Tax tussle: banks vs. credit unions

The line between the two was already blurring when Missouri House Bill 1323 came along in 1998. Approved July 9 that year by Gov. Mel Carnahan, the bill affirmed that already expanding credit unions could serve entire geographic areas, not just select employee groups.

Now, member-run credit unions are available to nearly as many people as banks are and offer most of the same services – all reasons bankers want to see a stop to credit union tax breaks. By law since 1937, credit unions are exempt from paying federal income taxes on profits.

Judy Hadsall, president and CEO of City Utilities Community Credit Union 818 N. Benton, said that most people don’t realize that nonprofit credit unions do pay some taxes.

While the federal exemption is the main reason that credit unions tend to offer more favorable consumer interest rates Hadsall said that credit unions do pay state franchise and sales taxes, real estate, Social Security and payroll taxes.

Missouri’s credit unions offered auto loans at a 4.67 percent interest rate on average in June 2004, compared to 6.19 percent for banks in the state, according to the Credit Union National Association.

Mike Williamson, president and CEO of 14 Empire Bank locations, said he doesn’t have a problem with the expansion of credit unions, but as far as the tax break is concerned, there is a question of equity.

“I think if they’re going to broaden their membership, do the same services we provide … they ought to give up the tax advantage,” Williamson said. “It is not that they’re not profitable.”

CU Credit Union offers membership to any person who lives or works in Greene or Christian counties, regardless of profession.

That, of course, wasn’t always the case.

“We wanted to continue to grow and add services,” Hadsall said. “You need more members to sustain yourself.”

Hadsall said the credit union served only CU employees and their families prior to 1995, when it started accepting other employee groups.

With assets of $47.5 million as of July, an average size for a Missouri credit union, it now has 5,100 members and serves about 30 select employee groups for businesses such as Anderson Engineering Inc., 2045 W. Woodland, and Ball Paving, 3196 W. FR 112, in addition to its geographical inclusions.

“We’re trying to grow for our membership,” Hadsall said, noting that she answers to members instead of stockholders. “It’s not because we’re trying to make more profit. That’s the last thing on our minds, actually.”

She said that CU Credit Union doesn’t want to become a for-profit business, and that its expansion is meant to fund ancillary services and technological growth, not the bottom line.

CU Credit Union, like most credit unions, offers many of the same services banks offer – loans, savings, checking and certificates of deposit. CU Credit Union doesn’t offer commercial loans, but might soon, and doesn’t offer stock and bond investment services.

Empire’s Williamson said that by having the services that credit unions do not, banks are able to level the playing field.

Empire bank has just more than $600 million in assets.

While only credit unions in Missouri are exempt from paying federal taxes, there is a way that some banks can get tax breaks.

Banks, and other businesses for that matter, that have 100 shareholders or less can become an Internal Revenue Service Subchapter S Corp., where shareholders pay income tax as though it were a partnership rather than the bank paying a singular corporate income tax.

There are 89 state-chartered and 12 national Subchapter S banks in Missouri, according to Richard Weaver, deputy commissioner for Missouri’s Department of Economic Development, Division of Finance.