It is a political clich? that credit unions wear the white hats in the eyes of the public and in Congress. Like most clich?s, though, it has a foundation in reality.
John Hawke, former Comptroller of the Currency, described credit unions as one of the "untouchable third rails" of U.S. politics. In an Oct. 4, 2004 speech before a group decidedly cool to the credit union tax exemption-the American Bankers Association-Hawke explained the American public's unwavering support for credit unions.
"They have a commitment to the cooperative movement and to the concept of mutuality. But for most, the answer is that they feel more comfortable with their credit union, and they see a superior commitment to customer service. They see modest, low-cost, user-friendly facilities run by people whose motivation is not to maximize shareholder value, they frequently participate in the governance of the institution, and they like the lower costs on loans and the higher rates on deposits."
This support is far from unanimous, of course. One can almost hear the bankers' groans during Hawke's speech. The struggle to hold on to the credit union tax exemption in the United States has been a malady that has lingered on since the first credit union was established in Manchester, New Hampshire in 1908. And the battles have been played out in local, state and national levels.
During the next 98 years, the American movement has had both supporters and opponents of the tax exemption from both parties. Historically, the Democratic party was a stronger supporter of savings and loans and credit unions; they saw credit unions as competitors for commercial banks, said Jonathan Lindley, who was a CUNA lobbyist in the late 1970s.
Government employees and elected officials often tend to view credit unions as having a special place in American society, apart from other institutions. Part of this support comes from personal experience-most governmental agencies have a credit union.
Indeed, along with grass roots lobbying, serving government agencies with a credit union is one of the reasons for their legislative success, said former CUNA CEO Ralph Swoboda.
"One-third of the membership has a governmental field of membership; every governmental agency has a credit union, including the White House and Federal Reserve," said Swoboda. "Effective lobbying has also done a lot to protect the exemption. The prime function of CUNA is lobbying. The success of the 'Save Our Share Drafts' Campaign in 1978 and Operation Grass Roots in 1994 have been the result of grass roots lobbying."
In 2006, the support for the exemption in the White House and Treasury is strong. Both President Bush and Treasury Secretary John Snow are on record supporting the tax exemption. Support in Congress continues to be solid as well, according to former member of Congress and CUNA CEO Dan Mica, who reflected on the House Ways and Means Committee's one-day hearing on the credit union tax exemption on Nov. 3, 2005, during which the credit union tax exemption was placed under scrutiny.
"There is not a single member of Congress that actively seeks taxation," said Mica. "Even Chairman (Bill) Thomas at the Ways and Means Committee did not ask for taxation. And the representative from NCRC (The National Community Reinvestment Coalition), who had harsh criticism for credit unions, prodding credit unions to do more for low-income people, did not want taxation. Not a single member of Ways and Means advocated for taxation. The only ones for taxation were the hard-line, myopic bankers."
Few in the industry argue with Mica's assessment of the mood of Congress. But Chairman Thomas had pointed questions that served to shake up the credit union industry and defined the issues for the next round of tax battles.
Scrutiny In House Hearings
The House Ways & Means Committee Review of the Credit Union Tax Exemption was a red light along the way in the journey of the credit union tax exemption. Chairman Thomas said that the credit union tax status has received "little scrutiny from Congress. In fact, this is the Committee's first hearing in 20 years devoted exclusively to credit union tax-exemption."
It is true that Thomas didn't advocate taxation, but he said that credit unions had changed a "great deal" and that it is important to "periodically revisit the field... and to see if it makes sense to the taxpayers who provide a very generous subsidy." A focus of Chairman Thomas' concern was what he called the lack of transparency and data that supports the credit union mission of serving people modest means.
"I have a little concern, because I would think you would want to be looking for tools to provide accountability, tools for transparency, tools for verifiability, because if as recently as 1998 you restated your mission as helping people of modest means, you should feel proud about proving that, and I think you could if you had the instruments that could establish that, but you don't," he said.
Thomas scolded NCUA Chairman JoAnn Johnson and NCUA as "supposed to be a regulator, appears to be, to a very great extent, an enabler, which is making excuses for not being able to measure up to deliver a product which gets a tax preference." Thomas also said that "concerns me as much as anything, in terms of the comments that have been made during this hearing."
"The defensiveness on the part of a number of people, who have been provided with new structures presumably to reach out and provide those services to certain groups of people, who seem to say that, 'That isn't our job. That isn't why we are here.'"
In his concluding statements, Thomas called for a method of collecting data that would support credit unions serving people of modest means "along the lines of the CRA."
State-chartered credit unions are required to comply with Community Reinvestment Act (CRA) requirements in only two states-Massachusetts and Connecticut. Massachusetts was the first state to enact a CRA for credit unions in 1982. Connecticut followed by passing their version of the CRA in 2001. Both states analyze credit unions in regard to their ability to deliver credit to specific areas. CRA performance evaluations are part of the calculus in the application for mergers, expanded fields of membership and other requests made of the regulator in those two states.
Always Playing Defense
The House Ways and Means Committee hearings surfaced a number of long simmering issues: the tax exempt status, data to support serving people of modest means and the defensive posture by some in the industry in their efforts to defend the tax exemption.
