GOP tax reform plan: hold your applause until the end
Credit unions and their trade associations have been very quick to applaud the fact that the tax reform plan didn’t include any mention of altering or doing away with the credit union tax exemption – but there are a lot of other things in that proposal that CUs need to think about. And, of course, a lot can still change between now and an actual bill being passed. With that in mind, Credit Union Journal asked a variety of credit union executives, analysts and other stakeholders to answer the following two questions:
1) How concerned are you that the credit union tax exemption could still come up as the real dialog on this effort begins?
2) Other than the CU tax exemption not being removed by this plan, what other aspects of the proposal are you taking a close look at?
John McKechnie, senior partner, Total Spectrum, Washington
You’re right to ask these questions now, in the first inning of what is going to be a nine inning (or more) game.
Credit union friends on Capitol Hill have consistently said two things when tax reform was being drafted: first, the policy arguments for why credit unions are tax exempt make sense to most in Congress; they buy what we’re selling. That’s the main reason why we’re untouched so far. Second, Members of Congress counsel vigilance. They understand that the banks are relentless in their attacks, and realize that this is a once-in-a-generation chance for them to get at credit unions. It would be stunning if the banks DON’T try last-ditch efforts to get an amendment offered. Yes, they’ve failed to win the argument thus far. But this is a process, one that requires the credit union lobby to pay close attention to every development.
Besides the statutory exemption, credit unions (both state and federally chartered) should be watchful on the Unrelated Business Income Tax issue. This has always had the potential to be a Trojan Horse, and there are rumored changes to UBIT being looked at, particularly by the Senate Finance Committee.
The unveiling of the GOP tax plan did not include any changes to the credit union tax exemption and that's good...and bad. Good because the tax exemption continues to be our Holy Grail; bad because it remains a target until the bill is finalized. How the tax plan will be funded continues to be a bit of a moving target and therefore any revenue source is still fair game. Often, tax negotiations can move quickly and without notice to the affected stakeholders so credit unions must remain on their toes to ensure that our exemption isn't bartered away behind closed doors at the last minute. Those nicked by the bill will be looking for others to either share their pain or offset their removal from the bill. One case in point: the elimination of the tax write-off of FDIC premiums for banks larger that $50 billion. The American Bankers Association and Independent Community Bankers Association continue to hammer our tax exemption and they will target it as this bill progresses.
Other issues that may concern credit unions is the elimination of the mortgage interest deduction for loans greater than $500,000. While this may sound like a fairly large figure, this provision could really affect credit unions serving members in New York, California, Northern Virginia, and larger metropolitan cities. And the tax on compensation greater than $1 million for employees of tax-exempt organizations may affect some CEOs.
Dennis Dollar, CEO, Dollar Associates, Birmingham, Ala.
Credit unions have stayed vigilant on the tax issue, and it is obvious that those efforts have paid off. The reality, from the perspective of a former elected official myself, is that any attempt to remove the credit union tax exemption is a loser politically. Before the first application of any tax management strategies, removing the credit union tax exemption will only generate about $2.4 billion a year against a $20 trillion federal debt. That’s like trying to drain the Gulf of Mexico with a Dasani bottle. It’s just not politically worth it for members of Congress to risk angering tens of millions of credit union members and voters for such a minimal return. If credit unions stay politically active in making that point, I think the tax exemption will stand for years to come.
Could removing the tax exemption get added at some point in the legislative process before the final tax reform bill is passed? I guess anything is possible with Congress. As someone once said, no man’s life, liberty or property are safe when Congress is in session. But I see it as very unlikely. The numbers and the politics, as stated earlier, just don’t work. Top that off with the fact that credit unions truly have generated good support on both sides of the aisle. Democrats like credit unions because they serve the little guy and attempt to reach the underserved. Republicans like credit unions because they are pro-small business and their members turn to each other for financial help instead of to the government. I am bullish on the credit union tax exemption remaining untouched in any final tax bill.
I don’t see much in the remainder of this far-reaching tax reform proposal with a great deal of direct credit union implication; however, anything that stimulates the economy and builds consumer confidence benefits the business model of any segment of the marketplace dependent upon borrowers seeking more loans, paying them back timely and finding some money left over to save. That certainly includes credit unions.
Patrick La Pine, CEO, League of Southeast Credit Unions, Tallahassee, Fla.
