What would community bankers think of proposed state legislation that would finally tax credit unions but also raise bankers' taxes?
That's the dilemma Maine bankers face in this legislative session, which began Dec. 1.
Rep. William J. Smith, a Democrat who represents Van Buren in the state's House of Representatives, has reportedly drafted a bill that would affect both banks and credit unions. The text has not yet been released, however, so no one knows what the tax burden would be on either group.
Even so, the measure has been widely discussed in Maine's banking and credit union circles.
Joseph M. Murphy, the president and chief executive of the $655 million-asset Bar Harbor Bankshares in Bar Harbor, said that he talked it over with others at a meeting of the Maine Bankers Association last month and that, like him, they are torn.
"It gives bankers something they nominally want - a level playing field with credit unions - and links it with something they don't want," Mr. Murphy said. "It's not the solution we would have looked for."
Yet the idea cannot be dismissed out of hand.
Credit unions currently receive an income tax exemption from the federal government and all 50 states. Wiping out that advantage ranks near the very top of the banking industry's legislative agenda, and if any state were to begin taxing credit unions, it would probably prompt others to do the same and could even induce Washington to reconsider its stance.
"We're going to study" Rep. Smith's bill "very, very closely once it is printed," said Mark L. Walker, the Maine Bankers' vice president and counsel. "It could be an important issue."
John G. Murphy, the president of the Maine Credit Union League, said his group has held discussions with Rep. Smith, and has, at his request, furnished the lawmaker with information on the 14 state-chartered credit unions. Not surprisingly, they plan to oppose the bill if it is introduced.
Mr. Murphy (no relation to Joseph Murphy at Bar Harbor) claimed that a tax on state-chartered credit unions would raise only about $140,000, "and that assumes all 14 would remain state-chartered."
The Federal Credit Union Charter exempts nationally chartered ones from all federal and state taxes except property tax.
Mr. Murphy said that the tax hike the measure would impose on banks would make them come out against it. Banks doing business in Maine already pay a franchise tax of 8 cents on every $1,000 of assets they hold and a 1% levy on net income.
Thus, a company like the $369 million-asset Merrill Merchants Bancshares Inc. of Bangor, which on Friday reported 12-month net income of $4.9 million, would get a tax bill of about $78,500 for 2004: $29,500 in franchise taxes and $49,000 in income taxes.
"I can't imagine that banks would be excited" about a higher tax burden, Mr. Murphy said.
It is unclear why Rep. Smith introduced the bill (he did not respond to several requests for comment). Lawmakers have been looking for ways to close a $750 million shortfall in Maine's 2006-2007 budget, and credit unions are obviously an untapped revenue source.
Mr. Murphy at the credit union league said he hopes the bill is not introduced.
After Rep. Smith "reviews all the information and has all the facts, he'll see this probably wasn't as good an opportunity as he thought it was," he said.
The issue of credit union taxation is being explored in other states too. Utah lawmakers are debating a resolution urging Congress to abolish the ban on taxing federal credit unions.
The Maine Legislature's session runs until June 15.
