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IRMO, S.C. – It was introduced as a debate intended to shed light on common problems and issues shared by banks and credit unions and that both financial groups can work together on to resolve. But in the end, it was the issue of credit unions’ tax exempt status that was the focus of the debate between South Carolina Credit Union League President/CEO John Franklin and American Bankers Association Chief Economist Keith Leggett at the recently held second quarter meeting of the South Carolina Management Association. From the outset, in their respective opening statements, both Franklin and Leggett referred to credit unions’ tax exempt status. Credit unions, Franklin pointed out, were not made tax exempt in 1934 but a few years later “because Congress recognized that you can not accumulate capital in a credit union without having some retained earnings. In 1998 with the passage of the Credit Union Membership Access Act, for the first time Congress officially recognized the credit union difference and officially stated why credit unions are tax exempt.” Franklin also mentioned how the American Bankers Association has made “supporting taxation of expansionist credit unions” one of its top priorities. “It’s a shame we can’t work together on many more things. We could accomplish so much in the areas of bankruptcy and fighting predatory lending, providing financial education, if we would just cooperate and quit fighting all the time,” said Franklin. Leggett agreed that there are many issues the banking and credit union industries have been working together on such as predatory lending, bankruptcy reform, and the renewal of the Fair Credit Reporting Act, but he wasted no time segueing into a discussion of credit unions’ tax status. Leggett quoted Paul Horgan, president/CEO, IBM Mid-America Employees FCU from a Filene Research Study in which the CU president stated that: “Some credit unions have grown to be not only successful credit unions, but also successful businesses.the other nine-thousand are no less legitimate, but survive largely by the will of their members.” Leggett said this was proof that Horgan “recognizes that there are two distinct credit union industries.” He added that, “I am here to tell you today that the ABA is not opposed to credit unions, but we believe that those one-thousand or so credit unions identified by Paul Horgan should no longer be tax-exempt. From our perspective, these institutions are tax-exempt banks.As credit unions seek to modernize their charters, should their tax exemption be reevaluated? Is there a point where a credit union transitions from being tax-exempt to being taxed? The American Bankers Associations’ view on this issue is yes. We answer these questions with a `yes’. If credit unions desire to offer new financial products and services just like other depository institutions, they should forego their tax exemptions.” The ABA economist also offered that contrary to credit unions’ assumptions, taxation will not hurt CUs’ members. Franklin disputed Leggett’s argument. “The premise that giving away one-third of your annual income will not damage credit unions is a difficult one to swallow,” said the South Carolina League president. He also attacked Leggett’s argument that large credit unions are different than smaller ones. Using Founders FCU, the largest credit union in South Carolina, as an example, Franklin said the $857-million CU will still make a $100, unsecured loan to someone who needs it. He also described the credit union’s program to serve the Hispanic community. Franklin also addressed Leggett’s assumption that credit unions are a threat to banks. The premise, he said “is difficult to swallow.there’s no evidence that credit unions are a threat to banks.” Leggett acknowledged the services and work credit unions have done in South Carolina in the areas of financial literacy and education and reaching out to the underserved, “but does that justify preservation of your tax exemption?” He tried to make the point that credit unions have paid the price for their growth rate with diminished member participation at annual meetings and voting for boards, and he cited various statistics to support his opinion that at credit unions’ current growth rates, they’ll eventually be larger than some banks. But Franklin came back. “If credit unions will not continue to sustain that growth rate because you have a point of diminishing returns.you can always argue that and project into the future that someday you’re going to be bigger than us, but real economics don’t happen to work that way.” The two then fielded questions from attendees on a wide range of subjects. Among the topics addressed were member business loans and small business lending; financial literacy and providing financial education; and banks’ Subchapter S tax exempt status. On this last issue, Franklin stated that, “I will never oppose tax exemptions for banks. I do not oppose banks going to Subchapter S.But it is a little bit hypocritical to have so many going Subchapter S and then take the position that credit unions have this incredible unfair advantage because they don’t pay income taxes. And that’s the part that kind of rouses us up is the hypocrisy of that argument.” The debate seemed to have come full circle back to tax exemption. -

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