For the second time in six months, credit unions have found themselves defending their tax-exempt status to Bush administration officials who are examining the impact of corporate tax breaks on the nation's global competitiveness.
A Treasury Department report released late last month concluded that the credit union exemption and several other corporate ones "narrow the business tax base" and lead to higher taxes for other businesses.
The credit union exemption was mentioned just once in the 121-page report, and the Treasury offered no recommendations for repealing it. Still, credit union representatives could not hide their disappointment that the exemption was mentioned at all after they met with administration officials in August to protest its inclusion in a similar report the Treasury prepared in July.
"We were surprised to see credit unions on the list again," said Mary Dunn, senior vice president and deputy general counsel for Credit Union National Association. If President Bush "supports credit unions, why would this even be an idea to be put forward?"
According to Andrew DeSouza, a public affairs specialist for the Treasury, the inclusion of the credit union exemption in the report is not a position against the industry, but rather an item in one of three possible road plans to position the United States better for global business.
"We are not setting out a policy prescription," Mr. DeSouza said. "We are trying to increase the debate over how our business tax system can be improved to make us more competitive in the global economy. This is a conversation that we are planning to continue."
Like the Treasury's July report, the latest one, titled "Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century," said that the government could generate some $19 billion of tax revenue over the next decade if credit unions paid taxes. In all, the Treasury identified subsidies that could add $1.3 trillion to federal coffers if they were eliminated.
In a letter to Treasury Secretary Henry Paulson last month, Dan Mica, the trade group's president and chief executive, reiterated what he wrote in a letter to Mr. Paulson after the July report came out: The mere mention of eliminating the credit union exemption "wholly contradicts the 2004 letter to CUNA from President Bush in which he stated, 'I support strongly the tax-exempt status of credit unions, and will continue to highlight the important contributions that credit unions make to our financial system.' "
Moreover, Mr. Mica wrote that certain tax exemptions mentioned in the first report as possibly being repealed — such as the one for income from controlled foreign corporations — were noticeably absent from the follow-up report.
"We were disappointed to note that, while the concerns of some parties had apparently been addressed, ours had not," he wrote.
Ms. Dunn said that CUNA officials met with Eric Solomon, an assistant secretary of the Treasury, in August to discuss the inclusion of the credit union exemption in the first report and left feeling as if the concerns were heard.
The group does not want "overblow this or put it out of perspective, but doesn't want to miss anything, either," Ms. Dunn said. It plans to make sure its supporters in Congress are aware of the situation and "understand that we are very dedicated to preserving the exemption."
Not surprisingly, the banking industry applauded the idea of taxing credit unions — especially large ones that, according to Keith Leggett, senior economist at the American Bankers Association, have moved away from their mission of serving customers of "modest means" and are morphing into "large sophisticated bank-like" entities.
"If the subsidy is not going for its purpose, it questions the efficacy of maintaining this exemption," Mr. Leggett said. "And if you are going to look at lowering corporate taxes, preferences just really distort the allocation of resources."
Jeff Plagge, the president and CEO of the $120 million-asset Midwest Heritage Bank in Clive, Iowa, agreed and said that he has no problem with letting small credit unions keep their exemption. He also said that as long as large credit unions are well managed, they could be taxed and still do well.
"Well-run credit unions can survive," Mr. Plagge said.
