End Of The World As We Know It?

by. Henry Meier

In poker, as in life, you can do more harm than good by over-reacting to the worst case scenario.  For instance, if you fold every time someone raises, then you’re never going to be in the game for the big money.  Imagine if the Tom Brady, the Patriot’s quarterback, reacted to the news that his team had recruited Tim Tebow by demanding to be traded.  What does this have to do with credit unions?

Well, yesterday the Senate Finance Committee released a paper outlining possible tax reforms and not surprisingly one of the suggested reform options is the elimination or narrowing of the credit union tax exemption.  So first, let’s not over-react.  According to the Senate Finance Committee’s website, this tax reform options paper includes “ideas from across the spectrum and, as such, do[es] not necessarily have the endorsement of the Chairman or Ranking Member.”   In addition, let’s keep in mind that it would be difficult to find any proposal reconsidering the government’s tax policy over the last fifty years that doesn’t at least broach the subject of the credit union tax exemption.

But yesterday’s report is different.  First, as CUNA has correctly pointed out, tax reform has never been this seriously considered since at least 1986.  While it is looking increasingly unlikely that Congress will be able to seriously consider fundamental tax reform this year, who knows what the political winds will bring in the coming months.

Yesterday’s option paper might also signal a more nuanced attack on the credit union tax exemption.  By suggesting that Congress should consider tightening requirements for non-profit organizations exempted from the unrelated business income tax (UBIT), we may be seeing the first salvo in an argument in which credit union critics argue that they are not pushing to get rid of the credit union tax exemption in its entirety, but simply looking to make sure that the tax exemption only applies to activities related to the core functions of credit unions.  However, as we have seen in the IRS’s unsuccessful efforts to impose UBIT taxes on state chartered credit unions, if we allow the IRS to decide which activities and services are related to helping consumers, particularly people of modest means, we might as well all start converting to banks.

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