Even bank trade groups concede that a bill being proposed in New York to tax federally charted credit unions could not override a federal law granting the tax exemption.
But bankers say it does offer hope that they are making headway in the long battle to convince lawmakers that credit unions should pay taxes.
The bill, introduced April 25 by New York State Sen. Thomas P. Morahan, a Republican representing Rockland and Orange counties, would eliminate the exemption that allows federally chartered credit unions to do business in the state tax-free.
"Many federal credit unions have become very large with hundreds of millions of dollars in assets, often equal in size to regular banks," Sen. Morahan said in a memorandum accompanying the bill. "However, credit unions are not required to pay the same taxes that regular banks are."
The National Credit Union Administration, the agency that regulates federal credit unions, said it would preempt any state law that attempts to revoke the tax exemption.
"The tax-exempt status of credit unions must remain intact so that America's underserved consumers can have continued access to the tools they need to open doors," Rodney Hood, the NCUA's vice chairman, said Tuesday at the Municipal Credit Union's annual meeting in New York.
He said in an interview Thursday that he was expressing his personal views. But John McKechnie, an NCUA spokesman, said the agency's position is in line with Mr. Hood's.
Even the banking industry agreed that federal law would trump state law in this case.
"While we would love to see federal credit unions taxed at the state level, the Federal Credit Union Act effectively prohibits states' taxing federal credit unions," said Keith Leggett, a senior economist at the American Bankers Association.
But such legal opinions have failed to mollify credit unions.
"I guess my concern would be that it was introduced at all," said William J. Mellin, the president and chief executive officer of the New York State Credit Union League. "We don't like it, we think it's inappropriate … and we are going to oppose the bill 100%."
Banks have long argued that credit unions' tax-exempt status gives them an unfair competitive advantage.
Credit unions say that if they paid taxes it would be harder for them to provide financial services to people of modest means left behind by the banking industry.
Federally chartered credit unions received their tax-exempt status in 1937, when Congress amended the Federal Credit Union Act to exempt those credit unions from all forms of taxes except property tax.
The federal government exempted state-chartered credit unions from federal taxes in 1951, but state law determines whether state-chartered credit unions pay state taxes.
New York is not the only state where the tax-exempt status of credit unions has come under attack lately.
On Monday the Pennsylvania Supreme Court will hear arguments from the Pennsylvania Bankers Association and several banks in the state challenging the tax-exempt status of state-chartered credit unions there.
About a half-dozen states already require state-chartered credit unions to pay some type of taxes, the ABA's Mr. Leggett said. Indiana, Iowa, and Oklahoma, for example, tax credit unions' profits, he said.
David Floreen, the senior vice president for government affairs at the Massachusetts Bankers Association, said the argument for taxing credit unions is gaining momentum. (Credit unions are not taxed in Massachusetts.)
"As credit unions grow, they start to get attention. You can only fly under the radar screen for so long," Mr. Floreen said.
"I think it's indicative that more and more legislators at the state level and even in Congress are starting to consider if the exemption that credit unions enjoy is no longer valid."
The New York bill's chances for passage appear dim. Sen. Morahan has no co-sponsor in the state Assembly, the second of the state government's two houses, and the final day of the current legislative session is only five weeks away, June 21.
Stephen Powers, an attorney who works with Sen. Morahan, said that the bill is one of 243 pieces of legislation that the senator has introduced this session, and that he is not actively seeking support for it from other lawmakers.
"It's a priority, but it's not our highest priority," Mr. Powers said. "All the issues surrounding the bill will be taken under advisement."
Michael P. Smith, the president and CEO of the New York State Bankers Association, said although his organization supports the bill, he doubts that state law would be enough to strip credit unions of their tax-exempt status. For "the ultimate resolution to be meaningful, we'll have to see legislation in Washington," he said.