Taxpayer Group Calls on Congress to Take a Fresh Look at CU Tax Exemption

The National Taxpayers Union, a nonpartisan taxpayer advocacy group, is calling on Congress to re-examine the tax exemption of large, bank-like credit unions.

The issue briefing paper noted the trend of large credit unions acquiring community banks. For example, the National Taxpayers Union cited Lake Michigan Credit Union's acquisition of a southwest Florida bank, despite the credit union's headquarter being 1,000 miles away.

The National Taxpayers Union wrote: "Permanently taking taxpaying business entities off treasuries’ tax rolls and shrinking the tax base is a textbook example of poor tax policy."

The paper also pointed out the erosion of the credit union's field of membership as another reason for Congress to take a look at the credit union industry's preferential tax treatment.

In addition, federal credit unions are not required to file Form 990 to the Internal Revenue Service. The National Taxpayers Union believes that large federal credit unions should be subject to Form 990 filing requirements, just like other tax-exempt entities. Requiring large federal credit unions to files a Form 990 would result in greater transparency and accountability at these institutions.

Furthermore, the Form 990 "is the main enforcement mechanism to ensure compliance with Section 13602 of the Tax Cuts and Jobs Act, which requires a 21 percent excise tax on not-for-profit executive compensation above $1 million."

Moreover, the taxpayer group noted that federal credit unions are not subject to Unrelated Business Income Tax, because they are viewed as instrumentalities of the federal government. This allows federal credit unions to avoid paying taxes on profits that are not related to their core mission. For example, the paper notes that some federal credit unions have gotten into the commercial real estate business and are leasing out excess office space to other businesses. This activity is not part of the core business of federal credit unions and should be taxed.

The taxpayer group concluded that "[w]ith many credit unions growing significantly in both size and scope, it is time for Congress to reevaluate the tax exemption and other tax-related provisions governing credit unions."

Read the paper.

BankBeat Publisher: Time Is Right for A Serious Fight Against CUs

Tom Bengston, the publisher of BankBeat, wrote on December 16 that the time is right for a serious fight against credit unions.

He argues that in states where the credit union charter is more liberal than the federal charter, banker advocacy efforts should seek to rollback these state charters putting them on a par with the federal charter.

Second, Bengston states that "bankers in all states should work to level the taxation playing field for smaller institutions." But instead of taxing all credit unions, Bengston advocates banker efforts should focus on exempting smaller banks from taxation.

Finally, he proposes that the net income of larger credit unions should be subject to taxation. He notes that this would place these large credit unions on equal footing with large banks. Bengston suggests that the line for larger credit unions could be drawn at $500 million or $1 billion in assets.

Read the article.

Kansas Bill to Tax Large CUs Won't Move Forward

The Sunflower State Journal is reporting that a joint House-Senate committee on financial institutions in the Kansas Legislature on October 29 recommended against the bill taxing large credit unions.

The bill (SB 239) would have levied a 2.25% tax on the business lending income of credit unions with assets of more than $100 million. It would have assessed another 2.125% tax on such income in excess of $25,000.

A second bill (SB 238) that would allow banks to deduct business loan interest from their net income moved forward with no recommendation from the committee.

Republican state Sen. Rob Olson, chair of the joint committee, said he expected the bill to be considered in the upcoming session, but noted the bill still needs quite a bit of work.

Read the article (subscription required).

Harris Poll: Most Americans Support Taxing Large Credit Unions

A majority of Americans across all political parties said they would support ending federal and state tax exemptions for large credit unions, according to a Harris Poll survey commissioned by the Florida Bankers Association.

Sixty-eight percent of those surveyed agreed that a tax exemption for these institutions was unfair, and 70 percent said they would support congressional action to require credit unions with more than $500 million in assets to pay income taxes.

Three-fourths of respondents also agreed that tax-exempt institutions should not be permitted to acquire local community banks.

The poll also showed opportunity for more consumer education about the credit union tax exemption, with just 18 percent of respondents correctly stating that credit unions are tax-exempt. Thirty-seven percent believe credit unions do pay taxes and 45 percent were unsure.

