End credit union tax exemptions

(Chelsea Update would like to thank John Mann, president and CEO of Chelsea State Bank for the information in this story.)

The Senate Finance and House Ways & Means Committees are currently examining ways to reform and simplify the United States tax code.

Thus far the committees have taken a “blank slate” approach to identify every opportunity to reduce tax rates, restore confidence in administration of the tax code, and promote economic growth. As a result, every possible tax expenditure and exemption is being reexamined, scrutinized, and subjected to rigorous justification.

Of the many tax exemptions, none is more deserving of repeal than the credit unions’ federal tax exemption, which has outlived its original, dated purpose and can no longer be justified –

especially in light of the credit union industry’s brazen attempts at having their cake and eating it too, by simultaneously pushing for a massive expansion of their commercial lending powers. Following is a letter that I have written to each of our delegates in Washington, and it makes points that I would like all members of our community to consider.

“As Congress starts the process of reforming the United States tax code, I urge you to support ending the tax-exempt status for credit unions. The credit union tax exemption has been in existence since 1916. It has long outlived its original purpose, it is unfair to tax paying community banks like mine, and it actually hinders economic growth.

Credit unions compete head-to-head with community banks like mine, serving the same markets, the same customers, and offering identical products. In fact, the public does not differentiate between banks and credit unions. It is patently unfair for community banks on all the Main Streets across America to compete with credit unions that enjoy an enormous tax subsidy.

These distortions have a significant cost, both to the U. S. Treasury and to the American economy. The office of Management and Budget recently estimated the credit union tax exemption at almost $10 billion over the next five years. With large annual federal deficits, our country can no longer afford to subsidize the $1 trillion credit union industry.

The credit union tax exemption was originally provided as a way to subsidize financial services for individuals with low and moderate income, but it is being abused and no longer serves its original purpose.

A 2008 GAO study found that only 14 percent of credit union customers were of low-income and 17 percent were of moderate-income, while 49 percent were of upper-income. Credit unions serve a wealthier customer base than taxable banks, yet they are given a tax exemption that subsidizes financial services to those who clearly do not need it.

If the credit union tax exemption is no longer conditioned upon the goal of serving low- and moderate-income individuals, it can no longer be justified and should be repealed.

Consider the fact that more than 200 credit unions have assets over $1 billion, making each of them larger than 90 percent of taxpaying banks. These large, fast-growing, and increasingly complex credit unions have diversified to the point that they bear no resemblance to the traditional credit unions that congress envisioned to be worthy of preferred tax status.

Once upon a time that included all credit union members sharing a common bond.  For these large mega-credit unions, that is just a fairy tale.

Credit unions were never intended to be tax-exempt banks, but this is the reality today.  And I can’t kid myself, it’s also a reality that the first attempt to repeal the tax exemption will result in angry letters and emails from millions of credit union members, but we need legislators who will stand strong and do what is right for the American people.

The credit union tax exemption is a tax break that for most credit unions has outlived its purpose. It no longer supports the public policy of providing financial services to low- and moderate-income consumers.

The time has come for Congress to abolish this exemption. It would be a fiscally sound way to help reduce the U.S. debt and eliminate distortions in the financial services industry.

Thank you for considering my views on this vital issue.”