Will Taxes Be the Death of the Credit Union Charter?
If credit unions were subject to income taxes, they would lose a key part of what makes them unique, but experts are divided as to whether it would create a stampede of bank conversions.
"Being taxed would cause a real difficult adjustment for some credit unions. They’d have to increase efficiencies, at the very least. But it is not at all clear that they would conclude that changing over to a bank would be better for their members," said Janice Hollar, a former credit union CEO who is now senior vice president of RP Financial LC. The Virginia-based consulting firm works with banks and credit unions on strategic planning, mergers and business plans.
"A credit union that is happy with the services it offers its members would have less incentive to switch. The biggest factor in deciding on a conversion would be how the credit union’s business model has matured," she added.
Insurance costs for credit unions, especially financially healthy ones, could be lower if they became banks because banks aren't having to pay for the corporate credit union losses and because the FDIC’s insurance is risk-based, Hollar noted.
CUNA Chief Economist Bill Hampel projects that over the next 11 years, insurance costs will be slightly lower for banks than for credit unions.
He projects that during that time, the average FDIC assessment will be 6.7 basis points of a financial institution’s assets, while the average NCUA assessment will be 7.7 basis points of assets.
The NCUA assessments are likely to only go toward paying off the loan from the Treasury Department that was used to rescue the corporate credit union system, starting in 2009. CUNA isn’t projecting any assessments for the NCUSIF during that time period.
For this year, the NCUA has advised credit unions to budget for 20-35 basis points' worth of additional assessments. The agency estimates between zero and 10 basis points for the NCUSIF and between 20 and 25 basis points for the Temporary Corporate Credit Union Stabilization Fund.
During the next two years, credit union assessments are likely to be significantly higher than those for banks, Hampel said, because of the way the corporate credit union repayment plan is structured. CUNA projects that the NCUA assessment will be 19.1 basis points this year and 12.1 basis points next year, compared with the FDIC assessments of 7.6 basis points for both years.
There isn’t a legislative proposal to tax credit unions, but it could be in the mix as part of an effort to raise revenue and reform the tax structure, in part by eliminating what are called "parlance tax expenditures" in Washington.
Bank lobbyists have said if credit unions are taxed, they would drop their opposition to raising the cap on member business loans and to credit unions being allowed to raise supplemental capital.
"We wouldn’t object because credit unions and banks would be on a level [tax] playing field," said ABA Chief Economist Keith Leggett.
But John McKechnie, a former NCUA official who now lobbies for financial institutions, doubts bankers will keep their word.
"Why should we believe anything banks say about credit unions?" McKechnie said. "They want credit unions to eat their vegetables first and then have dessert. Banks are trying to lure credit unions into a trap."
Alan Theriault, president of CU Financial Services, which helps credit unions convert to banks, said depending on how Congress structures the taxation of credit unions, there would likely be a phase-in period and credit unions could defer some taxes.
"If you go from a non-taxed entity to a taxable entity, you generate a deferred tax asset which might give you a tax shelter for a few years. So you can’t just put a mathematical percentage to your earnings to get to your tax liability. Things like charitable contributions and depreciation would come into play," he said.
Theriault said that being a bank would be a competitive advantage for some financial institutions because of poor consumer awareness of credit unions. He added that because credit unions aren’t FDIC-insured, they have to offer lower loan rates because the public is often confused about the safety of financial institutions that aren’t FDIC-insured. CUNA’s Hampel disagrees and counters that the cooperative model is a competitive advantage for credit unions.
"Members are better off in a cooperative model where the management and board are primarily concerned with member-owners rather than worrying about shareholders who aren’t always the same as customers. That means better rates," he said.
The tax exemption has been in place since the Federal Credit Union Act was passed in 1934. Ever since, banks have fought it by portraying it as providing an unfair competitive advantage.