Harris Poll surveyed 2,040 U.S. adults ages 18 and older, of which 1,668 are registered voters. The survey was conducted from September 26 thru September 30.

Read more.

Tax Foundation Calls for Repeal of CU Tax Exemption

The credit union industry has strayed from its original tax-exempt purpose and its tax exemption can no longer be justified, according to a research note published on October 16 at the nonpartisan Tax Foundation.

“Ending the exemption would make the tax code more efficient and provide lawmakers with revenue that could be used to offset other improvements in the tax code,” Erica York, an economists at the Tax Foundation.

York noted that the credit union tax exemption was historically justified by three purposes: serving customers with a common bond and customers with moderate means, as well as providing services difficult to obtain at banks. She cited evidence showing the erosion of common bond, that credit unions are increasingly serving high-income customers and that their services now resemble those offered by banks.

“The tax exemption for credit unions is not justifiable under principles of sound tax policy, nor under the rubric that lawmakers have used in the past to evaluate the tax-exempt status of financial institutions,” she concluded.

Read the research note.

Iowa Lawmakers Discuss Taxing CUs at State Level

State lawmakers highlighted the challenges of taxing credit unions at the state level at a banker convention.

According to BankBeat, a panel of lawmakers at the recent Iowa Bankers Association Annual Convention pointed out that state chartered credit unions could switch to a federal charter, if taxed at the state level.

The Federal Credit Union Act exempts federal credit unions from all state and local taxes, except property taxes.

Lee Hein, chairman of the House Ways and Means Committee, stated: "Credit unions have options. They can move to a federal charter, so that makes taxing credit unions not such an obvious solution."

Gary Carlson, chairman of the House Commerce Committee, commented: "If they all go to a federal charter, we do not achieve our goal of leveling the competitive playing field."

While I think the threat of switching charters for Iowa credit unions are overblown because the state charter is more liberal than the federal charter, this perceived threat shows that Congress needs to solve this issue.

Read more.

Policy Advocate Calls for Illinois CUs to Pay Their Fair Share of Taxes

Peter Prickett, President of Council for Sound Tax Policy, has called for credit unions, especially the largest, to pay their fair share of the tax burden in Illinois.

Prickett stated that most consumers don't see any differences between banks and credit unions. Credit unions offer the same products and services as banks. And the largest Illinois credit unions tower over the majority of community banks they compete with.

In an opinion letter, Prickett pointed out that if the 16 largest Illinois credit unions had paid their fair share in 2018, this would have resulted in $20 million to $27 million in additional tax revenues to the state.

Prickett noted that 3 of Illinois largest credit union have bought naming rights to sports stadiums and signed exclusive sponsorship deals with sports teams, but paid nothing in income taxes.

Pricket wrote that "Illinois taxpayers should consider whether now is the time to ... end the antiquated income tax exemption for credit unions in Illinois."

Read the Op-Ed.

CU Tax Expenditure Exceeds $24 Billion for Fiscal Years 2019 - 2028

The Office of Management and Budget estimated that the tax expenditure associated with exempting credit union income from corporate income taxes is $24.017 billion over the next ten fiscal years.

The following graph shows the annual tax expenditure for exempting credit union income from corporate income taxes for fiscal years 2019 thru 2028.

Public Policy Groups Defend CU Tax Status

Thirteen public policy organizations wrote Senate Finance Committee Chairman Orrin Hatch (R -UT) defending the tax status of credit unions.

The group stated that lawmakers should "be wary of any proposal that penalizes the millions of Americans who have chosen to join credit unions."

The letter also noted the importance of credit unions to our troops.

The group wrote: "The two largest credit unions do have substantial assets, but they are essentially limited to serving the families of active-duty military and veterans and some civilian defense employees."

The group concluded that the goal of free-market tax reform is to reduce or eliminate double-taxation and the committee should discard any proposal that would double tax certain types of financial institutions and their customers.

Read the letter.

Provision to Tax Iowa CUs Not Included in Final Tax Reform Bill

Iowa Republican leaders reached an agreement on tax reform, touting it as the largest tax cut in state history. However, the final bill left out a provision to apply the same state franchise tax to credit unions that banks pay.

