Calif. Analysis Labels Banks 'Hypocritical' For Attacks On CUs

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The California Credit Union League is calling banks "hypocritical" for seeking to impose taxes on credit unions at the same time the number of untaxed banks is soaring.

The league said its research shows the number of banks seeking to convert to Subchapter S status has risen 600% since 1997 in California, and climbed more than 10,400% across the U.S. during the same time.

Prior to bankers' meetings with legislators last week in Sacramento, the league distributed its analysis, along with figures from the FDIC on bank profitability during 2002, to more than 40 members of the California General Assembly who sit on banking and finance committees.

A spokesperson for the league said the information was distributed in anticipation complaints about the credit union tax exemption would be "one of the first things out of the bankers' mouths."

"Bankers in California, Utah, New Mexico, Iowa, and Florida are calling on their legislators to tax credit unions in the name of 'fairness,' at the same time they are quietly building a growing stock of untaxed banks behind the scenes," said Matthew Davidson, executive VP with the league. "It's one thing for bankers to take advantage of legitimate tax- reduction strategies, but to simultaneously call for the taxation of non-profit financial institutions in the name of 'fairness' or 'competitiveness' is simply hypocritical."

The league is citing Federal Deposit Insurance Corp. data showing there were three Subchapter S banks or thrifts in California at the end of 1997, the first year in which banks and thrifts were allowed to organize under the Subchapter S section of the Internal Revenue Service code. Those banks held a combined $372 million in assets, and had net income that year of $10.7 million, none of which the banks themselves had to pay corporate tax upon.

At the end of the third quarter of 2002, the most recent quarter for which data is available, there were 18 untaxed banks in California, a 600% increase. Those banks hold $4.85 billion in assets, an increase of 1,305% over the 1997 figure. The untaxed net income for these banks at the end of the third quarter 2002 was $78.8 million, according to the league.

Nationally, meanwhile, the league said its analysis shows the number of untaxed banks grew 10,482% over the same period, from the 17 that existed in 1997 to 1,782 by the end of the third quarter of 2002. "Untaxed banks now control more than $221 billion in assets-a figure nearly equal to half the total assets of all U.S. credit unions combined," the league said. "They had net income by the third quarter of more than $3 billion, none of which was subject to corporate income tax."

A Subchapter S corporation elects to have the corporation's undistributed taxable income taxed as personal income for its shareholders, thus avoiding payment of any corporate income tax. Currently, Subchapter S corporations can have no more than 75 shareholders, but banks have been lobbying Congress to increase that number to 150.

A bill has been introduced in the House of Representatives-H.R. 714, the Small Business and Financial Institutions Tax Relief Act of 2003-that would accomplish that goal.

The California league said the California Bankers Association has been meeting with state legislators for several weeks, seeking sponsorship of a bill that would study the feasibility of imposing taxes on California credit unions.

"Taxing credit unions is simply a strategy to reduce the savings that we, as non-profits, can pass along to members in lower rates and fees, drive consumers away from credit unions, and raise bank profits," said Bob Arnould, VP- governmental affairs. "It's a winning proposition only for banks. For consumers, it's a lose-lose scenario."

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