A recent story out of Des Moines, Iowa has us thinking abouttaxation again. The Iowa Bankers Association is arguing that thereal difference between banks and credit unions is that creditunions are free-loaders that don't pay taxes.

We all know the truth here. There is widespread ignorance of thedifferences between credit unions and banks. Bankers take advantageof this. But what's our role in this ignorance? We oppose taxes ofcourse, but do we take the time to explain member-ownership? Andwhy it matters?

Cooperative ownership is directly related to the logic oftaxation. For-profit companies are in the business of generatingincome for their stockholders, and it is this income that is taxed.Cooperatives do not generate income for their owners. Period. Inthe simplest terms then, there is nothing to tax.

If a tree falls in a forest and no one is there to hear it, doesit make a sound? It creates sound waves … but sound – as humansunderstand it – is what we absorb through our ears. So without alistener, a falling tree does not make sound.

If a financial cooperative generates positive net revenue and noindividual gets to spend it, is it profit? Not in the logic oftaxes. Income taxes are levied on economic value that accrues, atleast eventually, to an individual. Ultimately, this is the logicbehind virtually every provision or exception in the income taxcode. Unhappily, in a world of willfulmisunderstanding and misrepresentation – a world created bybankers' associations – we don't tell this story effectively.

The positive net revenue of banks is taxed because it accrues tobank owners – directly as stock dividends or indirectly as anincrease in stock value. In other words, these are taxable profitsbecause they represent economic value for individual owners.

The positive net revenue of credit unions does not accrue tocredit union owners. Credit union owners do not receive stockdividends and the value of their ownership share can neverincrease. In other words, this positive net revenue does notrepresent economic value for individual owners, so it should not beconsidered a taxable profit.

There are some challenges to this analysis of course, but evenas they are teased out, the basic logic remains.

First, cooperatives are plagued by the language of thefor-profit world. Credit unions have “income statements” androutinely speak in terms of “income” and “profitability” eventhough we use these words in different ways than banks. Thiscomplicates the technical argument against taxation because thereis no straightforward language to differentiate the positive bottomline of a cooperative from that of a for-profit company.

Second, credit union owners do receive dividends, some of whichappear remarkably similar to stock dividends. The key point herethough is that all dividends, from any source, are taxable incometo their recipients. In this sense, credit unions are taxed much asS Corporations are – their owners are taxed on the economic valuethey receive.

Third, the complication of the S Corp comparison is thetreatment of retained earnings. Stock owners can turn retainedearnings into cash by selling their stock, so those earningsrepresent real economic value. Credit union owners cannot turnretained earnings into cash, so those earnings do not representreal economic value. In other words, credit unions really don'thave anything that should be taxed.

This is our truth. We need to find an effective way to tellit.

Chris Howard is SVPat Callahan & Associates. He can be contactedat 202-223-3920, Ext. 253 or [email protected].