Changing the Rules: Credit Union Tax Exemption Status is a Worthy Fight, but is it the Victory We Need?

ACUC’s keynote speaker, Malcolm Gladwell, spoke at length about his research on how underdogs win.  That research argues that a big factor in an underdog victory is changing the rules.  Think of David picking up a sling and stones to defeat Goliath: bystanders to this fight would likely consider a slingshot breaking the rules.  But, given their physical differences, David stood no chance of winning without changing the rules.

As an industry, we have yet to pick up our sling, choosing instead to face banks in a “fair” fight in the marketplace.  But in such a regulated industry, what rules can change to make a big enough difference to level the playing field?  I decided the logical place to start was with the hot issue: the credit union tax exempt status.

No issue is of higher priority, and, truthfully, it is quite critical.  This act, around since 1934, allows credit unions to afford the commitment to community that we live.  Additionally, as shares, raising taxes on credit unions raises taxes on the 40% of Americans who hold only 6% of the assets in all financial institutions.”  Said differently, taxing credit unions hurts working families, unlike taxing banks, which only impacts a small group ofshareholders.  It’s a worthy fight to keep the status, one where I’ve already reached out to my representatives.

However, these are rational arguments in irrational times.  I’ve heard an elected official share the sentiment that until tax exemption is gone, he wouldn’t entertain changes to business lending or anything else.  This feedback was provided before the current no-holds-barred approach in Congress to remove all tax exemptions. Today, the environment is even more hostile in Washington, DC and winning this fight will be long and expensive.

Additionally, a victory does not increase our competitiveness even as more players enter the financial services marketplace.  It’s a fight for the status quo: a fight to retain a taxexemption, but also the same regulatory burdens and competitive hurdles we face today.  And, as Gladwell’s research indicates, the status quo does not favor the little guy.

Instead, what if we broke the rules and didn’t fight the attempt to remove our tax exempt status, but negotiated a deal with Congress that offered a new revenue stream and a political win? This would leave us better off than a win that allows us to keep the status quo.

For example, removing the business lending cap and creating vehicles for secondary capital would put us on a more equitable playing field. Going further, what if we could get something really off the wall passed, like requiring bank advertisements to look like cigarette cartons, depicting the harm that will come to you if you use their product?  Think of the splash this would make in the press. If these concessions could be considered stones, an aggressive marketing campaign lauding this voluntary move to pay taxes would be quite the sling.

Admittedly, this is an unlikely scenario, but the underdog doesn’t have the luxury of pushing for status quo; the underdog has to change the rules.  What rules would you change?

Brandon McAdams

Brandon McAdams

Brandon McAdams is VP of Growth Strategy and Insights at Coastal Credit Union, a $5 billion credit union headquartered in Raleigh, NC. He’s a self-professed credit union nerd dedicated ... Web: Details