The Senate version of the bill included a provision to tax credit unions. This provision was kept on the table throughout final discussions between Senate and House leaders and Gov. Kim Reynolds, but was ultimately dropped.

The Iowa Bankers Association stated that this issue is not going away and it is already working on this issue in preparation for the 2019 legislative session.

John Sorensen, CEO of the Iowa Bankers Association, stated to The Gazette: "Ï think we made real headway. The bill passed the Senate. That's never happened before."

Coalition Urges Senate Finance Committee to Examine Tax Exempt Status of Large CUs

The National Taxpayers Union along with other conservative public policy groups on April 24 wrote the Senate Finance Committee Chairman Orrin Hatch (R - UT) and the committee urging them to examine the tax exemption of large credit unions to ensure that these credit unions are adhering to the original intent of the statute.

The group expressed concerns that some of these large credit unions have strayed from their intended purpose.

The letter noted that many credit unions remain focused on their core mission, but some large credit unions operate like banks instead of credit unions.

The group wrote: "A tax exemption gives these select few credit unions a distinct edge over taxpaying banks and creates an uneven playing field, particularly over smaller community banks, which compete for similar customers."

The organizations stated that as credit unions evolve Congress should regularly review the governing tax and regulatory provisions to ensure that the tax exemption "is aligned with the intent of Congress and the interest of sound economic principles."

Read the letter.

NCUA to Sen. Hatch: CUs Would Need a Taxpayer Bailout, If Taxed

In a March 28 letter to Senator Hatch (R - UT), National Credit Union Administration (NCUA) Chairman McWatters wrote that that eliminating the credit union tax exemption without addressing the remaining regulatory differences between banks and credit unions “would almost certainly have a detrimental effect on the credit union system and increase losses to the Share Insurance Fund, which could ultimately fall to U.S. taxpayers.”

The letter was in response to Senator Hatch's January 31 letter expressing concerns that credit unions may be operating beyond their tax-exempt purpose.

According to McWatters' letter, NCUA's analysis found that "without eliminating the field of membership restrictions, member business lending restrictions, investment capital restrictions, investment authority restrictions, and other restrictions", the elimination of the tax exemption would almost certainly create safety and soundness issues.

McWatters also mentioned that if credit unions were taxed, they "would need an appropriate transition period to incorporate any such changes into their business model" and credit unions should have the option of "something akin to an S corporation election."

However, the letter does not include any details from the agency's analysis.

In response to questions regarding what data the agency has on rejected associational common bonds and community charters, NCUA wrote that it has denied or deferred less than 10 percent of applications for new associational common bonds since its updated associational common bond rule became effective in 2015. The agency stated that it has approved nearly 80 percent of its applications with another 10 percent of applications pending.

“Instead of outright denial, the NCUA typically defers action on requests the agency cannot approve and, to the extent reasonably possible, offers alternative solutions consistent with the FCUA and the agency’s regulatory framework,” McWatters noted.

In response to a question from Hatch about the proposed community charter expansions that NCUA rejects, McWatters said that “NCUA’s tracking system does not distinguish between denials based on the geographic area requested as opposed to other reasons, such as safety and soundness,” thus limiting the agency’s ability to discern where credit unions are pushing field of membership boundaries.

With regard to the disclosure of executive compensation, NCUA noted in 2010 it required corporate credit unions to disclose executive compensation. In 2011, NCUA finalized a regulation eliminating most golden-parachute arrangements for troubled credit unions.

Unfortunately, NCUA has not acted on a staff recommendation to require all federal credit unions to disclose executive compensation.

Read NCUA's letter to Senator Hatch.

CUs Buying Banks Are Here to Stay, But Raise Policy Issues

The American Banker is reporting that a trend has emerged of credit unions buying banks.

In the first quarter of 2018, four such deals were announced. In comparison, six deals were announced during 2017.

Michael Bell, an attorney at Howard & Howard law firm who specializes in these transactions, estimates that there are approximately 150 credit unions with the capital, management experience, and desire to buy banks. He told the American Banker that he is currently working on 20 possible deals.

