Credit unions may come under state scrutiny of tax-exempt entities

<p>WASHINGTON-According to CUNA Vice President of State Government Affairs Colleen Kelly some states are expected to review the possibility of taxing the currently tax-exempt organizations in their jurisdiction. Fortunately for credit unions, the interested states really are not that interested. Only a “handful” of states are going to start reviewing tax-exempt entities, she said but was unsure of an exact number. Kelly added that she knew Texas and Oklahoma were looking at the possibility. Other states are battling the tax issue for other reasons, such as banker attacks in Minnesota and Iowa. “So credit unions are certainly going to be on any list of any states looking at all the tax-exemptions. It doesn’t mean that they’re in danger of it; it’s just that they’re going to be on the table with all the other tax exemptions,” she said. Kelly added that on top of their regular workload, the credit union leagues have been even busier than usual trying to educate the state legislatures on the credit union difference. She pointed out that states are not looking at the income tax but others, such as the sales tax and added that state-chartered credit unions already pay taxes in many states. “It’s a significant loss and it’s a real big hit to the dual chartering system,” Kelly observed, since the states cannot impose taxes on federal credit unions. The move came as no surprise to Kelly considering the poor economy. She said that states began reviewing all their options for additional revenue back in December of 2000, when the economy first began heading downward. Most states are already planning to cancel tax cuts and reduce spending overall. Homeland security issues have also heightened the states’ need for funds. “What we did not foresee, however, which created a bigger issue, was the homeland security costs that the states are picking up, which has been considerable as their protecting their government facilities, their airports, their power plants, their water supply,” Kelly explained of the impact of the September 11 terrorist attacks. Additionally, because of the Internet tax moratorium imposed by the U.S. Congress, states expect a $10.8 billion decrease in tax revenues in 2003 due to more Americans shopping online, according to Kelly. The situation is also exacerbated by increasing bankruptcy filings, she noted. Many indebted Americans are afraid they will not be able slip in under the new stricter guidelines in the current bankruptcy reform legislation if it becomes federal law, and bankruptcy attorneys are preying on those fears. In 2000, the bill died via pocket veto by then-President Bill Clinton. Now, with a Democrat-controlled Senate and Republican-controlled House, new compromises must be ironed out regarding the homestead exemption and clinic violence fines, but President George W. Bush has said he supports reform. “It’s difficult for the states to collect income taxes from businesses and individuals who are in bankruptcy proceedings, so they are being affected by this as well,” Kelly commented. “So with all of this going on, the states are very busy looking for areas and avenues to take care of this problem and unlike at the federal level, deficit spending is not an option for the states.” She added that only Vermont allows for deficit spending. Some states are looking into dipping into their `rainy day’ funds, which 47 states really grew in the 1990′s, including tobacco lawsuit money. Because of these funds and other efforts by state lawmakers, the tax-exempt entity review remains on the back burner in most states. [email protected]</p>