As federal tax reform lingers onCapitol Hill, Credit Union Times asked industry expertshow the elimination of the credit union tax exemption could impactbalance sheets.

Dan McGowan, CFO at the $172 million Pioneer Federal CreditUnion in Charleston, W.V., said his shop is expecting to earnaround $800,000 this year, right at 50 basis points on averageassets of about $160 million.

“A quick calculation of our tax liability with those earningswould be $272K (34% of pre-tax earnings) diminishing the bottomline to a final post-tax net income of $528K,” hesaid.

“As with all not-for-profit co-ops, earnings are to bereinvested into the primary mission of the organization. Simplyput, federal income taxation would deprive us of the opportunity todo so to the degree of the taxation,” he added.

McGowan also said taxation would weaken the credit unionindustry as a whole, resulting in exposing more consumers tomarketplace participants with more exploitive natures thanconsumer-friendly credit unions.

However, the high-profile executive, who has snagged awards fromCUNA, CUES and NAFCU in the past few years, expressed a unique viewregarding how trades should address the issue on Capitol Hill.

“I would be more than willing to support the banks and otherfor-profit corporate entities in lobbying Congress to eliminatecorporate income taxes altogether,” he said. “The double-taxationof corporate earnings, first at the business entity level and thenat the shareholder level, is unfair.”

Eliminating corporate income taxes would result in an economicstimulus of monumental proportions, McGowan predicted.

The banks shouldn't be lobbying to increase the tax burden oncredit unions, but we should all join forces to lobby for theelimination of unfair double-taxation on everyone,” he said.

McGowan said he was once part of the accounting department at alarge bank, and recalled that a lot of resources were expended inthe accounting and reporting of taxes, and in determining how tolegally keep tax liabilities to a minimum.

“The added burden of federal income taxation would divert somedegree of management attention to address tax issues,” he said.

JohnJ. McKechnie, partner at Washington-based strategy and lobbyfirm Total Spectrum, said protecting tax exemption will probablyalways be the number one priority for credit unions on CapitolHill.

“Linking the exemption to any products or services credit unionsoffer consumers, such as MBLs, will never be part of ourlegislative strategy,” McKechnie said. “Having said that,credit unions would be wise to watch the entire playing fieldduring this tax reform debate—the situation is fluid, and myreading is that the bank lobby is being persistent in trying tofind any and all avenues to get at the exemption.”

Next Page: Taxes and MBL

A CFO at a credit union with more than $1 billion in assets, whospoke on the condition of anonymity, said taxes and MBL areconnected.

“My opinion is that taxes and MBL caps are linked: if wehad to pay taxes, there's no good reason for maintaining the cap.But I think as an industry, we're much better off with the MBL capand the tax exemption than with unlimited business lending capacityand a tax burden,” he said, adding that his credit union wouldsuffer if it was taxed.

He estimated taxation would cost his institution $6 to $7million per year assuming a 35% tax rate, although deductions woulddecrease that amount. “I cannot see business lending contributingan incremental $6 to $7 million to the bottom line,” he said.

Jim Blaine, president/CEO of the $26.7 billion State Employees'Credit Union in Raleigh, N.C., said the federal government couldgenerate more revenue by enforcing regulations on big banks.

“The income tax is a profits tax,” he said. “It's a bitstrange, unless you are a multi-billion dollar, serial,consent-decree signing banker, to try and contemplate a profits taxon a non-profit organization. We are, however, sure that anyproposed tax applied to SECU would produce far less revenue thanthe $13 billion 'guilty as charged' bank.”

Blaine called enforcement actions against predatory lenders lowhanging fruit and said the effort would be more profitable thantaxing credit unions.

Blaine also criticized the banking lobby for targeting creditunions.

“That taxation is the number one priority of the AmericanBankers Association speaks volumes for the continuing 'it's allabout us' decline in banking in this country,” Blainesaid. “Vilifying credit unions will not help rehabilitate thereputation of America's once proud banks—humility might.”

Peter Duffy, a managing director at the New York-based SandlerO'Neill and Partners, said his firm has met with some of thelargest credit unions because executives there wanted to understandthe impact of the taxation.

“The most profitable institutions would be impacted thegreatest, because the more you make, the more you are taxed,” Duffysaid.

Sandler O'Neill's analysts estimate the effective federal taxrate for community banks averages around 28%, he said.

In 2012, there were 405 credit unions with more than $500million in assets, according to Sandler O'Neill research. Thesecredit unions represent the majority of the revenue in theindustry, Duffy said.

“It is gruesome below a certain asset size to be financiallyviable,” he said. “I think it's difficult to talk about the taxexemption and access to capital and all of the other key issues ofthe business without discussing the ability of institutions togenerate a profit without scale.”

McKechnie said tax reform is unlikely before the end of thisyear.

“The controversy surrounding Obamacare has unquestionably suckedmuch of the political oxygen out of the room in Washington,” hesaid. “Hill Republicans I talk to say they're in no hurry to changethe subject by introducing a major tax reform effort at thistime.”