SHREWSBURY, N.J. – The bankers are feverishly pushing to get credit unions taxed. Credit union trade associations are just as feverishly fighting to protect the cherished credit union tax-exemption. So just what would happen if one day credit unions had to pay taxes? Credit Union Times posed this question to the people in the trenches – industry leaders ranging from trade association execs to credit union CEOs. It was a mixed bag and some may be surprised by the responses. “A lot of the advantages to the credit union charter would be eliminated if we were taxed. It would probably lead to more credit union conversions, especially among our larger credit unions. I'd be worried about the ability of our users to support the system. The leagues, associations and corporates would be affected in our ability to provide value. We're losing roughly one credit union a day. We have no alternatives. If we lose our supporters, our value proposition is challenged.” – Dave Preter, CEO, Mid-States Corporate FCU “It would have far-reaching repercussions for credit unions and their members. A 1998 study found that the cost of complying with the federal tax code, and the tax itself, adds 28% to the cost of every good and service provided in the country. Some of the costs of compliance are already paid by credit unions, but fees and product pricing would have to be increased in order to pay the tax. “This is not to say that credit unions couldn't engage in appropriate tax planning so that they have little or no profit at the end of the year. However, the regulators tend to want to see healthy earnings. “Overall, if taxation were to come, credit unions would hopefully be able to take advantage of all permissible investment options that other financials have. Through excellent management, the negative impact on members would be minimized.” -Mike Canning, executive director, Association of Corporate Credit Unions “A lot would depend upon how the taxation was implemented and what restrictions remained on us. I know that some people talk about mass conversions to bank charters but without more information, it's hard to know if that'd be appropriate or not. Even if you did decide that a bank charter was preferable, you still have the issue of how to fairly deal with the members' equity. Most of my peers feel very strongly that the members' money shouldn't be converted to enrich the insiders and I'd certainly agree.” – Greg Smith, CEO, Pennsylvania State Employees CU “I think we'd have less credit unions. Without the tax-exemption some credit unions may not be able to function given the competition. Unfortunately it would impact our members because we couldn't give back as much to them in terms of offering better rates or even more technology. As far as marketing we would have to get more creative.” – Katy Jett, vice president of marketing, UT FCU “There are two models out there already in Canada and Australia. What happened was pretty obvious. The competition became so great it forced consolidation on a large scale. We ended up with a bunch of large credit unions and not many small credit unions. It's very difficult for small credit unions to compete if we lose the tax-exemption issue.” -Bob Siravo, CEO, WesCorp “As long as we focus on servicing members we'll be just fine. The part that is scary is that banks are catching up on the service angle. If we keep the member at the center of what we do then the credit union movement will survive. Without the tax-exemption, unfortunately the smaller credit unions will suffer and the total number of credit unions will dwindle, but as a whole the credit union movement will survive.” -Brett Noll, senior vice president/chief marketing director, Langley FCU “I'm confident if any form of taxation of credit unions took place there would be an immediate piece of federal legislation crafted that would do away with all the products and service advantages banks have now such as those granted under Gramm-Leach-Bliley and allow credit unions those same rights. If you're going to tax cooperatives, then you have to let them do everything banks do.” – Mike Mercer, president/CEO, Georgia Credit Union Affiliates “Taxing credit unions would ultimately impact their charters as they determine how they are best equipped to compete in the future. If credit unions are forced to adopt new charters, CUNA Mutual's commitment is to be agile enough to serve credit unions in whatever charter they might choose.” -Jeff Post, CEO, CUNA Mutual Group “The taxation of credit unions raises many complex problems that reach well beyond the single issue of taxation. Regulators believe that the financial impact of taxation would be significant on credit unions. There are safety and soundness concerns. Some state legislatures have gradually implemented tax changes to minimize any substantial impact of those changes on financial institutions. Ill-advised implementation, therefore, could threaten the financial viability of credit unions serving America's consumers. “A world without credit unions would be difficult to imagine because of the significant role credit unions have played in the history of our nation and in the lives of its citizens.” – Mary Martha Fortney, president/CEO, NASCUS “Would things change? Yes. However, our principles and purpose would stay the same. Credit unions have always meant more to their members than just being a provider of great rates for loans and savings, but losing our tax-exemption would affect a credit union's ability to remain competitive without becoming more profit driven. I'm afraid the biggest losers would be those individuals that credit unions help the most – people of modest means who look to their credit union as a great source of affordable products and services, as well as financial education and