Bank Lawyer's Blog

The CU-Bank War Is Getting Ugly

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

Our First Native American President?

The American Banker this morning (paid subscription required) reported the enthusiasm displayed by a couple of "unbiased" sources, The Huffington Post and The Washington Post, for Liz ("Fauxcahontas") Warren's barn burner speech last night at the DNC. The Wapo even burbled that Princess Spouting Bull could be in line to be this country's next Big Chief.

"The reaction to Warren in the room made clear that if she winds up in the Senate in 2013, she will immediately become part of the 2016 Democratic presidential conversation," the Post's Chris Cillizza said.

Sure, I know: bankers everywhere just spit up a little in their mouths. Some even started checking into the attractiveness of living in tax-free Belize.

On the other hand, the Christian Science Monitor played the role of party pooper today by reporting that Lie-awatha's speech was interspersed with assertions that have come unraveled when checked against those pesky phenomena known as "facts."

Here’s the way Warren put it Wednesday night: Romney “wants to give tax cuts to millionaires and billionaires. But for middle class families who are hanging by their fingernails? His plans will hammer them with a new tax hike of up to $2,000 dollars.”

[...]

“Democrats base their claim on a study that doesn’t necessarily lead to that conclusion,” says the FactCheck.org site.

Here’s the fuller context: Mitt Romney has promised that if elected he’ll cut tax rates for all while keeping federal government revenue level by eliminating some deductions and broadening the US tax base. He’s added that he won’t raise taxes on the middle class.

But according to an analysis from the Tax Policy Center, he can’t do all those things. There isn’t enough credible base-broadening available to make those numbers work.“In other words, Romney has overpromised. But that’s no reason to assume ... that Romney would choose the course of breaking a promise not to raise middle-income taxes. He could choose, for example, to renege on his promise to cut rates or to keep the amount of revenue neutral rather than violate his promise not to raise taxes on those in the middle,” writes FactCheck.org.

But wait, there's more.

An ABC News fact-check site also dinged Warren for saying that she talks to Massachusetts small business owners all the time, and that “not one of them ... made big bucks from the risky Wall Street bets that brought down our economy.”

Not even one?

“The idea that no one in the Bay State, so close to New York< and Wall Street, benefitted from the bankers’ profligacy is off the mark,” writes ABC’s Gregory Krieg.

In Pocahotmess' defense, she made her claim with respect to those small business people "she talked to." Apparently, she only talked to Ben & Jerry franchisees.

As both the American Banker and CSM point out, Warren first needs to win her Senate race in November before anyone worries about a bid for The White House in 2016. That race is too close to call, although Liz is trailing at the moment and the trends do not appear to be breaking her way.

Independents make up nearly half the Bay State electorate, so their electoral role there is decisive, according to the Democratic-leaning poll firm Public Policy Polling. And many of them may perceive Warren as too strident and harsh. In a late August PPP survey, 50 percent of independents said they were worried that she is “too liberal.” By contrast only 19 percent said they felt Senator Brown is “too conservative.”

Among all voters Brown led Warren by 49 to 44 percent in the survey.

Still, using "Elizabeth Warren" and "President" in the same sentence is always good to generate some buzz among bankers.