New Tax for Iowa CUs Could Backfire, Forcing State-to-Federal Conversions

IOWA CITY, Iowa – Should legislators be swayed by a bill that aims to tax the largest state-chartered credit unions here, the Iowa Credit Union League said fallout may come by way of a number of state-to-federal charter conversions, a move than could potentially affect the state’s revenue by more than $500,000. The league met with Iowa Gov. Thomas Vilsack and legislators on Feb. 3 to explain the impact of an Iowa Bankers Association (IBA) bill that would assess the state’s 5% financial institution tax on the largest state-chartered credit unions. Iowa’s state-chartered credit unions currently pay a state sales tax, property tax, employer tax, and moneys and credit tax. If legislation were to pass, state-chartered credit unions may be propelled to convert to federally charters, which currently only pay property and employer-related taxes, league officials said. Those conversions could impact the state’s coffers by more than $500,000. In essence, state regulatory agencies including local governments would lose revenue from the fees and operating expenses that have been paid by state-chartered credit unions. “It’s the story the bankers don’t publicize,” said Gary Appleby, senior vice president of finance and administration of the University of Iowa Community Credit Union (UICCU). The credit union recently announced its intentions to buy Hawkeye State Bank (HSB), a move the (IBA) said “brought the issue of tax-exemption for credit unions back to the limelight.” State-chartered, multi-county-community chartered credit unions with more than $100 million in assets would meet the criteria for the additional tax, said John Sorensen, IBA’s president. Of the 180 credit unions here, nine would be affected by the tax. “This is not a new issue,” Sorensen said. “It really boils down to providing an equitable playing field between banks and bank-like credit unions.” Sorensen added that credit unions with “significant” commercial lending portfolios – loans exceeding more than 12.25% of net assets – would be required to pay the financial institution tax. The impact of an additional tax on credit unions would “produce maybe a couple million dollars in a state with a $4.5 billion state budget,” Iowa Superintendent of Banking Tom Gronstal told the Des Moines Register. Sorensen said the pending purchase of HSB by UICCU is a “burden on taxpayers” here because a portion of the taxes paid would eventually be taken from city and county businesses. League officials said the purchase could result in more loans to the community. At the end of 2002, UICCU had a loan-to-asset ratio of 77.55% compared to 70.79% for HSB. If the bank’s assets are acquired and loaned out at the same rate by UICCU, $10,851,000 in additional loans will be made to the community. If the transaction is approved, UICCU’s moneys and credit tax is estimated to increase to $57,500 in 2003 and more than $90,000 annually within five years. UICCU paid $30,000 in moneys and credit taxes against its reserve account in 2002 and is estimated to pay $80,000 in state sales tax this year, Appleby said. “I don’t think the bankers realize there’s more economic impact here than just taxation,” Appleby explained. “What they don’t realize is that any additional tax would have credit unions converting to federal charters to have the exemption.” Further, 41% of Iowa’s banks are in Subchapter S tax status including HSB, which filed in 1997, which requires paying no federal income tax, league officials told legislators. Meanwhile, Sorensen said the bill has “received high interest” by some legislators and a draft is expected to go before the Iowa’s House Ways and Means Committee within weeks. The IBA is also lobbying state legislators to conduct a study of credit unions in Iowa that will include competitive issues with banks and the impact of tax-exemption status on taxpayers. Industry watchers note that banking trade groups in Utah, California, Florida, Texas and several other states are pushing for more taxes on not-for-profit credit unions, as governors look for ways to fix budget shortfalls. -