A death sentence for credit unions? An impetus to change the business model?
Those are among the scenarios offered as possible outcomes if credit unions lose their tax-exempt status.
Congress will be looking at a range of tax expenditures as part of its effort to cut the federal budget deficit.
While the amount that could be raised by taxing credit unions would be small–as high as $3 billion per year according to one report–it could cause many credit unions to stop functioning in their current form, argues NAFCU President/CEO Fred Becker.
"They couldn’t continue to exist. They have no means to raise capital and the corporate tax rate is arduous. And taxing revenue that has been put aside as capital raises safety and soundness concerns," he said.
Former NCUA Chairman Dennis Dollar said the change will cause a "wholesale abandonment of the credit union charter" because the bank charter will be "considerably more appealing."
State Employees' Credit Union President/CEO Jim Blaine contends that the credit union model even without the tax exemption would be appealing, especially since credit unions might not be hampered by some of the current restrictions on their activities.
"If you tax credit unions, the business lending restrictions come off, and the field of membership restrictions come off," he said. "Under the current model, credit unions can accumulate reserves and don’t have to pay anyone [investors] for that. They are accountable to their members not investors, who have a primarily financial motivation. That will still be appealing, regardless of the tax status."
Blaine, whose Raleigh, N.C.-based credit union has assets of $22 billion, also noted that it is a myth to say credit unions are tax-exempt. While they don’t pay a corporate income tax, they are subject to all other taxes and the interest that members are paid on share accounts is taxed, as are membership dividends, he pointed out.
Keith Leggett, the top economist for the American Bankers Association, dismissed fears about the loss of the tax exemption as excessively pessimistic.
"It’s the fear of the unknown that drives many of the arguments. It [the tax] would become a business expense that they would learn to manage. Also, they would have more options because we would drop our opposition to expanding business lending and accepting capital," he said.
In countries where credit unions have been subject to taxation recently, such as Australia and Canada, there have been changes in the core mission of some credit unions and there have been more credit union mergers, according to the World Council of Credit Unions.
"In Australia, outreach to low- income communities isn’t at the front of the service offerings of as many credit unions," said WOCCU Senior Vice President David Grace.
Grace noted that in Canada, credit unions have received certain benefits in exchange for being taxed, including the ability to sell insurance products, which banks cannot, and unlimited deposit insurance. He also pointed out that the consolidation of credit unions has increased. There are 877 CUs in Canada now, compared with 2,570 in 1992, when a series of changes in tax policy began.
CUNA Vice President and Senior Economist Mike Schenk said taxing credit unions would escalate the consolidation in the United States and would also cause higher prices.
"Because of the tax exemption, not only have credit unions offered lower interest on loans and higher interest on savings, but this competition has helped all consumers by forcing non-credit union financial institutions to have more competitive pricing," he said.