planning. “Certainly, some credit unions might seek to convert to mutual banks, but I believe many credit union members would still desire to be part of a democratically elected financial cooperative that looks out for their best interests. Our business model would change with taxation, but our purpose and passion would remain people helping people.” -Curt Lykins, vice president/chief technology officer , Corporate One “The world for CUs without the tax-exemption would obviously be quite different from what it is now. Among the issues which would need to be addressed would be a complete understanding of the changes in tax code and a determination on how CUs could take optimum benefits from these changes. Issues concerning payment of dividends and the like would impact CU operations. The manner in which CUs operate would also be impacted since most everything CUs would do would require a `new' examination in light of a different tax structure. I also believe a CU organization which operates under a fully taxable structure would require more sophisticated human resources which may cause CUs to re-think their organization structure and compensation policies.” – Bob Dorsa, president, American Credit Union Mortgage Association “I think it would be a significant problem. The mission for which we were created would totally change and we'd become simply another for-profit financial system. “Would credit unions deal with it if they had to? I think they would. But I would see it as making a major change in what credit unions are all about. We'd become just another player.” – Anne Cochran, CEO, Louisiana Corporate CU “Any loss of credit unions' tax-exemption would be extremely detrimental to credit unions from a financial standpoint. It would also make it easier for some credit unions to argue there would be no reason to remain a credit union and to convert to a bank charter. There would still be credit unions around, but there would be a lot fewer because of the economies of scale necessary to do business in a taxable marketplace. Even if Congress gave credit unions the power to offer similar products and services as banks, you can get the powers to go into something but being able to afford the trained personnel and the costs for technology to do business would require a high volume of activity to cost justify offering it because of the overhead and credit unions' limited membership.” – Robert Allen, president/CEO, Teachers FCU. “Just back from a visit to the Czech Republic and Russia, my view is that the U.S. – even with its business tax – is the best place in the world to live and conduct business. With this said, I'd rather pay members than the IRS. If we lose our tax-exemption, credit union executives will need to call CPA firms to determine exactly how to calculate our required tax burden. Then, we'll need to spend additional resources to find out how to minimize the obligation. Our ability to pump value into credit unions will be curtailed. From a macroeconomic level, capital accumulation would probably slow as a result of paying taxes. More investment risk may be incurred as we pursue higher yields – so credit unions could endure the added financial tax burden. Worse yet, conversions from credit unions (to other entities designed to line the pockets of a select few instead of members) could become an alarming trend. Our philosophy of focusing on member service and member benefits could simply be “taxed” out of us. Greed could drive some to convert to Mutual Savings Banks – as we are now witnessing. Taxing credit unions is bad for business – except maybe for CPA firms. -Pete Pritts, CEO, FirstCorp “The first thing we have to realize is if a credit union gets taxed, members get taxed twice. There is a presumption that if credit unions were taxed, it would be large credit unions, however you define large, or community chartered (credit unions). Ultimately, all credit unions, little ones included, would be affected. Business services and lending programs in place now would change. Right now, MBLs and IDAs are open-ended services to members. Once you factor in the tax-exemption, you look at a tax minimization plan that doesn't solely focus on the members' benefits. It will destroy how the credit union operates. There are four different sectors of economy: for-profit, investment-owned, nonprofits such as United Way and not-for-profit like credit unions and other co-ops. And there's the government sector. If you're going to tax credit unions like you do (with the) for-profit sector, you're aiming at the other sectors too. The co-op philosophy doesn't just apply to credit unions.” – Larry Blanchard, senior vice president, CUNA Mutual Group “Realistically, financially speaking, if we were fully taxed like banks without having a provision to acquire capital to stock or float bonds, I can't understand how we could remain credit unions. I would think if credit unions were taxed, they would work with a host of CPA and regulators to see what the advantages would be in staying a credit union or converting to a bank. “The problem is the camel's nose is under the tent already and things are changing. The credit unions that converted to banks in Washington are prospering. Can (a credit union) lose between 30% and 40% of its bottom line? For credit unions to grow, (they) have to build capital. If you reduce your bottom line, it will slow your growth. You will be less able to fulfill your mission and that's a fact. Earnings will be less. In order to bring on additional services and move into more branches, you will have to do so with less of a spread if you're taxed. It will mean the underserved – people of modest means – will not be served.” -

Bob Harvey, president/CEO, Seattle Metropolitan Credit Union and chairman of African-American Credit Union Coalition