However, these transactions suggest that the lines of distinction between banks and credit unions are blurring and raise several issues that need to be addressed by policymakers.

Credit unions are exempt from federal income taxation. However, banks are subject to federal taxation. The acquisition of a bank by a credit union shifts income from a taxable base to a non-taxable base. If credit unions are using their tax-exempt status to buy taxpaying financial institutions, then this warrants policymakers revisiting the credit union tax exemption.

In fact, these transactions have attracted the interest of Senate Finance Committee Chairman Orrin Hatch (R - UT), who earlier this year wrote National Credit Union Administration Chairman McWatters questioning whether credit unions have outgrown their tax exempt status.

Credit unions are also exempt from the Community Reinvestment Act (CRA), while banks are not. These acquisitions may potentially create gaps with regard to service and lending to low- and modest-income consumers. The Government Accountability Office reported earlier this year that policymakers should consider extending CRA to credit unions, although the Treasury Department did not act on this recommendation.

Read the story (subscription may be required).

Tax Reform Has Eliminated the Case for CU Tax Subsidy

Scott Hodge, president of the nonpartisan Tax Foundation, wrote that with banks’ effective tax rates lowered by the recent tax bill, credit unions have even less of a case to remain untaxed.

“Credit unions were becoming anachronisms before the enactment of the [tax bill], but that status should be declared official now that the tax gap between banks and credit unions has effectively been closed,” Hodge wrote. “If they are going to act like banks and subsidize sports stadiums like banks, it is time that they paid taxes like banks.”

He also effectively rebutted credit union lobbyists’ arguments that taxing credit unions would cause losses of income tax revenue. “Such studies amount to one-sided accounting, ignoring the fiscal costs of the taxpayer subsidies to credit unions and the economic impact that their tax-advantaged competition has on taxpaying for-profit banks,” he wrote. “And, how is it that repealing the tax subsidy that is already costing the federal treasury some $36 billion over the next decade could ‘cost’ the federal government $38 billion? That makes no sense.”

Read the Real Clear market op-ed.

CU CEO: It Is Time to Tax Large Multiple Common Bond CUs

Nearly a month after Senate Finance Committee Chairman Orrin Hatch (R-Utah) wrote to the National Credit Union Administration questioning the federal tax exemption for the largest credit unions, one credit union CEO in an op-ed agreed that the time is now to explore taxation for those institutions.

In an op-ed in Credit Union Journal, Rob Taylor, president and CEO of Idaho State University Credit Union in Pocatello, Idaho, echoed Hatch’s concerns about large, multiple common bond credit unions that have been allowed to expand and, in many cases, compete with smaller credit unions. Often, these expansions are harmful to small credit unions “that have stayed true to their original fields of membership,” Taylor said.

He added that “the NCUA is contributing to this decline [in credit unions] with their laissez-faire approach to overlapping fields of membership.”

Taylor noted that most consumers already have access to a credit union given the broad availability of multiple common bond and community-chartered credit unions. Therefore, NCUA granting overlapping fields of membership should be rare and not a streamlined process.

“The problem with [the credit union] movement is most of us have been indoctrinated to believe our common enemy are bankers … when in fact the real threat to our future lies within our own industry,” he said. “I agree with Sen. Hatch that many larger credit unions operate in the same manner as taxable banks, and I believe it’s time for them to convert to bank charters and be taxed like the ‘big boys.’”

Read the op-ed.

State Bankers Associations: Time to Revisit CU Tax Exemption

State bankers associations wrote Senate Finance Committee Chairman Orrin Hatch (R - UT) on February 20th that taxpayers should no longer subsidize the nation’s largest credit unions, which effectively operate the same as taxpaying banks.

The letter came after Senator Hatch wrote the National Credit Union Administration last month raising concerns about whether credit union activities align with the purposes of the federal income tax exemption they enjoy.

While the credit union tax exemption was originally created to help institutions meet the credit needs of people of modest means with a common bond, the industry today has stretched the “common bond” requirements to allow credit unions to serve large, multistate regions, the associations said. They also pointed out that the number of credit unions with more than $1 billion in assets has more than doubled in the past decade, and that this group of almost 300 credit unions represents just 5 percent of the industry but enjoys 75 percent of the tax subsidy.

