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WASHINGTON-If growth rates continue as they are, the total tax revenue lost to banks’ Subchapter S election will total $13.5 billion over the next 10 years, according to a recent report by CUNA Economist Mike Schenk. In just seven years, banks’ tax savings will outpace credit unions’ tax exemption. “Commercial banks dramatically reduce their tax liabilities as Subchapter S Corporations.” Schenk explained in the report. “Policymakers who listen to bankers bash the credit union tax exemption should know the whole story: bankers now enjoy substantial tax benefits through Subchapter S election-and those benefits will soon surpass the magnitude of the credit union tax exemption.” When asked if this finding would take the wind out of the bankers’ sails in protesting the credit union tax exemption, CUNA Vice President and Senior Legislative Counsel Gary Kohn said, “I would think so. This is just one of the many tax savings banks have.” He added that if bank’s other opportunities for legal “tax avoidance” were figured in, the numbers would be entirely “disproportionate.” Subchapter S status requires a bank to have no more than 75 shareholders; that their “top shareholders” be individuals or certain types of trusts (not corporations); that the shareholders cannot be nonresident aliens; and it affords banks the right not to pay corporate income taxes. With Subchapter S banks, the net income is passed on to the owners of the bank as taxable personal income whether or not dividends are paid out. This helps to avoid the double taxation of stockholder dividends. Schenk found that aggregate statistics from Treasury reveal about a 40% loss in revenue than if Subchapter S status was not permitted. In 1999, banks avoided $425 million in taxes, according to CUNA statistics, but that number jumped 22% for 2000 with approximately $519 million in tax savings. American Bankers Association (ABA) Chief Economist Keith Leggett said that CUNA’s claims for Subchapter S income are “overly optimistic.” Additionally, he commented, the tax subsidy is not accurate because CUNA’s study does not take into account the additional approximately $600 million in taxes the Subchapter S shareholders pay. While the institution may get a $1 billion tax break, the individual shareholders now pay a total of about $1.3 billion in taxes. “The banks had to increase dividend rates, Subchapter S banks in comparison with non Subchapter S, to compensate shareholders for the increased taxpayer liability,” Leggett explained. The effort to make those funds up to stockholders in dividends, in turn, slows the bank’s growth. Subchapter S status is spreading further into the banking community, Schenk said. At the end of 1997, less than 6% of banks chose to become Subchapter S. Just two years later over 15% of banks (1,260) in the country took advantage of Subchapter S status. Near the end of 2000, 1,477 banks had converted to Subchapter S institutions, according to Schenk’s data. Under current laws, he quoted banking analysts as saying growth of Subchapter S banks will top out around 2,000. Leggett disputes these numbers stating, “Those that would take advantage of Subchapter S status already have.” He also pointed out the conversion rate is slowing. Currently, there is legislation in Congress to expand Subchapter S status to banks and other businesses with less than 150 shareholders. If bankers are successful in pushing this law through, the number of Subchapter S banks will grow as tax revenues from this area shrink. According to Leggett, with the current deficit the country is in right now fighting the war on terror, chances of it passing this session are not good. “While the tax treatment of Subchapter S banks is not the same as the credit union tax exemption,” Schenk admitted, “the foregone Treasury revenue from this election is substantial (and growing).” In a recent Subchapter S Report from the ABA, Leggett and colleagues wrote, “Subchapter S benefits for banks are negligible compared to the serious competitive advantages currently enjoyed by credit unions operating with a blanket of federal income tax exemption. The ABA encourages the credit unions to adopt a subchapter S approach if subchapter S is such a boon for eligible banks.” Leggett said he thinks that could serve to end banker attacks on the credit union community. [email protected]

 

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