Last week, credit unions’ federal tax exemption appeared to be in jeopardy. H.R. 6474 would have gradually repealed credit unions’ tax-exempt status over five years. Fortunately for credit unions, a spokesman for Rep. Dennis Ross, the bill’s sponsor, explained that the inclusion of this in the bill was accidental, and it will be deleted by a manager’s amendment.
While credit unions seem to have dodged this lob for now, it did draw attention to the credit union tax exemption, which the banking lobby is sure to relish. The issue has been brought up time and again, and particularly since the economic crisis and the resulting Simpson-Bowles commission, but this was the first time credit unions were named specifically in federal revenue legislation in decades, intentional or not.
Credit unions could certainly survive a 15% to 35% tax hit, but they would come out looking nothing like they do today. Credit unions’ net income in aggregate was 86 basis points as of the second quarter, so a tax would very much change the way they operate. Credit unions with less than $50 million in assets would essentially be wiped out if this were to come to fruition. Credit unions with $10 million to $50 million in assets have an aggregate net income of 30 basis points, according to a report from Catalyst Strategic Solutions. Those $2 million to $10 million have net income of 6 basis points. The credit unions smaller than $2 million in assets are already at a negative 49 basis points. Even the $50 million to $100 million category are at 45 basis points in net income.
The credit union community could survive, but the worst result would be that they would be working to pay the taxman rather than helping their members. With all of the other regulatory restrictions and burdens, what would be the point? A tax on credit unions would leave many moderate-income Americans out in the cold. It would eliminate the local, community-oriented nature of most credit unions. There wouldn’t be a reason for a true grassroots movement like Bank Transfer Day. Taxing credit unions would give Americans less, not more.
No, the credit union philosophy is worth more, as panelists in Credit Union Times’ Not For CEOs session held last week. Panelist Teresa Halleck of San Diego County CU enthusiastically defended the ‘not-for-profit, not-for-charity, but for-service’ philosophy credit unions bathe in. It’s “what makes us not Wells Fargo,” she said, pointing out that her credit union is the title sponsor of the Poinsettia Bowl every year. Banks have bashed credit unions that spend this kind of money, but Halleck pointed out that the bowl falls during a slow economic period in her region, and that event brings in money to all the local restaurants and shops, helping the businesses and increasing hours and tips for their employees–a very smooth and well-supported dodge of the banker spin. The credit union philosophy helps keep credit unions stopping to smell the poinsettias.
On the other hand, Greg Barnes with One Nevada CU in Las Vegas pointed out that his credit union serves a low-credit score area, even when it’s not in a recession. One Nevada offers payday loan alternatives with educational pieces and incentives intended to steer members away from the payday loan shops that litter the area. Plus the credit union’s fees are much lower. He said he didn’t want to refer to his credit union as a “second-chance” institution but often that’s what it is for members. With the solid work One Nevada is doing, maybe it won’t be one day. Another score for credit unions.
California and Nevada Leagues’ Carol Payne very enthusiastically chimed in, “It’s about emotions, the emotional attachment members feel to their credit union.” Emotional attachments like you’ll see in our article this week about how Alabama Telco Credit Union helped make Glenn Sasser and his late wife’s dreams a reality.
One wicked curve that credit unions were unable to dodge was the NCUA’s 6.1% budget increase for a total of $14.5 million. However, the collective bargaining agreement for the NTEU employees is indexed to the federal pay scale, which means if the federal pay freeze remains in effect, so will it for the NCUA. That would pull the NCUA budget increase back $12.8 million to a more reasonable $1.7 million. Still, in a time when credit unions are cutting their budgets and staffing left and right, in part to deal with regulatory burden coming from the NCUA, CFPB and elsewhere, the agency should do the same.