Noting that Congress missed a critical opportunity to address the treatment of credit unions in the new tax reform law, they urged Hatch -- the top tax policymaker in the Senate -- to revisit the tax exemption this year.

The letter stated that the tax code should not be used to pick winners and losers among similarly situated businesses. “There is no reason why the largest credit unions, which act and look just like the taxpaying banks they compete with, should be completely free of income taxation,” the associations wrote. “This creates a market distortion where the tax code effectively subsidizes one financial services entity (the largest credit unions) over another (the smaller community bank).”

Read the letter.

Tax Foundation:Lawmakers Should Regularly Review CU Tax Exemption

Yesterday, I wrote about Senator Hatch writing the National Credit Union Administration about credit unions operating outside their tax-exempt purpose.

In related news, the Tax Foundation has called on Congress to regularly review the credit union tax exemption to ensure that credit unions are fulfilling their original purpose.

The Tax Foundation cited an Internal Revenue Service (IRS) document from 1979, which identified three reasons for the credit union tax exemption -- "help unbanked, lower-income people; restrict their customer base; and avoid high-risk, high-return investments."

The Tax Foundation states if credit unions "have strayed from their intended function and now resemble other taxed financial institutions, their exemption would represent a disparity across similar economic activities" and should be an area for potential tax reform.

Read the story.

Op-Ed Calls for Ending Obsolete Tax Break for Large CUs

In an op-ed in The Daily Caller, David Williams, the President of the Taxpayers Protection Alliance, calls on Congress to end the obsolete tax break for large credit unions.

Williams writes that "the credit union industry today isn’t the mom and pop industry they portray themselves to be" ... but rather a "Washington special interest group — asking for taxpayer benefits at the expense of everyone else."

The op-ed points out that large credit unions are using their tax exemption to fund "bloated CEO salaries, questionable sponsorship deals, and even purchasing for-profit, private banks."

While the credit union tax exemption appears to be safe, there will be more opportunities in the coming years for Congress to address this obsolete tax exemption.

Read the op-ed.

ABA Chairman Says It's Time to Tax Large CUs

The tax code shouldn’t pick winners and losers, and businesses performing the same service should face the same rules, ABA Chairman Ken Burgess wrote in a letter to the Wall Street Journal. The letter was in response to a Dec. 5 article highlighting the fact that credit unions were left out of the tax reform bill.

“At a time when Congress is asking everyone from teachers to homeowners to give up tax breaks in the name of lowering rates, why is the trillion-dollar credit-union industry still getting a free ride?” wrote Burgess, chairman of FirstCapital Bank of Texas in Midland, Texas.

Burgess added that today’s credit unions look nothing like those of the 1930s, when Congress first exempted credit unions from federal income tax and noted that there are now 282 credit unions with more than $1 billion in assets.

Burgess wrote: “It’s time for Congress to end the uneven playing field and require the nation’s billion-dollar credit unions to pay their fair share.”

Read the letter to the editor (subscription required).

Is the Credit Union Tax Exemption the Third Rail of Politics?

An article in today's Wall Street Journal discusses why the credit union tax exemption is untouchable.

The article points out how credit unions have been successful in their grassroot efforts in keeping their preferential tax treatment off the chopping block, while lawmakers were scrambling to find tax breaks to eliminate to fund the tax code overhaul.

For example, the article mentions Project Zip Code, which matches credit union members addresses to Congressional Districts. This allows credit unions to tell Congressional offices how many credit union members would be affected by repealing the tax exemption in their Congressional districts.

The article stated that members of Congress would face "significant political blowback", if they proposed eliminating the credit union tax exemption.

However, I believe that the story overstates the clout of the credit union lobby. While the article mentions the 1998 legislation that overturned the Supreme Court field of membership decision, it failed to mention that the same 1998 legislation capped business lending at credit unions. It also did not point out that credit unions have been unsuccessful in their efforts to raise their business lending limit for more than a decade.

Read the story (subscription required).