The mere mention of comprehensive tax reform on Capitol Hill has reignited the high-stakes battle between banks and credit unions over the tax-exempt status of the credit union tax exemption.

But veterans of the tax and budget wars on Capitol Hill said that the poisonous atmosphere in our nation's capital makes it tough to tackle the easiest of issues, let alone something as complicated as the tax code.

“I think everybody wants a tax bill,” said James Dyer, a former legislative staffer in the Ronald Reagan and George H.W. Bush administrations who went on to serve as staff director of the House Appropriations Committee. “The tax code is a mess.”

But in discussing the possibility of a tax bill, Dyer added, “I thought they were higher at the beginning of the year than they are now after watching this White House and this Congress unfold.”

A former Democratic House member agreed.

“It's hard to see how there's a majority to do anything,” former Rep. Charles Stenholm (D-Texas), who spent 26 years in the House, said.

Tax reform is not easy in the best of times, former Sen. Byron Dorgan (D-N.D.), who served 12 years in the House and 18 years in the Senate before retiring in 2011, said.

“I think comprehensive reform is highly unlikely,” Dorgan said. “Tax reform is very hard to do. It's a very heavy lift.”

Tax reform most likely will not be enacted this year, but still could be passed next year, G. William Hoagland, the former Republican staff director of the Senate Budget Committee, said.

Nonetheless, the Senate Finance Committee has solicited views from stakeholders about what tax reform should look like. The panel recently held a hearing on the issue.

And Republicans have been circulating broad principles of what they want to see in tax reform.

Those steps were an invitation to banks and credit unions to renew their fight.

“Simply put, the tax exemption is an issue of survival for credit unions,” Carrie Hunt, NAFCU's executive vice president of government affairs and general counsel, said in a letter to the Senate Finance Committee. “If the tax exemption was removed, many would convert to banks or just go away.”

CUNA President/CEO Jim Nussle was just as pessimistic about the impact of credit unions losing their tax exemption.

“If taxed, a very significant number of larger credit unions are expected to convert to banks to take advantage of the much greater flexibility of a bank charter, and an equally significant number of smaller credit unions would simply liquidate,” Nussle said.

But bankers said the tax exemption provides credit unions with an unfair advantage.

“Tax reform should stop the code from picking winners and losers, which means that businesses offering similar services should be treated equally under the code,” American Bankers Association President/CEO Rob Nichols said in a letter to the Finance Committee. “As such, the Committee should review and eliminate unnecessary tax preferences for credit unions and the Farm Credit System.”

The credit union tax exemption comes under the category of tax expenditures — benefits given to special groups of businesses or people.

If Congress decides to try to pay for any tax cuts that accompany reform, eliminating some tax expenditures could offset those cuts.

The credit union tax exemption became more attractive this year, as the Treasury Department estimated that the 10-year cost of the exemption will be $35.31 billion, a whopping 32.3% increase over just a year ago.

Treasury officials offered no explanation for the increase.

Hoagland said that there will be pressure in the Senate for any tax legislation to be deficit-neutral. He added, however, that if tax reform is rolled up into an overall budget reconciliation bill, any tax cut could be offset by savings found in entitlement programs.

If Congress wants to pay for any tax cut, then tax expenditures, including the credit union tax exemption, will be open for debate.

“Everything has to be on the table, or you'll get nothing,” Stenholm said.

Banks are likely to make sure that the credit union tax exemption is at least discussed, Dorgan said.

“They will always push their agenda,” Dorgan said. “The banks have very significant clout. It always will be on a list.”

And while Stenholm said he has sympathy for most credit unions, he said that some have grown so large that it becomes difficult to defend a tax exemption for them.

“There are some credit unions that are so big that nobody can say [they] deserve a tax exemption with a straight face,” Stenholm said.

Senate Finance Chairman Orrin Hatch (R-Utah) acknowledged that any discussion of tax reform inevitably will result in huge lobbying battles between competing interests.

“Obviously, there are a number of competing interests out there, with many of them focused on narrow provisions or benefits in the tax code,” he said. “Some of these interests have employed efficient lobbyists to make compelling cases for changes while others have elected efficient legislators who have done the same.”

Instant Insights /

At Odds: Tax Battle Looms

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