Dollar Educates Utah Lawmaker on Possible Consequences of CU Taxation

SALT LAKE CITY-Utah State Senator Ron Allen wrote NCUA Chairman Dennis Dollar for his thoughts on Utah’s credit union taxation legislation. He replied with four pages worth of thoughts. As insurer to all Utah credit unions, Dollar was specifically requested to discuss any safety and soundness implications of taxing credit unions with more than $100 million in assets and operating in more than one county at 35%. While taking no specific official position on Utah public policy matters such as taxation, Dollar wrote of many factors that should be considered in making such a determination. He pointed out that the federal lawmakers determined that credit unions should not be taxed. “It is crucial, in understanding the credit union structural different which helps distinguish them from other for-profit financial institutions, that public policymakers recognize that the earnings retained by a credit unions after payment of all operating expenses and dividends to the member-owners is what constitute the total net worth of the credit union.” Dollar explained that not only do members already pay taxes on the dividends and that a credit union’s net worth is the only buffer between the National Credit Union Share Insurance Fund and losses. “Simply stated, without adequate retained earnings, a credit union cannot build sufficient net worth to remain viable.” Dollar wrote. “An income tax on retained earnings will naturally result in less retained earnings and.result in less credit union net worth.” He points out that a 35% tax applied over the last 10 years to all Utah credit unions would put their net worth at 8.47%, rather than the current 10.27%, recognizing that not all Utah credit unions would be taxed. Eventually, this would lead to prompt corrective action implications, Dollar wrote. That would lead to Congress possibly considering an exemption for taxed credit unions to the 7% PCA requirement and permitting subordinated debt may be necessary to maintain retained earnings. “A single state’s taxation of its state-chartered credit unions’ retained earnings may not have a dramatic impact on the nationwide averages presented above, but it is certain that any resulting net worth concerns that might arise could indeed become a significant issue for those credit unions having their retained earnings negatively impacted in that state,” the chairman wrote the state legislator. He added that is could also drive credit unions from the state charter. [email protected]