Will Congress Rescind The Tax Exemption?
We have all seen how effective Congress has been lately and it does not appear there is any change going to happen anytime soon. Comprehensive tax reform would mean putting all tax exemptions on the table. There are too many concerns about losing votes and control of each respective chamber for that to happen. If when dealing with sequestration and the debt ceiling, Congress could look to cover the costs of their resolution. Big ticket tax expenditures with broad, deep and vocal constituencies may survive, and Congress may look then at smaller ticket items, like credit union tax status.
Credit unions would undoubtedly be able to mount a meaningful grassroots response to such a threat. The value of maintaining credit unions' state tax exempt status has been reaffirmed at the presidential, congressional and state legislative level since the Great Depression. That value is more apparent now than ever. NAFCU commissioned a study in the summer of 2012 to look at the federal credit union tax exemption. Action to remove credit union tax exemption can only occur if they can justify reducing U.S. GDP by about $148 billion (in 2010 dollars) over the next decade. It is incumbent upon our industry's leadership, veteran and energetic, to educate, strengthen and uphold the trust these members have in the credit union industry.
Peninsula Community FCU
I believe there is a significant threat to our tax-exempt status. The government is in a financial crunch, bankers are determined to eliminate any competition, and credit unions are growing in size and complexity. Legislators are under pressure to find revenue to fill the holes known as the budget deficit and national debt. Bankers are all too happy to suggest credit unions are a great source of revenue.
While credit unions represent a very small share of the financial market place, bankers are determined to eliminate us. I believe they fear that over time we will continue to dilute their share of the business. Consumers are starting to be more aware of the benefits of joining credit unions. This makes banker’s fear for their success in the future. In my opinion, the bankers’ fear may also be driven by greed.
What the bankers conveniently forget and what we must continue to remind our legislators, is that yes, we have grown and yes, we are successful, but our charter has not changed. We remain a not-for-profit cooperative. This is why we have the tax-exempt status, and this is why we continue to deserve the exemption.
I would argue the existence of our industry would be in great jeopardy if credit unions become subject to taxation. Our industry is constrained by regulations that limit our ability to expand our field of membership, increase capital beyond our net revenue, business loans are capped and yet credit unions maintain their charter. Why? I would argue the tax-exempt status plays a significant role in that decision. If credit unions are subject to taxation, I think that many will give serious consideration to converting to a bank charter. What benefit remains if credit unions are subject to the same restrictive credit union regulations and pay the same taxes as banks? This is the “level playing field” bankers want!
If larger credit unions started to leave the fold, the domino effect could be devastating. Consider all of the league associations and CUNA, NAFCU, NASCUS just to name a few that could potentially lose members and dues if larger credit unions sought a bank charter. Who is going to pick up the tab?
Finally, who will be impacted the most by credit union taxation? Our members. As we all know, if a business’s expenses increase, eventually that cost is passed on to the consumer.
Scott Credit Union
Tax exemption will rear its ugly head during a financial crisis where winners and losers are determined by the government’s ability to take as it sees fit for the political expediency and power of a few to cover for its lack of fiscal restraint. The true breaking point in a modern financial crisis in our country has not been found yet as we continue to operate in murky and untested waters. Once the alarm sounds that the ship is sinking, all bets are off.
When you operate as a not-for-profit cooperative with small margins, tax rates become a very big deal with significant impact, and although credit unions would employ defensive tax strategies and restructure their balance sheets and revenue streams to minimize the overall impact of taxation as best as possible, taxation would be funded by credit union members through higher loan rates, higher fees and lower dividends. Credit unions, through a cooperative structure, operate to keep money in members’ pockets that they spend in local economies for basic needs. Taxation removes that local money, only to be spent or redistributed by government as it sees fit and to areas as they determine, which will not be local. Bottom line, taxation would diminish credit unions’ ability to provide cooperative life-line financial services, would diminish credit union members’ basic standard of living and would impact local economies through less spending, lower sales tax generation, and inhibited economic growth. To quote Thomas Jefferson, “I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
It very well could be. One of my main reasons for attending GAC is to explain our cooperative to lawmakers and educate them about the benefits that credit unions provide to consumers and the economic impact of credit unions in their communities.