The fact that the CU tax exemption was not mentioned in Chairman Brady’s draft bill is a big win for us. This bill will be the starting point for discussion and debate, so were happy (for now). However we know the bankers (ABA, ICBA) are not happy and will continue to work with their friends on the Hill to see if they can get us included along the way. For example, we’ve been told by two different tax staffers, one House and one Senate, that the bank lobby was circulating talking points about both credit unions and the Farm Credit System. Based on statements made by both bank trades after the Brady bill came out, I’d say there’s a theme here. We need to be on guard for an amendment at committee level, or maybe on the floor. The battle is a long way from over.
I am most interested in the treatment of banks and other provisions that could impact CUs down the road. A House Ways and Means staffer told us that bank lobbyists were complaining recently about a provision in the House bill to tax FDIC premiums. Under the Brady draft, banks with more than $50 billion in assets will not be able to deduct FDIC premiums as a business expense; banks with less than $10 billion of assets could continue deducting premiums as an expense. The elimination of the deduction would phase out for banks with between $10 billion and $50 billion of assets. Bank lobbyists see that as a back door way to raise taxes on banks. It would raise $13.7 billion over 10 years. We also need to remember, that the Senate Finance Committee will have its own process and tax reform priorities, which we’ve not seen (publically) yet.
Another way to look at it is: we won the first round (Brandy’s initial draft), Congress is not going to do tax reform again for several years, but the fight is not over until Trump signs a bill or tax reform is declared dead for this Congress.
Susan Mitchell, Susan Mitchell, CEO, Mitchell, Stankovic and Associates, Henderson, Nev.
The main concern will be the long-term impact on members financially. There are so many caveats in the bill that what appears to be a tax break today can become a burden in the future. It is critical that credit unions renew their focus on mission and cooperative principles during a disruptive time as the tax plan will evolve. Credit unions need to be the voice for member-owners with active engagement and political advocacy.
Scott Earl, president/CEO, Mountain West Credit Union Association, Phoenix, Ariz.
Obviously keeping credit unions out of the original tax reform plan was a great first step, but we will remain vigilant on the issue while the proposal goes through the legislative process. We know that the banker lobby has increased their efforts to raise the issue of our tax-exempt status, and we will continue to be engaged and prepared if it becomes part of the dialog. There are a few changes in the proposal that we will be closely watching, these include: changes to unrelated business income tax, tweaks to the mortgage interest deduction, changes to business loan interest and retirement accounts.
Michael M. Bell, attorney, Howard & Howard, Royal Oak, Mich.
Perhaps I am naïve, but I highly doubt the credit union tax exemption is in jeopardy now or any time soon. The industry, its trade associations and its grassroots have delivered the true message about credit unions effectively. They are different than other financial institutions and should be treated differently when it comes to taxation. One portion of the proposed tax bill will serve as a catalyst for more credit union acquisitions of banks and bank Branches. The lowering of the corporate tax will help level the playing field (when credit unions compete against bank bidders) by further reducing a possible ‘double taxation’ issue. In the last few years I have had a handful of deals fail due to this taxation issue.
Michael A. Wishnow, SVP-marketing & communications, Pennsylvania Credit Union Association, Harrisburg, Pa.
We are pleased that the credit union tax status will remain unchanged in this initial proposal and will monitor the process closely to ensure that credit unions remain outside the tax reform discussions.
Tony Ferris, CEO of Rochdale + Paragon, Overland Park, Kan.
Without diving deep into the technical or political aspects of the current proposed tax plan, if credit unions look at the plan from a true strategic view point, we see significant opportunities. I believe the likelihood of eliminating the tax exemption is very low but the opportunity may be significant. The turmoil and national discussion offers credit unions the opportunity to drive a discussion about the benefits of a “credit union” and begin to truly differentiate themselves from for profit financial institutions. The industry has long been plagued globally by a weak consumer understanding and brand image of what a credit union is. This debate offers a platform for credit unions to take the stage. Rather than hiding from these debates and threats, the strategic risk return should lead us to openly engage and drive a stronger message.
Mark Cummins, president & CEO, Minnesota Credit Union Network, St. Paul, Minn.
We’ve worked continuously to demonstrate to Congress why credit unions are tax-exempt and every day demonstrate our value through purpose, structure and deeds. We are pleased that Congress understands the importance of these values and it demonstrates the power of the CUNA/League system. That said, credit unions must remain vigilant until final disposition of the bill. We are also closely watching other areas of the tax bill that would impact our members including: home mortgage interest deduction; state income tax deduction; standard deduction; and changes to treatment of retirement accounts.
Eric Richard, principal, CU Counsel, PLLC, Washington
History shows that the bankers are incredibly persistent in pursuing their goals against credit unions. Winning at the Administration level is wonderful, but it would be extremely naive to assume that the fight will stop there. Credit unions will have to watch every minute for a sign that someone is going to offer an amendment that might turn victory into defeat.
