Crying "The Time Is Right To Tax," commercial bankers are upping the thermostat on state and federal regulators to "level the playing field" by eliminating the tax exempt status of credit unions. According to the ABA Banking Journal, in a recent panel discussion at the American Bankers Association's 2013 Government Relations Summit, bankers of all stripes, including a CEO of a bank that was once a credit union, took the position that in this time when Congress and just about every state legislature is looking for ways to raise revenues without raising tax rates, the opportunity exists to convince legislators that tax exempt status for the credit union industry is an idea whose time has passed.
Panel member Ken Kies, managing director of the Federal Policy Group lobbying consultancy, spent years in Washington tax-writing roles, and believes banks could pursue a change.
"Frankly," said Kies, who's working with ABA, "I'm not sure that the environment has ever been better than it is today."
Kies indicated that no one should think that "not taxed" means "never to be taxed." History has not only seen many attempts to subject tax-exempt organizations to federal tax, but success in those attempts. Today's congressional urge towards tax reform, even on a revenue-neutral basis, could be the factor that pushes credit union taxation into reality.
In 1986, tax legislation pulled Blue Cross and Blue Shield organizations under the tax umbrella, reflected Kies. And a year later, the TIAA/CREF benefits organization likewise got shifted. And savings institutions lost their tax-favored status decades ago, and remain a viable part of the financial services business.
Mr. Kies also mentions the fact that there's a trillion dollar federal deficit that makes this the best time to press the case. However, he does not mention by how much that deficit would be reduced by taxing credit unions, which ought to show up somewhere in the argument if it's to survive counter attacks.
Meanwhile, In Illinois, the hate-fest between banks and credit unions rages on.
Linda Koch, CEO of the Illinois Bankers Association, wrote an op-ed piece for The State-Journal Register in that state's capitol city, in which she sang the same tune as the ABA panelists.She took the additional step of citing the CBO to the effect that CU tax exemption costs the federal government $2 billion a year in "lost revenue" and the state of Illinois $25 million. I don 't know what the state of Illinois's budget deficit is, but I do know that $2 billion in additional tax revenue is a drop from an eye dropper in a Pacific ocean of federal spending that, according to the Heritage Foundation, reached $3.6 trillion in 2012 and is expected to reach $5.5 trillion by 2022. To me, contributing such relatively small amounts to the black hole of government spending is an argument that lacks weight. I'd prefer that banks stick to the fact that if credit unions want to be "more like banks" (in other words, make commercial loans), they can pay the same freight that goes with that business model, including income taxes. You want to waddle, quack, and fly like a duck, but be pampered like a golden goose. Sorry, leveling the playing field on the powers side ought to come with a leveling of the playing field on the taxation side. Otherwise, you really are gaining an unfair competitive advantage.
The CEO of the Illinois Credit Union League, Dan Plauda, responded to Ms. Koch with the argument that tax revenues from credit unions in Illinois won't solve Illinois' revenue shortfalls. That's most likely very true. However, he also alleges that taxing credit unions will hurt their members, who rely on deposit rates that are much higher than banks pay and consumer loan rates that are much lower than those charged by banks. To me, that makes the banks' case, that tax exemption gives credit unions an unfair competitive advantage on the same deposits and loans that banks fight for. It seems to weaken the case for credit unions to intrude further into the commercial banks' sacred ground of commercial lending.
Mr. Plauda talks about how credit unions are member owned, "democratically controlled," and manned by volunteers. He also alleges that all "excess revenues" are plowed back into the credit union. By "excess revenues, he means what would otherwise be deemed "profits." I started out my career as a bank lawyer in-house for a large mutual savings bank. The only practical difference between a stock-owned commercial bank and a member-owned mutual is that, by soliciting proxies from members who don't give a rip about anything other than services and rates, management of a mutual is, in many cases, able to "rest easy" from all those pesky shareholders who demand the distribution of "profits" either in the form of higher stock prices, dividends, or both. At the same time, there's not exactly a lot of oversight on salaries and cash bonuses that are deducted from gross revenues before the "excess revenues" are calculated.
Mr. Plauda finished his piece with a flourish.
This “people helping people” approach to financial services helps explain why credit unions have become so popular in recent years. As new bank fees have proliferated, for instance, Americans have moved to credit unions in droves. Last year alone, credit unions nationwide added more than 2 million net new members — the biggest annual net member growth in 15 years.
Today, more than 96 million people belong to credit unions.
If anyone seriously thinks that folks flocked to credit unions because credit union members feel like they are part of a movement of "people helping people," as opposed to the financial incentives of lower loan rates and higher deposit rates, both possible because of CU's tax exempt status, that person needs a reality transplant. It just seems to me that responding to banks' call for the end of credit union tax exempt status by taunting banks with the line "we're stealing your customers by the boxcar-load" is going to make even the densest legislator wake up and smell the coffee, eventually.
Both sides of this debate need to sharpen their arguments. If they're able to do so, that is.
Thanks to a loyal reader from Illinois for links to the Illinois op-ed pieces