These are not your grandparents’ credit unions. Credit unions were formed in the 1930s to serve small groups of consumers of modest means. A Government Accountability Office analysis found banks serve more low- and moderate-income households than credit unions. Instead of helping those for which the tax exemption was intended, the largest credit unions are now focusing their efforts elsewhere – by using their tax exemption to take deposits from Iowa’s rural communities.
For example, the largest financial institution in Iowa is the University of Iowa Community Credit Union. With $4.5 billion in assets, the University of Iowa Community Credit Union has leveraged its tax exemption to chase after deposits in Iowa’s rural communities, and then use those deposits to build glitzy new offices near places like Jordan Creek Town Center in West Des Moines. It has become one of the fastest-growing business lenders in the country, financing large commercial developments in downtown Des Moines with rural Iowa dollars. This blatant abuse of their tax subsidy hurts economic development in our rural Iowa communities.
This massive institution also kept more than $60 million in profits last year, and paid no state income taxes. Had they paid taxes like a bank, this one credit union would have contributed nearly $3 million to our state. How many teachers could be hired in a rural Iowa community with that amount of money?
Meanwhile, an Iowa family of four pays more in income taxes than a mega credit union making millions.
This is not a bank vs. credit union issue. This is a taxpayer issue. Iowans are paying the credit unions’ taxes for them. This credit union tax exemption is expected to cost U.S. taxpayers $35 billion over the next 10 fiscal years, according to the Office of Management and Budget Analytical Perspectives. When some pay none, all taxpayers pay more.
It is important to understand that these large credit unions operate just like banks. They offer checking and other deposit accounts and make auto and other consumer loans, home mortgages, and business loans. They also provide debit cards, ATMs, online and mobile banking, as well as services such as brokerage/wealth management and insurance.
And don’t let them fool you that they are giving their customers a better deal with their tax exemption. According to government data, Iowa banks and credit unions pay the same rates on deposits on average. In fact, Iowa banks charge lower rates on loans, and Iowa credit unions charge higher fees than banks.
A fundamental principle of taxation is treating similar businesses in a similar manner. That does not always happen, and tax reform presents an opportunity to get it right. If credit unions want to continue to operate like banks, they should be taxed like banks. The largest credit unions in Iowa made more than $180 million in profits in 2017 and can afford to pay their fair share of taxes like other businesses.
The State of Iowa now has an important opportunity to pass meaningful tax reform. Tax reform’s goals should include lowering rates and broadening the tax base to stimulate economic growth, which is especially important to our rural communities. This requires difficult decisions involving many cherished deductions, like federal deductibility. All the while, a few large, dominant credit unions may find their nearly $30 billion 10-year federal tax subsidy untouched. Nearly every Iowan would agree this outcome
is blatantly unfair.
The next time you hear a large credit union CEO attempt to justify their outdated tax exemption, think about that school teacher in your local community who deserves a raise, the road in front of your home or business that needs fixing, and remember that you are helping to pay for their tax exemption.
Tax reform is our opportunity to right this wrong, and to support our rural Iowa communities. It’s time to end these mega credit unions’ free ride.
Kurt Herbrechtsmeyer is president and CEO of First Security Bank & Trust
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