Storm Clouds Rising Over Tax Exemption

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A powerful lawmaker raised a red flag last week over the credit union tax exemption, announcing he will probe into whether credit unions and other tax-exempt organizations continue to be worthy of their exemptions.

Rep. Bill Thomas, the chairman of the tax-writing House Ways and Means Committee, told the Federation of American Hospitals his committee will look at and possibly hold hearings into whether 501(c) organizations, specifically credit unions and non-profit hospitals, have strayed from their original purposes and should retain their special treatment.

Thomas focused his remarks on not-for-profit hospitals and recent revelations that they treat uninsured patients differently than the insured, but it was clear he also has credit unions in mind, raising a red flag among industry lobbyists. While the California Republican noted that credit union membership was traditionally geared towards low-income and the underserved, "now the only rationale to belong (to a credit union) is that you are warm and sometimes vertical," he said, calling the continued logic for the federal tax exemption, "murky, if not lost."

Thomas said Congress should examine 501 (c)s to determine whether they provide greater value to the public than taxable competitors. He said his investigation, which may include hearings, will look into the criteria for obtaining tax-exempt status and whether the law should be more specific about the responsibilities of those organizations.

The bankers were quick to pounce on Thomas' remarks.

"We agree with Chairman Thomas that one must look at the 'societal good,' provided by credit unions, and determine whether today's credit union industry has strayed from the original mission for which it was given preferential tax treatment-serve customers of modest means," said William Zuppe, chairman of America's Community Bankers, the trade association for savings and loans. "The questions is, 'are tax-exempt credit unions really providing more societal good than tax-paying community banks? The answer is clearly, no."

"We're pleased to see a key leader like Chairman Thomas take on this long-overlooked issue," said Ken Fergeson, chairman of the American Bankers Association. "There should be a point at which tax exemptions end if the organizations have strayed from their original purpose. Many credit unions have morphed into full-serve financial institutions that are virtually indistinguishable from community banks."

NAFCU President Fred Becker said the emergence of the tax exemption as an issue in the important Ways and Means Committee came as a surprise to his group, which will be working to educate Thomas, other members and staffers of the House committee in the coming weeks.

John McKechnie, chief lobbyist for CUNA, said they had some indication for several months that Thomas is interested in the issue. "But we think a hearing, at this time, is unnecessary and inappropriate, especially after Secretary Snow's remarks to the GAC last week," said the CUNA lobbyist, referring to Treasury Secretary John Snow's endorsement of the credit union tax exemption the week before.

McKechnie said CUNA will also be working with Thomas and his staff over the coming weeks to satisfy the lawmaker's concerns, saying "the politics of it doesn't make sense." "Raising taxes on 85 million Americans this close to an election," is how he explained the political ramifications.

Still, with the burgeoning federal budget deficit, projected by the Bush Administration to top $520 billion this year, any initiative that could raise new revenues, could have some kind of resonance. Some estimates put the value of the credit union exemption at $1.5 billion a year. CUNA President Dan Mica, warned the CUNA Board of the potential tie of the two issues during the CUNA Board meeting last month.

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