Elimination would dramatically affect my credit union. As we continue to struggle with rising expenses related to keeping up with the regulatory burden currently in place. Losing our tax exemption would add yet another process and expense or a need to find ways to offset it.
United Health Credit Union
Not at the moment. Congress is too focused on side issues right now. I do, however, think that option will be on the table during the current administration. When the subject arises, CUs will need to utilize the grassroots campaigns we've used in the past to bombard Congress with correspondence, phone calls and visits explaining the importance of CUs retaining the exempt status and how a change negatively impacts the members.
The first effect is obviously to income. The change in income directly effects the dividend rates we are able to pay and the loan rates we are able to offer. We have to be able to fund operating expenses and capital expenditures that are necessary to serving our membership. As to the question of how much, it will depend on the tax rates implemented and the deductions we'll be allowed to claim.
Chief Financial Officer
Secured Advantage FCU
The credit union tax exemption makes a difference for consumers. Filene research from Professor Steve Swidler of Auburn University shows that Subchapter S banks, which are also exempt from federal corporate income tax but are not cooperatives, do not generally pass on their tax savings to consumers like credit unions do.
Regardless of what makes sound public policy, though, credit union members must recognize that in the current fiscal environment lawmakers face difficult decisions in balancing spending cuts and raising new sources of tax revenue. Education, medical and senior government benefits are considered sacred. To ensure credit unions are prepared for scrutiny, now is the time to not just live the credit union ethos of people helping people in credit union strategy and actions but also tell the story and invite members to share their credit union experiences. Many credit unions are doing this well. Consider Summit Credit Union's Project Money, which helps families save and pay down debt, or the 300-plus credit unions offering Debt in Focus, an anonymous on-line debt management tool.
A minority may see taxation of credit unions as part of a corporate social responsibility platform. This is a common view in Canada. The taxation of Canadian credit unions has not eliminated the model, but it has had a negative impact. Although the rate of tax Canadian credit unions pay is a result of strong negotiations and much lower than what other corporations in Canada pay based on capital requirements, there are fewer credit unions in Canada today.
If credit union taxation is implemented, the resiliency of the cooperative model will persevere. However, it will impact Americans’ wallets. The shrinking, hard-working middle class will pay more for financial services and earn less on their savings. It will reduce an important check in a profit-driven consumer finance market. It will shrink the number of choices Americans have for their financial services. Some credit unions will change charters, while others will merge to create scale. Consumers, and America, will lose.
Filene Research Institute
I don’t know that the bankers’ agenda would gain much traction currently, so right now I think we’re O.K. But we know things change fast, and we must always be prepared to fight that issue. It’s important to continue to show that we’re using our not for profit status as intended. I see more and more credit unions paying member bonus dividends, efforts like that will show our difference.
On a micro level, to me it’s less about preserving the tax-exempt status and more about preserving the financial cooperative model. Our business does not work with shareholders. But from a movement standpoint, losing our tax-exempt status would hinder many credit unions financially. Margins are already extremely tight, and many would be forced to make the eventual decision of merger, liquidation or conversion.
First Financial Credit Union
Over $62 million
While I realize the need for enhanced federal revenue, I doubt the Congress would take on 95 million taxpayers who would lose the benefits of our tax exemption. It would result essentially in a tax increase for them, not a popular position in elections two years from now.
We continue to struggle with rising expenses related to keeping up with the regulatory burden currently in place. Losing our tax exemption would add yet another process and expense or a need to find ways to offset it.
SAFE Credit Union
North Highlands, Ill.
I believe the tax exemption for credit unions will always be endangered because the bankers take issues with credit unions having that status. The ABA lobbyist was quoted the week of Jan. 21 that taxing credit unions will be a top ABA goal this year. We must stay on top of our tax-exempt status legislatively in order to continue to be tax-exempt financial institutions, providing consumers with a choice for financial services.
It is important that credit unions preserve our tax-exempt status in order to serve our members. Credit unions are nonprofit. We serve members of low to moderate means/income and in order to continue to serve this segment of our society, we must preserve our tax-exempt status. Taxing credit unions would mean raising fees that would limit cost effective financial service options for all members.
North East Texas Credit Union
Lone Star, Texas