Miscalculation Throws Tax Reform into Texas Limbo

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A carefully calibrated agreement on a broad business tax reform bill that retains the credit union tax exemption was thrown into limbo last week when the state Comptroller told legislative leaders the deal falls billions of dollars short-$4.1 billion over two years-of being revenue neutral, a key goal of the legislation.

The miscalculation increases the likelihood that the deal will be significantly rewritten when the House-passed measure moves over to the Senate after the Easter Recess, according to Buddy Gill, chief lobbyist for the Texas CU League, who worked weeks to mobilize credit union executives on behalf of the credit union exemption.

Still, Gill and others lobbying on behalf of credit unions expressed confidence last week that the Senate will continue to support the credit union carve-out from the business tax. "They have indicated all along that we're going to be O.K. But how this all plays out, I can't be sure," said Gill last week as he was trying to determine the meaning of the new revenue shortfall.

Meantime, the banking lobby insisted last week it will not surrender in its efforts to end the credit union exemption, at least for the biggest, most diverse institutions. The Texas Bankers Association will employ a new strategy to try to chip away at the credit union exemption when the Senate takes up the bill, according to a top official with the TBA.

In a strategy being crafted at the national level-by the American Bankers Association-the TBA will try to convince state senators they should consider ending the exemption for diversified, multi-service credit unions, or "de facto banks," according to John Heasley, executive vice president of the state trade group. "We continue to advocate to tax-writers that there should be a distinction drawn," said Heasley.

Heasley said they hope to incorporate a scheme devised by the ABA and debated in the Utah legislature where the bank lobby tried to divide the state's credit unions into two groups: traditional institutions serving a restricted membership base with limited service offerings which would continue to be tax-exempt; and those credit unions with open community charters that provide a broad-range of financial services traditionally offered by banks, like small business loans, trust and insurance services. Those institutions would be subjected to taxation.

"For those credit unions that are de facto banks, we believe they should be taxed like commercial banks," said Heasley, acknowledging that two diversified Texas credit union giants, Community CU and OmniAmercan CU, are abandoning their credit union exemption in favor of bank charters.

Both Community CU, with $1.7 billion in assets, and OmniAmerican CU, with $1.5 billion, have applied to regulators to convert to tax-paying mutual savings banks, then plan to convert to full stock-owned institutions.

The tax bill approved by the House two weeks ago is aimed at resolving a decades-old problem for funding local school expenses in Texas, one of a handful of states still without its own personal income tax. As a result of the tax system, local school districts have relied for years on property taxes and relief from the state's business tax revenues. But a recent court order has required the state to equalize school funding. The business tax reform bill is aimed at lowering property taxes by as much as $6 billion. The legislature is supposed to take up another initiative later on that would provide additional school funding.

So lawmakers sought to raise an additional $6 billion from the business tax that would go to local communities for property tax relief of the same amount. To do that they proposed closing many loopholes in the current business franchise tax and giving businesses the option of paying the current franchise tax or paying a new tax on payrolls. The credit union lobby successfully fought to retain the exemption from the business tax for the 230 state chartered credit unions, along with other 501(c)3 not-for-profit institutions.

But the massive funding shortfall in the House bill means that lawmakers are going to have to come up with a new scheme when they take up the bill in the Senate.

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