Hearing Set on CU Tax Exemption

By Reosti, John | American Banker, November 2, 2005 | Go to article overview

Hearing Set on CU Tax Exemption


Reosti, John, American Banker


Twenty years ago, the House Ways and Means Committee -- then chaired by Illinois Democrat Dan Rostenkowski -- briefly mulled a tax on credit unions as part of a package of reforms, only to drop it like a red-hot coal in the face of fierce opposition.

Ways and Means is set to examine credit unions' tax exemption on Thursday for the first time since the mid-1980s, and credit union industry officials insist not much has changed. Despite budget shortfalls, they say, members of Congress have little appetite for taxing credit unions.

Bankers, of course, do not agree and are drawing on their own historical analogy as evidence that tax exemptions are not necessarily permanent. They refer to 1951, when Congress, in need of funds to pay for the Korean War, stripped the savings and loan industry of its tax exemption.

"The turning point there" was that S&Ls "looked too much like any other financial services providers," said Paul Merski, the chief economist for the Independent Community Bankers of America. "Maybe credit unions have reached ... a tipping point."

Ways and Means Chairman Bill Thomas first raised the prospect of taxing credit unions in March of 2004. In a release describing Thursday's hearing, the California Republican said, "Congress has an obligation to ask questions to ensure that the country is receiving something in exchange for the benefit of tax exemption."

Banking groups would argue no, and they say they believe they are making progress getting their point across. Mr. Merski cited four recent think-tank studies that either recommended or discussed a tax on credit unions, as well as the contretemps that arose this summer when the National Credit Union Administration tried unsuccessfully to block two Texas credit unions from converting to mutual savings banks.

That move angered a number of influential legislators, including seven-term Texas Republican Sam Johnson, who serves on Ways and Means.

But Murray Chanew, the director of political affairs for the National Association of Federal Credit Unions, insisted that there has been no erosion of congressional support for the 68-year-old tax exemption. Indeed, he predicted that Ways and Means would conclude in short order that the credit union industry still merits its favorable tax treatment.

"This hearing is pure oversight," Mr. Chanew said. "The committee is looking at the revenue measures of the U.S. government. It does that all the time."

Mr. Chanew and other credit union lobbyists also noted that Rep. Thomas has been examining other tax-exempt industries and held hearings on nonprofit hospitals last year.

Bankers are nonetheless delighted that Congress is finally eyeing a tax exemption they say many credit unions no longer deserve and are exploiting to capture market share from community banks. They have raised increasingly vocal objections as a growing number of credit unions have adopted expansive community charters that allow them to serve all the residents of a specified area, and ventured into small-business lending -- a niche once populated almost exclusively by banks. …

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