Credit unions argue to keep tax-exempt status

Credit unions first earned their tax-exempt status in 1934 with the passage of the Federal Credit Union Act. The act granted the exemption because “credit unions are mutual or cooperative organizations operated entirely by and for their members.”

Credit unions are eligible for tax-exempt status if they operate on a not-for-profit basis, are organized without capital stock and operate for mutual purposes.

Some politicians and financial institutions have questioned if the tax exemption is fair. But with some credit unions presenting a more formidable competition to banks, lobbyists and industry trade groups are urging Congress and the Obama administration to end the federal tax exemption.

A status several Las Vegas-based credit unions say is crucial.

“There are a lot of issues involved with this,” said Brad Beal, president and CEO of One Nevada Credit Union. “We are nonprofits. That’s where the tax-exempt status comes from. There’s nothing wrong with that.”

Beal said credit unions are not open to the general public and are limited to the amount of business loans they can make. He cautioned lawmakers that if they eliminate the tax exemption “most credit unions will no longer hold to the other limitations we face.”

One Nevada Credit Union has 17 branches, $650 million in assets, and 75,000 members in Clark, Washoe and Nye counties.

“The tax exemption is absolutely crucial to the financial health of credit unions,” said Wayne Tew, president and CEO of Clark County Credit Union. “Our net worth or capital is acquired only through net income and retained earnings. We do not raise capital through stock sales.”

Tew said his ability to grow would be severely impaired without a tax exemption. Clark County Credit Union operates four branches in Southern Nevada.

Banks argue the tax break is an unfair advantage for large credit unions, especially the almost 200 credit unions with more than $1 billion in assets each.

“Credit unions were never intended to be untaxed banks, yet that is what many have become,” Frank Keating, president and CEO of the American Bankers Association, wrote in a letter to Sen. Majority Leader Harry Reid, D-Nev., and other House and Senate leaders. “Today, the average person cannot distinguish between a credit union and a bank, so why should our tax system give preference to credit unions?”

Now Keating and others see an opportunity to get rid of the tax break as lawmakers debate ways to reduce the federal deficit and continue work on a major overhaul of the country’s tax code aimed at eliminating many corporate exemptions and lowering the overall corporate tax rate.

“With large annual federal deficits, the U.S. can no longer afford to subsidize the $1 trillion credit union industry, which increasingly operates like an untaxed banking system,” Keating said.

Tew said as for tax reform in Washington, nothing is on or off the table at this point. But he argued that a tax on credit unions, which serve 96 million consumers, is a tax on the middle class.

In his two-page letter, Keating reminded lawmakers that Congress eliminated the tax exemptions for mutual insurance companies in 1942 and for mutual savings banks in 1951. He said removing this tax exemption for mutual savings institutions did not drive them out of business or hinder their growth.

The exemption cost $1.6 billion this year in taxes avoided, according to the Obama administration’s proposed 2014 budget. That figure would rise to $2.2 billion annually in 2018, the budget proposal said. In an email, Tew noted 2,368 banks do not pay taxes on their foreign source income, or sub chapter S status, and received the $700 million in TARP funding, along with $30 billion from the small-business lending fund.

Credit union executives in Las Vegas say the effort at repealing their tax-exempt status is simply an attempt by banks to eliminate competition and consumer choice. The tax exemption is crucial to credit unions, which by law can’t raise capital through public stock offerings like banks can.

“If the credit union tax exemption is done away with and credit unions cease to exist, who remains to hold the banking industry accountable?” Tew said. “Let me stress that our members receive the benefits of our profits.”

Beal said he wouldn’t be surprised if credit unions converted to banks.

“Most consumers will lose that alternative,” Beal said. “Credit unions will cease to exist as we know it and the consumer will be the real loser.”

According to a survey released in September by the National Association of Federal Credit Unions, the total benefit to U.S. consumers from the tax-exempt credit unions to the tune of about $10 billion annually.

The survey cautioned the elimination of the tax exemption would reduce U.S. gross domestic product by $148 billion over the next decade, with 1.5 million jobs lost in that time. It also forecasts a $178 billion reduction in personal income and $1.5 billion less in federal income tax revenue.

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