The Long & Winding (Credit Union) ROAD
The historical archives housed in CUNA's Madison's Information Resource Center contain a wealth of material on the history of taxation as well as credit unions. The following account is derived from these sources. For the odd writer or researcher that takes the time to wade through the credit union past, a rich narrative awaits. There are letters from Alphonse Desjardins, speeches from John F. Kennedy, the earliest English definition of a common bond and an unlikely lobbyist's diary.
1901: Desjardins' Appeals
Like a wayward uncle who shows up at dinner time with a smile and nothing else, the threat of taxation has been an unwanted guest at the credit union table since the first caisse populaire was opened in 1901 in Alphonse Desjardins' kitchen in Levis, Quebec. Since that time, credit unions have fought to both gain and retain their tax exemption in North America. Canadian credit unions lost the battle and were eventually taxed while their American cousins maintained their exemption.
"One must not forget that the humble savings, by means of which is created the small circulating capital, are entitled to a reward in the form of dividends, and that taxation should deprive them of this-if above all else there were people bold enough not to fear the tax," Alphonse Desjardins wrote in a letter to Canadian Prime Minister Lomer Gouin, on February 14, 1907 to oppose credit union taxation.
Credit union taxation has garnered a great deal of attention as well as misinformation during the past century. To be fair, it is a complicated subject; partisans from both sides have offered arguments-albeit some dubious-to weave positions to justify their case. Desjardins wrote that credit unions are "economic families" with two distinct characteristics, "restriction of transactions to members and limited scope of the activities of the cooperative."
The members of a credit union "do not aim to enrich themselves at the expense of their neighbors, but of helping each other and protecting the weakest among them." Desjardins helped his fellow converts in Manchester, New Hampshire to organize the first credit union in the United States, with the ironic name of St. Mary's Bank in 1908.
Convert is an accurate description; many credit unionists then, and perhaps to a lesser extent today, view the mission of the financial cooperative in spiritual terms. It is no accident that many of the credit union movements around the world were started by priests and nuns who viewed financial independence as a foundation for spiritual growth. When I started my first credit union job, an older editor told me that if I stayed long enough, I'd come to view credit unions as a religion. I laughed at the thought, but came to understand the wisdom of his observation years later.
1914: Sobriety And Industry Common Bond
For writers and researchers, Jerry Burns was one of the unsung heroes of the credit union movement. A chain smoking true believer and eccentric, he served for many years as historical librarian and keeper of the archives at CUNA's former headquarters, Filene House, as well as in the current offices on Madison's West side. His "Origin of the Term Common Bond in Credit Union Usage," CUNA, 1979, is one of the few works about the subject.
Burns wrote that the earliest mention of common bond in a credit union context and in English was published in the Credit Union Primer, by Arthur Harold Ham in 1914.
"The basis of membership in a credit union must be some common bond or community of interest. This may take a number of forms. It may be a neighborhood. It may be common occupation, employment by the same establishment or membership in the same church, club, lodge, labor union or other organization. In rural communities the church, parish, school district or local grange furnish a satisfactory foundation for membership."
According the Primer, qualifications for membership are based on two criteria. The first is an "identification with the basic unit upon which the Credit Union is founded-the church, the club, the business establishment, etc." The second is "good moral character and a reputation for honesty, sobriety and industry."
1943: Taxation Is Morally Wrong
The National Tax Equality Association (NTEA) was formed in 1943 to lobby for the taxation of cooperatives. Eight years later, U.S. Rep. Noah Mason of Illinois introduced a bill in the House of Representatives that would have repealed the section of the federal credit union law exempting credit unions from paying income taxes. The NTEA was successful in that Congress did vote to tax savings and loan associations, mutual banks, but credit unions maintained their tax exemption.
While NTEA continued their attacks on credit unions, CUNA became more assertive in its responses, realizing that a tax on cooperatives threatened credit unions. CUNA President Marion Gregory said in 1953 that an "increasingly number of people are becoming increasingly concerned about our growth... ahead of us is our place in the sun, or relative oblivion."
Gregory justified the tax exemption on grounds that would be repeated during the next 50 years. He also used an ethical brush to paint the subject of credit union taxation as "morally wrong."
* "There is no room for federal taxation of credit unions in the earnings of credit unions.
* "Credit unions are unique in structure. They are non-profit by philosophy, operation and structure.
* "It would be morally wrong to tax credit unions, and taxation of credit unions would not be in the public interest."
The "morally wrong" position is still part of the rhetoric today, a bit more nuanced perhaps. Marion wrote that credit unions "have taught the habit of thrift to millions of individuals who would not have otherwise saved money."
