Taxation Fights Likely In States As Income Shrinks

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Look for the debate over taxation to return to the credit union movement in 2003-but not on the federal level. Even with the burgeoning federal budget deficit, the federal tax exemption is safe, for now, as few lawmakers have expressed any intention of tinkering with such a broad-based levy.

But a fiscal emergency is growing throughout the states, with more than half the states projecting budget deficits for the coming year. Some of those will amount to billions of dollars, with California's projected as high as an astronomical $38 billion.

The spreading crisis will pressure credit unions in two ways. First, each state facing a deficit will be moving to cut expenses. For some, this could mean slashing regulatory expenses, trimming examiner staffs and/or other spending meant to monitor the safety and soundness of state- chartered credit unions.

But more ominously, credit unions in several states could be faced with some kind of tax proposals in an effort to raise new revenues. Battles over taxation are already shaping up in Utah, Florida, and several other states where lawmakers, prompted in no small part by the banking lobby, are being urged to apply some kind of tax to state- chartered credit unions to help make up fiscal shortfalls. In some states that could amount to an income or franchise tax, in others it could be a tax levied on certain kinds of activities.

The growing size and popularity of credit unions makes them a ready target for such revenue schemes. And efforts by the credit union lobby to expand powers, such as impending recodification efforts in Michigan and Iowa, are bound to extract some kind of bounty for the greater powers.

One irony to this trend would be that it could become an enhancement to the federal credit union charter, something that some lawmakers, as well as officials at NCUA and NAFCU, have been pushing for. That's because a new tax on state-chartered credit unions could induce credit unions in that state to convert to federal charter, usually a shelter from state taxes.

And even though the chances of a federal tax remain slim, the bankers will continue to hammer away at the issue. This despite the fact the greater numbers of banks are moving towards the tax-exempt status of a Subchapter S, or closely held corporation. A new study by accounting firm Grant Thornton shows that another 210 banks and 10 thrifts converted to tax-exempt Subchapter S status last year, making a total of 1,849 banks and thrifts that have done so since the option became available in 1997.

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