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Banks vs. credit unions: Sparring over taxes

Banks wind up to take another shot at credit unions' tax-exempt status. The credit unions say they're still nonprofits despite their success.

By JEFF HARRINGTON, Times Staff Writer
© St. Petersburg Times
published December 15, 2002

For almost five years, banks have been nearly silent in their century-old, occasionally contentious coexistence with credit unions.

Get ready for a rumble.

The Florida Bankers Association is planning a direct attack on the tax-exempt status enjoyed by credit unions. It's galvanizing its members to make the issue a top legislative priority during a trip to Washington early next year.

If all goes as planned, the Florida bankers hope to be the vanguard in a national movement compelling credit unions to pay taxes.

Exhibit one will be a study the association recently commissioned from Florida TaxWatch to illustrate how much large credit unions, many of them with $1-billion or more in assets, have avoided in state and federal taxes in recent years juxtaposed with how much small businesses have paid in taxes.

The study won't be ready until January, and the bankers association is hesitant to talk much about the issue yet. The association is still, as spokeswoman Rebecca McCarley put it, "crafting our message for public consumption."

But the bankers' rallying cry is already clear:

"Should a family of four or a small business pay more in taxes than a credit union?" McCarley asked.

Mark Ivester, vice president of communications for the Florida Credit Union League, said he has noticed the bankers have "ratcheted up the rhetoric" about taxing credit unions in communicating to their members.

He's ready for a rematch.

Credit unions can be counted on to warn their 80-million members nationally that paying taxes would leave less money to offer attractive rates on auto loans and savings accounts.

For example, as of last week the Suncoast Schools Federal Credit Union, the Tampa Bay area's largest, was offering a one-year CD paying a 3 percent return compared to 1.1 percent at the biggest bank, Bank of America.

The size or profitability of a credit union is irrelevant to whether it should pay taxes, Ivester contends. All are nonprofit organizations owned by their members, not investors. As co-operatives, credit unions distribute any profits directly to members, much like hospital co-ops, electric co-ops and even neighborhood food co-ops.

"Publix, last I looked, wasn't looking to tax any food co-ops," Ivester said.

TaxWatch conducted a credit union survey for Florida bankers the last time the two financial groups went at it in earnest in 1997.

In that survey, TaxWatch estimated that Florida credit unions saved $89.1-million in 1995 on their exemption from federal and state income taxes as well as from the state's intangibles, sales and documentary stamp taxes. About $64.6-million of the exemptions was in federal taxes, $24-million in state taxes and $550,000 in a smattering of local taxes.

Within 10 years, Florida TaxWatch said at the time, the total annual value of the tax exemptions was expected to swell to $217.1-million.

* * *

As of June 30, Florida's credit unions had more than 4-million members, not including the Navy Federal Credit Union's 2.2-million members.

Such numbers belie the humble roots of credit unions.

After the first credit union opened in 1909, the institutions persisted for decades as a minor distraction to banks. The small offices served employees of a company or members of a particular association or civic group. They were viewed by many as a place to get an affordable car loan, not as a full-fledged financial services center.

That began changing in 1982 after the National Credit Union Administration allowed the credit unions it regulated to accept members from small businesses that lacked enough workers to form their own credit unions. Over the next 15 years, 3,500 credit unions brought in more than 150,000 unrelated employer groups.

The Supreme Court abruptly ended the open-door policy at credit unions in a 1996 decision involving the AT&T Family Federal Credit Union. But the ban, heartily endorsed by banks, didn't last long.

Within two years, Congress overrode objections from the banking lobby and passed the Credit Union Membership Access Act. The law lets credit unions tap 63-million Americans who work for businesses too small to form credit unions without imposing any of the fair lending restrictions that banks must obey.

And more credit unions are opting for a community charter, which allows them to draw members from an even wider pool: anyone living in a given area, such as a county or city. The National Credit Union Administration, the industry's federal regulator, has proposed further liberalizing the rules to make it even easier to join a credit union.

As a result, the big credit unions have only gotten bigger. In the Tampa Bay area, there are three credit unions with more than $1-billion apiece in assets.

The biggest, the $3.4-billion Suncoast Schools Federal Credit Union, is far removed from the old image of a small shop with clerks who knew all the members by name and could help them get a car loan. Suncoast offers its 315,000 members an online brokerage account, manages mutual funds and trust accounts, even sells term life insurance.

None of that, though, should affect the organization's tax-exempt status, Suncoast president Tom Dorety says.

"We're still not for profit. We don't pay shareholders," he said. "Our whole structure is different than banks, and legislators understand that. The fact that we are successful doesn't change that."

Dorety declined to say how much he's paid to run the big organization but said he doesn't make anything near what the CEO of a comparable $3.5-billion bank earns.

Like his fellow credit union leaders, Dorety said, he had fully expected banks to resurrect their tax attack at some point.

The GOP dominance in the last elections, giving Republicans control of both houses of Congress along with the White House, has only strengthened bankers' resolve that their timing is good.

Plus, they think their argument will hold more weight in today's economy as people sympathize with struggling small businesses that do pay taxes.

Still, the movement could stall quickly as credit unions attempt to portray the repeal of tax exemptions as new taxes. "The issue of raising taxes is not something a lot of Republicans are talking about these days," said Ivester of the credit union league.

Savings and loans and mutual savings banks used to be tax exempt as well. Congress revoked that status in 1951 after it deemed the S&Ls were in active competition with commercial banks and life insurance companies for public savings.

Credit unions contend they are too small to be considered in "active competition" with banks. The top three banks in Florida -- Bank of America, Wachovia and SunTrust -- each have more assets in the state than the combined $21-billion in assets of the 250 credit unions. Bank of America alone has nearly $50-billion in deposits in Florida.

Banks, however, increasingly view credit unions as competitors, if not by size, then by service. Beyond expanding into financial offerings such as trust services and brokerage accounts, "They're even trying to move into SBA loans," said McCarley of the bankers association.

McCarley said taking on the credit unions is an issue "near and dear" to the heart of Alachua banker Jerry Smith, who began a one-year term as association president in August.

The bankers have no illusions of an easy fight on Capital Hill.

"This definitely isn't going to happen overnight, and we realize that," McCarley said, "but I think it'll be fun. I'm looking forward to it."

-- Jeff Harrington can be reached at or (813) 226-3407.

About credit unions

-- A federal credit union is a nonprofit, cooperative financial institution owned and run by its members. Members pool their funds to make loans to one another, and a volunteer board runs each credit union.

-- After credit unions originated in Europe, the first credit union in the United States was formed in Manchester, New Hampshire, in 1909.

-- Today, there are more than 10,000 credit unions with over $480-billion in assets serving more than 80-million people in the United States.

-- To join a credit union, you must be eligible for membership. Each institution decides who it will serve. Most credit unions are organized to serve people in a particular community, group or groups of employees, or members of an organization or association.

-- Source: National Credit Union Administration

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