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John McKenzie: Consumers lose if banks win with attacks on credit unions

August 10, 2018

mckenzie-john-viewpointEven though the banking industry is enjoying record profits, it is trying to convince lawmakers to take steps against its competition by increasing taxes to credit unions, which are consumer-owned cooperatives.

Raising taxes on credit unions would effectively be increasing taxes on the more than 2 million consumers in Indiana who belong to them. This attempt to saddle credit unions with more expenses comes in a year the U.S. banking industry is estimated to enjoy a $23 billion reduction in expenses from the new tax law.

Banks hold 93 percent of all assets of financial institutions, yet still want Congress to hurt credit unions by targeting them with new taxes. Consumers need to be aware that the banking industry wants to gain at their expense.

Here’s why consumers will lose if banks win on this issue. Credit unions, on average, offer better rates and lower fees than banks because—due to their member-owned not-for-profit cooperative structure—earnings not needed for reserves are returned to members through lower prices. At banks, profits are generated to benefit stockholders, not customers.

In Indiana, credit union members receive a combined annual financial benefit of more than $126 million by not using banks. The presence of credit unions also causes banks to offer better pricing to their customers, so this issue has implications for all consumers.

Credit unions remain rooted in the communities where they operate. The banking industry, on the other hand, has seen the 100 largest U.S. banks grow to 75 percent of all bank assets; 25 years ago, that group held just 41 percent of total assets. Out-of-state banks already control 40 percent of total bank deposits in Indiana.

Given the cooperative structure and mission of credit unions, current levels of taxation are appropriate. The Competitive Enterprise Institute stated in a letter sent in May to a tax-policy leader in Congress, “While credit unions are not taxed at the corporate level, their individual member-owners are fully taxed on the proceeds distributed by credit unions as they are taxed on interest [earnings].”

Instead of trying to hinder competition from credit unions by lobbying for higher taxes on them, perhaps the banking industry should focus on why it had to pay more than $240 billion in penalties stemming from the financial crisis and work to remedy those problems.

There are 1,965 Subchapter S banks that also have a different tax status than other banks and don’t pay taxes at the corporate income level. So, different types of banks have different tax treatments, just as credit unions have a different tax treatment.

A typical bank could eliminate its corporate tax expense by converting to a credit union, but it would have to be willing to turn ownership over to all its depositors, who would replace stockholders as owners. Banks don’t want to give ownership and control to the consumers who deposit money there. They’d rather hinder competition by lobbying for more taxes on credit unions.

The more than 2 million Hoosiers who belong to Indiana credit unions, and all consumers, will lose if banks win. Credit unions and their associations are working hard to make sure Congress says no to banks and yes to consumers on this issue.•

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McKenzie is president of the Indiana Credit Union League.

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