The fact that the legislative process is moving so fast on this bill is good for our side in the current posture of things. Speed makes it more difficult for those seeking changes to line up their forces. But we cannot count on the idea that the proponents of this legislation will always succeed in moving as fast as they want to.
It will take a long time to know all the possible effects of everything that is buried in this long and complex legislation, but one concern is its possible effect on the mortgage market. If buying a home becomes less financially desirable because of changes in the deductibility of mortgage interest, for example, that could have a negative effect on credit union mortgage lending.
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Steve Williams, partner, Cornerstone Advisors, Scottsdale, Ariz.
In the past, I have not been concerned at all regarding Congressional tax reform efforts. However, some of the provisions that are targeted only would raise $10 billion over 10 years. This shows Republicans are down to the small items in trying to make the tax cuts budget acceptable.
Going forward, the credit union industry still might be targeted. On a budget that is $4 trillion, the credit union tax exemption has been immaterial. This budget proposal is down to some pretty small numbers – $1 billion per year – to make the budget score better from a deficit standpoint. I think most efforts still are looking at high earners and loopholes to be shut down, but the credit union tax exemption is not a loophole for the rich, it is a consumer-friendly tax benefit.
In my opinion, there is a move to take something and give something back, from a deficit standpoint.
The change in the corporate tax rate is most substantial. This could have a positive impact on the economy as too much income and activity has moved offshore. Both parties have been talking about changing the corporate tax rate for decades. There is no guarantee that tax savings will be invested in wages. But our tax rate is so high worldwide in a world that is going to have robots everywhere, we have to do something. We have hotbeds of innovation and a great rule of law, but we have hurt ourselves with a high tax rate. It is not a giveaway to corporations, it is just bringing activity back to the U.S.
The mortgage deduction limitation at $500,000 actually could have some negative impact. In some metro and coastal markets, home mortgages over $500,000 are quite common in this low-rate environment, and any interest under this bill would no longer be deductible.
When you look at tax rate changes and expanded childcare credits balanced against the personal exemptions, it hard to see this being much of a boon to the middle class. It is really quite complex in its provisions to really be called a tax-simplification bill.
I do not see a big impact from the phasing of the estate tax for credit unions as only 0.2 percent of American households fall over the $5.2 million estate amount today. This is not in the middle of the bell curve where credit unions operate.
There is a split between child care expense deductions and the new standard deductions. I see it as a netting-out effect for the middle class. Maybe there might be a $100 per month savings for the middle class. There are plenty of things credit unions are doing proactively to help their members that are as substantial as the economic impact of this potential tax cut.
Jeremy Empol, vice president of federal government affairs for the California and Nevada Credit Union Leagues, Rancho Cucamonga, Calif.
“[Nov. 2] was Day 1 in terms of the new tax bill. While we are thrilled that the credit union status was untouched, the final bill is months away. There will be openings where some may look at the value of the credit union tax status as a potential offset, as more and more of the true costs of tax reform comes to fruition. Credit unions remain vigilant in our efforts and will, at a moment’s notice, activate our 110 million working class members to defend the tax status. We are currently looking at several of the provisions for review, such as the impact on the financial services sector, Unrelated Business Income Tax (UBIT), and the economic impact of the loss of popular deductions.
Jim Phelps, chief advocacy officer, Cornerstone Credit Union League, Plano, Texas
We are pleased that upon initial analysis our tax status is unchanged; however, we realize that this is but the first step in a long process. We must remain vigilant as discussions progress, and be prepared to engage if it appears our tax exemption is threatened. We are in the process of analyzing the proposal to identify aspects beyond the tax exemption that may impact credit unions.
Michael Mattone, VP of public relations at Municipal Credit Union, New York
Credit unions are relieved to see the industry’s tax exemption wasn’t put on the chopping block in the tax reform plan the GOP released Thursday, but we are a long way from a final bill. We are pleased to see that political leadership continues to recognize the importance of the current tax status that credit unions have, and although we always need to be prepared for our tax status to come into question, we have confidence that legislators understand the important role that credit unions play in our economy and will protect our tax status going forward. Like all proposed federal legislation that is proposed as a bill, MCU will work with our partners at CUNA and the NYCUA to go through the proposed tax plan in detail and discuss aspects that will require our attention. Clearly, proposed changes to mortgage interest deduction and student loan interest will have an impact on many of our members who are homeowners, potential home-buyers, recent college graduates and current college students; however, the magnitude of how these will impact our business is still yet to be determined.
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