A discussion older than two parties fighting over whether Miller Light Beer tastes great or is less filling; banks insist that credit unions surrender their tax exemption status because in their eyes, it gives credit unions an unfair advantage.
Before even discussing the issue, consumers should understand credit union versus bank market share, along with profitability metrics. According to the Credit Union National Association (CUNA), “As of third quarter 2011, banking institutions held over fourteen times more assets than credit unions ($13.8 trillion vs. $963 billion). Each of the nation’s four largest banking entities are larger than the entire credit union movement.” Other important facts include:
The average banking institution is over fourteen times larger than the average credit union ($1.9 billion vs. $132 million in assets).
At third quarter 2011, half of all U.S. credit unions had less than $19 million in assets. Overall, less than 2% of banking institutions are this small.
Two-thirds of banking institutions had $100 million or more in total assets at third quarter 2011. Only 20% of credit unions are this large.
Considering those statistics, why do banks continue to beat the drum that credit unions have an unfair advantage?
When Credit Unions Online asked Pat Keefe, CUNA Communications about this ongoing quarrel he responded by saying, “Respectfully: What debate? Look: Credit unions just passed the $1 trillion asset mark. They are pushing toward 100 million members in this country. They continue to provide the best-priced financial services at a high level of service. Consumers clearly like the benefits they receive from not-for-profit financial cooperatives. Banks should try to get their heads around that.”
Lewis Wood, VP/Public Relations & Communications at the Virginia Credit Union League agrees that there appears to be nothing that can be done to quell banker outrage, especially as S. 2231 (to raise the member business loan cap from 12.25% to 27.5% of the credit union’s assets) sits in lawmaker’s hands.
“Every argument banks make against advancing the credit union charter circles back to our tax status, which we find particularly hypocritical given the number of U.S. banks now enjoying subchapter S tax status,” Wood says. “The taxation of credit unions would destroy the movement.”
Banks Continue to Have a 70-Year Old Conversation About Taxes
Banks have become extremely skilled at beating a dead horse. Mark D. Cummins President/CEO of the Minnesota Credit Union Network recently posted an open response in a local newspaper to a commentary about why credit unions should relinquish tax-exempt status.
Cummins said that in order to have an intelligent discussion on the topic, parties should have a better understanding of how this exemption materialized.
“First, it is important to review the reason why Congress granted credit unions’ their tax exempt status,” he writes in the Brainerd Dispatch. “In 1937, Congress exempted credit unions from federal income taxes because they are non-profit, democratically controlled cooperatives that return earnings to the people they serve. In fact, Congress encouraged the success of credit unions to, among other things, foster the development of a system of financial cooperatives that would serve as a valuable alternative to the for-profit banking system. Credit unions’ tax exemption was deliberated, reviewed and reaffirmed by Congress in 1951 and again in 1998. Since credit unions’ structure has not changed, the reasons for the affirmation of credit unions’ tax exempt status are as valid, if not more valid, today.”
Bankers complain that credit unions are getting too big for their britches and helping far too many people; folks who are not of modest means. Bankers argue that if credit unions want to help a larger scope, they should pay taxes like banks.
“The current credit union tax exemption is directly linked to, and can only be justified by, their original mission of serving individuals of modest means,” testified Noah Wilcox, a member of the Independent Community Bankers of America (ICBA) Executive Committee, before the Senate Banking Committee. “Credit union business lending is an immediate threat to my bank. I’m happy to compete with other tax-paying lenders, even large banks, but the credit union tax exemption creates an unfair advantage and distorts the market.”
Wilcox forgot to mention that thousands of small business owners have tried seeking a loan to save or develop their business from banks, only to be turned away. In many cases, a credit union has been the small business owner’s only hope and means to save jobs, which could ultimately help prop up the economy.
ICBA Cries: “Stop the Credit Union Grab!”
