US credit union movement hits back at attacks on tax exemption

Sector advocates warn that the movement’s opponents in the corporate banking world are switching focus from federal to state level

Debate between the credit union and banking sectors over tax and regulation turned fierce this month when Alex Sanchez, president and chief executive of the Florida Bankers Association, called for an end to “corporate welfare” for credit unions.

In a piece for Fox Business News, Mr Sanchez attacked a tax exemption for credit unions “which has far outlived its usefulness and intended purpose”. This put community banks at a disadvantage, he argued, putting their future at risk.

There have been similar debates in Iowa, Nebraska, Connecticut, and Kentucky, prompting Ryan Donovan, chief advocacy officer at the Credit Union National Association (Cuna) to warn that bankers were switching the focus of their attacks from federal to state level.

In his attack on credit unions, Mr Sanchez pointed to the rapid growth of the sector as evidence of their advantage.

“In 1994, there were only 14 credit unions in the nation that were $1bn or larger,” he wrote. “Today, there are 300 and growing. Meanwhile, according to FDIC official records, the number of banks in our nation is at the lowest point in recent history. From a high of 18,033 in 1985, there were 5,477 as of the third quarter of 2018.”

Mr Sanchez conceded that “most credit unions have remained true to their original charters’ intent and should remain tax exempt” – but argued that tax exemption for  Suncoast Credit Union in Tampa Bay, Florida, which is “$9bn in size, larger than all community banks in the region combined … is an abuse of the nation’s tax code.”

He added: “Congress continues to allow corporate welfare for credit unions like Navy Federal, which is nearly a $100bn financial institution. It’s about time for credit unions to pay their fair share of state and federal corporate business taxes to support the needs of our great nation.

“Navy Federal Credit Union reported $1.4bn in net income in 2018 and a $0 tax payment; this form of corporate welfare must come to an end. Our national debt now exceeds $22tn.”

This put the community banking sector at risk, wrote Mr Sanchez. “With nearly 50% of all Americans working for small businesses, and almost 50% of all business loans coming from community banks, this sector of the banking industry must remain strong and vital.

“How can banks that pay 21% in federal corporate taxes, plus any state business tax, fairly compete in the marketplace with tax-exempt credit unions?”

But in a counterblast to Mr Sanchez, published in Credit Union Journal, Patrick LaPine, president and CEO of the League of Southeastern Credit Unions,  wrote: “I for one am tired of hearing his off-key screeches, which have no basis in fact.”

He added: “His attacks on credit unions, which hold 8.7% of the market share in Florida, can’t be justified if he would only look at the large national and regional banks that continue to devour community banks and make it more difficult for all community financial institutions to do business.

“This rabble rouser should realise there are more than 2,200 for-profit banks in the US that pay no corporate income tax because they organise as tax-exempt Subchapter S banks. And let’s not forget the more than $28bn in tax breaks the banks received from the Tax Cuts and Jobs Act of 2017.”

He added: “Bank profits in 2018 were 44.1% greater than in 2017. And for smaller banks, net income was up 65% compared to the prior year. Banks should be thinking of ways to help consumers get a better deal, like the ones they get at credit unions.

“Credit unions brought more than $530m in direct benefits to Florida’s consumers in 2018, but Sanchez doesn’t acknowledge such facts. We work in a co-operative spirit, and it would serve Sanchez and other nay-sayers to work with Florida’s credit unions to enact much-needed regulatory reform.”

Mr LaPine added: “He even had the audacity to say credit unions don’t give back to their communities the way banks do, when in fact credit unions are known for serving their communities. Banks are subject to the CRA because of their notorious history of aggressively redlining and ignoring low-income consumers.

“Unlike paid directors who rake in big cash bonuses from banks, Florida credit union board members are volunteers … There is a reason credit unions continue to outperform banks in consumer satisfaction surveys and it has nothing to do with taxes. Credit unions are for people and not-for-profit, and so naturally more and more Floridians are choosing credit unions as their financial institution of choice.”

