With tax base for education eroding, Utahns still support fairness in credit union taxation

Some 12 years ago, the Utah Legislature sent a resolution to Congress asking federal lawmakers to stop encroaching on state tax policy regarding financial institutions.

The Legislature was concerned that federal tax laws exempting large, bank-like credit unions from paying federal and state income taxes (and sales taxes) were eroding state and local government tax bases, resulting in lost revenue to state and local governments. Utah lawmakers were especially concerned about the loss of education funding.

Today, the issue is more relevant than ever, as Congress is trying to simplify the federal tax code, eliminate unfair and costly tax exemptions, and create a level playing field for similar businesses to compete on even terms.

At the same time, Utah is scrambling to fund public education adequately, with a possible tax hike for education on the horizon if the Our Schools Now ballot proposal is successful.

The problem today is larger than it was 12 years ago, as billion-dollar credit unions have further expanded, enjoying a major advantage as they compete directly with community banks that pay taxes to support education. As banking services migrate from community banks to large credit unions, the education tax base is further eroded.

Compared with 12 years ago, these large credit unions have strayed further from the original mission of credit unions, which were granted non-profit, tax-exempt status so they could provide credit for people of modest means who enjoyed a common bond.

I was involved in this issue several years ago, and have maintained an interest in it as Utah has struggled to fund education. With tax reform heating up in Congress, and with many taxpayer groups and think tanks suggesting the tax exemption for large credit unions is no longer fair, UtahPolicy.com commissioned a Dan Jones & Associates poll to measure Utah citizen attitudes about the issue. (Note: Zions Bank is among the sponsors of UtahPolicy.com, but does not determine editorial content.)

The results of the poll conducted Nov. 21-22 (602 registered voter respondents; plus/minus 4% possible error margin) are consistent with similar research done a decade ago when this was a hot topic in the Utah Legislature.

Utahns clearly distinguish between the large, bank-like credit unions and the small, traditional credit unions still deserving of tax-exempt status.  

The survey asked: “If large credit unions are competing directly with community banks for the same customers, and are providing the same services as banks, do you agree or disagree that these credit unions and banks should be taxed equally?”

Some 67 percent of respondents said they strongly or somewhat agreed that these financial institutions should be taxed equally. Twenty-eight percent disagreed. Also:

Some 72 percent of poll respondents said that if retained earnings of large credit unions are not distributed to members as dividends, then those retained earnings should be taxed, similar to the way bank profits are taxed.

Some 84 percent of respondents said credit union members should be allowed to vote on whether retained earnings should be distributed to members, or used for such things as expansion into new locations.

Some 75 percent of respondents said that if credit unions make large commercials loans, like banks do, then retained earnings or profits from those loans should be taxed, like profits from a bank would be taxed.

Interestingly, the poll showed that even among credit union members, strong majorities support fair taxation of retained earnings of large credit unions that aren’t returned to members.

The Utah Legislature has made it clear that, under Utah law, the retained earnings at large, bank-like credit unions should be taxed like bank profits. But federal laws exempting even very large credit unions from income taxes interfere with Utah’s tax system. 

If just the large credit unions with assets over $1 billion were taxed like banks, it would mean some $27 billion more in federal tax receipts overall. Interestingly, that would impact only about 280 credit unions, representing less than 5 percent of the industry. Clearly, billions of dollars in tax subsidies are flowing mostly to large financial institutions that are virtually indistinguishable from taxpaying banks.

In Utah, because all state income tax revenue is devoted to Utah’s schools, taxing just the large credit unions like banks would add about $11.2 million for education. That could provide a helpful raise to Utah’s teachers.

With questionable tax exemptions under scrutiny in the tax reform effort, this would be a good time for the Utah congressional delegation to make the case for tax fairness for community banks, along with respect for state taxation authority.