Twenty years ago, the House Ways and Means Committee - then chaired by Illinois Democrat Dan Rostenkowski - briefly mulled a tax on credit unions as part of a package of reforms, only to drop it like a red-hot coal in the face of fierce opposition.
Ways and Means is set to examine credit unions' tax exemption on Thursday for the first time since the mid-1980s, and credit union industry officials insist not much has changed. Despite budget shortfalls, they say, members of Congress have little appetite for taxing credit unions.
Bankers, of course, do not agree and are drawing on their own historical analogy as evidence that tax exemptions are not necessarily permanent. They refer to 1951, when Congress, in need of funds to pay for the Korean War, stripped the savings and loan industry of its tax exemption.
"The turning point there" was that S&Ls "looked too much like any other financial services providers," said Paul Merski, the chief economist for the Independent Community Bankers of America. "Maybe credit unions have reached … a tipping point."
Ways and Means Chairman Bill Thomas first raised the prospect of taxing credit unions in March of 2004. In a release describing Thursday's hearing, the California Republican said, "Congress has an obligation to ask questions to ensure that the country is receiving something in exchange for the benefit of tax exemption."
Banking groups would argue no, and they say they believe they are making progress getting their point across. Mr. Merski cited four recent think-tank studies that either recommended or discussed a tax on credit unions, as well as the contretemps that arose this summer when the National Credit Union Administration tried unsuccessfully to block two Texas credit unions from converting to mutual savings banks.
That move angered a number of influential legislators, including seven-term Texas Republican Sam Johnson, who serves on Ways and Means.
But Murray Chanew, the director of political affairs for the National Association of Federal Credit Unions, insisted that there has been no erosion of congressional support for the 68-year-old tax exemption. Indeed, he predicted that Ways and Means would conclude in short order that the credit union industry still merits its favorable tax treatment.
"This hearing is pure oversight," Mr. Chanew said. "The committee is looking at the revenue measures of the U.S. government. It does that all the time."
Mr. Chanew and other credit union lobbyists also noted that Rep. Thomas has been examining other tax-exempt industries and held hearings on nonprofit hospitals last year.
Bankers are nonetheless delighted that Congress is finally eyeing a tax exemption they say many credit unions no longer deserve and are exploiting to capture market share from community banks. They have raised increasingly vocal objections as a growing number of credit unions have adopted expansive community charters that allow them to serve all the residents of a specified area, and ventured into small-business lending - a niche once populated almost exclusively by banks.
Ronald W. Heaton, the president and chief executive officer of Southern Utah Bancorp in Cedar City, said Monday, "I hope Congress will look closely at this issue, especially at the larger credit unions that have significantly expanded their fields of membership and ventured into commercial lending and are competing head to head with us."
Mr. Heaton said his $487 million-asset company pays about $2 million a year in federal income tax and $400,000 in state tax. Like many other bankers, he stopped short of advocating a tax on traditional credit unions that still serve a tightly defined field of membership, but said that larger, community-chartered credit unions that act much like banks have an unfair competitive advantage.
John McKechnie, the senior vice president of governmental affairs at the Credit Union National Association in Washington, said last Thursday that banker arguments that seek to divide credit unions into "large" and "small" or "complex" and "traditional" categories miss the point: all credit unions, regardless of size, are member-owned financial cooperatives.
"Obviously, Congress has a legitimate oversight role, but what I think it would be unfortunate if the hearing were somehow driven by bankers' complaints," he said. "Eliminating the tax exemption would be extraordinarily poor public policy."
Credit union executives add that if credit unions were taxed, it would be difficult if not impossible for them to carry out their mandate of serving people of modest means.
"We'd be challenged if we had to pay taxes," said Bert J. Hash Jr., the president and CEO of the $758 million-asset Municipal Employees Credit Union in Baltimore. "We couldn't provide products and services that are as beneficial as those we offer now."
Some banking industry officials suggested that Ways and Means is taking up the taxation issue partly in response to the NCUA's failed attempt to prevent the $1.1 billion-asset OmniAmerican Credit Union in Fort Worth and the $1.4 billion-asset Community Credit Union in Plano, Tex., from converting to savings banks. The NCUA argued that because disclosure statements mailed to members had been improperly folded, members who voted in favor of conversion were uninformed.
The episode led to a legal challenge, which the NCUA lost, damaging the agency's credibility on Capitol Hill. One lawmaker, Rep. Patrick McHenry, R-N.C., introduced legislation that would limit the NCUA's ability to intervene in future conversion cases.
The committee has invited representatives from both banking and credit union trade associations, but the witness list had not been finalized as of Tuesday.
