Government

Credit union tax a sticking point in rival plans

House and Senate, now working in overtime, have yet to agree

(File photo)The Iowa State Capitol building in Des Moines, photographed on Tuesday, June 10, 2014. (Liz Martin/The Gazette)
(File photo)The Iowa State Capitol building in Des Moines, photographed on Tuesday, June 10, 2014. (Liz Martin/The Gazette)
/

DES MOINES — The lingering question of whether credit unions and banks — rivals for customers in the financial industry — should be taxed alike soon will be answered in Iowa.

As the 2018 Iowa Legislature goes into overtime, Republicans who control the House and Senate have yet to agree on a single plan to change the state’s tax code. The Senate’s tax plan envisions charging credit unions. The House plan does not.

Under current law, for-profit banks pay a 5 percent state tax on income; nonprofit credit unions do not.

“What we’re seeking is equity between similarly situated businesses,” said John Sorensen, president and chief executive officer of the Iowa Bankers Association.

Credit unions, which pay other state taxes but not on their income, say they should not be required to pay the income tax because they are nonprofit entities. Despite their growth, they say they still represent a small market share.

“Banks have been trying to raise credit unions’ taxes for decades,” said Justin Hupfer with the Iowa Credit Union League. “They’re dominating the market.”

State lawmakers are similarly divided.

As the 2018 legislative session enters its final days, legislators have two significant tasks remaining: crafting the state budget, which is required by law, and rewriting the state’s tax laws, which is not required by law but is desired by Republicans.

ARTICLE CONTINUES BELOW ADVERTISEMENT

The Senate’s bill taxes credit unions. It also adjusts the tax on financial institutions to 2 percent on the first $7.5 million of income and 4 percent on any income above that.

“The beauty of what’s included in the Senate bill, the tiered tax structure, is so small community institutions pay less in tax than large financial institutions that are headquartered in Iowa,” Sorensen said.

Randy Feenstra, a Republican senator from Hull who leads the Senate’s committee on tax policy, said the Senate’s tax bill seeks to create fairness, which is why banks and credit unions would be taxed the same.

“We believe the largest institutions in our state should be paying some tax,” he said.

Two of the state’s three largest financial institutions are credit unions that pay no income tax, according to figures from the banking association, which cites financial data analysis company S & P Global Market Intelligence.

The University of Iowa Community Credit Union had $4.7 billion in assets in 2017 and Veridian Credit Union $3.6 billion, according to the figures. The top bank, Bankers Trust, had $4.5 billion.

Those credit unions have outgrown the need for a tax break, banking leaders say.

“There is really a small component of credit unions that have gone way beyond what they were intended to provide when they were originally created and when the tax exemption was originally created,” Sorensen said. “They’re both big enough and diverse enough to pay their fair share of taxes, just like every other business does in Iowa.”

But banks still dominate the financial market in Iowa, Hupfer said. Banks control 95 percent of business loans and 86 percent of deposits, according to information published by the credit unions league, citing data from financial research companies and the state.

ARTICLE CONTINUES BELOW ADVERTISEMENT

Thank you for signing up for our e-newsletter!

You should start receiving the e-newsletters within a couple days.

Wells Fargo, which is based in San Francisco but has a strong presence in Iowa, is larger than all 5,800 U.S. credit unions, according to the credit unions’ information.

And banks receive their own tax breaks, credit unions point out, including state tax credits and $152 million in relief for Iowa banks as a result of the recent federal tax changes. And 180 Iowa banks avoid paying federal income tax by registering as S-corporations, which allows them to pass the income tax onto the company’s shareholders.

Credit unions say they support lowering taxes on banks, but not adding the tax to credit unions.

“I don’t mind if they want to change the tax rates on banks,” said Pam Jochum, a senator from Dubuque and the top Democrat on the Senate’s tax policy committee. “I disagree with taxing credit unions like banks because they are organized differently.”

If credit unions’ income is taxed, the cost would fall to credit union members, Hupfer said.

“When anybody’s taxes go up, somebody pays for that ultimately,” Hupfer said. “That means our members would see that cost passed on in the form of higher rates on their loans, lesser interest rates on their savings.”

Feenstra bristled at the suggestion.

“It’s not going to increase anybody’s mortgage. It’s not going to increase anybody’s loan. That’s just being very disingenuous from the credit unions on what they’re trying to sell the public,” Feenstra said. “Frankly, I think they should be ashamed of what they’re saying because this is such a trivial amount of dollars to them.”

The Senate proposal to tax credit union’s income would add $4.4 to $4.9 million annually to the state budget, which is more than $7 billion annually, over the first four years, according to the nonpartisan estimate.

ARTICLE CONTINUES BELOW ADVERTISEMENT

The proposal also would reduce state revenue from the income tax on banks by $31.3 to $34.8 million over those four years, the nonpartisan agency estimated.

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.

CONTINUE READING

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.