Credit Union Times previously reported in breaking news at deadline last issue that CUNA had emphatically argued against any change in credit unions' tax status.

In CUNA's letter, President/CEO Dan Mica stated, “While silent on the substantial benefits of credit unions to consumers, the paper lauds Subchapter S Corporations, characterizing many of them as 'small.' Yet an April Government Accountability Office study showed that Subchapter S banks, which are often quite large (two have over $10 billion in assets), cost the federal government $726 million in lost revenues in 2006.” The Government Accountability Office has reviewed other bank tax preferences as well, which came to a total of $1.3 to $1.9 billion by CUNA's figuring.

He also emphasized the public policy purpose behind the credit union tax-exemption. “In the case of credit unions, study after study has shown that not only do they pay higher rates on savings and charge lower rates and fees but the presence of credit unions in the marketplace encourages other institutions to offer more favorable rates, providing enormous economic benefit to consumers throughout the country,” he wrote.

Both credit union trade associations have requested a meeting to discuss the matter in detail.

The American Bankers Association also swiftly picked up on the report and lauded Treasury Secretary Henry Paulson on the department's efforts to decrease corporate tax rates for competitiveness in the global market. “Identifying wasteful uses of tax preferences is an excellent way to make the tax system more equitable,” ABA President/CEO Ed Yingling wrote in a letter to Paulson. “One such wasteful tax preference–which is noted in you report in Table 2.1–is the tax exemption for credit unions.”

He continued, “Credit unions have a mandate to serve people of 'modest means.' Their tax exemption exists for this purpose, as recently was documented in a hearing before the House Committee on Ways and Means in 2005. Many traditional credit unions continue to hold true to this mission. However, a newer breed of credit union has grown rapidly, leveraging their tax-preferred status, and serving only those segments of the community they choose to serve.

“While many traditional credit unions have remained true to the chartered mandate of serving people of modest means and are deserving of their tax benefit, the tax exemption for those new breed of credit unions should be eliminated,” Yingling concluded.

Treasury tax policy spokesman Andrew DeSouza explained, “The background paper for Treasury's Conference on Business Taxation and Global Competitiveness by no means was a list of policy prescriptions for our complicated business tax system. The paper makes a series of observations as to the complexity of our business tax system, and how those complexities can hurt our competitiveness in the global economy.”

When asked whether the past statements of President Bush, former Secretary Snow, or former Assistant Secretary Henry would be upheld, DeSouza simply said that no recommendations have been made.

According to the paper, the United States has gone from a high corporate tax-rate country to low and back again since 1980, currently at 39% (including state taxes) versus a 31% average in other nations. At the same time “flow through” entities, such as Subchapter S banks and others, have “grown substantially” in importance over time.

The report also states that distortions are caused by tax incentives meant to encourage beneficial activities, but that may do damage to other economic activities, “and the value of what is lost can exceed the value of what is gained, reducing the overall value of society's output of goods and services.”

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