• Bankers: Rescind credit unions’ tax-exempt status
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     | June 30,2013
     
    Albert J. Marro / Staff Photo

    VSECU (no longer called the Vermont State Employees Credit Union), which has offices on Seward Road in Rutland Town, is among the 19 state-charted and six federally chartered credit unions in Vermont.

    American bankers are again pressing the Obama administration and Congress to rescind what the industry claims is an unfair advantage given to credit unions by the decades-old federal tax exemption.

    “With large annual federal deficits, our country can no longer afford to subsidize the $1 trillion credit union industry, which increasingly operates like a tax-free banking system,” the American Bankers Association wrote in its June 21 letter to President Barack Obama.

    In 1937, Congress exempted credit unions from corporate income tax so they could better provide financial access to people of modest means. But the ABA, citing a 2006 General Accountability Office report, said credit unions today “lagged behind banks” in serving households of modest means.

    In his letter, ABA President Frank Keating pointed out that the Office of Management and Budget estimated the “subsidy” at nearly $10 billion over the next five years.

    Keating said more than 200 credit unions each have assets in excess of $1 billion.

    Vermont views

    As president of the Vermont Association of Credit Unions, Joe Bergeron has heard it all before.

    Bergeron said when the banking industry complains about the alleged unfair advantage credit unions enjoy, they conveniently forget that credit unions are like any other cooperative with the profits flowing back to the co-op’s members.

    “It allows credit unions to lower the rate slightly on loans, to raise the rate slightly on deposits and to lessen fees that they would assess to people that do business with them,” Bergeron said.

    As of March 31, Vermont had 19 state- and six federally chartered credit unions with assets of $3.2 billion. The largest is the New England Federal Credit Union with assets of $956 million. Next in line is VSECU, no longer limited to state employees, with assets of $606 million, according to the state Banking Division. Total statewide membership is 324,695.

    The 14 state- and federally chartered banks headquartered in Vermont have total assets of $6.3 billion. The largest bank is Merchants Bank with assets of $1.7 billion.

    Contacted about the ABA letter calling for rescinding the tax-exempt status, the state Department of Financial Regulation had no comment.

    The issue of the credit union tax exemption came up this year in the Vermont Senate Finance Committee, said committee member Sen. Kevin Mullin.

    “When the Shumlin administration proposed to increase the bank franchise tax on Vermont’s larger banks, we took testimony from bankers and a common theme was how much more they are taxed than credit unions,” Mullin said in an email.

    Mullin, a Rutland Republican, said because of the federal exemption there was little the committee could do on the state level so the committee “rejected the Shumlin proposal to further tax banks.”

    Bergeron said credit unions are already highly regulated and are limited in the size of commercial loans that can be made. In Vermont, he said, several credit unions are running up against that cap.

    “Credit unions have far more restrictions not only on what they can be involved in but how they can be involved than the banking industry does,” he said.

    Don’t expect Chris D’Elia of the Vermont Bankers Association to be swayed by credit union industry arguments.

    D’Elia said credit unions should be taxed the way all other financial institutions are taxed.

    “Isn’t it time they start paying their share?” said D’Elia, the VBA president. “Isn’t it time they take responsibility to contributing to support governmental services and Vermonters throughout the state?”

    D’Elia said credit unions are the only financial institution that enjoy a tax-exempt status. He said mutual savings banks and mutual insurance companies lost their tax-exempt status long ago.

    If it’s public policy to provide tax-free financial services, D’Elia said the banking industry would be more than happy to be included.



    A nonstarter

    However, the chances Congress will move to rescind the tax-exempt status are nil.

    “That’s not going to happen,” said Rep. Peter Welch, a member of the House Energy and Commerce Committee and a champion of financial reform.

    Welch said both the state’s credit unions and community banks are vital to the economy and Vermont consumers.

    “In Vermont, we’ve got credit unions that are absolutely critical and do a great job and helped immensely after the collapse of Wall Street,” Welch said. “But we also in Vermont have good local banks that are likewise doing a tremendous job.”

    The Vermont Democrat said credit unions and community banks represent two different business models. Welch said while credit unions benefit from their tax-exempt status banks have access to shareholder capital.

    Wall Street’s collapse nearly five years ago was laid at the doorstep of the nation’s largest banks and investment houses that engaged in risky behavior.

    In its response, the National Association of Federal Credit Unions emphasized the role credit unions played in the aftermath of the worst financial crisis since the Great Depression.

    “As a matter of fact, a 2011 Small Business Administration Study found that credit unions stepped in and help fill a small business lending need when banks pulled back their business lending during the Great Recession,” the credit union industry wrote in its letter to Congress.

    In its letter, the credit union industry shot back that bankers are distorting the cost and contributions of the nation’s credit unions.

    The letter went on to state that credit unions pay various taxes, including local property taxes and federal payroll taxes.

    In addition, the National Association of Federal Credit Unions said the banking industry ignores “the fact that nearly one-third of banks are Subchapter S corporations that don’t pay federal taxes …”



    ‘Not pure’

    D’Elia acknowledged the role big banks played in the financial collapse. But he also said some credit unions engaged in risky lending as well.

    “That industry without question is not pure,” he said.

    Between Jan. 1, 2008 and June 30, 2011, a GAO report found, 85 small credit unions and five corporate credit unions failed. Corporate credit unions provide capital and other services to the 7,400 federally chartered credit unions.

    Corporate credit unions experienced billions in losses during the financial crisis. The GAO “found poor investment and business strategies contributed to the corporate failures.”

    The GAO in a separate report said there were were 414 bank failures between January 2008 and December 2011. The report found many of the failures were concentrated in 10 states in the West, Midwest and Southeast — states at the center of the housing bubble.

    However, the problems encountered by the financial industry in other parts of the country were not mirrored in Vermont.

    D’Elia said when it came to Vermont’s community banks and credit unions, both adhered to prudent lending standards, thus avoiding the mortgage meltdown seen in other states.

    bruce.edwards@ rutlandherald.com

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