BY JOE WITT
President/CEO Minnesota Bankers Assoc.
For years bankers have complained about credit unions and their unfair tax advantages. And they are right to do so. It makes absolutely no economic sense to have two businesses, located right next to each other, offering the same products and services to the same potential customers, but one business has the incredible advantage of not paying federal and state income taxes. Obviously the tax exempt business has a huge competitive advantage.
What was once a dispute between financial institutions should now be viewed as an issue for all taxpayers. The federal government is running huge deficits. Minnesota has had several state government shutdowns. Policy makers can no longer ignore the revenues that would be generated by taxing the profits from the credit union industry, which controls just a shade under $1 trillion in assets.
All taxpayers subsidize the credit union industry, so we all should consider whether the credit union tax exemption is money well spent. To determine whether the exemption makes sense, we need to know whether there is a legitimate public policy purpose that justifies the tax exemption. Then, we need to know that the credit unions do a good job of fulfilling their tax exempt mission. Otherwise, the tax subsidy extended to the credit union industry is money poorly spent. If the tax exemption is no longer warranted, it should be repealed.
Credit unions earned their income tax exemption back in the 1930’s by serving “people of modest means.” People working at the same factory or living in the same neighborhood pooled their money together in a small financial cooperative. Deposits in the credit unions were used to fund small, consumer loans to the other credit union members. The credit unions served a legitimate public policy purpose: providing financial services to “people of modest means,” who generally were not able to get banking services elsewhere.
But, oh my, a lot has changed since the 1930’s. While some credit unions remain true to the original credit union mission, many credit unions have completely abandoned that mission. Rather than focusing on “people of modest means,” these credit unions target wealthy customers. You can review credit union branch locations, for example. A credit union might claim to serve the entire twin cities metro area, but they don’t branch in low- and moderate-income areas. They branch in middle- and upper-income areas. And credit union advertisements also demonstrate their focus. A credit union places two advertisements in my weekly hometown newspaper. The first advertisement promotes the credit union’s boat and RV loans, and the second promotes their wealth management services. It is shocking that credit unions do not pay one cent of state and federal income taxes, yet they can afford to spend millions on sophisticated advertising campaigns. Many credit unions also make a significant amount of loans to businesses, a situation that is diametrically opposed to their mission.
So, if these credit unions are no longer serving their tax exempt mission, have they lost their tax advantages? Unfortunately for taxpayers, they still receive all their tax benefits. Taxpayers should be gravely concerned about the fact that the credit unions enjoy a 100 percent income tax exemption, but there is a complete lack of accountability with respect to ensuring they fulfill their tax exempt mission. Every credit union enjoys the 100 percent income tax exemption without proving the percentage of income that is derived from serving “people of modest means.” There is no record keeping required to earn the income tax exemption. Even if a credit union derived only a tiny fraction, or none, of its income from serving “people of modest means,” 100 percent of the credit union’s income is tax exempt.
Even among tax exempt entities, the credit union industry’s tax exemption is especially generous. Many non-profit entities must track income earned from activities that fall outside their tax exempt purpose. If these non-profits earn income from a source that is outside the scope of their tax exempt mission, they must pay unrelated business income tax (UBIT) on that income. Credit unions do not.
For the sake of all of us taxpayers, it really is time that policy makers take a fresh look at the credit union industry’s income tax exemption.
Joe Witt is the President and Chief Executive Officer of the Minnesota Bankers Association.
Comments (4)
Add commentHere's a clue
Here's a clue for Joe Witt, the President and Chief Executive Officer of the Minnesota Bankers Association:
< Sit Down
< Shut Up
&
< Get a real job
a little reality check
Mr. Witt like most bankers like to twist the facts in order to make a point. Because if they don't they loose the argument.
First if there is such a big "competive advantage" for credit unions than why do banks own 96% of the market and credit unions own 4%? You would think it would be the other way around...WHY? Because it's not an advantage. Sorry Mr. Witt.
And if it's such a great competitive advantage than why aren't for-profit banks changing thier charters to credit unions? They can do that at any time. I don't see banks lining up to do that? Why not?
