If you're the leader of or a volunteer at a credit union in the United States, no one needs to tell of the attacks upon the credit union tax exemption. And the banking industry is promising only to increase the level of its vociferous objection to that tax exemption.
But what you may not know much about is what has happened in another credit union movement similar to that of the U.S. that not so much lost its tax exemption as it surrendered it, only to realize later the consequences it hadn't anticipated.
Unlike their U.S. counterparts, Australia's credit unions pay a corporate income tax and have done so for several years. Moreover, they are also subject to the same regulatory requirements as banks and other financial institutions. Why did the Australian movement lose the battle against taxation? What has been the impact? And, what can the U.S. credit union movement learn from its counterpart down under? I hope to offer you some answers to those questions, below.
There were several reasons why Australian credit unions lost the tax battle. One of the main reasons was because the leadership of the movement was divided. As hard as it may seem, some Aussie credit union leaders at the time actually welcomed the proposal. They argued that the tax was inevitable and credit unions should "accept it and get on with doing their core business" rather than be distracted by fighting the tax. They also thought that paying tax was an easy way to fulfill their social obligations.
Unprepared For Battle
Regardless, many Australian credit unions were unprepared for the battle. The initiative came from the government of the day, which was trying to balance an annual budget, rather than as a result of a long-term attack from the banks. Credit unions had no strategy in place, and were unprepared for both the battle against the tax, and for the tax when it was introduced.
The movement's response was narrowly focused and essentially only involved a small leadership group who attempted to persuade the government not to introduce the new tax. There was little consideration given to involving all levels of the movement in a campaign to oppose the introduction of the tax. While boards of directors and staff were informed of the proposal and what the leadership was doing about it, members were virtually ignored.
Structure also played an important part in the movement's inability to adequately oppose the introduction of the tax. Earlier in the decade, the movement had disbanded its state leagues and moved to one single, peak organization. To further compound the problem, chapters only existed in a minor way. Therefore, with the power and influence centralized, many within the movement who were passionate about opposing the tax lacked the opportunity to have input into the debate. The structure created a huge gap between the senior leadership and the members.
Putting all those issues to one side for the moment, why wasn't the leadership able to persuade the government not to introduce the tax? While the real answer to this question is unclear, it is my opinion that the leadership was unable to adequately articulate those things that made credit unions different from other financial institutions that paid the tax. While there were some CUs that didn't, most were involved in a wide range of socially responsible programs. However, it is one thing to point to a set of impressive values, operating principles and philosophies; it is another to be able to document what is actually being done. The Australian movement then, and to this day, has no documented record of what credit unions are actually doing that makes them different than banks.
As a result, the leadership was unable to articulate the real impact the tax would have. Crucially, they were unable to document the important socially responsible initiatives that credit unions would be forced to cease in order to pay the tax.
To that end, the battle was lost and the tax was phased in over three years. Measuring the impact is not an easy exercise. Without adequate records prior to the introduction of the tax, it is impossible to precisely measure the impact.
Clouding this measurement are other important events that occurred at the same time the tax was introduced. The most devastating of those was the "margin squeeze" that occurred in the Australian financial services industry as a result of the emergence of mortgage originators. Credit unions were faced with reduced margins on their housing (mortgage) loans of around 2%. At the same time, the demand for higher margin consumer loans was decreasing and the demand for lower margin housing loans was increasing. This resulted in a dramatic effect on the income levels of many credit unions faced with paying tax for the first time.
Many Australian credit unions were forced to cut costs and closely scrutinize their priorities and strategies. Unfortunately, many chose (or were forced) to cut back on socially responsible programs, the very programs that made them different to the banks. The rate of mergers increased and has continued at a rapid pace. The focus of many credit unions, especially the smaller ones, turned away from traditional credit union values to business survival.
Two Important Lessons For The U.S.
Credit unions in the U.S. have already learned a few lessons from their Australian counterparts, and some of the conditions that existed in Australia do not exist in the U.S. Nevertheless, I believe there are two lessons that are particularly important to U.S. credit unions to which they should pay attention.
The first lesson is to treat the threat as an opportunity. It is an opportunity to become a more united movement. The entire movement needs to work together to fight an external enemy. It is an opportunity to involve everybody in the movement-members, staff, managers, directors, suppliers, supporters and movement leaders. It is an opportunity to articulate the credit union difference to members, potential members and communities. It is an opportunity for the movement to grow stronger.
The second lesson is to document the credit union difference. Having values and principles, and saying what you do is important. However, being able to point to an independently verified document that demonstrates that you live by your values and principles and do what you say is incredibly powerful. This system of social accountability or social auditing is a concept that American credit unions should be considering as part of their anti-tax strategy.
In my opinion, the Australian credit unions would not be paying tax today if they had adopted these two strategies.
Mark Lynch has been an active credit union board member in Australia and the United States for the past 23 years, and has worked as a speaker, trainer and facilitator in both countries. Prior to moving to live in the U.S. permanently, he was the Deputy Chairman of Australian National Credit Union, Australia's largest credit union and was the Volunteer and Resources Manager with Credit Union Foundation Australia. He can be reached by e-mail at mark.lynch
