It’s time for credit unions to pay their fair share

NJBIZ STAFF//July 6, 2015//

It’s time for credit unions to pay their fair share

NJBIZ STAFF//July 6, 2015//

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One of the best-kept secrets in the U.S. today is the federal tax exemption provided to credit unions across the country, which costs American taxpayers more than $3 billion annually, according to the non-partisan Tax Foundation, the nation’s leading independent tax policy research organization. The Obama Administration’s 2014 proposed budget…It is time for credit unions to step up to the plate and do the right thing. It is time for credit unions to pay their fair share, just like the community banks they are virtually indistinguishable from today. Credit unions need to share in the responsibility of helping our government manage the daunting annual challenge of providing adequate resources to support necessities, such as education, roadway and infrastructure repairs, and services for the elderly and informed.

Credit unions today are not the mom and pop shops they were when established in the 1930s to provide low- and moderate-income families with modest-sized loans. At the time, the credit union tax exemption was designed to encourage loans to this population. However, tax-paying banks today are actually doing just as good a job serving these customers as credit unions – if not better. The Government Accountability Office, an independent, nonpartisan agency that works for Congress, reported that 49 percent of credit union customers are upper income as compared to 41 percent of bank customers; and 31 percent of credit union customers are low- or moderate-income compared to 30 percent of bank customers.

Credit unions today are a trillion dollar industry with two-thirds of all credit unions, or 218 nationally, each holding more than $1 billion in assets, which makes these institutions larger than 91 percent of all banks. The largest credit union in New Jersey has $2.3 billion in assets, larger than 84 percent of all banks headquartered in the Garden State, according to the American Bankers Association. In 2014, New Jersey banks paid more than $445 million in taxes; credit unions zero.

As credit unions get larger, and they are growing at an alarming rate, the U.S. government loses more tax dollars and comes looking to the American people to make up the difference. New Jersey credit unions leveraged their tax exemption to grow deposits from $7.9 billion in 2004 to $11 billion in 2014, an annualized rate of 3.43 percent during that time, according to the ABA. Credit unions are growing at twice the rate of banks and their tax subsidy will continue to grow as they continue to take business away from tax-paying institutions.

The origin of the tax exemption dates back more than 80 years, when basic financial services were extremely limited for many low- and moderate-income individuals. In addition to serving those of modest means, Congress required credit unions to restrict their services to individuals sharing a “common bond,” such as those with the same employer. However, today’s credit union environment looks vastly different.

Credit unions have decided they can dispense with the common bond requirements that might stifle membership growth by establishing associations that allow virtually anyone in an entire state to join a credit union. Credit unions simply establish associations, which exist solely to gain members for credit unions. The National Credit Union Administration, the regulator for federally chartered credit unions, has failed to adopt meaningful rules to curb the abuse of the common bond restrictions, which, in the end, penalizes the American taxpayer.

Credit unions today are virtually indistinguishable from taxpaying community banks except for the fact that they are tax exempt and do not face anywhere near the level of government regulation foisted upon banks. Few would expect people to feel sorry for banks, but imagine for a moment that you own a business where your chief competitor is exactly like yours except they do not pay taxes. This is the situation that faces the nation’s 6,000 community banks, which contribute $4 billion annually in taxes that support our nation and its communities. Factor in state and local taxes and the figure goes much higher.

In an economy based on free-market principles, the tax code should not provide a competitive advantage to one segment of the financial services industry. The tax code should not be picking winners and losers. The Independent Community Bankers Association recently called on Congress to hold hearings on the generous tax subsidy granted to credit unions. We encourage you to contact New Jersey’s elected officials in the U.S. Senate and House of Representatives and tell them you are tired of footing the bill for credit unions.

James A. Hughes is the president and CEO of Unity Bank in Clinton. Hughes joined Unity Bank in December 2000 as executive vice president and CFO. He previously served as senior vice president of finance at Summit Bancorp and as an audit manager with KPMG.

The Community Bankers Association of New Jersey is a non-profit organization comprised of New Jersey community banks, including: 1st Constitution Bank, Atlantic Stewardship Bank, Bank of New Jersey, Colonial American Bank, Community Bank of Bergen County, Community First Bank, Cross River Bank, Crown Bank, First Bank, First Choice Bank, First Commerce Bank, First Hope Bank, Fulton Bank of NJ, Harmony Bank, Heritage Community Bank, Highlands State Bank, Hopewell Valley Community Bank, Lakeland Bank, Magyar Bank, Mariner’s Bank, Metuchen Savings Bank, Millington Savings Bank, New Jersey Community Bank, Pascack Community Bank, Regal Bank, Roselle Savings Bank, Roselle Savings Bank, Somerset Hills Bank, Sussex Bank, Two River Community Bank and Unity Bank.