Because he "forgets" to mention that one of the restrictions placed on credit unions for that Tax status is an inability to raise capital in the markets. Thier capital comes solely from thier annual retained earnings. That's it. banks can raise money all day long in the markets. now that to me seems like a real competitive advatage not available to credit unions. See what i mean about twisting the facts to make an argument.
Why credit unions have an exemption has nothing to do with the issue of serving people of modest means, and everything to do with the federal laws on "not-for-profit" status of organizations. Mr. witt knows that but doesn't want anyone else too.
As far as tax payers footing the bill for credit unions, someone should send the good banker a calculator so be can add up all the billions of dollars we taxpayers had to give to the financial services industry since 2008. By the way taxpayers didn't have to give a single cent to cover any losses at credit uinons because thier regulator the NCUA have been sending a annual bill to all credit unions to the tune of billions of dollars to recharge the insurance fund for credit unions. Look at any credit union annual report if you don't believe me. I don't see banks paying anything.
The Truth about CU Tax Exemption
I second JAR's comments. I love it when banker's bring the "people of modest means" line into the conversation every time talks swirl about the tax exemption status of credit unions. Yet one thing Mr. Witt never mentions in his article is that credit unions operate under their not-for-profit status because each account holder at a credit union is a member/owner of the credit union. All profits generated at a credit union are returned to those members in the form of lower interest rates on loan products, higher interest rates on saving products, and pay for the credit union to operate and offer financial services to it's member/owners. Meanwhile, Mr.Witt sits in his office making sure his bank will generate enough income to... pay shareholders.
A bank's chief duty is to make money for it's shareholders. Mr. Witt knows this, and the reason he and others in the banking industry are calling for the tax exemption status of credit unions to be removed is not that it gives credit unions a competitive advantage, or you would see more banks becoming credit unions. It is in fact, that as banks continue to fee their customers to death to generate income in a market where low interest rates continue to slow growth from lending products, more and more people are finding that credit unions can usually offer better service and rates on comparable products.
For the sake of all us taxpayers, stop twisting the facts Mr. Witt.
"I sure wish the government didn't have to bail out the credit unions with all my tax dollars." - said no one, ever.
Credit unions received $0 taxpayer dollars for the bailout
Banks received roughly $205 billion in TARP funds - taxpayer dollars, and we all know how accountable the banking industry was with that money.
Mr. Witt is angry that the consumer market has smartened up to what the big banks really are, and are growing happier with the products and services they receive from credit unions instead.
Credit union fact check
JAR and jayp: Thanks for reading my article and for commenting. However, there are several comments you make that are factually wrong.
First, while it is true that a small percentage of the banking industry did receive TARP funds, you fail to note that the bank portion of the TARP program was profitable. Taxpayers had a positive return of $19 billion. The portion of TARP that went to Fannie Mae, Freddie Mac and the car companies is not showing a profit. But as to the bank portion of TARP, there is no question about the fact that the taxpayers made a positive financial return.
Second, you failed to mention that the taxpayers, through the Treasury Department, made a loan of $9.3 billion to bail out the credit union insurance fund, which is broke. The taxpayers subsidize the credit union industry's operations, and on top of that the taxpayers needed to pay even more to bail out their insurance fund. That money has not been paid back. The credit union backers like to think that they made it through the downturn all on their own, but they did not.
Third, you do not understand the reason that credit unions are tax exempt. It is not because of their structure as member-owned cooperatives. Mutual savings banks have the exact same ownership structure, but they have been paying taxes since the 1950's. Mutual insurance companies do, too. There is a whole federal tax code subchapter that sets the rules for taxpaying cooperatives, Subchapter T.
A business's structure does not justify its tax status. A business gets a tax exemption based on fulfilling a tax-exempt mission. For credit unions, the tax exempt mission that justifies the tax exemption is the fact that credit unions once served people of modest means. That is a fact.
If the credit union industry can prove that it is doing a good job of fulfilling its tax exempt mission, then policy makers should continue to grant the tax exemption. But for the sake of all the individual and business taxpayers who are paying their fair share, we should at least have the debate.