New Restrictions, Franchise Tax Proposed For Utah's CUs

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In what is widely expected to be a multi-state assault on credit unions, a banker-supported state legislator last week introduced a bill that would apply the state's corporate franchise tax on Utah's largest credit unions.

The proposal would apply the 5% franchise tax to all state-chartered credit unions of more than $100 million in assets that have physical facilities, brick and mortar, in more than one county. Those credit unions would be barred from operating in more than one county, offering commercial loans or merging with other credit unions unless they opt for a new creation called the competitive equity tax, a 30% levy on net income, equivalent to the federal income tax paid by banks.

Credit union officials said they expect similar assaults on their tax-exempt status in other states across the country, many of which are experiencing severe strains on their finances. The Florida Bankers Association is already preparing a report that purports to show the financial advantages the tax exemption provides credit unions over banks and the potential for raising new revenues for state governments.

Rep. Jeffrey Alexander (R), the sponsor of the Utah bill, said as written it will apply to three credit unions, including the state's two largest, America First CU and Mountain America, as well as Goldenwest CU, and would cost them about $2 million a year.

The three credit unions are the only ones to survive a heated 1999 legislative battle with their multi-county branch network intact, after a new bill erased the state charters' powers to expand into numerous counties. Those three, the only ones with physical facilities outside their home counties, were grandfathered in the new legislation.

Despite a heated debate over the state's growing budget deficit, currently estimated at $150 million for the fiscal year, Alexander denied his motive was to narrow the budget gap. "We're aiming to create greater equity not only between the credit unions and banks, but between large credit unions, that appear to be more like banks, and small credit unions," he said.

Alexander said he devised the new tax scheme with the help of the Utah Bankers Association and also discussed it with some credit union representatives, whom he would not name, but insisted they supported the measure. He did not speak with the Utah League of Credit Unions, the chief credit union lobby, on the matter, he admitted.

Scott Earl, president of the league, expressed disappointment with both the proposal and the failure to get a meeting with Alexander. "We tried on several occasions to meet with him but he never did meet with us," said Earl. "Now he's running a major piece of legislation and we weren't even given a courtesy of a meeting or even seeing the bill before it was introduced."

Fred Nydegger, vice president at Mountain America CU, also derided the inability of representatives of this credit union to discuss the tax proposal. "We didn't have a heads up on the bill. We had no advance warning," said Nydegger, of the measure that could cost the $1-billion credit union about $500,000 a year. "We approached him (Alexander) but he refused to call us back."

Shelly Clarke, president of Goldenwest CU, called the proposal an attempt by the bankers to separate the credit union movement between large and small institutions. "This is another effort to divide Utah credit unions and drive a wedge between us," she said.

Clarke suggested that if the bill passes it would be the beginning of a broader attempt to tax credit unions. "It's not just large credit unions that they're after. When will it stop?" she said. "I believe if they win in Utah it will be just the start of an effort across the country. So we've just got to win this one."

Nydegger said the Alexander proposal raises several important issues, including the potential impact on the credit union's capital.

"It does not address, in any way, what both NCUA, as the federal regulator (of federally insured credit unions) would require that a credit union must retain for safety and soundness," he said, noting that his credit union retains a 7.75% capital ratio that could be impaired by an annual subtraction from its retained earnings, as the bill would do. "We've got a very modest capital level," he noted.

Nydegger, a long-time credit union activist, promised the involvement of all credit unions to defeat the bill. "We can either fight or roll over and play dead," he said. "And the credit union movement is not going to roll over and play dead; not in Utah and not anywhere else in the country."

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