Calif. League Blasts Bankers For More Hypocrisy On Taxes

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The California and Nevada leagues last week again blasted bankers for their renewed calls for federal taxation of credit unions, saying the demands smack of hypocrisy.

The California/Nevada leagues' response followed an earlier announcement from a trade group representing savings and loans congratulating the Bush Administration for considering removing the tax exemption under which credit unions operate. The Bush Administration, projects the exemption to amount to $1.3 billion in 2003, $1.36 billion in 2004 and $1.43 billion in 2005. The budget estimates that the credit unions' tax exemption will total almost $8 billion between 2005 and 2009 (see related story, page 20).

"America's Community Bankers plucked a figure buried deep in the proposed 2005 federal budget to call once again for taxing non-profit credit unions," said David L. Chatfield, League president and CEO. "At a time when banks are making record profits and lobbying Congress to further reduce their own tax responsibilities, there's only one word for this tired refrain from the nation's bankers - hypocrisy."

"In both good economic times and bad, the bankers are fond of talking about the amount of money the federal government does not collect due to credit unions' income tax exemption," Chatfield continued. "What they don't like to talk about is the amount of money states are continually losing as more banks convert to tax-free, Subchapter S status. Bankers also don't like to talk about the $150 billion taxpayer bailout of the bank and thrift insurance funds in the late 1980s, which continues to cost American taxpayers about $2 billion a year in interest alone."

The California/Nevada league argued that in contrast to the ACB's assertions:

* CUNA has estimated that the conversion of banks to Subchapter S status cost the federal government a record $970 million in 2003, and $3.8 billion since banks were first allowed to convert to Subchapter S status in 1997.

* CUNA noted that if the growth rate of such bank conversions continues, the federal government will lose about $13.5 billion over the next 10 years - and that within the next two to three years, the annual revenue the federal government forgoes from Subchapter S banks will exceed the foregone revenue from credit unions.

* A 1999 study by the California consumer advocacy group Consumer Action found that while federal tax, regulatory and deposit insurance policies benefit credit unions from $1.1 billion to $2.5 billion per year, they benefit banks anywhere from $30 billion to $46 billion.

The same table cited by the ACB shows the government lost $2.13 billion in 2004 in deferred taxes for financial firms on certain income earned overseas, and expects to lose $2.19 billion in such taxes in 2005. This deferral is expected to cost a cumulative $5.4 billion from 2005-2009. Some of this loss is due to bank activity, but none is due to CU activity.

* The federal government also lost $30 million in revenue in 2004 due to the excess bad debt reserves of financial institutions, and expects to lose $20 million in such revenue in 2005, with a cumulative loss from 2005-2009 of $50 million. Again, none of this loss is due to credit unions, the league reported.

* As of Sept. 30, 2003-the most recent period for which data is available from the FDIC-there were 2,007 Subchapter S banks in the United States, out of 9,209 institutions insured by the FDIC. These banks held a combined $265 billion in assets and reported $3.79 billion in net income, none of which was subject to corporate income tax. California's 22 Subchapter S banks held $6.6 billion in assets as of Sept. 30, 2003, and reported net income of $107.4 million, which again was not subject to corporate income tax.

"The lack of a stampede of banks rushing to become credit unions reveals that banker complaints about credit unions' alleged advantages are a sham," said Chatfield.

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