Utah League Says State is Losing $3 Million Due to Bill to Tax CUs

SALT LAKE CITY – Utah bankers may have won the battle in March with the passage of their banker-backed bill that sought to impose a tax on credit unions, but the state has lost nearly $3 million in sales tax and regulatory revenue as a result of the new law, state lawmakers were told during a Legislative Task Force hearing here. Scott Earl, president of the Utah League of Credit Unions, forecast those losses are expected to mount as more state-chartered CUs convert to federal charters, following in the path of America First CU, Mountain America CU and Goldenwest CU which converted in May. “I think there’s a feeling by some legislators that they may have gone too far with this bill inviting more credit unions to switch charters,” declared Paul Allred, the deputy director of the state’s Financial Institutions Division who cited the loss of $200,000 in regulatory fees from the first three conversions. The sales tax revenue loss is in the $2.5-$3 million range. Allred pointed out that the three CUs as well as others making the switch will pay higher regulatory fees to the NCUA, but the change in charter reflected concerns over the March law which barred business loans for the three CUs. The revenue generated each year in fees paid by the three large credit unions represents about 5% of the Utah Department of Financial Institutions’ budget, said Allred. It is his understanding, said Allred, that “anywhere from 10 to 40 more credit unions would consider switching to a federal charter” after the passage of the bill which originally sought to impose both a franchise and “competitive” tax on the three CUs. Other CUs, worried that a tax on them is imminent in 2004-5, have called the state financial environment, controlled by the banking lobby, hostile to CUs and prompting moves to a federal charter. There are 87 state-chartered credit unions in Utah, and it has been projected that 20 of them could switch to a federal charter sometime this summer though bankers have threatened to mount a legal challenge before the NCUA on multi-county field of membership expansion. So far there has been no suit in Washington by the American Bankers Association or the Utah Bankers Association to block future FOM expansion in Utah. Meanwhile, the 12-member Financial Institution Task Force spent 90 minutes on June 19 hearing discussion about the tax issue and definitions of financial coops and whether CUs meet the definition. The Task Force’s mission, under the March law, is to plot what type of credit union/banking industry legislation the Legislature should pursue next year. The wide-ranging dialogue in the June 19 meeting centered on how credit unions justify their tax exemption – an exemption that bankers say is giving CUs an unfair advantage. “The issue before you today comes because there is vagueness” in the current law governing credit unions, said Brian Allen, a lobbyist for the Utah Bankers Association. “We’re not really sure where an entity exceeds its social policy justification for a tax exemption. From our perspective, that’s what policymakers ought to be deciding and that’s the question we’d like to have answered.” CUs are financial co-ops, Earl said adding, “other cooperatives don’t pay taxes on earnings from members, only on unrelated business.” He called a comparison to rural electrical co-ops made by lawmakers “a good one” and said “the difference is that we’re safeguarding people’s funds.” Earl said the committee remains in a “fact-finding mode” and that the June 19 meeting “was a non event” as the panel “struggles to find a purpose.” -