James A. Hughes, president of Unity Bank, recently penned an Industry Insights blog for NJBIZ entitled “It’s time for credit unions to pay their fair share.”James A. Hughes, president of Unity Bank, recently penned an Industry Insights blog for NJBIZ entitled “It’s time for credit unions to pay their fair share.”
There is a simple reason why credit unions do not pay taxes — they are member-owned, not-for-profit financial cooperatives that have numerous restrictions placed on them that banks do not. By point of example, credit unions do not have access to capital in the marketplace, which significantly restricts their growth. Credit unions have restrictions on how much they can lend to businesses, and what businesses they can lend to, while banks do not. And notably, credit unions are subject to strict regulations including stringent capital requirements and restrictions in where they can invest their members’ deposits.
Hughes states that it’s increasingly difficult for little banks — like his — to compete. He blames the state’s credit unions, pointing out that credit unions have grown by an average of 3.43 percent per year over the past 20 years. He fails to mention that his own bank has grown from $79 million in assets to $1.03 billion in assets over that same 20 year period — an annual average growth rate of roughly 13.6 percent per year.
Keep in mind that New Jersey credit unions hold a 3.8 percent market share of depository assets in the state, while New Jersey bankers hold a whopping 96.2 percent market share. Unfortunately, bankers and their $16 trillion banking lobby will not be happy until they have the market all to themselves. And with less competition in the marketplace, consumers will be the losers.
Hughes also omits the fact that big banks — and especially out-of-state banks — are the root cause of most small bank difficulties. In fact, out-of-state banks operating in New Jersey control two-thirds of total bank deposits in the state.
Hughes also incorrectly states that New Jersey credit unions paid “zero” in taxes in 2014. In fact, New Jersey credit unions paid real estate and payroll taxes. At the same time, Hughes remains mum on the issue of tax breaks embraced by the banking industry he represents. Just one of these tax breaks — Subchapter S status — has been adopted by over one-third of banks, including six banks (holding $4.7 billion in assets) in the state of New Jersey. The effect of a Subchapter S election is that the bank is no longer subject to corporate-level taxes. In 2014, bank Subchapter S status alone resulted in an estimated drain of $900 million to U.S. Treasury coffers compared with the taxes that would have been paid were these institutions structured as normal Subchapter C corporations. Moreover, U.S. Treasury foregone revenue from bank Subchapter S election totals approximately $11.6 billion since 1997.
Also lost in his commentary is the fact that credit unions are not-for-profit and are owned by their depositors — they have no stockholders. So they pass earnings directly through to their member-owners — saving average New Jersey consumers $55 million in 2014 and $3.6 billion over the past eight years. For-profit banks, in contrast, pass earnings out to stockholders — mostly consisting of big out-of-state corporations and wealthy individuals.
The tax treatment conveyed on credit unions roughly 100 years ago continues to serve the purpose for which it was created, and is one of the best investments that the government makes in its citizens. Thirty-one percent of New Jersey credit union offices are located in Community Development Financial Institution areas — roughly double the 17 percent of bank offices located in such areas. Credit unions provide substantial benefits to their members and the dollar amount of those benefits greatly exceeds the loss in federal revenue that would result from taxing not-for-profit credit unions.
Finally, it is true that membership to a credit union can be established through membership in government-approved associations. What Hughes fails to mention is that Congress passed the Membership Access Act in 1998 to allow more Americans access to credit unions. Affinity Federal Credit Union abides by the law and credit unions are regulated to ensure compliance with the law.
One thing is true — both credit unions and small banks are finding it increasingly difficult to be successful as the market becomes dominated by big, aggressive Wall Street banks — those same banks that were responsible for the financial crisis due to their imprudent loan and risky investment practices in their quest for personal profits. It’s unfortunate that Mr. Hughes has decided to attack credit unions. By working together, credit unions and small banks might be able to make headway on this and other big issues of mutual concern.
John Fenton is the chief executive officer and president of Affinity Federal Credit Union. Affinity Federal Credit Union was ranked No. 1 on the NJBIZ list of Top Credit Unions in the 2015 Book of Lists.