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Credit Union Tax Debate Rages On

Credit Union Tax Debate Rages On By Gina Ragusa
Published April 24, 2013
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As banks continue to express concern over credit union tax exempt status, Alabama Credit Union ($590 million, Tuscaloosa, AL) CEO Steve Swofford says bankers seem to forget about the growing sector of banks operating as Subchapter S organizations.

“The credit union tax exemption is always going to be the banks' ultimate target,” he says. “They view it as a tremendous competitive advantage, but interestingly enough fail to acknowledge the increasing number of banks operating as Subchapter S organizations, which holds significant tax benefits.”

Connie Major, executive vice president, Louisiana Credit Union League (Harahan, LA) agrees that banks should examine their complaints. “They should take that off the table,” she says. “As a Subchapter S organization, you aren’t paying as much taxes either.”

Recently the National Association of Federal Credit Unions (NAFCU) fired off a letter to lawmakers regarding the banking industry’s assertion that credit unions have dropped the ball with business lending, which has had a negative impact on the economy.

The letter, authored by Brad Thaler, vice president of legislative affairs for NAFCU addressed the number of banks migrating to Subchapter S status. "The bankers also ignore the fact that nearly one-third of banks are Subchapter S corporations that don’t pay federal taxes themselves, a tax break worth billions to the bankers."

Thaler’s letter focused on the contribution credit unions have made to the economy during the recession, pointing out how the industry picked up slack when banks wouldn’t lend to small businesses.

He also discussed why credit unions tax exemption is good for the economy. "Eliminating the credit union tax exemption would result in the loss, on average, of over 150,000 jobs a year over the next decade, a shrinking of the GDP and a net loss of revenue to the federal government."

Tax Exemption Topic Triggers

Swofford says that bankers tend to bring up the tax debate virtually anytime credit unions seek additional powers. “Evidence with the introduction of the member business loan legislation in Congress. Banks believe that by threatening the loss of the tax exemption they can force credit unions to operate under laws passed over 50 years ago. They also use any U.S. or state government fiscal crisis as an opportunity to raise the issue, even though the amount of money that would result from the elimination of the exemption is truly minimal.”

“Personally, I believe the tax exemption is more important from a philosophical standpoint than a competitive one,” Swofford adds. “With credit union cost structures and cooperative principles, I believe we would still be successful even without the benefit of the exemption. However, there is evidence from other countries where credit unions lost the tax benefit that the institutions begin to operate more like banks, depriving the consumer of a valuable alternative.”

Major says that competition drives a healthy marketplace. “And if the issue is so unfair, I ask my bank friends to consider converting to a volunteer board. Credit unions and banks operate through an entirely different model where banks are for profit and have stock holders--we’re just completely different from one another.”

She points out that banks continue to dominate the marketplace--with or without credit union tax exemption status.

When asked if bankers will ever stop harping on the issue? Swofford says, “Probably not. Their trade groups use the credit union tax exemption as a common rallying point, so they will always keep it at the top of their ‘wish list’. And frankly, the banking lobbies haven't been too effective of late, so perhaps focusing on credit unions distracts their membership from their effectiveness.”

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