Seeking credit union party

Northwestern Financial Review, May 15-May 31, 2002 by Bengtson, Tom

In Minnesota, the legislature recently passed the Credit Union Protection Act, which brings the state charter into near-parity with the federal charter. When the credit union industry proposed the bill, it originally sought several new powers in the areas of trust, insurance, real estate and leasing. It wanted fewer regulatory examinations and it wanted additional ability to compensate directors. Those provisions were dropped from the bill before it was passed in April.

The Tax-exempt advantage

Bankers who compete against credit unions have long decried the unfair competition. Joe Hardy, president of Prairie State Bank in Springfield, Ill., notes that many credit unions in his state have converted to community charters, which makes their field of membership indistinguishable from community banks that serve a defined geographic marketplace. "They don't pay income taxes," Hardy said. "It makes a big difference."

Hardy also took issue with many of the common stereotypes associated with credit unions. "In central Illinois, their loan and deposit rates aren't any different from what banks offer," he noted. "They tend to have nicer buildings and they pay their employees on the high end."

Hardy said giants like the Peoriabased Citizens Equity First Credit Union, with assets of $22 billion, have a significant advantage over his $148 million bank.

Most of the banking industry's complaints are leveled against only the largest credit unions. "I have sympathy for the small credit union," commented Roger Bense, president of Lake Country State Bank in Long Prairie, Minn. "I have no problem with the credit unions that are doing what they are supposed to be doing."

Congress granted credit unions an exemption from income tax partly because of their cooperative corporate structure, in which each customer is considered an owner with a voice in the credit union's governance. At the largest credit unions, however, there are so many customers that most do not participate in the credit union's annual meeting nor governing activities. They are no different than bank customers, Bense noted.

The credit union industry is maturing at a time when many state governments are struggling to balance their budgets. In Texas, for example, the state's comptroller's office noted that the state loses $3.6 million by exempting credit unions from a state franchise tax. As pressures grow on state budgets, experts predict more lawmakers will begin to consider taxing credit unions.

"The downturn in the economy has resulted in budget shortfalls across the country," noted Colleen Kelly on CUNA's web site. "The poor economy has resulted in lower sales tax and income tax collection, and at the same time, corporate layoffs raise the demand for state government services." Kelly is CUNA's vice president of state government affairs.

Lawmakers in Minnesota considered the tax consequences associated with its credit union law. The Minnesota Credit Union Network noted that in recent years 54 state-chartered credit unions have switched to a federal charter, under which they avoid paying state sales tax. It represents a loss to the state of $1.7 million per year. Minnesota's 123 state-chartered credit unions pay approximately $3.1 million in sales tax per year, the trade group says. The credit unions would pay much more in income taxes if the state taxed credit union income in the same fashion it taxes income at banks and thrifts.