Chairman Thomas' criticism of the "defensiveness" begs the question of whether the American credit union movement would be better served with a more proactive, offensive strategy. As reported elsewhere in this issue, while there were pros and cons to losing the credit union tax exemption in Australia, one of the benefits was that the movement was no longer restricted in their political advocacy because of the fear of losing their tax exemption. Australian credit unions were able to change their defensive strategy to partake fully in public policy debates concerning credit unions.
"The biggest problem is that credit unions don't respond to bankers' attacks," said Jonathan Lindley. "Credit unions take the defensive all of the time; you don't take the offensive. You can't win if you just take the defensive position."
Lindley speaks from experience; he was head of CUNA's Washington office during the late 1970s and has also served in leadership positions in banking, s&ls and most recently was vice president of advocacy for the National Association of State Credit Union Supervisors. During his time with CUNA, he negotiated with the s&ls and banks to get additional powers for credit unions-offering certificates of deposit and mortgage lending.
"I argued that we needed certificates of deposit and mortgage lending or we would go out of business," said Lindley. "I negotiated with the U.S. League of Savings and Loans and with banks. We would not oppose the expansion of Reg Q so we could get the ability to offer certificates and mortgage lending. We used the threat of getting involved as an offensive strategy."
Of course, that type of strategy is not "something that is written down, you don't go to the CUNA board and ask permission." Lindley admits that an offensive strategy is harder today with the political environment being polarized. "There is no cost for banks and thrifts to pick on credit unions because they don't fight back. An offensive strategy is harder, if you wear the white hats, it's easier, but the good guys often lose."
Lindley argues that the credit union community has not effectively defended tax exemption and that there is a cost to a defensive political strategy. The tax exemption is both an advantage and a burden, "since 1998 no legislation has passed that benefits credit unions. The bankers' message is that if you seek any expansion of powers, we will work for the taxation of credit unions."
Credit unions have an obligation to serve those of modest means, but it is not linked to the tax exemption, said Lindley. Chairman Thomas has made that linkage and has made it an issue, so it will "have to be tackled," said Lindley. Lindley agrees with Chairman Thomas that credit unions should adopt some type of documentation of serving people of modest means, such as a CRA type of proposal.
What's Really Needed
CUNA CEO Dan Mica agreed that "we can do a better job of collecting data; we'll do a better job. Our data shows that with middle- or lower-income people both get benefits from credit unions." Mica and most credit union trade associations do not support Chairman Thomas' argument for a CRA type of approach
"The question is really do they have a consolidated database?" said Mica. "Yes, but not enough. Any given credit union has a wonderful story to tell. But they do it in different ways. Thomas would like uniform data."
NAFCU CEO Fred Becker concurs. "We need to do a better job so that Congress and the American public has a better understanding of our value and what we provide to our members. You can always do a better job or people will easily and quickly forget.
"In hindsight in 2001, the mistake we made is that we didn't do enough talking to our members, American public and in local communities to ensure that members of the community understand the credit union difference and unique aspect of credit unions," said Becker. "You can never do enough of that."
Credit unions still do wear the "white hats," according to Mica. "The ABA, Gallup and our own polls show that we wear the white hats. Our fiduciary responsibility is to members and the institution. We keep money in the members' pockets. The fiduciary responsibility of the bankers is to take money out of the consumer's pocket."
The credit union message to defend the tax exemption is the same for consumers as it is for the White House and Congress. CUNA's strategy is to be "very direct, honest and transparent with members of Congress about who we are and what we do.
"Our structure is not-for-profit," said Mica. "We do a better job of serving consumers than any other financial institution. People need to analyze the rhetoric; bankers stretch the facts. There is no 'morphed credit union.' Every credit union operates under the same law-state charter or federal charter."
NAFCU CEO Becker agrees. "CUs are democratically run and volunteer boards. They make a difference in people's lives on a daily basis. The message to all groups has to be the same. The service that credit unions provide to members."
The credit union message is harder to make today than it was in the past, because of the size of credit unions and demographics. Credit unions are not doing a good job of serving the poor, who are excluded from financial services, said Swoboda.
"When I was at CUNA, there were two arguments; credit unions serve the underserved. Critics say show us the data," said Swoboda. "Can you demonstrate how you are serving the underserved? The tax exemption is the only way to preserve the mutually owned financial institutions. If there is an inability to retain earnings, there will inevitably be no credit unions. If the tax exemption is lost, credit unions will convert to non-mutuals."
Swoboda said that credit unions need to recognize that they need to do more than political advocacy; they have to change their operations to justify it. "The tax exemption should go away if credit unions don't try to earn it. They have to earn it every day."
Cooperatives Doubting Thomas
The American cooperative community watched the Ways and Means Hearings with apprehension, since any change in the tax law could affect all cooperatives. The credit union tax battle has always been a cooperative tax battle, since consumer cooperatives have a similar tax structure (see related story, page).
"This is not just a credit union issue; Congress could look at the taxation of other cooperatives," said Paul Hazen, CEO of the National Cooperative Business Association (NCBA). "The farm credit system gets the same type of attacks. Rural electric cooperatives get attacked by propane gas dealers who say the cooperatives have an unfair competitive advantage."
