Credit Unions: Banks Hypocritical on Taxes

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

The league is citing Federal Deposit Insurance Corp. data showing that there were three Subchapter S banks or thrifts in California at the end of 1997, the first year they were allowed to organize as such under the Internal Revenue Code. They held a combined $372 million of assets and generated net income of $10.7 million, which was free of corporate taxes.

At the end of the third quarter of last year, the most recent quarter for which figures are available, the number of untaxed banks and thrifts in the state had jumped to 18, with combined assets of $4.85 billion, an increase of 1,305% from 1997. Their untaxed net income was $78.8 million, according to the league.

Subchapter S corporations avoid paying corporate income taxes by having their undistributed taxable income taxed as personal income for their shareholders. Currently they can have no more than 75 shareholders, but banks have been lobbying Congress to raise that limit to 150.

Nationally, meanwhile, the league said its analysis shows the number of untaxed banks and thrifts grew from 17 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 on its Web site. “They had net income by the third quarter of more than $3 billion, none of which was subject to corporate income tax.”

Before 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 Assembly who sit on banking and finance committees.

A league representative said the information was distributed because it was likely that complaints about the credit union tax exemption would be “one of the first things out of the bankers’ mouths.” California is one of a handful of states where bankers are lobbying for legislation to tax credit unions.

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