Credit Union Ruse


*PROFILES*

Credit Unions and Taxes:

Credit unions are costing taxpayers billions of dollars.

Many people and public policy makers might say, “Who cares if credit unions don’t pay taxes?” Every individual taxpayer, every city, every town and every municipality should care. All across America, individuals and local governments are losing tax revenue that should be coming from large credit unions.

A new study by The Tax Foundation, a Washington, D.C.-based nonpartisan educational organization with a reputation for independence and credibility, states that the credit union tax exemption is “an unjustified $31.3 billion tax break” over a 10-year span (Click to view publication). Moreover, it says “Credit unions were granted a tax exemption almost 70 years ago so that they could serve low-income people who had little access to financial services. Now credit unions are growing by leaps and bounds, serving middle- and high-income people. Why should the exemption continue?”

All the while, large credit unions are claiming they are not-for-profit. It’s a huge credit union ruse.

How the ruse works:

The 1934 law establishing the federal credit union charter stated its purpose was to make more credit available to people of small means through a national system of co-operative credit.

Originally, members of a credit union all knew each other and pooled their resources to provide credit for their co-workers and/or neighbors. Today, this “common bond” — the former hallmark of the credit union industry — has been stretched beyond recognition while large credit unions still describe themselves as not-for-profit. Many credit unions have grown into highly profitable, billion-dollar institutions offering a full range of financial services, including commercial lending, to just about anyone. The common bond is hardly recognizable.

Though these institutions look and act like community banks, they do not pay taxes or abide by the same rules as banks, costing taxpayers and the government of billions of dollars. Most taxpaying Americans, probably don’t realize:

As credit union membership expands, so does the cost to American taxpayers who underwrite the credit union industry’s tax subsidy.
The credit unions’ regulator — the National Credit Union Administration – has steadily adopted policies that have expanded credit union membership beyond recognizable limits.
Federal- and state-chartered credit unions are not required to meet the credit needs of low- and moderate-income people — with the exception of Massachusetts-based state-chartered credit unions — as banks are required to do. They have no Community Reinvestment Act (CRA) requirements, despite a huge taxpayer subsidy.
Many large credit unions are heavily and steadily investing in more commercial lending, exposing their depositors and the government (which provides insurance) to greater risk.

Credit Unions and Taxes: Points for Consideration

Bankers across the nation have challenged these policies and will continue to make the case that similar institutions ought to be treated similarly. It’s not the majority of traditional credit unions that are objectionable; it’s those larger credit unions whose assets have exceeded $100 million, for example, and which no longer have a definitive common bond among members.

Over the past 10 years these credit unions have evolved to the point that they bear little resemblance to the traditional credit union, and their non-taxpaying status threatens the survival of small community banks – and even small credit unions. What’s needed is a level playing field for all of these competitors. Unfortunately, local municipalities, individual taxpayers, and businesses will be bearing a disproportionate burden until the large credit unions are taxed and regulated the same as small community banks.

