The tax-exempt status of credit unions has become a hot topic in Iowa.

State senators are expected to vote on a sweeping tax bill soon that would impose a franchise tax on credit unions. While Iowa's bankers are thrilled, credit unions are encouraging members to object to lawmakers.

The debate comes about a month after Senate Finance Committee Chairman Orrin Hatch, R-Utah, wrote in a letter that credit unions have evolved beyond their original mission. That has spurred a national conversation about the original intent of nonprofit credit unions, which were formed to serve specific constituencies.

Bankers have long argued that the tax-exempt status of credit unions is an unfair advantage. The expansion of credit unions’ membership bases has further fueled bankers’ animosity. If passed, the proposed bill in Iowa would treat credit unions and banks equally — and could serve as a model for other states pondering the issue.

“I hope and think our success in Iowa would bring this to the attention of other states to do the right thing for their citizens,” said Dave Nelson, CEO of the $2.1 billion-asset West Bank in West Des Moines, Iowa. “I know banks across America have their eyes on Iowa right now.”

Banks in Iowa are currently subject to a 5% state franchise tax on net income. The bill proposes to lower the rate on that tax to 2% on the first $7.5 million of net income, and to 4% on all net income above $7.5 million for all financial institutions in Iowa, including credit unions.

The bill would also repeal the “state moneys and credit tax” that is currently imposed on credit unions’ reserves, a proposal that has drawn some support from Iowa's credit unions. Broadly, credit unions argue that their federal tax exemption allows them to keep rates and fees low for members.

Iowa is home to over 300 banks, mostly with assets of $250 million or less. The state has about 90 credit unions, including the $4.6 billion University of Iowa Community Credit Union, which has no affiliation with the University of Iowa.

Jeff Disterhoft, the credit union's CEO, published a note on the institution’s website Feb. 22 encouraging members to push back against the bill.

“This will impact the credit union you own, and we’re asking for your help in reaching out to your state senator, advocating they oppose a tax increase on your credit union,” Disterhoft wrote.

If passed, the bill would cost the credit union about $2.2 million annually, DIsterhoft said in an interview, adding that his institution's 170,000 members would end up bearing the cost with higher fees and less favorable loan and deposit pricing.

"Our initial reaction is disappointment," Disterhoft said. "We recognize that credit unions have grown in the state of Iowa, but they have grown because they save Iowans money. ... I understand how this is good for the shareholders of banks. I'm wrestling to figure out how it is good for Iowans."

Credit union trade associations have made their distaste for the bill clear through public statements and advertisements explaining the differences between banks and credit unions.

Jim Nussle, president and CEO of the Credit Union National Association, has also urged state lawmakers to reject the bill.

“This legislation would raise taxes on Iowa credit union members and reduce taxes on banks and their stockholders, many of whom do not live in the state,” Nussle wrote in a Feb. 22 letter. “It would make it more expensive for Iowans to access safe and affordable credit provided by not-for-profit financial cooperatives. This legislation is bad for Iowa and we urge this body to soundly reject it.”

The Iowa Credit Union League also opposes the bill, said Justin Hupfer, the group's vice president of government affairs, adding that the tax would impact the cost of financial services for Iowa's credit union members in the state. Hupfer said his group is working with its constituents and their members to act quickly to convince lawmakers to remove the credit union tax from of the bill.

“I don’t think it’s positive for consumers and it’s not good public policy as it is written today,” Hupfer said. “We're not opposed to a bank tax cut, but we would be opposed to a bank tax cut and a credit union tax increase."

Iowa bankers argue that larger credit unions in Iowa have expanded beyond the intent of their original mission and should be taxed just like banks.

Todd Gipple, chief financial officer and chief operating officer at QCR Holdings, which owns three banks in Iowa, said he is supportive of credit unions that serve members with a common bond and meet the intended purpose of the tax exemption.

“We think this tax bill benefits about 90% of credit unions in Iowa that do operate in that fashion,” Gipple said. “The large credit unions that operate well beyond that common bond and compete with and act like banks will be taxed like banks. We think that is equitable and appropriate given their operations.”

The Iowa Bankers Association in January launched an advertising campaign calling to end “the free ride” for the credit union industry.

“It’s very difficult for these community banks to compete,” said Sharon Presnall, senior vice president of government relations for Iowa Bankers Association.

Credit unions have a leg up over banks because they can make loans and accept deposits without restrictions like the Community Reinvestment Act, said Robert Gamble, a bank lawyer with Davis Brown Law Firm in Des Moines.

“They’ve expanded beyond the scope of their mission and I think that is to the detriment of community banks in Iowa,” Gamble said.

Bankers, for the most part, seem optimistic that the bill will pass.

“The only reason to support this wasteful subsidy is if you are benefiting from it,” West Bank's Nelson said about the tax exemption for the credit union industry. “Iowa taxpayers are not benefiting from it.”

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