Credit unions are on alert about the fate of their tax-exempt status as a result of President Obama’s speech outlining his deficit reduction strategy.
In his April 13 speech, he called for reviewing “tax expenditures,” which include the tax-exempt status of credit unions. He said any reform should build on the calls made by his deficit-reduction commission to reduce “tax expenditures so that there is enough savings to both lower [tax] rates and lower the deficit.”
Lobbyists for CUNA and NAFCU said it is too early to tell how much the tax-exempt status of credit unions could be at risk since Obama wasn’t specific about which expenditures he might go after.
“The battle lines have been drawn, and we will do all that we can to ensure that we are not in the middle,” said CUNA Senior Vice President John Magill. “It’s a fight we must win because without the exemption credit unions will cease to exist as we know them. Without the current structure and tax status, the advantages to provide better rates to their members would disappear.”
NAFCU Vice President Brad Thaler said his association is pleased that the president spoke about reviewing and reducing tax expenditures, not eliminating them.
“By saying that everything is on the table, it will force us to redouble our efforts to remind members of Congress that our tax-exempt status helps 93 million Americans get their financial services at better rates than if they were at banks,” Thaler said.
John McKechnie, a lobbyist and former NCUA and CUNA executive, said Obama’s comments are cause for concern among credit unions, but they shouldn’t panic.
“It should give credit unions reason to be watchful. It is the beginning of a long process. And while there is a large reservoir of good will toward the industry on Capitol Hill, credit unions are going to be under constant attack from the banking lobby.”
The Independent Community Bankers of America has said ending the credit unions’ tax-exempt status is one of its top legislative priorities. The American Bankers Association has also said it will seek to eliminate it.
In his speech, Obama didn’t mention specific expenditures but did talk about the need to reduce the deficit and spoke of the need to make sacrifices to ensure the nation’s long-term prosperity.
“We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m president, we won’t,” he said.
The White House talking points accompanying the speech said the goal of all their tax decisions would be to “ask more of those who can afford it while protecting the middle class and promoting economic growth.”
Obama said his proposals, which include higher taxes on the wealthy and changes to entitlements, would cut the deficit by $4 trillion over the next 12 years.
He said that his program achieves about $2 trillion in spending cuts and will lower interest payments on the debt by $1 trillion. The tax reform proposals could cut about $1 trillion in spending from the tax code.
Obama also took aim at the Republican budget proposals. He said the GOP vision is “less about reducing the deficit than it is about changing the basic social compact in America.”
And he added that there is “nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill. And this is not a vision of the America I know. ”
Obama's Economic Recovery Board raised the possibility in a report issued last summer on ways to simplify the tax system and raise revenue.
“Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income,” the report noted. "Eliminating this exemption would raise revenue and level the playing field but would clearly raise taxes on credit unions.”
When the Treasury Department did an analysis in 2005, it estimated the annual revenue at $1.39 billion, while Congress's Joint Committee on Taxation estimated $1.30 billion.
The Tax Foundation, in a study funded by the Independent Community Bankers of America, concluded during that same year that that the annual revenues from such a tax could be as high as $3 billion.