A study by the General Accountability Office (GAO) found that consolidation in the credit union industry has resulted in two distinct groups of credit unions - larger credit unions that are similar to banks in the products they offer, and smaller, traditional credit unions that provide more basic financial services.
Nationwide, there are now 100 credit unions with more than $1 billion in assets each. The number of billion-dollar credit unions has increased by more than 1,000 percent in the past dozen years – from seven in 1991 to more than 90 in 2004.
Large credit unions mislead when they defend their not-for-profit status because most large credit unions have loads of profit which they retain year-to-year and don't distribute back to their members. They simply hold on to it, pay executive salaries, conduct branch expansion, and spend millions on marketing with the tax savings. For example, Massachusetts-based Digital Federal Credit Union is spending $5.2 million for the naming rights of the Worcester Centrum, a sports and entertainment arena. This is a not-for-profit? Given it effectively receives a 40 percent tax break, individual taxpayers are in effect paying for more than $2 million of those naming rights. (By the way, Digital Equipment, the company for which the credit union was named, no longer exists, yet this credit union with $3.1 billion in assets continues to expand in four states. See the profile elsewhere on this Web site.)
In Massachusetts there is one $3.1 billion credit union, one $1.3 billion credit union, and two catching up on $1 billion very fast. (Source: NCUA) Moreover, there are dozens of bank-like credit unions with assets greater than $100 million and balance sheets similar to community banks.
The top 34 credit unions in Massachusetts with assets ranging from $201 million to $3.1 billion, made more net profit in 2004 ($128 million) than all of the co-operative Massachusetts banks combined, even though the co-operative banks — which operate much like credit unions but pay taxes — outnumber the credit unions 2 to 1. (Sixty-eight co-operative banks last year had net income of $90 million. The co-operatives paid $49 million in local, state, and federal taxes. Co-operative banks are primarily mutual institutions — non-stock banks — like credit unions.) (Source FDIC)
In nearly half the states, a credit union would rank among the largest 10 banking institutions. (This growth usually occurs at the expense of local community banks and small, traditional credit unions.)
A demographic survey by the Credit Union National Association showed that the average household income of credit union members is 20 percent higher than nonmembers — $55,120 versus $45,790. Credit union members are also more likely to own a home, be employed full time and have a college degree than nonmembers. Where is their commitment to low- to moderate income communities that banks must demonstrate to regulators through the requirements set forth in the Community Reinvestment Act (CRA)?
Massachusetts is the only state to impose CRA obligations as a management tool on state-chartered credit unions. However, despite their taxpayer subsidy and a charge to serve low- to moderate-income individuals, only 17 percent of all these credit unions earned an outstanding/high satisfactory CRA rating compared to 43 percent of all state-chartered banks during 2002 to 2004.
Some credit unions now serve areas as large as the state of Maryland, yet have no requirement to reinvest in their communities. Consumer groups like the Woodstock Institute and the National Community Reinvestment Coalition have recommended that CRA — rules that require banks to reinvest in their communities — be applied to some if not all credit unions. The essential question: Why should credit unions that morph into full service financial institutions, be allowed to retain their tax and CRA exemptions?

Credit Unions and Taxes: Time for a Change

There is precedent for a policy change: Congress removed other financial co-operatives’ tax exemption after they had outgrown their mission. After concluding in 1951 that mutual savings banks, co-operative banks and savings and loans were in “active competition” with taxable institutions, Congress removed their tax-exemption. Lawmakers can consider a number of other “comparables” and other ways to level the playing field if they want to create credit union parity:

In Canada, credit unions pay taxes; the industry is thriving and individual taxpayers benefit.
Credit unions will tell you that they don’t have the powers that banks have today and, therefore, they should not be taxed. However, they operate much the same as banks do today. Ironically, in 1951 when Congress decided to tax mutual, co-operative and savings institutions, those institutions did not have nearly the powers that credit unions have today. Many bankers would advocate giving credit unions full powers if they paid taxes.
Credit unions continue to grow their commercial loan portfolios by creating credit union service organizations that can circumvent many credit union regulations.
Today large credit unions are asking Congress for permission to nearly double their capacity to make business loans, while at the same time lowering their reserves. If their bill, the Credit Union Regulatory Improvement Act, were to be enacted, credit unions would have more commercial lending authority than tax-paying federal savings associations.
In Massachusetts, large credit unions are seeking the ability to accept state and municipal deposits. Why should large credit unions benefit from business from the state and local municipalities when they pay no corporate income taxes to support those governments?

Credit Unions and Taxes: In Conclusion

Bankers do not object to those credit unions that have adhered to their original charters, only those that have moved beyond the scope of their original intentions. If it walks like a bank, and talks like a bank, it should be taxed like a bank. Credit unions always say if banks want to compete better why don’t they become credit unions? In fact, banks could not convert to a credit union charter and receive tax-free status. It’s not hard to predict how lawmakers would react if any company asks to be removed from the tax roll.

Using Massachusetts as an example, last year the Bay State’s banking industry employed more than 65,000 people, contributed substantially to economic development and helped create consumer wealth throughout the state. Moreover, the commonwealth’s banks contributed more than $40 million to local charities and non-profits. Such largess, and the survival of many community banks and thousands of jobs, is in question over the long term if small banks are perennially forced to try and compete on an un-level playing field with large, non-taxpaying credit unions. Would you want to lose the services of your local community bank?

What if you found out that Wal-Mart, the retail operation that has driven thousands of local businesses out of business, was also not paying any taxes? You would, undoubtedly, be outraged.

Large credit unions that defend their not-for-profit status have perpetrated this ruse on hardworking, taxpaying Americans long enough. It is time that large credit unions begin to pay their fair share of taxes. Contact your elected representatives and ask them to take a look at this issue.

Why should we subsidize large credit unions any longer?

Credit unions and taxes: presented by the Massachusetts Bankers Association.