Is it time for credit unions to pay up?Some call credit union tax exemption an unjust advantage over banks; others say it is needed to raise capital and to lend to small customers
Do credit unions enjoy a competitive advantage over banks and other financial institutions that pay taxes?
Those in the banking industry overwhelmingly say "yes," while credit unions maintain that a tax exemption is necessary for their businesses to compete as not-for-profits — with a focus on lending to small companies and customers with fewer dollars in their pockets.
What's at stake in the ongoing battle?
Nationwide, nearly $2 billion each year, according to banks.
That is the amount the nation's credit unions are not paying in taxes because of their federal tax exemption, according to the American Bankers Association. Credit unions say that figure is much lower.
Furthermore, as credit unions take on bigger commercial loans, bankers wonder whether credit unions have bitten off more than they can chew.
"The playing field needs to be leveled," said Mike Kochenour, president and CEO of York Traditions Bank. "When I am sitting with a potential client who is looking for financing on a building project, and the only difference between our package and the one the credit union is offering is the half-percent-better interest rate of the credit union because it doesn't have to pay federal corporate tax, that's not right."
Benefits outweigh taxation
The catalyst for talk about ending the tax exemption stems from a bipartisan effort in Congress to reform the tax code, credit union officials have said.
While credit unions have not been specifically targeted, some lawmakers working on the tax code reform have said all possibilities are on the table.
That sent credit union officials into pro-active mode with a social media campaign telling Congress, "Don't Tax My Credit Union."
Nationwide, 97 million people are members of a credit union, and 700,000 people have joined this year, according to first-quarter 2013 figures, said Paul Gentile, executive vice president of Credit Union National Association.
"The benefits far outweigh the taxation," he said.
Overall at credit unions nationwide, $6 billion in benefits flows back to the membership through the rate differential for savings and loans products, offering consumers better rates on loans, Gentile said.
Also, Gentile said, credit unions provide a $2 billion benefit to nonmembers, including bank customers, bringing the total to $8 billion.
It used to be that you had to work for a specific company to be a member of a credit union. But that's not the case today. For some credit unions, one simply has to live, work, worship or go to school in the same county.
The Pennsylvania State Employees Credit Union and Members 1st Federal Credit Union, the two biggest credit unions in the state by membership, have large pools of qualifying potential applicants.
For banks, money that could go toward buying new branches, increasing marketing budgets or funding expansions and paying more dividends to shareholders goes instead to paying taxes.
"The scope of what credit unions do has significantly changed from the outset," said Curtis Myers, president and COO of Lancaster-based Fulton Bank. "We've reached the point where most credit union branches look exactly like bank branches. The scope has significantly broadened and expanded."
However, credit unions offer a different take, seeing the tax exemption as fair, particularly since these institutions are owned by members and still need to raise capital. Profits from credit unions go to the members, not the shareholders, according to Greg Smith, president of PSECU, which allows credit unions to offer more competitive loan rates and reduce fees on services.
Enacting a tax would put some credit unions — smaller ones, likely not PSECU — out of business, he said.
"Banks hate competition regardless of the size of the competing institution," Smith said. "Credit unions have a proven record of paying higher deposit rates, offering lower loan rates and having much lower fees than banks. Banks hate that, although I will tell you that I've run into dozens of PSECU members who work for banks but bank with PSECU."
Getting too big?
PSECU has the most members of any Pennsylvania credit union with 405,000, and Members 1st has about 241,000. PSECU manages $4.25 billion in assets, and Members 1st has about $2.5 billion. Those assets would rank them in both the top 20 banks and bank-holding companies in Pennsylvania, according to statistics from the Federal Deposit Insurance Corp.
As of March, 208 credit unions throughout the country had assets of more than $1 billion each, said Keith Leggett, vice president and senior economist for the American Bankers Association, a trade group based in Washington.
