In his zeal to attack non-profit credit unions by selectively quoting from a 2003 study by Boston College, American Bankers Association (ABA) Chairman Harris Simmons recently brought into question the "good citizenship" of more than 2,000 small, community banks in America.
In a column in the November issue of ABA Banking Journal, Simmons said, "Good corporate citizens pay taxes." This suggests that organizations that don't pay corporate income taxes are not good citizens. Those implicated would not only be all non-profit organizations, such as the American Red Cross, but also more than 2,000 "Subchapter S" banks that do not pay income tax at the corporate level.
Simmons, CEO of megabank Zions Bancorporation in Utah, quoted from a 2003 study by Boston College's Center for Corporate Citizenship and the U.S. Chamber of Commerce that asked 2,500 companies to define "good corporate citizenship." There were several answers, but Simmons focused on one: 82% of the 515 survey respondents said it was "very important" that a business make a profit, pay taxes, and provide jobs. Simmons then stated his opinion that organizations that do not pay taxes have not earned the "basic license to operate" as good corporate citizens.
An Astonishing Statement
This is an astonishing statement from a self-proclaimed champion of small, community banks, especially when you consider that the majority of Subchapter S banks are small- to mid-sized, and many are agricultural lenders. In some states that have a preponderance of community banks (e.g., Minnesota, Iowa, and Texas), half the banks have qualified for Subchapter S status.
Subchapter S banks avoid taxation at the corporate level by transferring liability to shareholders, who pay tax on their share of the bank's income as part of their individual income taxes. As of March 2004, there were 2,137 Subchapter S banks, or roughly one-fourth of the nation's banks.
In fact, at the rate Subchapter S banks are growing, CUNA's Economics and Statistics Department projects the dollar value of Subchapter S banks' tax benefits will exceed the dollar value of credit unions' federal income tax exemption by 2006.
I'm certain that Simmons did not consciously intend to take a swipe at more than a quarter of the ABA's membership. It just points up the hypocrisy of the ABA. I have no objection to the Subchapter S bank provisions or efforts to reduce taxes for bankers. However, I am compelled by recent events to point out the banking trade associations' hypocrisy. It is incredulous that on the one hand they ask for more tax breaks for themselves, and on the other they ask Congress to pay for it by taxing 87-million Americans who are credit union members.
Since Congress relaxed the rules under which banks can qualify last December, there has been a marked increase in banks choosing to form as Subchapter S corporations to avoid taxes. Interestingly, though, not one bank has chosen to convert to a credit union charter. If paying taxes puts banks at such a disadvantage, then why not seek the "advantage" of non-profit status? Simply put, it's because banks are not threatened by credit unions, and Simmons knows it. In fact, Simmons' bank, Zions Bancorporation in Utah, is enjoying record profits with the third-highest revenue growth of any corporation in the state. And the Federal Reserve has just approved Zions' purchase of Amegy Bancorporation and its subsidiary bank in Houston, several hundred miles away from Utah. This purchase alone moves Zions from 44th to 38th largest depository institution in the country.
Some Facts To Consider
Facts such as these are important to keep in mind when the ABA and other groups push for "fairness" by taxing credit unions. Credit unions still account for only 6% of the nation's depository market share. Meanwhile, according to the FDIC, since 1993, community banks have lost nearly half of their depository market share to the largest 100 U.S. banking institutions (including Zions).
And those 100 have taken that market share from community banks while the banking industry has increased its profits to record levels-nearly $105 billion in 2004 alone.
In fact, banks are the most profitable industry in the nation, according to Business Week magazine's "Corporate Scoreboard" for the second quarter of 2005. Of 24 industries surveyed, banks lead the pack with 19.6 cents profit for every dollar in sales. That's more than pharmaceuticals, insurance, telecommunications, and even the big oil companies -recently called before Congress to justify their earnings-who made barely one-third of what the banks made.
It seems to me that the nation's largest banks are more interested in serving themselves and their stockholders than in serving the communities they are based in.
Simmons made another point in his column. He wrote, "This summer two Texas credit unions won the right to switch their charters to mutual savings banks..." In the interest of accuracy, the statutory "right" to convert was never in question; the adherence to a proper and agreed-upon conversion process was at the center of the Community CU/Omni CU-NCUA dispute. These credit unions did not have to "win a right" that their members already possessed.
Another Non-Issue
Simmons goes on to say, "ABA and the state bankers associations are implementing a strategy to achieve equal taxation and regulation of credit unions that want to be like banks." Again, not one bank has expressed a desire to convert its charter to a credit union. And credit unions that want to convert to bank charters can already do so; it's a non-issue.
Simmons and the ABA repeatedly claim that they want to "level the playing field." Credit unions already level the playing field for consumers-especially those of modest means that many banks have abandoned- by providing them an alternative in the financial marketplace. That's what good corporate citizens do, Mr. Simmons.
Dave Chatfield is president/CEO of the California and Nevada Credit Union Leagues, Rancho Cucamonga, Calif.
