Credit unions seek to retain tax-exempt status

Though the legislative waters currently are calm, credit unions and banks are digging in their heels on the topic of taxes.

The longtime federal income tax exemption for credit unions was among issues in an Aug. 25 roundtable discussion U.S. Rep. Billy Long, R-Mo., held at BluCurrent Credit Union. Executives with southwest Missouri credit unions asked the congressman if legislation was coming down the pike to threaten the industry’s exempt status awarded by the Federal Credit Union Act of 1934.

Acknowledging it’s been discussed for years, Long said financial institution tax reform was unlikely before 2017.

“Very little gets done in Washington in an even-numbered year, and especially in a presidential even-numbered year,” he said. “I don’t think there’s going to be a lot – good or bad – happen that affects your industry in the foreseeable future.”

The U.S. banking sector has been vocal in pushing for a change.

“The average family of four pays more taxes than the entire credit union industry in the U.S.,” said Springfield banker Shaun Burke, a member of the American Bankers Association’s Community Bankers Council. “The bottom line is it’s no longer justified. They’ve really outgrown that status.”

Burke, the president and CEO at Guaranty Bank, said the American Bankers Association continues to push for tax status equality on the basis that banks and credit unions provide similar services, such as commercial loans. Bankers say both financial sectors should play by the same rules.

But credit unions have operated as not-for-profit cooperatives for over 80 years. They were originally designed to serve member shareholders often based on employment, religious affiliation or family ties.

Over the years, membership restrictions have changed. At CU Community Credit Union, for instance, the group formed 80 years ago to serve City Utilities’ employees and their families. Now, it’s open to anyone who lives and works in Greene and Christian counties, and President and CEO Judy Hadsall said the CU staff contingent is between 60 and 70 percent of the credit union’s roughly 11,000 members.

Fewer qualifications for membership is another argument among bankers.

“It has nothing to do with the membership and everything to do with our governance structure,” BluCurrent CEO and President Craig Tabor said of the tax exemption. He said because credit unions are member-owned, the members pay federal taxes on the income generated from dividends paid. As a state-chartered institution, Tabor said the roughly 19,000-member BluCurrent also pays state income and local property taxes.

According to a 2014 report by the ABA, credit unions’ cumulative federal income tax bill would amount to $22.3 billion since 2001. Burke said the tax rate for banks is a maximum of 35 percent, with an average of 20-25 percent after offset activities, such as purchasing tax credits.

“Whether it’s in the banking industry or anything else, if a competitor has a 30-plus percent operating expense advantage, that’s not fair competition,” he said.

Tabor said because most credit unions target smaller loans, typically between $85,000 and $200,000, there is little comparison against banking institutions capable of making multimillion-dollar loans. According to 2014 data from the Missouri Credit Union Association and the Credit Union National Association, credit unions represented 6.3 percent of the Show-Me State’s financial institutions.

“I don’t see how we measure up as having a competitive advantage,” Tabor said, adding credit unions make up a relatively small percent of the total financial sector. “That hasn’t changed in 20 years, so if we have a competitive advantage, why is it that we haven’t been able to grow market share?”

Burke said requests from credit unions to increase their business member-lending cap, currently at 12.25 percent of total assets, helped reignite the tax status conversation in recent years.

If the cap is raised, Burke expects to see declines in community banks’ commercial loans issued, income, revenue and, ultimately, what they contribute in federal taxes.

According to Tabor, the current cap prevents credit unions from handling more small-business loans. Although BluCurrent did no marketing for its commercial loan services, Tabor said the credit union has reached its cap of slightly less than $19 million – based on an estimated $155 million in assets – two years after it was implemented in 2013. Tabor said both credit unions and banks are losing business to alternatives not governed by the Dodd-Frank Act. For instance, 4-year-old startup Kabbage Inc., a Web-based, automated lending platform for commercial loans up to $200,000, has loaned over $1 billion, and Square and PayPal have experimented with small-business cash advances.

Credit unions also may see some relief with the passage of the Credit Union Residential Loan Parity Act, which would reclassify certain residential loans as consumer rather than commercial.

First introduced in 2013, the legislation was brought before the U.S. House and Senate earlier this year for committee review.  

If the act passes, Tabor estimates it could free up roughly $15 million, or 80 percent of currently capped loans, at BluCurrent.