Repeal of Tax Exemption A Death Knell?

Some Say Credit Unions Would Die, Others Say They Could Still Thrive.

A death sentence for credit unions?  An impetus to change the business model?

Those are among the scenarios offered as possible outcomes if credit unions lose their tax-exempt status.

Congress will be looking at a range of tax expenditures as part of its effort to cut the federal budget deficit. While the amount that could be raised by taxing credit unions would be small–as high as $3 billion per year according to one report–it could cause many credit unions to stop functioning in their current form, argues NAFCU President/CEO Fred Becker.

"They couldn’t continue to exist. They have no means to raise capital and the corporate tax rate is arduous. And taxing revenue that has been put aside as capital raises safety and soundness concerns," he said.

Former NCUA Chairman Dennis Dollar said the change will cause a "wholesale abandonment of the credit union charter" because the bank charter will be "considerably more appealing." (CU Times April 27, 2011)

Editors note: Even if taxation is inevitable, you can bet the NCUA and credit union trades will be fighting to prevent what Dollar called the “wholesale abandonment of the credit union charter." There’s a mountain of evidence for how they have conspired to slow conversions since 2004. Their self-interest is manifold and overwhelmingly transparent.

Hence, as part of a “taxation compromise” with legislators, it’s likely the option to convert charters will be ended or made too costly to consider. The NCUA and credit union trades will rationalize the deal by boasting that “the consumer was rescued” and the potential “ruin” of the NCUSIF prevented.

The American Bankers Association was recently quoted as saying it will drop its objections to alternative capital and business lending for credit unions, seemingly a “compromising” victory in exchange for taxation. Meanwhile, idealistic credit union conversion critics will continue to argue that, with the new powers obtained by the “taxation compromise,” any future conversions can only be motivated by greed.

However, alternative capital structures for credit unions are untested; the jury is still out regarding NCUA's ability to properly supervise business lending; the risks related to the interdependency of the NCUSIF remain as high as the assessments; and poor consumer awareness persists; all combining to hamper the competitiveness of progressive credit unions. It could take a lifetime to work through these and other charter handicaps.

Who will argue to protect the conversion option?