. Whatever "earnings" are made at a credit union go right back to its members in the form of higher dividends and lower rates and fees.

If the bankers want the advantages of being a credit union, they should convert, not try to destroy a proven, valued business model.

B. Dan Berger is president and CEO of the National Association of Federal Credit Unions.

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Comments (4)
As usual in this long standing discussion, Mr. Berger is less than truthful with some of his facts in this article. He's correct in saying that 1/3 of the banks in this country have a Subchapter-S corporate status and that they don't pay federal income taxes. What he fails to mention is that those same Sub-S banks dividend out most of their earnings to their shareholders who then pay federal income taxes, typically at some of the highest tax brackets the IRS has. So federal income taxes are still paid on Sub-S bank earnings; they are paid by the shareholders instead of the bank. By the way, the other 2/3 of banks do not have Sub-S status and pay federal income taxes at the 34% corporate tax rate currently in place. My small community bank paid more in federal income taxes to the IRS than all credit unions in the country last year combined. CU's were supposed to provide financial services to those of limited means (common bond) but in reality banks do far more lending to those of limited means due (numerous studies support this statement) in part to the fact that banks have to comply with Community Reinvestment Act (CRA) regulations while CU's aren't even subject to CRA.

Most of Mr. Berger's comments are either hollow or only tell part of the story (the part he wants you to hear). There was a time when Savings & Loans held certain tax exemptions but their business models evolved and their growth eventually led to those tax exemptions being removed. This is the same story for CU's today. It's time for CU's to stop making excuses, accept that their business model has evolved too and begin paying federal income taxes on their earnings. It's possible for them to pay federal income taxes and maintain mutual ownership status. If you want to see what model looks like, look at a Mutual Thrift (Savings & Loan).

I'm sure if banks held the tax exempt status, while offering the same checking/savings/loan products that CU's provide (same story but opposite of what exists today), that Mr. Berger and the CU lobby would be crying foul about the unlevel playing field that exists the same way that bankers are making noise now.
Posted by farm10boy | Thursday, August 29 2013 at 4:48PM ET
Credit unions keep getting the tax treatment of SubChapter S banks wrong. Sub S bank owners pay taxes on the profits of the bank; credit union owners (members) do not. What the credit unions aren't telling you (to use Mr. Berger's phrasing) is that difference is $2.7 billion in tax breaks for credit unions. Big difference.
Posted by klcuwatch | Friday, August 30 2013 at 2:25PM ET
If 1000 people say a foolish thing it is still a foolish thing. Mr. Berger shares the same fluff and feel good bull-crap without addressing any of the substantive tax policy issues raised in this debate. He will keep doing it as long as it works, let's hope Congress raises their standards of debate a little when it comes to the debt and deficit and trying to get this economy going.

Credit unions are not run for their members by their members, most credit union members have no idea what management is doing and why management is retaining millions of dollars in profits each year to grow the credit union - and the managers' salaries. At a recent annual meeting of a 3 billion dollar local credit union they had 15 people show up and half of them were executives of the credit union.

Reality check Mr. Berger

Posted by banker88 | Tuesday, September 03 2013 at 2:53PM ET
I'd bet all business people out there would love "a proven, valued business model" that gets to skip paying federal income taxes. Hey, the mom and pop diner on the corner pays payroll and other state and local taxes as well! I bet their "model" would definitely work better if they didn't have to pay federal income tax.
Posted by My 2 Cents | Thursday, September 05 2013 at 5:27PM ET
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