"According to reliable estimates, 95% of money deposited in credit unions would not have otherwise fond its ways into savings accounts," wrote Marion. "They handle deposits so small that banks could not handle them economically."
1961: The President Co-signs For A Janitor
Some U.S. presidents have been members of the White House Credit Union, others passed on membership. Presidents Jimmy Carter, Ronald Reagan and George H.W. Bush proposed credit union taxation; while John F. Kennedy and George W. Bush supported the tax exemption. President Harry S. Truman could be counted as a supporter; he attended CUNA's dedication and cornerstone ceremonies at Filene House in 1950. A famous photograph shows President Truman at CUNA's new headquarters with two cement trowels in hand beaming proudly.
President John F. Kennedy was the son of a wealthy banker, merchant and Ambassador to Great Britain, but came to be a credit union supporter. In the early 1980s, I interviewed the manager of the White House Credit Union, located in the Old Executive Office building. To get the interview, I needed to pass a series of security checks. The manager revealed that John Kennedy declined membership, but agreed to co-sign a loan for a White House janitor.
To say that experience shaded his view towards cooperative financial institutions may take a leap of faith. But, his April 20, 1961 speech on taxation calls for taxing cooperatives, but not credit unions.
Kennedy said that tax breaks for cooperative earnings should be "corrected in a manner that is fair and just to both cooperatives and competing businesses... I recommend that the law be clarified so that all earnings are taxable to either the cooperative or to their patrons."
The part of the speech on cooperatives concluded with President Kennedy's statement that "The exemption for rural electric cooperatives and credit unions should be continued."
1965: The Credit Union Tax Position
The reasons for the tax exemption evolved as the financial industry evolved. One of the arguments used by bankers is that the tax exemption was deserved in the 1930s, but credit unions have long since abandoned their mission and have changed.
But NAFCU CEO Fred Becker asks this question: "Would you want to belong to a financial institution that was still in the 1930s? Banks and credit unions have evolved. Credit unions have checking and mortgages. Consumer credit has evolved, it is no longer car and signature loans, it includes mortgages, credit cards, online lending and small business loans."
The rationale for the tax exemption evolved as the CUNA's 1965 unpublished paper, "The Credit Union Tax Position," indicates. As laws, regulations and operations have changed, some of the reasons are no longer used today. Twelve reasons are given for the tax exemption, which a critic might consider piling on.
* "Nonprofit. Credit unions are organized and operated on a nonprofit basis, and all income after expenses and required reserves is returned to members whose savings make the income possible.
* "Mutual. Credit unions are true mutual organizations. Participation in the credit union is confined to members and no one can obtain a loan or other benefit unless he also has savings in a credit union.
* "Common Bond. Credit unions do not serve the general public but are limited to accepting savings and making loans to members who ordinarily have a common bond of occupation, association or community.
* "Small Size. Nearly half of all credit unions remain below $100,000 in assets, limited by their small membership and amount their members can save.
* "Volunteer Help. Credit unions are run principally by volunteer help, and directors and committee members generally serve without pay.
* "Low-Cost Financial Service. Loans are made to members at an interest rate not to exceed one percent per month, regardless of how small the loan may be.
* "Statutory Safeguards. The special and unique characteristics of credit unions have been built into federal, state and provincial legislation, and close governmental supervision is provided to assure compliance with legislative requirements.
* "Social Benefit. In addition to providing low-cost credit, credit unions encourage systematic thrift and educate members and their families in the management of their own money.
* "Self-Supporting. The cost of government regulation is defrayed by the examination fees paid by credit unions.
* "Dividend taxation. Virtually all income after expenses and required reserves is returned to members in the form of dividends. These dividends are fully taxable as interest.
* "Other Exempt Organizations. Credit unions constitute a group of people who have voluntarily banded together in much the same manner as other non profit organizations such as churches; parent-teacher associations, labor and agricultural societies, and all of these organizations are free of income tax.
* "Nontaxable Concept. The statutory concept of credit unions contemplates volunteer service, employer support, limited expenses, a common bond and tax exemption in order to provide low cost credit within the one percent limitation."
Late 1980s: A Lobbyist's Diary
Many people-famous and anonymous- passed through the doors of CUNA's Washington office both as visitors and employees. Historically, there has been a friendly rivalry between the Madison and Washington staff, one that centered on competing for resources, importance and power. The rivalry was ultimately decided in Washington's favor when CEO Dan Mica moved the headquarters to the nation's capital.
