The Impact of CU Taxation
As federal tax reform lingers on Capitol Hill, Credit Union Times asked industry experts how the elimination of the credit union tax exemption could impact balance sheets.
Dan McGowan, CFO at the $172 million Pioneer Federal Credit Union in Charleston, W.V., said his shop is expecting to earn around $800,000 this year, right at 50 basis points on average assets of about $160 million.
“A quick calculation of our tax liability with those earnings would be $272K (34% of pre-tax earnings) diminishing the bottom line to a final post-tax net income of $528K,” he said.
“As with all not-for-profit co-ops, earnings are to be reinvested into the primary mission of the organization. Simply put, federal income taxation would deprive us of the opportunity to do so to the degree of the taxation,” he added.
McGowan also said taxation would weaken the credit union industry as a whole, resulting in exposing more consumers to marketplace participants with more exploitive natures than consumer-friendly credit unions.
However, the high-profile executive, who has snagged awards from CUNA, CUES and NAFCU in the past few years, expressed a unique view regarding how trades should address the issue on Capitol Hill.
“I would be more than willing to support the banks and other for-profit corporate entities in lobbying Congress to eliminate corporate income taxes altogether,” he said. “The double-taxation of corporate earnings, first at the business entity level and then at the shareholder level, is unfair.”
Eliminating corporate income taxes would result in an economic stimulus of monumental proportions, McGowan predicted.
The banks shouldn’t be lobbying to increase the tax burden on credit unions, but we should all join forces to lobby for the elimination of unfair double-taxation on everyone,” he said.
McGowan said he was once part of the accounting department at a large bank, and recalled that a lot of resources were expended in the accounting and reporting of taxes, and in determining how to legally keep tax liabilities to a minimum.
“The added burden of federal income taxation would divert some degree of management attention to address tax issues,” he said.
John J. McKechnie, partner at Washington-based strategy and lobby firm Total Spectrum, said protecting tax exemption will probably always be the number one priority for credit unions on Capitol Hill.
“Linking the exemption to any products or services credit unions offer consumers, such as MBLs, will never be part of our legislative strategy,” McKechnie said. “Having said that, credit unions would be wise to watch the entire playing field during this tax reform debate—the situation is fluid, and my reading is that the bank lobby is being persistent in trying to find any and all avenues to get at the exemption."
Next Page: Taxes and MBL
A CFO at a credit union with more than $1 billion in assets, who spoke on the condition of anonymity, said taxes and MBL are connected.
“My opinion is that taxes and MBL caps are linked: if we had to pay taxes, there’s no good reason for maintaining the cap. But I think as an industry, we’re much better off with the MBL cap and the tax exemption than with unlimited business lending capacity and a tax burden,” he said, adding that his credit union would suffer if it was taxed.
He estimated taxation would cost his institution $6 to $7 million per year assuming a 35% tax rate, although deductions would decrease that amount. “I cannot see business lending contributing an incremental $6 to $7 million to the bottom line,” he said.
Jim Blaine, president/CEO of the $26.7 billion State Employees' Credit Union in Raleigh, N.C., said the federal government could generate more revenue by enforcing regulations on big banks.
“The income tax is a profits tax,” he said. “It’s a bit strange, unless you are a multi-billion dollar, serial, consent-decree signing banker, to try and contemplate a profits tax on a non-profit organization. We are, however, sure that any proposed tax applied to SECU would produce far less revenue than the $13 billion ‘guilty as charged’ bank.”
Blaine called enforcement actions against predatory lenders low hanging fruit and said the effort would be more profitable than taxing credit unions.
Blaine also criticized the banking lobby for targeting credit unions.
“That taxation is the number one priority of the American Bankers Association speaks volumes for the continuing ‘it’s all about us’ decline in banking in this country,” Blaine said. “Vilifying credit unions will not help rehabilitate the reputation of America’s once proud banks—humility might.”
Peter Duffy, a managing director at the New York-based Sandler O’Neill and Partners, said his firm has met with some of the largest credit unions because executives there wanted to understand the impact of the taxation.
“The most profitable institutions would be impacted the greatest, because the more you make, the more you are taxed,” Duffy said.
Sandler O’Neill’s analysts estimate the effective federal tax rate for community banks averages around 28%, he said.
In 2012, there were 405 credit unions with more than $500 million in assets, according to Sandler O’Neill research. These credit unions represent the majority of the revenue in the industry, Duffy said.
“It is gruesome below a certain asset size to be financially viable,” he said. “I think it’s difficult to talk about the tax exemption and access to capital and all of the other key issues of the business without discussing the ability of institutions to generate a profit without scale.”
McKechnie said tax reform is unlikely before the end of this year.
"The controversy surrounding Obamacare has unquestionably sucked much of the political oxygen out of the room in Washington,” he said. “Hill Republicans I talk to say they're in no hurry to change the subject by introducing a major tax reform effort at this time.”