Hazen agrees with Jonathan Lindley that credit unions would be better served by taking a more proactive, offensive approach. The NCBA board, in fact, had a discussion about this very topic and decided to change to take a more offensive strategy. What would an offensive strategy for cooperatives be?
"We believe that the cooperative business model is a superior business model," said Hazen. "We went to Congress and secured a $500,000 grant to do research on the cooperative model."
Credit unions and all cooperatives need a more proactive approach to show the effect they have on the economy, said Hazen. "We have to demonstrate that cooperatives are different in the community and we need a different tax structure.
Hazen agrees that credit unions and other cooperatives need to provide better data and make sure that they are serving their communities. A CRA- like requirement isn't the answer, though.
"CRA was developed for banks; it was for-profit entity, it is needed for banks," said Hazen. "The problem is trying to apply rules and regulations for investor-owned businesses to a non-profit. Cooperatives serve their community every day, CRA isn't needed; we are not in business to enrich outside investors."
The tax exemption for credit unions can be justified the same way it is for other consumer cooperatives, said Hazen. "A credit union is a non-profit business; it is a group of members providing services at cost to members," said Hazen. "The surplus is returned to members in patronage refunds or additional services."
Serving people of modest means is part of a credit union's mission, but it has nothing to do with the tax exemption. The tax code focuses on the non profit structure and services to members at cost, said Hazen.
The Cost, If Lost
unless statistics lie
he was more brave than me
more blond than you
-e e cummings, 1931
The poet e e cummings would have difficult finding the truth while reading the numerous statistics and studies conducted on the cost of the credit union tax exemption. The problem with many studies of the subject is that it would be difficult to hold all other variables in the U.S. economy constant to get a true reading. The best one can hope for is a rough estimate.
One study that provides a reasonable estimate was conducted by the Congressional Research Service in August 11, 2005 that estimates if credit unions were taxed the revenues yielded for fiscal year 2006-Oct. 1, 2005 through Sept. 30, 2006-would be $1.39 billion. The study also cites the Joint Committee on Taxation, which estimates that federal taxation of credit unions with assets of $10 million or more would yield revenue of approximately $1.3 billion.
This number parallels what CUNA economists calculate. CUNA VP for economics Mike Schenk wrote in the January 9, 2006 Credit Union Executive Newsletter:
"CUNA economists, after examining bank tax payments and adjusting for avoidance behaviors, estimate that credit unions would have paid $1.8 billion in federal income taxes in 2005, if they were taxed like commercial banks."
Credit union advocates also hold that this number would be far less because there would be tax minimization strategies taken that would limit the amount of tax collected. "Anyone who studies this knows that the loss to consumers is billions of dollars. There would probably be a net loss," said Dan Mica.
There have been studies that analyzed the effect of credit unions in specific states. Florida Tax Watch estimated that in 2003 the total annual value of the tax exemption for the credit unions of Florida was $102.2 million-70 million for federal taxes, $30.3 million for state taxes and $1.9 million for local taxes.
In May 2005, Dr. William Jackson of the University of North Carolina, studied the effect of credit unions on the economy of North Carolina. Jackson found that credit union members in North Carolina saved more than $336 million by doing their business at their credit union instead of a bank. And, because of competition from not-for-profit credit unions, bank customers in North Carolina saved nearly $60 million. Jackson concludes that the overall annual savings to consumers of North Carolina to be about $400 million.
If credit unions were to be taxed, it would be similar to Canada, where credit unions are taxed at the small business rate according to several interviewed for this report. "The corporate income tax has come down substantially; Congress would have a special tax for credit unions. The tax exemption is worth 25 to 50 basis points," said Jonathan Lindley.
Will It Go Away?
All industry leaders interviewed for this report agreed that the struggle to retain the tax exemption is likely to continue and unlikely to fade away. The real problem is not taxation but regulatory burdens for financial institutions, according to NAFCU CEO Fred Becker.
"The regulatory burden on all depository institutions has never been as great as it is today. Bankers should come together and work with other depository institutions for regulatory relief. Credit union taxation in the big scheme of things is not a problem for them. Bank profits last year were at record highs."
Trade associations need a common enemy; a rallying point for members and justification for dues, according to association leaders interviewed for this report.
They echoed the words of Paul Hazen that the tax issue for the banking lobby is "good association politics, it gets members really engaged by scaring them."
The strategy of banks and credit unions working together for regulatory relief is one that former Comptroller Hawke endorses. In it is the high road that will unlikely be followed. In his famous speech in 2004, he advises the American Bankers Association to change their strategy of "increasing the tax and regulatory burdens on credit unions."
"You are asking members of Congress to deprive credit unions of the very advantages that you say enable them to offer services to consumers at better rates than you can offer...Not many members of Congress are likely to agree to such a proposition, and it's no wonder that you have been losing this battle on the Hill."
Hawke suggest that banks need a new strategy and "real regulatory burden relief should be at the heart of it" that could include tax relief for community banks as well as credit unions."
