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WASHINGTON-The American Bankers Association and America’s Community Bankers used the opportunity of the President’s Advisory Panel on Federal Tax Reform’s request for comments to individually stress the uneven tax treatment between banks and credit unions. ABA Executive Vice President Ed Yingling stressed that the credit union tax exemption is no longer justified for bank-like credit unions, similar institutions should be treated and taxed similarly, and he pointed to mutual savings banks’ tax as precedence for altering the tax exemption of some credit unions. “A new breed of credit union is flourishing,” Yingling wrote former Senator Connie Mack, chairman of the panel. “These credit unions have dispensed with their original mission to serve a limited common bond of membership and to provide services to moderate and lower income individuals as laid out in the preamble to the Federal Credit Union Act. These new-breed credit unions are indistinguishable from banks and a far cry from traditional credit unions. The growing size of their tax expenditure, the increasing evidence that credit unions are serving the affluent, and the competitive implications for taxpaying institutions raise the question of whether continuing the special tax treatment for all credit unions can be justified.” ACB Executive Vice President and Managing Director of Government Relations Robert R. Davis told the panel, “The strength of our economy is built on free and fair competition. However, the free market is frustrated by those tax-exempt credit unions that compete head-to-head with taxpaying community banks, particularly those that are mutual in form. We urge the Panel to investigate this government-created competitive disparity and help create a level playing field between community banks and sophisticated credit unions.” The Problem, As Bankers See It He stated that credit unions have a built-in 40% price advantage-which is no longer justified for certain credit unions-and that there are a number of cooperative banks, savings associations, and savings banks that are taxed. “Contrary to credit union industry statements forecasting that taxation will lead to their untimely demise, mutual savings institutions have not collapsed under taxation,” Davis said. ABA’s Yingling agreed, pointing out, “Basic economics tells us what will happen when a tax-exempt firm and a taxpaying firm offer the same products: the tax-exempt firm will grow at the expense of the taxpaying firm. This is exactly what has happened as credit unions use their tax advantage to grow their market share.” Credit unions have grown at an annual rate of 8.3% over the last decade, Yingling pointed out, much faster than banks’ 6.9%. According to ABA, tax policy mandates similar treatment of similar institutions. Yingling noted that the Office of Management and Budget has estimated that the credit union tax exemption will cost the Treasury $7.5 billion in potential revenue over the next five years. “Most of the tax subsidy goes to the most aggressive credit unions – those that are least likely to embrace traditional credit union principles. In fact, the largest 100 credit unions absorb 40% of the tax expenditure – quite a contrast with the 29% just six years ago. This is a substantial subsidy, and with no restraints it can be expected to grow rapidly.” Yingling said these facts beg the question: “Are the tax-subsidized credit union services targeted to those most in need of subsidized financial services?” He said that credit unions’ tax-exempt status was initiated to subsidize services to low- and moderate-income individuals. While many “traditional credit unions” stick to their mission, he noted a General Accounting Office study, which found that 64% of households that primarily use a credit union are middle and upper income, compared to 58% for those that primarily use banks. “Moreover, the typical credit union member has higher than average income, more years of education, and is more likely to own a home than noncredit union members,” Yingling wrote. “Thus, not only is the tax expenditure growing, but it is increasingly subsidizing financial services to individuals who clearly don’t need it.” Additionally, ACB noted that credit union service organizations have “contributed significantly to the dramatic growth of complex credit unions.” CUSOs are credit union subsidiaries that offer services credit unions often cannot or will not provide in-house. “Income generated from bank-like products and nontraditional financial services offered through CUSOs should not be exempt from taxation,” Davis wrote. ACB asked that if credit unions are permitted to maintain their tax-exempt status that they be required to file a form 990, Return of Organization Exempt from Income Tax, to disclose their gross income. Federal credit unions are currently exempt because the Internal Revenue Service considers them an “instrumentality of the United States.” These disclosures were required prior to 1989, according to Davis’ comments. “Federal credit unions should not be given the same rights and privileges that are afforded to the federal government,” he wrote. “Federal credit unions are not owned by the United States, nor do they possess any special governmental attributes or purpose that would justify an exemption from these disclosure rules. In fact, credit unions are profitable, retail financial service organizations whose activities should be appropriately disclosed in order to efficiently administer the tax laws.” ABA offered up “solutions to end disparity,” including taxing the “new breed credit unions” or applying Subchapter T of the Internal Revenue Code, which applies to most cooperatives, to credit unions. In closing its remarks, ACB tacked on that the panel should work to maintain the mortgage interest deduction and provide incentives for saving. CUNA and NAFCU are not going to idly sit back and watch the bankers tear apart credit unions, even if it is the same old arguments. “It’s the same old rehash of what they’ve shared before,” NAFCU Director of Legislative and Political Affairs Brad Thaler explained. The bankers’ remarks are “filled with inaccuracies and misrepresentations.” Citing that the initial comment period closed March 18, he said NAFCU would continue to seek opportunities to set the record straight with the panel. CUNA Vice President of Communications and Media Outreach Pat Keefe said CUNA would probably have a formal response into the tax panel this week. “We’re preparing a formal response to the bankers as well as our own comment to the tax commission,” he said. -

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