Trump budget gives small banks ammo against credit union tax exemption

Bankers, who have complained for years about the credit union industry's tax-exempt status, may have been handed a new weapon by the Trump administration.

As part of the budget document released Tuesday, the Treasury Department estimated that federal government will forgo $35.3 billion over the next decade due to the credit union income tax exemption. The estimate is 32% higher than last year's forecast of $26.7 billion.

Bankers were quick to cite the data as a sign that the exemption issue is ripe for re-examination.

"It's very interesting," said Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America. "It's up about a third in just a year. It shows just how big the exemption is getting. ... I think it will cause some people to ask if we can continue to afford this."

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The new forecast is also getting the attention of credit union advocates.

"Typically, these kind of budget estimates remain consistent year to year, and the size of this increase is noteworthy," said John McKechnie, a prominent credit union lobbyist. "Credit unions shouldn't overreact, but we shouldn't underreact either. Time will tell if this is an indicator of where the [Trump] administration is on credit union tax issues."

The Treasury released its numbers a week after the National Association of Federally-Insured Credit Unions sent a letter to the leadership of the House Ways and Means Committee arguing that the exemption results in a net positive for the government.

The May 18 letter, drafted by Carrie Hunt, NAFCU's general counsel and executive vice president of government affairs, claimed that the exemption will generate $159 billion in economic activity over the next decade. Canceling it would result in $38 billion in lost tax revenue, she wrote.

"That's just the opposite of what the administration is striving for," Hunt said in a separate statement.

Ryan Donovan, the Credit Union National Association's chief advocacy officer, echoed that point, asserting that the increased estimate is most likely the result of the credit union industry's continued strong financial performance.

"Estimates are not gospel; they are merely estimates and can be debated by good men and women for weeks on end," said Dennis Dollar, a former chairman of the National Credit Union Administration and the principal partner at the consulting firm Dollar Associates.

"The political question is would [legislators] be willing to tee off millions of credit union members for such a small return of annual revenue against such a gargantuan deficit and debt," Dollar added. "As a former elected official who had to face the voters every few years, I believe Democrats and Republicans will both see this as political loser. Personally, I don't think the Trump administration — once it looks at the political cost-benefit — will do more than study it a bit and then leave it alone."

The release of the estimate comes just weeks after a delegation of community bankers associated with the ICBA engaged in a high-profile meeting with President Trump.

While credit union advocates insisted that the new numbers won't lead to any new traction for banker objections to the tax exemption, they quickly added that they would remain alert should the situation change.

"You know the bankers will keep pushing this absurd argument that gives hypocrisy a bad name because of the large number of Subchapter S banks that also pay no corporate income tax," Dollar said.

"Every president's budget lists out 'tax expenditures,' and there's no proposal in this budget to tax credit unions," Hunt said. "Even so, NAFCU is always vigilant and stays in touch with [Capitol] Hill, Treasury and [the Office of Management and Budget], so they understand the value of credit unions' tax exemption."

This article originally appeared in Credit Union Journal.
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Community banking Credit unions Tax exemptions Regulatory reform Treasury Department NAFCU ICBA
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