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NAFCU’s Letter to Senate in Response to ABA’s Recent Letter on Credit Unions

July 15, 2013

The Honorable Max Baucus
Chairman
Senate Finance Committee
Washington, D.C. 20510

The Honorable Orrin Hatch
Ranking Member
Senate Finance Committee
Washington, D.C. 20510

Re:  The Importance of Retaining the Credit Union Tax Exemption

Dear Chairman Baucus and Ranking Member Hatch:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents the interests of our nation’s federal credit unions, I write today in response to the letter dated July 15, 2013 from Frank Keating of the American Bankers Association (ABA) to help set the record straight on credit unions.

To that end, we continue to urge you to protect the credit union federal corporate income tax exemption as you move forward with tax reform. As we have communicated to you before, the cumulative benefit credit unions provide the greater economy totals over $10 billion a year according to an independent study released by NAFCU last year.  As the study also shows, altering the tax status of credit unions would have a devastating impact not only on credit union members across the country, but also on consumers and small businesses in general. Eliminating the credit union tax exemption would result in the loss of 150,000 jobs a year, a shrinking of the GDP and a net loss of revenue to the federal government. I have included a copy of the study summary along with this letter.

While the letter claims credit unions threaten the business done by other financial institutions, this is simply untrue. What the ABA did not tell you is that a 2011 study commissioned by the Small Business Administration’s (SBA) Office of Advocacy found that bank business lending was largely unaffected by changes in credit unions’ business lending, and credit unions’ business lending can actually help offset declines in bank business lending during a recession (James A. Wilcox, The Increasing Importance of Credit Unions in Small Business Lending, Small Business Research Summary, SBA Office of Advocacy, No. 387 (Sept. 2011)). The study shows that during the 2007-2010 financial crisis, while banks’ small business lending decreased, credit union business lending increased in terms of the percentage of their assets both before and during the crisis.   Clearly, credit unions were making loans when banks did not want to.

Furthermore, the letter claims that credit unions have unfair advantages and should be taxed.  If credit unions have such an extraordinary advantage, why aren’t banks lining up to convert to credit unions?  What the ABA did not tell you is that nearly 1/3 of banks are Subchapter S corporations and pay no corporate income tax.  Yes, they pay other taxes, but so do credit unions and their nearly 96 million member-owners who pay personal income taxes on the dividends they get from their credit union.  Credit unions actually pay many taxes, such as payroll taxes and state and local taxes.  Next time a banker complains to you about credit unions, we would urge you to ask them if they have looked at converting to one.  Perhaps examining ways to raise new revenue from Subchapter S banks is something the Committee should consider in this process.

Simply put, the tax exemption is an issue of survival for credit unions. Despite what the bankers claim, there remain significant regulatory and statutory differences between not-for-profit member-owned credit unions and other types of financial institutions – including limits on who they can serve and their ability to raise capital. As you know, during the financial crisis credit unions continued to lend to consumers and small businesses left behind by our nation’s mega-banks that the ABA represents. Credit unions didn’t participate in the TARP bailout and are proud of their continued service to Main Street America.

In other countries where the tax exemption has been eliminated for credit unions, the number of credit unions has declined dramatically. If the tax exemption was removed, many would convert to banks or just go away. Without credit unions, which serve to provide checks and balances in the marketplace, for-profit banks would likely increase rates and fees on consumers.

Furthermore, we are perplexed as to why, the ABA seems to ignore the good work of your staff on the Joint Committee on Taxation (JCT) and the JCT’s own estimate of the cost of the credit union federal tax expenditure that puts the five-year (2013-2017) cost of the credit union at $3.9 billion (p. 35), much less than the numbers found in their letter (“Estimates of Federal Tax Expenditures For Fiscal Years 2012-2017,” February 1, 2013).

Thank you for the opportunity to respond to these attacks against our industry. We urge you to retain the credit union federal income tax exemption as tax reform moves forward. If my colleagues or I can be of assistance to you, or if you have any questions regarding this issue, please feel free to contact me or NAFCU’s Senior Associate Director of Legislative Affairs Jillian Pevo at (703) 842-2836.

Sincerely,

Brad Thaler

Vice President of Legislative Affairs

cc:        Members of the United States Senate

Enclosure:       Key Findings on the Economic Benefits of the Credit Union Tax Exemption to

Consumers, Businesses, and the U.S. Economy, National Association of Federal

Credit Unions, September 2012


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