RANCHO CUCAMONGA, Calif. – Attempts by the banking industry to have state legislatures pass measures to tax credit unions are being described as “hypocritical” by the California Credit Union League. The league pointed to a growing number of banks that have converted to Subchapter S status and do not pay corporate income taxes. “It’s one thing for bankers to take advantage of legitimate tax-reduction strategies, but to simultaneously call for the taxation of non-profit financial institutions in the name of `fairness’ or `competitiveness’ is simply hypocritical,” said Matthew Davidson, executive vice president with the league. The California Bankers Association (CBA) responded by saying credits unions have become so much like banks, so they should be subject to the same rules and regulations. “Over the last several decades, credit unions have become much more bank-like in the way they go about doing business, ranging from the members that they serve to the products that they offer,” said Anissa Yates, a vice president with the CBA. “From our perspective, that naturally begs the question, if you’re operating like banks and offering the same products by and large, or seeking to offer the same products and services that banks offer, why don’t you have to comply in the way that banks have to comply with regulations and other obligations.” The California Credit Union League’s salvo at the banking industry on Tuesday (March 4) came as the CBA opened its two-day legislative conference and lobbying effort in Sacramento. The association has been working to get a bill introduced in the California Legislature dealing with taxation of credit unions. One bill is pending in the Assembly but its sponsor, freshman Assemblywoman Cindy Montaez (D-39), later contended that she never intended for the measure to deal with the issue of credit union taxation. Her bill, which she said was provided by the bankers association, would authorize a study to look into the feasibility of imposing “fees” on state and federally chartered credit unions in California. The league said such moves on the part of the banking industry come at a time when a number of banks are going untaxed. “Bankers in California, Utah, New Mexico, Iowa, and Florida are calling on their legislators to tax credit unions in the name of `fairness,’ at the same time they are quietly building a growing stock of untaxed banks behind the scenes,” Davidson said in a prepared release. Yates, however, said the study was needed to “investigate whether or not there are anti-competitive issues that exist between banks and credit unions.” The league said the number of untaxed banks in California had risen 600%, from three in 1997 – the first year that banks and thrifts were allowed to organize under the Subchapter S section of the Internal Revenue Service Code – to 18 at the end of the third quarter of 2002. Assets of those financial institutions have grown from a total of $373 million in 1997 to $4.85 billion at the end of the third quarter of 2002, an increase of 1,305%. Net income for the same period jumped from $10.7 million to $78.8 million, all of which was not subject to corporate income taxes. Nationwide, the league said the number of Subchapter S banks has grown from 17 to 1,782, an increase of 10,482%. Those banks had more than $221 billion in total assets, which the league pointed out was nearly half of all U.S. credit union assets combined. Net income for those banks in the third quarter of 2002, the latest period for which information was available, was more than $3 billion. “None of which was subject to corporate income tax,” the league noted. Under Subchapter S, the undistributed taxable income of a corporation is taxed as personal income for the shareholders, thus avoiding payment of any corporate income tax. “Banks aren’t hurting. They continue to enjoy record profits and expansion,” said Bob Arnould, vice president of state governmental affairs for the league. “Taxing credit unions is simply a strategy to reduce the savings that we, as non-profits, can pass along to members in lower rates and fees, drive consumers away from credit unions, and raise bank profits. “It’s a winning proposition only for banks,” he said. “For consumers, it’s a lose-lose scenario.” Davidson said if bankers were so concerned about their tax liability, “the appropriate remedy is for them to lobby their state and federal representatives for relief, not seek to impose new taxes on credit unions.” Yates of the CBA countered, saying credit unions should be treated more like banks in terms of regulations. “Because credit unions are seeking to conduct business in a fashion that is very similar to banks, we do not think it is appropriate that they are not subject to the same regulations and community reinvestment requirements and other obligations like taxes that banks are subject to,” she said. Davidson offered another suggestion for the banking industry which has long complained that credit unions enjoy an unfair competitive advantage. “If bankers truly believe credit unions have all the advantages, and truly want to be tax-exempt, they are always free to give up their for-profit structure, switch charters, and become credit unions,” he said. [email protected]

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