With similar debate raging in other states – including Iowa, where bankers have accused credit unions of enjoying a “free ride”, Cuna’s chief advocacy officer Ryan Donovan made the case for tax exemption in the Credit Union Journal.

“We are not-for-profit co-operatives owned by the people we serve,” he wrote, “which makes us fundamentally different than the for-profit corporations that use other people’s money to turn a profit for shareholders.

“And, we have a congressionally mandated mission to promote thrift and provide access to credit for provident proposes. We exist to serve our members and help them afford life, and that is the job that Congress has given us in exchange for the tax status.”

Mr Donovan said banking lobbyists had failed to persuade Congress to change the tax regime for credit unions – but had devised “a renewed plan to take on credit unions at the state level” instead.

One such attempt was defeated in Iowa’s state legislature last year after a counter campaign by the Iowa Credit Union League and Cuna.

But Mr Donovan warned: “Undeterred by their 2018 setback, the banks are back at it again with efforts focused not only on Iowa but also in Nebraska, Connecticut, and Kentucky.

“These fights don’t all look the same. Sometimes the bill calls directly for a tax on credit unions. Other times bills make tax status a stipulation in broader legislative efforts. Regardless, the intent is always the same: Weaken the impact credit unions have on their members and communities by financially burdening them with additional taxes.

“This is their playbook. It may not be visible in your state yet, but the banks have drawn it up to work everywhere.”

He said Cuna and the state credit leagues had successfully defended the movement but added: “With so many states in their sights and so many resources in their pockets we can’t just continue to just react to the banker rhetoric, we must be proactive and bust the myths.”

Mr Donovan also rebutted the “free ride” argument, pointing out that in 2017, credit unions generated about $12.2bn in federal taxes and $7.4bn in state taxes through employer, excise and property taxes. And credit union members paid about $1.5tn in federal and state taxes on the proceeds distributed and interest earned on their accounts.

Historic debate

The debate is a long-running one – with some differences of opinion within the movement. Writing for American Banker last year, Robert Taylor, president and CEO of Idaho State University Credit Union, said: “Many larger credit unions operate in the same manner as taxable banks, and I believe it’s time for them to convert to bank charters and be taxed like the ‘big boys’.

“The credit union trade associations who want to preserve the tax exemption for all of us must stop trotting out smaller CUs before members of Congress to ‘tell our story’ – which is not the story of banklike credit unions – when it’s clearly a disadvantage for smaller credit unions to support a tax exemption for banklike credit unions.”

But 2018 also saw ongoing defence of tax exemption, with the National Association of Federally-Insured Credit Unions (Nafcu) teaming up with Cuna for a piece in Business Observer.

Dan Berger, president and CEO of Nafcu, and Jim Nussle, president and CEO of Cuna, wrote: “Credit unions’ structure has not changed and they continue to fulfil their mission.”

They said credit unions only make up a small proportion of the financial services industry and, unlike banks, are statutorily restricted in their powers with limited fields of membership, which “unnecessarily inhibit their ability to serve their communities”.

Despite this disadvantage, they argue, credit unions “have managed to consistently pass on savings to their member-owners through better rates and member service … because, as nonprofit co-operatives, credit unions focus on the member and not the shareholder.

“Perhaps banks should spend more time and effort working to improve their own industry, rather than writing letters attacking credit unions who are upstanding contributors to their communities and membership.”

They added: “The value that credit unions provide to consumers and the greater economy because of their tax status is greater than its cost of the government.

“The numbers speak for themselves when you look at big bank fines and various settlements and buy-backs stemming from the financial crisis that total over $13bn in penalties paid by big banks …

“If the banking trade associations would partner with us on creating meaningful regulatory relief for the entire financial services industry, rather than attacking us in frivolous letters, we could truly advance access for financial services to all Americans.”