howardnlby Howard Stephenson

HJR 1, the resolution regarding financial institutions passed the recently concluded Utah Legislature. It is a resolution encouraging Congress to create fairness in the taxation of competing financial institutions and determine whether the tax exemption currently given to federally-chartered credit unions is justified. The resolution has no effect of law, yet it was lobbied harder and longer than almost any other issue before the legislature except perhaps, SB 61, the IHC hospital tax issue.

Both issues were based on the principle of tax equity among competitors.

The debate surrounding HJR 1 was more heated than most other issues. The debate was even more elevated in the public arena than in the legislature itself. Credit unions spent more than one million dollars on television, radio, billboard and newspaper advertisements urging citizens to contact their legislators and tell them to vote no on HJR 1.

During my thirteen general sessions in the Utah legislature I’ve never received a greater number of threatening messages from constituents. The most common message went something like this, “I like my credit union. If you vote to tax credit unions I will get my family and neighbors to defeat you in the next election.” Almost identical letters were received regarding SB 61 only in place of “credit unions,” they substituted “IHC.” There was little substance to the letters, few principled arguments explaining why one type of institution should be tax-exempt and their competitors should be taxed.

What’s the real issue?

In Utah all state income taxes go directly to fund education. Neither credit unions nor Intermountain Health Care pays corporate income taxes. That means any business done with credit unions, including the mortgages and home theater loans they advertise, results in less money for education. The IHC exemption means that any medical services received through IHC-owned hospitals results in less money for education. This all translates to fewer teachers and larger class sizes, among other things. The only other option is for taxpayers and taxpaying businesses to pay more in taxes to raise sufficient revenues to educate our kids.

I will write more about the IHC exemption another time. Today, however, I would like to explore the credit union issue more fully.

Although credit unions provide services very similar to those offered by other financial institutions, credit unions have a distinct advantage – they don’t pay any income taxes, while their competition does. In other words, Utah and federal tax laws give credit unions an unfair competitive advantage while eroding our state’s tax base.

Historical Perspective

The original idea behind the credit union’s tax exemption was to provide credit for people of lesser means. A hundred years ago it was difficult for ordinary people to get credit to participate in the American dream – to buy an electric refrigerator or an automobile. Today, however, just about anybody can get credit instantly, on the spot while looking at new refrigerators at Sears or kicking tires at the automobile dealership. Today, if American’s have a problem with credit, it is that we have too much credit and too much consumer debt, not too little. The credit union ads we see so prominently today are focused on helping people to buy luxury items, not necessities. Home theaters, boats, and recreation properties are the things for which these taxpayer subsidized loans are suggested today.

The ink has barely dried on HJR 1 and already Congress is considering legislation to expand the types of tax exempt loans federally-chartered credit unions can get into. The credit union tax exemption was justified because it was to benefit people of lesser means. So why are we now debating the expansion of credit union business loans? Congress needs to seriously question the justification for allowing credit unions to expand their business loan portfolios. It is clear that credit needs of people of lesser means have been more than satisfied. Is Congress now saying that they want to take care of credit needs of businesses of lesser means?

CURIA would make a bad problem worse

The Credit Union Regulatory Improvements Act, commonly referred to as CURIA, will soon be debated in the U.S. Congress. This bill will more than double the commercial lending ability of credit unions. In fact, they’ll have more commercial lending authority than tax-paying federal savings associations, which had their tax exemption removed by Congress in 1951.

If CURIA passes, the playing field for financial services will be made even more uneven. By allowing credit unions to have nearly identical lending authority as any other type of financial institution while still keeping them tax-free, CURIA will make the playing field for financial services even more uneven.

The Utah Taxpayers Association opposes CURIA and is currently engaged in an effort to let Utahns know what they can do to prevent its passage. The Association believes taxes and regulations should apply equally to all competitors.

Additionally, following a two-year task force study, Utah’s legislature recently asked Congress to consider establishing fair and equitable tax policy among competitors in the financial services industry. CURIA, by exacerbating the competitive inequity among financial service providers, is completely contrary to the policy set forth by Utah’s legislature.

Legitimate tax exemptions are often created to help grow the economy, increase wages and provide more jobs. These decisions are made through a fair, thoughtful, deliberative legislative process and then signed by the governor. But Congress is now considering a tax exemption which will take the decisions for who gets business tax breaks from state elected representatives and place them in the hands of federally chartered credit unions – specifically, in the hands of loan officers. In other words, credit unions will be given the power to decide which businesses they want to favor with tax-exempt loans and which ones they don’t.

Expansion of business loans is a line in the sand which Congress should not allow tax-exempt credit unions to cross.