Banker-Sponsored Credit Union Study Finds Tax Exemption Unjustified WASHINGTON-A study released recently by the Tax Foundation, an organization that has monitored tax policy at the federal, state and local levels since 1937, called the credit union tax exemption `unjustified’ and said it is costing the nation billions. According to the study, “Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions,” by John A. Tatom, Ph.D., adjunct scholar at the Tax Foundation and Adjunct Professor in the Department of Economics at DePaul University, tax-exempt credit unions will cost the Treasury $31.3 billion in “unjustified” lost revenue from 2004 to 2013. “The U.S. corporate tax rate is one of the highest in the world, and it could be lowered to good effect if some unjustified exemptions were eliminated,” Scott Hodge, president of the Tax Foundation, said. CUNA President and CEO Dan Mica countered by pointing out a number of inaccuracies in the study. He argued that it overstates the estimated revenue lost compared with estimates by the Congressional Budget Office and the Office of Management and Budget and points out that the study was commissioned by the Independent Community Bankers of America. The study also totally ignores the preponderance of evidence that credit unions pay depositors much more than banks, as well as the effect of the banks’ use of Subchapter S. “This tax exemption has been in law for almost 70 years because of the original concept of credit unions’ cooperative ownership,” the study read. “The original legal “field of membership” restrictions on credit unions were designed to limit their ability to compete by strictly defining who could be a depositor and borrower from a credit union, with the idea that credit unions would use their tax advantage to serve low-income borrowers and depositors. However, over time credit unions have avoided most of the restrictions, and as a result they have competed directly and successfully with other financial institutions in many markets with a major cost advantage, the tax exemption.” To the contrary, CUNA Chief Economist Bill Hampel said the field of membership was initiated because credit unions are not-for-profit financial cooperatives. Fields of membership were established at a time when there were no credit reports so credit unions were to work with people who knew each other. According to the study, the members receive their benefits from the tax savings in “unusual returns,” such as higher capital and not dividends. “The shareholders’ extra income reinvested in the credit union provides new capital that allows the credit union to grow faster than other institutions,” it read. Tatom also seems to assume that capital is just socked away and the credit unions are not making earnings on that, NAFCU Chief Economist Tun Wai said. “Capital is not something that just sits there in a pot stored away.” Both economists agreed that the study ignored the fact that numerous studies cite credit unios rates on loans lower than at banks and credit union rates on savings vehicles are higher. The study even takes a sample day from in which credit unions beat out banks on every category except for mortgages. Lacking Sufficient Data? Hampel stated that using just one day’s worth of data is irresponsible. The conclusion they draw from that sparse amount of data doesn’t flow,” he said. He plans to look at data from more than one day, he added. As for mortgages, Hampel said they are typically priced about the same at every type of lender so they can be sold on the secondary market. And, he called the statement that credit unions do not offer better rates on savings and loans “the most preposterous” of the entire study, though he noted he is still working his way through it. “The group has taken a position and is doing whatever it can to defend its conclusion,” Hampel accused. The study, however, states that of the 50 basis point advantage credit unions are provided by their tax exemption, 11 go to employee compensation, 33 basis points are held onto by the institution, and the consumer may benefit from six of those basis points. “There is little or no effect on deposit rates or other costs,” Tatom states in the study. It also accuses credit unions of holding 25% higher equity ratios than banks over the past 10 years. It gives banks equity ratio at 9.1% in 2003, compared to credit unions’ 10.7%. What the study ignores is the different regulatory environments. Credit unions have to maintain a net worth ratio of 7% to be considered well-capitalized, while banks only need 5%; in reality, the banks are actually more overcapitalized at 9.1% than credit unions at 10.7%. Wai also questioned, “When is it that having capital is a sign of inefficiency?” as the study charges. The erosion of field of membership restrictions has allowed credit unions to grow much more rapidly than banks over the past two decades, according to the study. “As a result, credit unions have rapidly consolidated, merged and broadened their geographic markets, all the while maintaining their tax exemptions,” it read. “Thus, Congress created new tensions by weakening the original case for tax exemption.” The study completely ignores banks that are chartered as Subchapter S Corporations, Wai indicated, many of which do not pay income taxes either. Additionally, he said banks in the first nine months of 2004 grew more than the entire assets of the credit union movement. He also highlighted that 447 banks have more than $1 billion in assets, representing 86% of all bank assets, while 98 credit unions have more than $1 billion with just 33% of credit union assets; consequently, Wai said, there are a lot more smaller credit unions than banks. And, where are the Sub S banks in all this talk of tax equity, Hampel wanted to know. Tatom appears to advocate that all credit unions pay taxes to achieve equity, not just the larger, bank-like ones that bankers have been pushing to tax. It notes that small credit unions could maintain their tax-exempt status, or all institutions under a certain size could have a tax exemption applied to them. “But of course this scheme conflicts with the notion that all firms with net income should pay taxes, even if they face a different marginal tax rate because of size,” according to the study. He also raises the fact that credit unions are not subject to Community Reinvestment Act requirements and the associated costs, which the bankers are often quick to point out. It noted that many credit unions are based on occupation, often in relatively well-paying fields like teaching or government work. “Today credit unions continue to grow faster than banks, have little practical limitations on membership, and make business loans that increasingly have no limits on who can borrow, how much or for what purpose.Today the principal justification for the tax exemption would seem to be that it already exists and, therefore, removing it could adversely impact thousands of institutions and their customers,” the study asserted. The research notes that some state chartered credit unions pay some taxes from income to franchise to sales and other taxes. It also notes that rates at federal credit unions are no better than at state charters that might be taxed at some level. Tatom ultimately concludes that there is no justification for the credit union tax exemption. “Under current law, as it is being enforced, there is no good policy argument based on equity or efficiency for maintaining the tax exemption,” he concludes. By contrast, CUNA’s Mica said in a statement, “Credit unions have earned their tax exemption by being not-for-profit financial cooperatives, directed by volunteers, which provide low-cost financial services to their members – regardless of their size. This study shows absolutely no understanding of what credit unions are, or what they do.” He added, “Were all credit unions subject to income taxation, the maximum revenue to the Treasury would be $1.5 billion per year. If credit unions could be nearly as successful as banks in “managing” their tax liabilities, the amount would be far less than that.” [email protected]

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