Does McWatters’ response to Hatch put tax issue to bed? Bankers say no

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Credit union trade groups are praising National Credit Union Administration Chairman J. Mark McWatters’ response to a controversial letter from U.S. Sen. Orrin Hatch (R-Utah) questioning the value of the CU tax exemption.

Changing credit unions’ tax status, McWatters told the Senate Finance Committee chair, "would almost certainly create a safety and soundness issue for the [National Credit Union Share Insurance Fund] that could ultimately fall to U.S. taxpayers.”

Hatch’s letter – which was followed today by another letter to acting IRS Commissioner David Kautter suggesting that the IRS oversee federally chartered CUs – included questions related to field of membership, the services credit unions offer, executive compensation and more, and McWatters outlined the impact ending the tax exemption would have on each item in six different questions Hatch posed.

"Federal credit unions continue to be member-owned, democratically operated, not-for-profit organizations that are managed by boards of directors that consist mostly of volunteers, and work primarily to meet the credit and savings needs of consumers of modest means," McWatters wrote.

Both the National Association of Federally-Insured Credit Unions and the Credit Union National Association were quick to laud McWatters’ response, suggesting it has put the matter to bed once and for all.

"The NCUA has thoroughly responded to Chairman [Orrin] Hatch's inquiries, with specifics laying out how the loss of the credit union tax exemption would impact credit unions and the American taxpayer," Carrie Hunt, NAFCU EVP of government affairs and general counsel, said in a statement. "NAFCU appreciates Chairman Hatch's interest in performing the Senate Finance Committee's oversight role and we look forward to working with Congress to focus on issues critical to the credit union industry and our members."

Calling Hatch's questions "very reasonable," CUNA President and CEO Jim Nussle's statement also seemed to imply the matter had been laid to rest.

“Chairman Hatch asked very reasonable questions related to our tax status and various NCUA actions and procedure,” Nussle said in a statement. “In response, Chairman McWatters correctly states that Congress has conveyed the credit union tax status based on credit unions’ structure as not-for-profit financial cooperatives and their mission to promote thrift and provide access to credit for provident purposes. We are confident that credit unions earn this status every day through the service to their members and communities.”

The American Bankers Association, however, has not finished with the issue.

“No one wants to eliminate the federal tax exemption for all credit unions – just for the five percent of institutions that enjoy 75% of the tax exemption,” said ABA spokesman Jeff Sigmund. “The fact that NCUA claims that credit unions would need a taxpayer bailout without the tax exemption is extremely troubling and raises more questions than it answers. Maybe if they spent less on stadium naming rights deals and exorbitant executive compensation packages they wouldn’t be in this situation.”

And the momentum in the argument may be on the bankers’ side. A federal judge in March struck down to separate parts of NCUA’s revised field-of-membership rule, irking credit unions and provoking a harsh response from one member of the NCUA board. The regulator has not yet filed an appeal, but recent paperwork submitted to the court indicated one might be forthcoming.

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Tax exemptions Law and regulation Tax reform Orrin Hatch Jim Nussle Carrie Hunt NAFCU CUNA American Bankers Association