Credit unions oppose removal of federal tax exempt status
by Patrick McCreless
Jul 25, 2013 | 3011 views |  0 comments | 47 47 recommendations | email to a friend | print
Credit unions are opposing recent efforts in Congress to remove their federal tax exempt status, saying it will limit their services, while banks support the change to a situation they see as creating an unfair competitive advantage.

The House Ways and Means Committee is considering a move that would remove tax exemptions to credit unions — exemptions that, as nonprofits, credit unions have had since they were created 70 years ago. Credit unions were created to offer low-cost loans to low-income residents. Credit unions say they still need the tax exemption to effectively continue their original mission. However, banks argue some credit unions have grown so large that their tax-exempt status gives them an unfair advantage in the financial marketplace.

Credit unions are different from banks in that they are nonprofit financial institutions that are owned by their members and have restrictions on who can join them and the amount of money they can loan to individuals.

Richard Simonton, president and CEO of AOD Federal Credit Union in Oxford, said removing the federal tax exempt status would significantly hurt AOD's services and its membership. AOD has 32,000 members, six locations and $260 million in assets.

"We could not provide the services that we do now at the same cost structure," Simonton said. "It would cause us to increase our fees ... that's the only way we could cope with the additional services."

Simonton added that because the members own the credit union, removing the exemption would amount to a double tax, meaning members would have to pay for the federal tax in addition to the taxes they pay on the dividends on their tax returns.

Patrick La Pine, president and CEO of the League of South Eastern Credit Unions, the trade association for Alabama and Florida credit unions, said if the tax exemption is removed, credit unions will face extreme uncertainty.

"Credit unions are built on a member-owned cooperative model that would have to be revisited should Congress choose to remove the exemption," La Pine said. "Many credit unions would have to impose new fees and offer less attractive rates on loans and returns on deposits."

La Pine said the change would also force many credit unions to merge or convert their charters.

Scott Latham, president and CEO of the Alabama Bankers Association, the trade association for banks in the state, said that the federal tax exemption should be removed, since some credit unions have grown larger than they were originally intended and are acting more like banks.

"Our argument to Congress is if credit unions want to be banks, then they should change their names and pay their taxes," Latham said.

Latham said credit unions are traditionally supposed to make just small consumer loans.

"Banks can lend to consumers and large businesses and small businesses," Latham said. "It's when credit unions get out of that barrier of small lending, that's the problem."

Andreas Rauterkus, associate professor of finance at the University of Alabama at Birmingham school of business, said credit unions should be able to handle the loss of the tax exemption.

"It will not change the way they do business," Rauterkus said. "They will still have a competitive advantage over banks due to member ownership."

However, Rauterkus said it would only be fair to remove certain restrictions, such as loan limits, from credit unions if the tax exemption is removed.

"It's just not fair to take something away without giving them something for it," Rauterkus said. "It's a two-way street, but I haven't heard that from banks."

Shad Williams, president and CEO of Cheaha Bank, said he supported the removal of the tax exemption.

"We pay taxes and I think everyone should pay taxes," Williams said. "There ought to be a level playing field."

Williams noted however, that he did not see a problem with the government easing other restrictions on credit unions if the tax exemption was removed.

"If they want to lend money the way banks do then I don't have a problem with that if they are willing to pay their taxes," he said.

Latham said easing loan restrictions would likely be a fair trade for most banks.

"I think it's safe to say if credit unions are on an equal level on taxes, we'd have much less of an argument in what they can do on lending," Latham said.

La Pine, however, said also easing loan restrictions would not be a fair trade for paying taxes. La Pine said the tax exemption is not based on the products and services credit unions offer.

"The exemption from federal income taxes is based on the credit union not-for-profit, member-owned, cooperative structure, something that has not changed throughout the history of credit unions," La Pine said.

"While credit unions will still advocate for an easing of the restrictions on member business lending, we do not believe one has anything to do with the other."

Staff writer Patrick McCreless: 256-235-3561. On Twitter @PMcCreless_Star.

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