From what has been seen recently, bankers may not be as interested in big picture economic relief but more full market domination. Concerned that the credit union member business loan cap could be raised, bankers have dug back into the tax exemption argument to wag the finger at credit unions saying, “Not fair!”
During a Senate Committee on Banking, Housing and Urban Affairs hearing in June the American Bankers Association testified that boosting the credit union member business loan cap would position credit unions to act like “tax-exempt” banks--essentially claiming that credit unions would be going rogue.
ABA Chairman Stephen P. Wilson told the committee, “Make no mistake about it, S. 509 is nothing less than legislation that would allow a credit union to look and act just like a bank, without the obligation to pay taxes or have bank-like regulatory requirements applied to them. Credit unions’ current tax-exempt status and lack of equivalent regulation have created huge competitive inequities in the local marketplace.”
Okay, so what if Wilson and the thousands of bankers across the country got their wish? Keefe says that the end result loser would be the member/consumer. He referenced a letter by CUNA President/CEO Bill Cheney sent to the subcommittee last week.
“He wrote: ‘If taxed, a very significant number of larger credit unions are expected to convert to banks and an equally significant number of smaller credit unions would simply liquidate. The remaining credit unions would have to pass the costs of taxation on to their members because they are wholly owned cooperatives, increasing the cost of accessing mainstream financial services. As a result, the ability of millions of American consumers and small businesses to rely on a system of financial cooperatives for affordable access to mainstream financial services, which is made possible by the credit union tax exemption, undoubtedly would be jeopardized. When that outcome is considered side-by-side with the credit unions’ historic record of member service and mission fulfillment, the absurdity of the bank lobby’s demand is self-evident.’”
The notion of tax exemption is once again at the forefront with banker’s newest initiative, “Stop the Credit Union Grab.” The project is basically a petition of names urging Congress to block an increase in the member business loan cap. Although this petition speaks directly to the cap increase, bankers are wrapping credit union tax-exempt status into the reason why credit unions should be prevented from making more loans. The petition has 13,787 signatures thus far.
Wood’s response to this action was, “The petition is one more of a tool the bank trade associations are using to make their argument to lawmakers in opposition to raising the MBL cap. An April 20 poll conducted by American Banker revealed only 55% of banks oppose raising the credit union member business lending cap; 28% of participants were in favor of raising the cap; and another 17% would approve of lifting the cap if credit unions were also required to maintain enough capital to cover potential losses. It would seem to be a case of the banker trade associations being more fired up about the issue than their base, but they have certainly pulled out all the stops in their efforts to sway lawmakers.”
When Credit Unions Online asked where Keefe thought the ICBA was taking this motive he said, “I won’t speculate as to their motives. I can say, however, that the banks have a long-standing campaign to try to limit or otherwise exclude credit unions from effectively serving all consumers (e.g., lawsuits, congressional initiatives, etc.). As CUNA President and CEO Bill Cheney said in a letter last week to leaders of the oversight subcommittee of the House Ways and Means Committee, ‘When the bank lobby calls on Congress to tax credit unions, what they are really demanding of Congress is to do away with credit unions – after all, that would be the end result.’”
What Can Credit Unions/Members Do?
As the arguments continue to heat up and issues are blended and morphed, what can members and credit unions do to continue to defend tax-exempt status?
“The best thing that credit unions can do is what they have always done and are, in fact, doing today: Giving their members the best deal in financial services,” Keefe says. “Members by and large ‘get’ that there is something different about the credit union vis-à-vis a bank. They certainly know they get better loan rates, higher return on their savings and lower or no fees for services. And they also know that the credit union seems to have a better handle on how to treat its members. Some may understand that it’s all because the credit union is a not-for-profit cooperative owned by the members; others may not. It would be terrific if all members understood the not-for-profit model, the ownership structure, the cooperative nature, the volunteer leadership and the democratic principles. But, in my view, if the vast majority of members see the product of those unique qualities - which I think they do - then they will support credit unions with everything they’ve got.”