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Credit Unions – Summary of OBA's Position

Oklahoma bankers generally have no objection to traditional credit unions that stick to the original purpose for which they were given special tax and regulatory treatment: serving low- to moderate-income consumers who have some realistic and meaningful connection to one another. Large credit unions that seek to serve anyone and everyone should be treated like other similar financial institutions – and should be required to contribute their fair share of taxes to help pay for homeland security, national defense and the administration of both federal and state government.

 
The Oklahoman

The Oklahoman recently interviewed OBA President and CEO Roger Beverage about the credit union issue, followed by a response from Oklahoma Credit Union League President Lisa Finley. Finley's response furthered misconceptions about the issue. Below is the follow-up response from Roger Beverage.

Questions and Answers: Banks vs. Credit Unions - Response to the Credit Union "Response"

By Roger Beverage

Q. Why would a consumer choose a credit union over a traditional bank?

As a part of her response, in suggesting that credit unions offer better rates on savings and loans (which is only partly true, and then only some of the time) Ms. Finley said:

"[C]redit unions do not operate to make a profit . . . and (customers) enjoy lower loan rates and higher interest on savings because of that unique philosophy. . ." (emphasis added)

Of course credit unions operate to make a profit. "Not-for-profit" is a tax status, not a way of doing business. Credit unions are no different than any other business in this respect: if they don't make a profit, they can't stay in business.

The reason credit unions are able to offer better rates is because they are exempt from federal (and most state) income taxes and, in the case of federally-chartered credit unions, every other state and local tax except real and personal property taxes.

Federally-chartered credit unions (62 out of 89 in Oklahoma, or roughly 70 percent of all credit unions in the state) pay only real and personal property taxes. They pay no federal or state income tax, or in lieu of tax, or sales and use tax, or occupancy tax, or anything else other than real and personal property tax.

Bankers do not object to traditional credit unions that adhere to their original purpose. They do object to full-service financial institutions being permitted to hide behind outdated reasons for their tax exemption and that rip off the American taxpayer in the process. Here's what we mean:

    • The twelve largest credit unions in Oklahoma (based on June, 2004 statistics) represent 73 percent of the total credit union assets, 64 percent of the state's credit union customers, and about 20 percent of the state's total population. Each is open to virtually anyone who applies for membership, and they offer essentially the same products and services that are offered by tax-paying banks and savings banks. Each is larger than 216 of the state's 273 commercial banks.
    • In 2003, these twelve credit unions had combined assets of $4.38 Billion compared to $4.55 Billion in 2004.
    • These same twelve had total net income of $57,220,013 in 2003, and $51,736,621 in 2004, clearly demonstrating that these institutions are operating on a "for-profit" basis.
    • Based on these earnings and assuming a conservative 25 percent income tax rate, in 2003, these twelve credit unions caused the United States to forfeit $14,305,003 in federal income taxes. In 2004, the United States forfeited another $12,934,144 in federal income taxes.
    • In just these two years, that's a total of $27,239,147 in federal income tax that just these twelve full-service financial institutions avoided paying that would have helped fund our national defense and homeland security.

On the state level, the five federal credit unions listed among the twelve largest avoided approximately $1.79 Million in state "in lieu" taxes in 2003, and another $1.56 Million in 2004. They also avoided more than a half a million dollars in each year (2003 and 2004) in local and state sales taxes.

Q. Do credit unions pay taxes?

Yes. Some credit unions pay some taxes. But only 27 of the state's 89 credit unions pay the in lieu tax to which Ms. Finley referred. No credit union, large or small, state or federally-chartered pays any federal income taxes. Period.

Q. Are there services that banks provide that credit unions cannot?

The products and services offered by the twelve largest credit unions in Oklahoma are essentially the same products and services offered by commercial and savings banks, generally at or near the same rates.

Ms. Finley's statement that "[c]redit unions are unable to provide trust services to their members, and cannot offer commercial lending products," is not true.

  • Credit unions can and do make commercial (business) loans up to 12.25 percent of their capital, excluding any loan less than $50,000 from that calculation.
  • Weokie Credit Union in Oklahoma City, for example, has aggressively expanded its business lending portfolio from $0.9 Million in 2001 to $18.4 Million as of June, 2004.
  • Credit union advocates are currently pushing a bill in Congress (H.R. 2317) to expand their business lending authority up to 20 percent of the credit union's capital, but excluding all loans less than $100,000 from that limitation.
  • Credit union advocates specifically sought an amendment to the Family Wealth Preservation Act (S. 573) signed into law by Governor Henry so that they could be included in the language authorizing such trusts and making certain credit unions are able to offer them. The OBA agreed to support that amendment.

The issue that banks have with credit unions is simple and affects only the largest credit unions that are virtually open to anyone who has a pulse (an actual MA credit union radio advertisement) or who can fog a mirror (an actual CA billboard sign):

IF THERE IS NO DISCERNIBLE DIFFERENCE BETWEEN ENTITIES THAT PROVIDE THE SAME PRODUCTS AND SERVICES, WHAT POSSIBLE JUSTIFICATION CAN THERE BE FOR DIFFERENT TAX TREATMENT?

The answer is, none. And no amount of misdirected argument or continuing to spout earlier justifications will change today's competitive reality.

Q. Some in the banking industry seem to think credit unions have an unfair advantage. Is that true?

Avoiding payment of income tax, by whatever means, inherently creates a pricing advantage. Think about it: if you earn $14.1 Million and can avoid paying $3.5 Million in income taxes, that's more (by $3.5 Million) you get to keep.