During the late 1970s and 1980s, Karl Hoyle worked as lobbyist, then chief lobbyist for CUNA. The Credit Union Journal's Jan. 22, 1999 edition, characterized Hoyle as "well traveled in the financial services industry, having served prominent positions with CUNA, NAFCU, the Office of the Comptroller of the Currency, FSLIC as well as NCUA."
While serving as a CUNA lobbyist, Hoyle started to write his thoughts in a "lobbyist's diary." The diary uncovers the background in the shift in tax strategy to focus on the member as lobbyist - a strategy that is still be used today. CUNA CEO Dan Mica agrees with this assessment.
"During the last 10 years I've been CEO we have depended on the grassroots. No organization can hire enough lobbyists," Mica said. "We use lobbyists; they are a key part of our program."
Hoyle wrote about a meeting with the House Ways and Means Committee and CUNA's tax strategy. He noted that members of the committee staff walked up to bank lobbyists to give them reports on decisions that the tax-writing panel had reached that day.
"I probably knew fewer committee staffers than any other lobbyists working the tax bill," wrote Hoyle. "The thought made me break out in a cold sweat. All of a sudden I wasn't so sure that the decisions we had made early on in the tax campaign had been right."
"Basically, we decided in January to deviate from traditional Washington lobbying tactics," Hoyle continued. "Instead of working closely with committee staff, the people with whom groups usually broker legislative solutions to problems, we chose to take the credit union issue tax issue directly to the elected officials."
Hoyle wrote that many of the committee staff members had already made up their mind about credit union taxation and that "changing their views would be impossible. They seemed convinced that credit unions were no different from banks or savings and loans. Even some of our old friends on the Hill were beginning to think we had outgrown our tax exemption."
"We opted to bypass Hill staff and target the movement's lobbying efforts at the ultimate quarterbacks, the members themselves... Instead of hiring high-priced lawyers and former government officials to make calls and influence votes on our behalf, we opted to stake the movement's money-and its future-on the rank and file. We gambled that the people best equipped to lobby members of Congress were credit union managers, members and volunteers back home in the members' own districts. This decision, too, departed from the customary method of running a tax campaign."
1984: President Reagan's CU Tax Proposal
At President Reagan's request, the Treasury Department conducted a study of tax reform and released its report on Nov. 27, 1984. The proposal was a modified flat tax which would lower the corporate tax rate by eliminating many of the exemptions, deductions and credits. The Treasury Department proposed eliminating the credit union tax exemption.
CUNA had a list of talking points to give to elected officials as an "important part of CUNA's strategy to prevent repeal of the tax exemption" that mirror the arguments used today:
* "Among all financial institutions, only credit unions are financial cooperatives that are democratically owned and managed by their members.
* "Rather than a profit motive, the purpose and driving force behind credit unions is a commitment to provide excellent financial services to members who share a common bond. After paying expenses, earnings are returned to members in the form of better rates on loans and higher returns in savings.
* "Unlike banks and thrifts, credit unions cannot raise capital through the sale of stock but must depend on net income for capital to improve services for members and ensure the financial security of the credit union.
* "Credit unions are the only financial institutions that are capitalized by their own federal deposit insurance fund. Both the FDIC and FSLIC received seed money from the government. Credit unions have never sought government assistance or bail outs."
"In 1984, credit union voluntarily increased their federal deposit insurance fund, the NCUSIF, by transferring 1% of their insured shares to the Treasury. This contribution offset the deficit by $850 million. In 1985, credit unions will contribute an additional $113 to $130 million to the fund to accommodate annual credit union growth."
1985: The Consumer Federation
Consumer groups have consistently supported the credit unions tax exemption and could be counted on for a variety of legislative efforts. A notable exception: The bankruptcy reform billed which passed in 2005 was not supported by consumer groups, although credit union and banking trade associations advocated for the bill.
As the threat of taxation presented itself in 1985, Steven Brobeck, executive director of the Consumer Federation of American, defended the exemption before the U.S. Senate Committee on Finance. Brobeck characterized credit unions as having "pioneered and continue to make available the most consumer financial services available." Even though change is occurring, the mission is constant, according to Brobeck:
"Credit unions have continued to provide these basic services to their members even as the financial system as a whole has undergone a rapid series of bewildering changes, leaving most consumers with higher costs and less reliable information on which to base decisions."
Credit unions that are taxed "may eventually look more like banks-but they will look like very weak banks...if anything, Congress should consider how to make banks behave more like credit unions, instead of the other way around," said Brobeck.