"That's larger than 90 percent of the banks out there," Leggett said. "In many local markets, the 800-pound gorilla is actually the credit union. You have banks and credit unions offering the same products, serving the same customers; however, you have one who has an advantage. It's fundamentally a fairness issue."
Bob Marquette, CEO of Members 1st, based in Upper Allen Township, said the current structure of credit unions puts them at an immediate disadvantage. Because they are nonprofit, they cannot raise capital the way a bank can by selling stock.
A tax would cut into a credit union's net worth, stymieing its growth and its ability to give members the benefits that make it an attractive alternative.
Since credit unions help keep banks pricing competitively, Marquette said, a loss of credit union power would be detrimental to the public.
"Credit unions were a dependable source of lending to help get people through the unprecedented time of (the recession)," Marquette said. "We had many examples of businesses that were turned down for lending from a bank they had a long relationship with, and they came to us to stay in business, and we were able to help."
Community reinvestment act
As the leader of a $310 million bank and chairwoman of the Pennsylvania Bankers Association, Centric Bank CEO Patti Husic sees credit unions making a strong deviation from their original mission to provide smaller loans and services for low- to moderate-income customers.
Credit unions are financing major building projects, including the 2006 construction of The Coliseum entertainment complex in Hampden Township, Husic said. That business failed within two years and was sold at sheriff's sale in 2011. Members 1st financed the construction, then took the property back after a 2009 foreclosure.
She also pointed to Members 1st recently refinancing a $5.7 million, 10-year fixed commercial loan for a shopping center project on Cherry Street in Derry Township, where Karns Quality Foods is located. Centric had bid to refinance the property, but Members 1st offered better terms.
"It's easier to (have better terms) when 34 to 40 cents of every dollar of profit you make isn't going to taxes," she said.
Banks are required by law to adhere to the Community Reinvestment Act, which ensures that loans are made to low-income customers and organizations that serve the underserved, she said.
"The credit unions are not required to demonstrate that they are fulfilling that mandate," Husic said. "The credit unions are operating like a tax-free banking system. I think it's time that they need to pay their fair share."
Eliminating the tax exemption for credit unions could bring $10 billion in tax revenue over the next five years, Husic said.
Gentile said the tax-exempt structure of credit unions has been upheld by Congress many times since it was introduced in 1934.
"It's a very important part of our structure," Gentile said. "It's not about shareholders. It's not about a small group; it's about 97 million Americans. We think more people want to do business with value-based organizations."
He said he welcomes the opportunity for banks to change their charter to become credit unions, which has occurred only twice in the history of credit unions.
Marquette said he believes the effort to tax credit unions ultimately will fall short.
"They're trying, the banks are trying, I'll give them that," he said. "The banks have attacked us for years, but nothing is going to come out of it. I don't think Congress has the will to do anything, not when they compare the amount of money it will generate to the amount of grief they would hear from people who love their credit union."
Lehigh Valley Business reporter Brian Pedersen also contributed to this story.
An outdated exemption?
• Since 2001, credit unions have not paid what would have been an estimated $20.5 billion in federal income taxes.
• The credit union tax exemption is expected to be the 17th-largest corporate tax expenditure, by conservative estimates contained in the Office of Management and Budget's Analytical Perspectives.
• Decades ago, mutual insurance companies and mutual savings banks, with ownership structures similar to credit unions, lost their tax exemptions, specifically in the 1940s and '50s, and continue to operate while paying taxes.
• Canada and Australia, in 1972 and 1994 respectively, repealed their credit union industries' tax exemptions.
Source: American Bankers Association
Count on these benefits
• The Joint Committee on Taxation's most recent estimate of the credit union "tax expenditure" is $500 million in both 2012 and 2013 and averages $800 million over the five years from 2013 to 2017.
• The benefits that credit unions provide to members and others far exceed those totals, amounting to an estimated $8 billion alone in 2012.
• Credit unions provide benefits directly to members in the form of lower fees, lower loan rates and higher deposit yields than other financial institutions.
Source: Credit Union National Association