Spring Fever and Bad Policy Engulf the Capital
Spring fever is in the air. Or hay fever. Some kind of fever has policy makers in Washington not thinking very clearly.
Though not specifically discussing the credit union tax exemption, President Barack Obama called for a reduction in “tax expenditures” so that there will be enough to lower tax rates and the deficit. By tax expenditure he means your credit unions’ tax-exempt status, among others. Yes, the government is now going after not-for-profits to prop up its ludicrous spending. The president framed it as $4 trillion in savings over 12 years.
This would be a bad public policy move. President Obama’s campaign promise was about change for a better America now and into the future. Taxation of credit unions would serve to decrease their services and service areas, including areas that are not being served by other regulated financial institutions. Credit unions branch into areas that banks wouldn’t touch because the return on investment is not there. That is credit unions’ purpose–to care more about the people they’re serving than bolstering profits. Credit unions still need profits and should follow ROI, but making money is not their sole purpose. Texas Dow Employees CEO Ed Speed, who is a reformed banker, recently said that he enjoys working in credit unions because it allows him to be a good business person and ethical.
At this particular time in history, taxation would crush many credit unions that are on the verge of trouble because they are too small or unsophisticated to handle the change. Some credit unions could adjust their business model to write off enough so they wouldn’t have a tax obligation, like Bank of America and other large corporations. (A tax return for a credit union? It could happen!)
Many would simply have to merge. Following the economic and housing crisis, the corporate credit union system implosion and subsequent assessments, many credit unions are facing slim to negative return on assets. Even at the lower Subchapter T (cooperative) rates, it would seal the fate of many credit unions.
Credit unions not only create jobs with their own hires, but they also make it possible for small businesses to start or hire more employees. Banks would never touch these loans, as they’ve already demonstrated. Better employment numbers is what this administration needs if it wants to stay in power.
Credit unions also serve as a regulator on bank rates and fees. CUNA has estimated that credit unions save American consumers (many of them voters) over $6 billion a year. When credit unions save their members that kind of dough, they feel wealthier with the money in their pockets and can spend, which is needed to help boost the economy. If instead the government takes that money in the form of taxes, it’s essentially gone in the consumer’s mind. Consumer spending accounts for the bulk of the U.S. economic engine.
Others have a strategy in their back pockets, and from what I’ve gleaned, it’s most that of the larger credit unions. They’re prepared for the day taxation might come with a plan to convert to banks. This would also be disastrous to the industry. But if credit unions are taxed, what benefit to the charter would be left? Arcane capital and business lending rules? The credit union charter merely would become a bank of the 1930s. How long could it survive?
CUNA and NAFCU have vowed to oppose a repeal credit unions’ tax exemption, and they should for the above reasons. But, it could also be used as a leveraging tool. If the repeal of the tax exemption becomes inevitable, then possibly it could do some good in the fight for capital reform and expanded member business lending powers.
As you can imagine, the bankers are back in their offices drooling over the prospect of credit unions being taxed. Keith Leggett, senior economist for the American Bankers Association, took it one step further–a kick ’em while they’re down approach. He recently noted in his blog that the federal government may lease land or facilities to federal credit unions free of charge under the Federal Credit Union Act. He called for the immediate repeal of this section in the name of the deficit. Yes, that’s what will save Social Security. Never mind that the on-base credit union keeps the financially inexperienced, newly enlisted servicemen and women from going to the title loan company just outside the installation gates. How well will they be able to do their job of defending our freedom if they’re sidetracked because they became ensnared by some unscrupulous ‘lender?’ What does that save the Uncle Sam?