Editor’s note: Congress has been debating the merits of the federal tax exemption for credit unions. Small Business Times asked the Wisconsin Credit Union League and the Wisconsin Bankers Association to enlighten our readers about the debate.
Point
Protect Tax Exemption for Credit Unions – By Brett Thompson
So, when is a credit union no longer a credit union? If you listen to bankers, you’d be confused. They claim a credit union is no longer a credit union when it provides services, like business loans, that are needed by their members.
You see, it doesn’t matter to bankers that Wisconsin credit unions have served their members for years by offering business loans. Bankers also don’t want you to know that the U.S. Small Business Administration has turned to credit unions to fill the void left by banks because they found that as banks get larger, they make fewer and fewer small business loans.
This sounds all too familiar to credit unions; not long ago bankers claimed that credit unions shouldn’t be permitted to offer checking accounts to their members.
The banks also claim a credit union stops being a credit union when it gets too big. The problem here, however you define "too big," is that the law does not say credit unions need to be small. There is simply no public policy position served by keeping credit unions small or requiring them to operate just the way they did in the 1920s any more than there is a reason for requiring banks to do the same.
The fact is the size of the credit union and its services have nothing to do with the federal tax exemption. Because a credit union is not-for-profit, member-owned and democratically operated, and has the special mission of meeting the needs of consumers, especially those of modest means, Congress recognized that credit unions serve a unique role in society – a role banks have refused to play.
What’s more, the facts don’t support bankers’ claims that they can’t compete with credit unions. Wisconsin credit unions, for example, have just over a 1 percent share of the business lending market in Wisconsin – the banks and thrifts hold the remaining 99 percent.
In the past two years, Wisconsin-based commercial banks and savings institutions have grown by $15.2 billion. This surpasses the $14.1 billion by which all Wisconsin credit unions have grown since they began operating in the state in the 1920s. In fact, the two largest banks each hold more in assets than all of Wisconsin’s 280 credit unions combined.
Apparently, contrary to their claims, it’s still a "wonderful life” for Wisconsin banks.
Yet banks say "humbug" and look to increase the tax burden on Wisconsin individuals and families. Banks know that any new tax burden on credit unions would fall on the member-owners who borrow and save at the credit union.
The irony is that the chairman of the American Bankers Association (ABA) claims that credit unions aren’t good corporate citizens because credit unions "do not pay taxes." Of course credit unions do pay taxes – they are exempt only from paying corporate income tax.
The irony is that if you follow the chairman’s logic, banks aren’t good corporate citizens either. Did you know some of the state’s most profitable banks paid no state corporate income tax in recent years until a crackdown by the Wisconsin Department of Revenue?
The public policy question to answer is this: is it better for Wisconsin individuals and families to be able to choose a not-for profit credit union? Here’s what the banks won’t tell you: credit unions are locally-owned and managed; credit unions provide great service and competitive loan and savings rates, including loans as small as a few hundred dollars to help members in a pinch, and loans for businesses that can’t get their borrowing needs met elsewhere; credit unions provide credit counseling and financial education for Wisconsin youth; and credit unions are vested in their communities and their more than 2 million members
When it comes to this public policy question, common sense holds the answer.
Counterpoint
Revoke Tax Exemption for Credit Unions – By Kurt Bauer
Imagine that you run a business in Milwaukee. Like all types of businesses, you have competitors that offer the same services you do to the same customer base. But you don’t mind, just as long as your competitors pay the same state and federal income taxes and abide by the same laws.
Now imagine how you would react if your business had a competitor that offers the same services to the exact same customers, but doesn’t pay state or federal income tax like you do and isn’t mandated to comply with the same costly regulatory requirements?
This "imaginary" scenario is the cold reality for many Wisconsin community banks that compete against large, non-traditional credit unions.
Credit unions were given an exemption from paying state and federal taxes in exchange for providing basic banking services to what the Federal Credit Union Act of 1934 defines as "people of small means."
Today, most credit unions in Wisconsin still fulfill that social mission and should remain tax-exempt. But the largest and most aggressive credit unions have a well-documented substandard record of serving people of modest-means, which should put their tax-exemption in jeopardy.
In May, the Washington, D.C.-based National Community Reinvestment Coalition (NCRC) issued a comprehensive study titled, "Credit Unions: True to Their Mission?" The report concluded that large credit unions in Wisconsin and nationwide are providing "lackluster service to people of modest means."
Here are two direct quotes from the report’s executive summary: "NCRC’s study finds that banks make a higher portion of their home loans with fewer loan denials than credit unions to traditionally underserved populations. NCRC’s findings strengthen the argument that credit unions overall are not meeting their intent of serving low- and moderate-income people."
Studies conducted by the Government Accounting Office (GAO) and the Chicago-based Woodstock Institute reached similar conclusions. In fact, the GAO study found that credit union members have higher incomes, are better educated, and are more likely to be homeowners than non-members.
In Wisconsin, the best example of how some large credit unions abuse their tax and regulatory advantages is Landmark Credit Union. With nearly $1 billion in assets, Landmark is larger than 95 percent of Wisconsin’s taxpaying financial institutions and is completely indistinguishable to the public from a bank.
One of Landmark Credit Union’s recent advertisements featured a woman wearing a multi-diamond necklace. Another displayed a fancy sports car. Both advertisements encouraged potential customers to "live large."
Clearly, Landmark Credit Union isn’t attempting to use its income tax exemption to attract low-to-moderate income customers, which begs the question: What social mission is being served by Landmark offering taxpayer subsidized loans for luxury items? I think most taxpayers would agree that Landmark and other non-traditional credit unions could render a far greater service to society by paying their share of corporate income taxes, especially given the budget deficits in both Madison and Washington.
The credit union tax exemption was granted by Congress because of who they were intended to serve, not because of how they are structured.
So if there is no practical difference between large, non-traditional credit unions and other financial service providers, and if those credit unions no longer focus on serving people of modest means, is the tax exemption still justified? I bet you would answer no if that business I asked you to imagine yourself running was a bank.
