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WASHINGTON-The latest update to the Congressional Research Service’s look at the credit union tax-exemption states the obvious: it will continue to be a matter of debate. Credit union entities did find a silver lining to the report, Should Credit Unions be Taxed?, that was last updated in August 2005. The report did include more background information on credit unions’ democratically controlled, cooperative structure, which they had worked for. CUNA and NAFCU also both applauded the inclusion of some information on Subchapter S banks, of which more than 1,100 do not pay taxes. On the other hand, the report included not so positive recent events for credit unions, such as House Ways & Means Committee Chairman Bill Thomas’ (R-Calif.) letter to NCUA Chairman JoAnn Johnson questioning the agencies independence, CUNA Vice President on Communications and Media Outreach Pat Keefe said. The Congressional Research Service is the public policy research arm of the U.S. Congress within the Library of Congress. One key point still really irks NAFCU Director of Political Affairs Murray Chanow. “There is one glaring issue that I have with this report and that is that taxing credit unions is going to happen in a vacuum,” he said. There would also be accounting changes, regulatory changes, changes in credit unions’ revenue, and others. The Office of Management and Budget has estimated that taxing credit unions would bring in about $1.3 billion in tax revenue annually, Chanow pointed out. “To me, that number makes absolutely zero sense” given the tax avoidance measures credit unions would likely take and are not considered in the estimate. He challenged the report’s assumption that deregulation has taken place for credit unions. “Credit unions differ in some aspects from other providers of financial services, but financial deregulation continues to lessen these differences,” the report read. “Deregulation has resulted from new legislation and decisions of regulatory agencies. Proponents of the taxation of credit unions argue that deregulation has led to vigorous competition between credit unions and other depository institutions. They maintain that the tax exemption gives credit unions an unfair competitive advantage over other depository institutions, and there is no market failure that justifies government intervention with a tax subsidy.” Chanow stated, “I don’t believe that the Credit Union Membership Access Act is deregulation.” There were changes in regulations, he said, but credit unions are still unique financial institutions. “It has its pluses and minuses.” Keefe said of the CRS report. “Overall, I’d say the report could be improved still from a credit union point of view.” It also cites arguments of the supporters of the credit union tax-exemption. “Supporters.assert that the purpose of credit unions is to serve the financial needs of their members rather than to maximize profits. They argue that taxation would eliminate this service character of credit unions.” Due to technological advances, deregulation, and revenue needs, the debate will continue, James M. Bickley, specialist in public finance in the government and finance division of CRS, concluded. “In the 1980s, 1990s, and early 2000s, the credit union industry grew more rapidly than other depository industries, and this more rapid growth may continue. Since many believe that an economically neutral tax system requires that financial institutions engaged in similar activities should have the same tax treatment, the income tax exemption for credit unions likely will occasion continuing debate,” the report read. -

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