Dollar: Tax on CUs Requires Congress Revisit PCA

SALT LAKE CITY – Any national push to start taxing the retained earnings of credit unions poses a dangerous erosion of CUs’ net worth and would require Congress to revisit the 1998 prompt corrective action law, NCUA Chairman Dennis Dollar told Utah CU executives here. In a keynote speech to the annual meeting of the Utah League of Credit Unions laced with praise of the industry’s financial and service record but warning of the tax threat, the NCUA chairman suggested lawmakers cannot disregard safety and soundness under PCA “when taxation is put on the table.” “To tax these not-for-profit institutions would definitely result in reduction of their net worth, as required by federal law,” warned Dollar who coupled his remarks on PCA with suggestions that Utah CUs remain focused on their positive performance despite fighting an exhausting legislative battle. Dollar’s admonitions to the Utah gathering were greeted warmly, though the 250 CU executives acknowledged both publicly and privately their weariness in beating back a banker-backed bill March 4 levying a 5% tax on three large Utah CUs. The bill, however, bars business lending by the three CUs starting in May and creates a two-year legislative tax study of CUs which could eventually lead to the reimposition of the 5% tax as well as an even harsher 30% “competitive equity” tax on the three CUs and other state-chartered CUs which seek to branch or merge. The 12-member study task force, which could have a strong representation of banker-legislators on the panel given the influence of the banking lobby, could start its work in a matter of weeks following final enactment of the bill by Utah Gov. Michael Leavitt, who is expected to sign the measure or let it become law without his signature by March 20. In his talk here, Dollar, a former Mississippi legislator, stressed-perhaps to the consternation of many-the right of states to make and apply their own laws and regulations to tax financial institutions including credit unions, but Dollar said no state should enter the matter “lightly” when it comes to net worth concerns. Lawmakers either in Congress or at the state level have to consider the impact such a step would have “on the safety and soundness and long term financial stability of those credit unions,” he said. Had a cumulative 35% tax proposed in Utah been in effect for CUs nationwide for the past 10 years, the ratio of average net worth to total assets for all federally insured CUs would today be estimated at 8.42% rather than the present level of 10.71%, he said. Since the net worth ratio is the only buffer the National Credit Union Share Insurance Fund has to protect against losses as well as protect taxpayers from CU losses, it is incumbent on legislators, Dollar implored, “to weigh the impact of taxing the retained earnings” of CUs that “have no other means of building net worth.” Dollar told the Utah gathering that the structure of CUs justifies their tax exemption even though they sell the same products and services as banks. While the Girl Scouts of America is exempt from taxing cookies they sell, it is right for government to tax for-profit retailers like “Keebler who makes cookies” for a profit. The same goes for farm co-ops which sell products, and yet farmers buy the same merchandise “at Home Depot or Wal-Mart,” said Dollar. But just like the “Salvation Army” where the public can buy products and which is tax exempt, so should CUs serving the public as non-profit. Responding to Dollar’s rationale, the president of the Utah Bankers Association as quoted over the weekend in Salt Lake City-area newspapers, said the NCUA chairman should be “criticized and embarrassed for supporting corporate welfare” for CUs. Howard Headlee, the UBA president went on to warn the NCUA chairman that “Congress will have something to say if the NCUA plans on letting credit unions become tax-exempt banks.” Dollar also told Utah CU executives that the virulent banking attack over the last few months climaxing in passage of the restrictive bill-minus the tax-does in an oblique way demonstrate the industry’s growing financial strength and even public muscle. In citing robust growth and addition of many new CU services including member business loans, the NCUA head observed that the “foundation” of the assault by the UBA reflects the fact that “you’re obviously doing something that matters or you wouldn’t be attacked.” Because “when you’re not doing anything” in the marketplace indifference pervades, but CUs in Utah and elsewhere have shown “they are making a difference,” he said, as evident in their outreach to under-banked areas and in rural or urban communities where banks have closed their branches. CUs have mounted vigorous campaigns to find alternatives to “the check cashers, the pawn shops, the title lenders and the rent to own outfits,” said the NCUA chairman, as a means of helping the public find alternative sources of financing so consumers would not have to pay “400% or 600% on some rent to own loan.” Dollar also cited membership growth as another example of why bankers are on the attack – the leap to 83 million members from 45 million 20 years ago while the number of CUs has dropped from 20,000 to under 10,000. Citing recent high court cases in which NCUA has “beaten” bids to halt CU expansion, he said banking’s frustration with CU growth comes when a bank customer “has to pass by the credit union banner stating the auto loan rate is 5.9%” while the bank is offering 7.7%.” In his remarks, Dollar implored Utah credit unions to be wary of letting the fight with the bankers “take you off your game plan” of operating a sound shop or of community service. “Keep your eye on the changing marketplace,” Dollar pleaded, adding it was necessary that CUs be prepared to respond to new services with a strategic plan. “Don’t lose your vision,” he concluded. [email protected]