If you're selling widgets and generate $14.1 Million in net income, you can sell them a lot cheaper than your competition if you can avoid paying $3.5 Million in federal income taxes and just under another $1 Million in state in lieu tax. Because you want to generate more income (and, thus, more capital) you don't have to sell your widgets cheaper to everyone. Just the customers who will buy even more widgets from you, in order to get them to shift their business.

That's where the "unfair" competition from large, full-service and open to anyone credit unions - like Tinker Federal Credit Union - comes in. Substitute "financial services" for "widgets" in the above example, and it's precisely what Tinker was able to avoid in federal and state income/in lieu of taxes last year.

Ms. Finley also said:

"An income tax on credit unions is a tax on the owners of the credit unions – its members. These members have already paid taxes on their money and continue to pay taxes on the interest earnings of their savings accounts. So when you talk about credit union income taxes, you're talking about a double tax on consumers. . . . Also, many banks in recent years have begun the trend of converting to 'Subchapter S' status. By doing this they avoid corporate taxation on their profits. . ."

This is a capital gains tax argument, only in reverse. But the truth is, customers at large, multi-jurisdictional credit union should be treated no differently than customers at tax-paying bank and savings banks, although in fact credit union customers are generally better educated, employed, wealthier and have a higher incidence of home ownership.

  • Interest on savings accounts and certificates of deposit owned by bank customers is no different than interest earned on savings accounts by credit union customers.
  • Subchapter "S" shareholders are required to pay taxes on the entire amount of the bank's earnings, regardless of whether it's distributed in the form of dividends. Neither credit unions nor their customers are required to pay taxes in any manner on retained earnings.
  • In other words, unlike any other business in the country (except some hospitals) credit unions build expansion capital on a tax-free basis while the rest of us pick up their fare share to pay for all of the critical services provided by federal, state and local governments.


Credit Union Competition Background

Oklahoma bankers and others are engaged in a spirited debate with credit union managers across the country. The debate is about the tax status of large credit unions that offer the same products and services as those offered by tax-paying banks and thrifts, and are open to virtually anyone. This is an issue that is very important to all of us.

The credit union industry is divided into two groups: traditional credit unions, and a "new-breed" of credit unions that have graduated from their earlier status by abandoning their original mission . Both groups are exempt from federal income taxes, and federally-chartered credit unions are exempt from state income tax as well as state and local sales taxes. These "new-breed" credit unions use the millions they save in taxes each year not to benefit their customers, but as a way to fund their own aggressive expansion and growth on a tax-free basis.

As bankers, we often get the question, "So what's the big difference between banks and credit unions anyway?"

Both provide financial services, and in some instances the two are virtually indistinguishable in the eyes of Oklahoma consumers. But there are some significant differences, and as taxpayers everyone needs to understand what's at issue in the debate between banks and credit unions.

Credit unions have been around a long time, basically organized as cooperatives where individuals saved with and borrowed from one another. Federal credit unions were created by Congress in 1934 in response to the Great Depression. Their mission was to assist people "of small means," who had a common bond "of occupation" or who lived "within a well-defined neighborhood, community or rural district." Its members would pool savings and provide unsecured credit to their peers.

And (along with their state-chartered counterparts) they were given an exemption from federal income tax. Not a bad plan, and it worked well for more than half a century. Even today, many credit unions still exist to serve this purpose of serving people of limited means.

But a "new breed" of credit union has evolved over the past 20 years or so, and those institutions aren't much different from today's banks. These large financial service institutions allow virtually anyone to join, and provide the same financial services as banks. They are credit unions in name only.

Bankers believe that the tax exemptions for traditional credit unions still makes sense in today's financial services marketplace. But the "new-breed" credit unions are taking advantage of this tax exemption to facilitate their own aggressive growth, and they're not contributing a dime to help pay for our national defense, the war on terror, homeland security, or to pay our teachers, our police force and our firefighters.

Let's look at the 12 largest credit unions in Oklahoma. Each has more than $100 million in assets, which is larger than 210 of the state's 273 commercial banks. They have thousands of customers located all across the state. And together, in 2003 alone, these 12 entities earned more than $57 million.

But - unlike the rest of us - these 12 institutions paid no federal income tax on what they earned last year. As a result, the United States forfeited approximately $14.3 million in federal income taxes last year, taxes that the rest of us have had to make up.

Five of the 12 are federally-chartered, which means they are exempt from Oklahoma income sales and use taxes. They pay only real and personal property taxes. As a result, the State of Oklahoma forfeited another $1.79 million in state income tax, and another $664,749 in state and local sales taxes from these five federal credit unions in 2002.

By hiding behind the "credit union" label, these new-breed credit unions don't contribute anything to pay for our local teachers, police, firefighters and highways, nor do they help pay for Homeland Security or our national defense. Oklahoma's banks did.

The contributions of the banking industry to our state and each of our respective communities can be partially measured in dollars, but that's just the beginning. Banks help families achieve their dreams of home ownership, education and secure retirements. Each year, Oklahoma bank employees donate hundreds of thousands of volunteer hours to community programs. In every community across Oklahoma, you'll find a bank that is dedicated to helping its community grow and flourish. And, like you and me, they pay their fair share of taxes.

Again, there's nothing wrong with a tax-exemption for traditional credit unions that adhere to their original mission. But it isn't right for big credit unions that have abandoned their original purpose just so they can expand and grow. They operate like any other full-service financial institution and serve anyone who walks in the door, and it's not right that they do so without paying at least some fair share of taxes. That's American and that's fair.

Credit unions need to decide whether they want to be true credit unions worthy of that tax exemption, or be full-service providers of financial services and pay taxes like the rest of us.

runs Q&A series on credit union competition