Tax Reform Proposal Backs Credit Unions into a Corner

The credit union lobbyists are in full panic mode. Their tax exemption is on the chopping block and they can't blame it on the big bad banks.

The bipartisan "Blank Slate" tax reform proposal that has been initiated by the Senate Finance Committee and the House Ways and Means Committee has finally put this outdated tax exemption in the proper perspective. Should we raise taxes on every business in America so that a handful of highly profitable financial institutions can continue to retain profits and grow tax-free? Of course not!

Let me explain. The "Blank Slate" approach to tax reform starts by eliminating all tax exemptions, deductions and loopholes and uses that money to lower tax rates across the board. Then every exemption, deduction and loophole is scrutinized to determine whether or not it should be added back with the understanding that tax rates will have to be increased to offset the lost revenue. In other words, Congress would have to agree to raise tax rates on everyone else in order to preserve the credit union exemption.

So you can see why the credit union lobbyists are panicked. Their main talking point – a tax on a credit union is a tax on the credit union's members – is true for every other business as well. By advocating for their own exemption, they are advocating for a tax increase on the customers of every other business in America.

The irony here is that they are talking about taxing the money a credit union does not give back to its members. If the credit unions lose their exemption, Subchapter T of the Internal Revenue Code would only require them to pay income taxes on the profits they retain from their members to grow and expand. Most credit union members have no idea that as soon as their credit union retains those profits, they are lost to the members forever (unless the credit union is liquidated). Maybe if Congress does the right thing, and lowers taxes on everyone else by eliminating this outdated loophole, credit unions will start giving back more of their profits to their members in order to avoid taxation.

Some credit union lobbyists are telling Congress that without the exemption, the credit union industry will just fade away. Really? What legitimate business would ever admit that it can't compete without a subsidy from Uncle Sam? Don't they see that they are arguing against themselves? They are admitting that their exemption does make all the difference in the marketplace and if it weren't there, they wouldn't exist – clear evidence that Congress is picking winners and losers.

Credit union lobbyists are struggling to motivate their troops because they can't blame this whole debate on the big bad banks. This isn't a fight between banks and credit unions. It is a policy discussion about how to stimulate the economy through pro-growth tax reform and get our country on a path toward a balanced budget – something most credit union members agree with.

The credit union tax exemption is the perfect litmus test to gauge how serious Congress is about tax reform. There is no legitimate tax policy justification for keeping the exemption. State and federal courts have repeatedly ruled that credit unions have expanded well beyond their statutory membership limits. They basically serve the general public like a bank. They have started making big business loans, and they pay their executives huge salaries.

Additionally, the Government Accountability Office has determined that banks do a better job of serving the poor. Given the fact that other cooperatively owned businesses have to pay taxes on the profits they retain from their members, the only reason this exemption might survive would be raw political pressure from the group receiving the subsidy.

The primary reason I support meaningful tax reform is because I believe it is the only way to grow the economy, create jobs and achieve the deficit reduction America needs. I hope Congress will have the courage to stand up to every special interest that lobbies to save its sweetheart tax deal in order to lower taxes on everyone. Every American, not just bankers, has an interest in getting this right.

Howard M. Headlee is the president and CEO of the Utah Bankers Association and a member of the steering committee of Fix the Debt Utah.