Are Proposals to Tax Credit Unions a New Nonprofit Policy Front?

April 4, 2018; Gazette (Cedar Rapids, IA)

NPQ has long been writing about state and local attempts to tax nonprofits or ask for payments in lieu of taxes (PILOTS). These efforts have largely been aimed at large institutions—the “eds and meds” among us—which often pose a tempting target. The Tax Cut and Jobs Act (TCJA) of 2017, which represented a $1.5 trillion overhaul of the federal tax system, essentially imposed taxes on some of these larger nonprofits. For example, TCJA introduced a 21 percent tax on certain nonprofit executives, and legislated a 1.4 percent excise tax on net investment income of nonprofit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students.

In addition to this focus on nonprofit hospitals, colleges, and universities, there has been an effort in Washington DC to question the tax exemption for not-for-profit credit unions, despite the fact that the 2017 Tax Cut and Jobs Act fully kept this exemption intact. According to the National Association of Federally-Insured Credit Unions (NAFCU), the results of such a move would be disastrous. Removing the credit union tax exemption would actually cost the federal government $38 billion in lost income tax revenue over the next 10 years. In addition, GDP would be reduced by $142 billion, and nearly 900,000 jobs would be lost over the course of next decade as well. While the direct hit to the economy would be dramatic, cost to consumers would be even higher in the form of higher interest rates and lower deposit rates, with an estimated 50 percent reduction in the credit union market share costing bank customers an estimated $6.9 billion to $15.7 billion annually.

While the federal exempt status of credit unions is intact, discussions such as these have the potential to drive change in local governments. For example, changes in federal tax policy impacting nonprofits, as well as the influence of lobbying, have led to conversations about taxing credit unions at the state level, as more states are reopening their tax codes to adjust to the latest federal changes. Many nonprofits might not realize that a significant downstream effect of federal tax revisions is that state and local tax codes revisions may follow, as 36 states use the federal code as a starting point for their personal income taxes. Besides, as the issues with the eds and meds prove, these ideas about nonprofit taxation are often in free-flow between the states, localities, and the feds. Decisive moves and judgments are made at all levels and provide models to the others.

In Iowa, for example, the state has not changed its tax laws since 1997, yet the governor and legislature are seeking a sweeping tax overhaul, aiming to cut taxes by $1.7 billion by 2023 while maintaining growth rates in revenue. The proposed cuts are balanced by establishing taxes on large credit unions in the state, among other provisions, and builds on decades-long efforts by the bank lobby to change the tax status of credit unions.

For years, banks and banks trade associations have painted credit unions as having an unfair tax advantage, yet through the recent federal tax overhaul, banks and other financial institutions were by far the clear winners, in part by having a new lower tax rate due to the restructuring of the corporate tax code. JPMorgan Chase & Company, the nation’s largest bank, and Wells Fargo both released statements earlier this year stating they expected the new law to reduce their effective tax rates next year to 19 percent, a cut of nearly one-third from what they paid in 2016. Furthermore, according the data from the FDIC, more than one-third of banks are organized as S Corporations, or pass-through corporations that allow shareholders to receive profits before income taxes are applied.

Although the tax burden is dramatically different for banks today given these changes, their lending and business practices stand in stark contrast to credit unions. Many people are unable to access affordable credit, checking, and savings accounts, and charged high fees for using standard banking services. Even as recently as January, Bank of America announced that it was eliminating its free checking program, and beginning to charge a monthly fee of $12, which primarily impacts its customers with low account balances. Furthermore, according to the Pew Charitable Trusts, which has been publishing research on bank overdraft fees, 70 percent of overdrafters do not understand that they have the right to have transactions declined without a fee if their account does not have sufficient funds to cover a debit card purchase.

In the case of Iowa, changes in tax policy targeting credit unions would impact the interest rates for loans and savings accounts at credit unions. Across the state, credit unions manage only 15 percent of all banked financial assets and fill a critical need for affordable consumer products. Over 85 percent of all credit union loans in Iowa are consumer loans, and the benefits that credit unions in that state provide affect one out of every three Iowans, who are credit union members. The critical need for affordable consumer loans and financial services is reflected by the state’s largest credit union, the University of Iowa Community Credit Union, which has 170,000 members, half of whom reside in a low income zip code.

By considering taxing credit unions in Iowa, lawmakers are ignoring the role that credit unions play in communities by providing affordable financial services to people who would otherwise be unable to access them. Built into the credit union model is an ethos of people helping people, and the business model of being nonprofit should not be penalized by instituting taxes, overlooking the positive community benefit that credit unions have. Doing so is both shortsighted and creates a pass-through tax on credit union members.—Derrick Rhayn