April 12, 2013 04:50 PM

Commercial and community banks are lashing out at credit unions for what they describe as an unfair tax advantage.

The tax-exempt status of credit unions is coming under fire in Washington, D.C., and the debate is slowly creeping into the politics of the Bayou State. The issue has a long history, dating back to the 1930s when Congress passed a law exempting federally-chartered credit unions from the income tax, following a ruling from the attorney general that they are nonprofits and their members share in expenses.


 Photo by Danny Landry
 U.S. Rep. Charles Boustany
Lawmakers have since maintained that status and protected the unique business model. But now commercial and community banks are making an aggressive push to have Congress revoke the special tax designation. The effort is being led by the American Bankers Association, which has purchased print ads and radio spots carrying the same message: "Today credit unions are a $1 trillion industry that pays no income tax. That's nearly $2 billion every year that could help shrink the federal deficit."

Around the same time ABA unveiled its blitz last month, members of the Louisiana Association of Bankers were on Capitol Hill meeting with lawmakers for their annual Washington gathering. Executive Director Bob Taylor says a good deal of chatter involved over-regulation, but that the tax status of credit unions was discussed as well. "If your competitor does not have the same expenses or tax liability as you, you start to wonder why they don't and you do," says Taylor.

U.S. Rep. Charles Boustany, R-Lafayette, has been at the core of the national debate as chairman of an oversight subcommittee of the influential Ways and Means Committee, which hosted hearings last year on the broader topic of tax-exempt organizations. He was also the keynote speaker at LBA's Washington event in March. On LBA's website, Boustany's speech was described as pertaining to "credit union taxation, among other issues of concern."

Boustany, however, declined to be interviewed on the matter, and his office rejected a request for a copy of his LBA speech. "We've had some conversations, but he hasn't responded directly to the credit union issue," Taylor says. "Absent an actual bill that's going to be voted on, it's not something elected officials are eager to engage in."

There is a wealth of people, resources and money on both sides of the issue, enough to make lawmakers not want to take sides unless absolutely necessary. Boustany has connections to both sides, but the scales tip in terms of campaign fundraising. While Boustany received $3,000 during the last Congress from the National Association of Federal Credit Unions, according to the Center for Responsive Politics, he also took in $31,500 from commercial banks and financial institutions, many of them ABA members, including the following:

- Bank of America, $14,500
- Citigroup Inc., $4,500
- Comerica Inc., $2,500
- Compass Bancshares, $2,000
- IberiaBank, $2,500
- JPMorgan Chase & Co., $4,000
- Quicken Loans, $1,500

Rusty Cloutier, president and CEO of MidSouth Bank in Lafayette, says he has not heard anything on the issue from Boustany, either, but personally sees merit in ABA's public outreach campaign. "It's very clear that on April 15 everyone will pay taxes except for the credit unions," he says. "When they have conventions in Louisiana, they're not even paying a hotel-motel tax."

A request for comments from the Louisiana Credit Union League, which Boustany has also addressed and met with in the past, was unsuccessful. But the National Association of Federal Credit Unions has been lobbying the issue hard. Executive Vice President of Government Affairs B. Dan Berger says that the "banking trades continue to ignore the fact that many for-profit banks still rely on massive amounts of taxpayer funding in the wake of the financial crisis."

Berger points to nearly 400 American banks still struggling to repay government assistance loans, known as TARP funds. He says credit unions cost the federal government about $1.27 billion annually due to the tax designation, while Subchapter S banks, some of which pay no corporate income tax, amounts to a break of $2.05 billion.

Credit unions do not make the same kind of billion-dollar trades as mega-banks, he adds, and are nonprofit cooperatives owned by members. "Every dollar earned at credit unions is returned to members through enhanced services including lower fees, higher rates on savings and/or lower rates on loans," Berger says. "Simply put, the differences between credit unions and others who operate in the banking sector extend far beyond fair tax treatment."

 Photo by Robin May
Rusty Cloutier, president and CEO of MidSouth Bank

Cloutier counters that "nobody objects to little credit unions getting to do business," but it "troubles" him that the credit unions paint a political picture of modesty while simultaneously asking Congress to increase the cap on their business lending. Legislation, pitched as a job-creator, would allow credit unions to lend an additional $13 billion to small businesses. "They don't have the talent to pull it off," Cloutier says. "It'll bankrupt them."

The loan push may very well be the reason the ABA has resurrected the tax status issue, which has been publicly debated before. But Congressman Ed Royce, a Republican from California, says he filed the bill to increase business lending because, as nonprofits and cooperatives, credit unions are uniquely positioned to help their communities grow. "This effort is not a debate about credit unions versus banks, this is about helping small businesses access the capital they need to grow and hire," says Royce. "Now is not the time to place artificial caps on safe and sound lending."

If capital is king and competition breeds success, then the bickering between credit unions and commercial and community banks is far from over. Yet with the federal government regulating the sector with more gusto than ever and Congress in desperate need of new revenues to prop up the national budget, the combatants could potentially end up on the same side - eventually.

But it will not be on the tax designation issue or the proposed increase in business lending. "We just want to create a level playing field," Taylor says. "It's a competitive thing, and it's a revenue thing."

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