ARTICLE

Outdated tax exemptions

By John Sorensen

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Say what you will about the iterations our government has been going through as of late to address our debt ceiling and budget issues, one thing is clear: We have a national debt that is unsustainable.

Should interest rates rise anytime soon, even more dollars will be required to service our growing public debt, resulting in fewer resources for education, research and infrastructure — investments that contribute to a better future for the next generation of Americans.

Any solution will need to be multifaceted, but a good place to start is the tax code. At a time of trillion-dollar deficits, America can no longer afford to turn a blind eye to outdated tax exemptions that cost the country billions of dollars each year. We should be pushing for more meaningful tax reform. The “blank slate” tax reform proposal from Senate Finance Committee Chairman Max Baucus and Ranking Member Orrin Hatch this summer is the right approach.

NOT VALID TODAY

Many beneficiaries of tax exemptions have long outgrown their original mission and no longer fulfill the original purpose for their exemption. Two exemptions that deserve a closer look in any tax reform discussion are those given to the credit union industry and the Farm Credit System.

A recent survey conducted by independent research firm Victory Enterprises Inc., found that the majority of Iowans (58 percent) were not aware that large credit unions, often with billions in assets, are exempt from paying income taxes on their profits. Even more Iowans (62 percent) were not aware that the Farm Credit System, a government-sponsored lender, pays no income tax on their profits from agricultural real estate loans.

The same survey shows that once Iowans become aware of these tax exemptions, they want those exemptions eliminated.

Take, for example, the credit union tax exemption, which was granted in 1934 to help low- to moderate-income people. Yet, government studies show banks serve more low-income customers than credit unions. Credit union executives will argue that is OK, because their financial institutions are structured differently. But the exemption wasn’t given for their structure — it was to fulfill a mission. Now that mission is being overlooked. Today, the credit union industry is a $1 trillion industry with more than $2 billion in annual profits, paying no federal income taxes.

Two Iowa credit unions are among the five largest financial institutions chartered in Iowa. One of these credit unions is located in Eastern Iowa. They are investing in SuperPACs, building new office facilities in highly affluent areas, and paying extremely generous compensation packages to their executives.

At the same time, the Office of Management and Budget recently estimated the credit union tax exemption has cost an estimated $20.5 billion in lost federal income taxes since 2001.

FARM CREDIT MISUSED

The Farm Credit System has a similar story. They received their tax exemption in 1916, at a time when agricultural credit was less plentiful, with an emphasis on helping smaller, entry-level farmers get off the ground. Yet, today, only 18 percent of their loans are to small farmers, only 16 percent of their loans are to entry-level farmers and only 12 percent of loans are to young farmers.

They are leveraging their tax subsidy to finance exclusive golf courses, expensive hunting lodges and high-end developments. Today, the Farm Credit System is a $247 billion government-sponsored enterprise with more $4 billion in annual profits, up 4.5 percent from last year. It is estimated that their tax exemption will cost taxpayers $6.44 billion over the next five years.

In the Victory Enterprise survey, once Iowans learned about the credit union exemption, and how it is being used today, the majority of respondents (55 percent) were in favor of eliminating it. Most (49 percent) also were in favor of eliminating the income tax exemption for the Farm Credit System once they learned about it.

Iowans know there is something wrong with a system that causes an average family of four to pay more in income taxes than a large credit union or Farm Credit lender making millions in annual profits.

John Sorensen of Des Moines is, president and CEO of the Iowa Bankers Association. Comments: jsorensen@iowabankers.com

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