I love bankers. Truly I do.
I love some personally, and I love them professionally. Banks are my favorite businesses to cover because every industry depends on the banks and the banks depend on every other industry — and because federal regulators make so much data readily available.
But while I love banks and bankers, I confess to enjoying how irritated they get when the subject is credit unions.
Two weeks ago, we published guest commentary by Rodney Showmar, CEO of Arkansas Federal Credit Union (How to Grow Your Tax Dollars). For reasons that were completely transparent, Showmar argued in favor of state legislation that would allow state agencies and local governments to deposit funds in institutions insured by the National Credit Union Administration as well as the Federal Deposit Insurance Corp. “Both are backed by the full faith and credit of the United States government,” Showmar explained.
Credit unions, he said, routinely pay higher interest rates than banks — sometimes significantly higher. Including them among approved depositories would mean taxpayers would earn more interest — either from credit unions or from banks that would start paying higher rates in order to keep the business.
As I expected, the banking industry responded in opposition. Letters from Lorrie Trogden, the new executive director of the Arkansas Bankers Association (It’s Tax Time, but Not for Credit Unions), and Larry Wilson, CEO of First Arkansas Bank & Trust of Jacksonville (How to Grow Your Tax Dollars II), appear in this week’s issue. As you can see, their central argument against allowing credit unions to compete for public deposits rests on their perennial complaint about credit unions having an unfair advantage because they are tax-exempt nonprofits. “They are, in fact, very much for-profit institutions. They are simply non-taxed institutions,” Wilson wrote.
That argument could be made for every nonprofit organization that doesn’t operate in the red, but Wilson’s point is not entirely without merit. There was a time when credit unions were basically employee-to-employee lenders, and membership was limited to employees of the sponsoring company or union.
Over the decades, savvy and unified lobbying by the credit union industry persuaded Congress and the NCUA to relax membership restrictions, allowing larger and larger “fields of membership.” Last year, to the utter disgust of bankers, the NCUA essentially allowed each credit union to define for itself the “community” it plans to serve — up to 10 million in population. Katy bar the door.
Both Trogden and Wilson singled out Arkansas Federal for their complaints, which is fair since Showmar volunteered to be the face of this proposal. “The state’s largest credit union made more than $10 million in profits in 2018 and has accumulated well over $100 million in untaxed profits over time. How many businesses do you know that make more than $10 million per year and pay exactly zero in taxes?” Wilson asked.
Well, Amazon will pay no federal income taxes for the second year in a row on combined profits of $16.8 billion, according to a report released last month by the Institute on Taxation & Economic Policy. In fact, Amazon will get a rebate of $129 million for 2018, a tax rate of negative 1 percent. That’s better than any nonprofit credit union.
Nearly a third of the banks chartered in Arkansas are organized as subchapter S corporations, so they don’t pay income taxes either. (Shareholders do. Credit unions cleverly avoid that by not having shareholders.)
More to the point, AFCU is an outlier in Arkansas. While there are gigantic credit unions in some areas of the country that no Arkansas state legislation would affect, AFCU’s $1.2 billion in assets represent 40 percent of the assets of all 56 credit unions chartered in Arkansas combined, and its net income is half of the combined profit. Most are so small that if Arkansas Business granted Showmar’s wish by combining banks and credit unions into a single list, 34 of the state’s 56 credit unions would be smaller than the smallest of the state’s 93 bank charters when ranked by assets.
And the taxes they are avoiding? If the state collected the maximum 6.5 percent on a generous combined net income of, say, $25 million — a gross oversimplification — the state government would collect $1.63 million. As Showmar pointed out in his commentary, taxpayers could collect more than that in higher interest rates on nearly $400 million in state deposits invested in bank CDs.
The Legislature can do nothing about NCUA rules or Amazon’s tax burden, but the simple question is politically hard. Should taxpayers be able to earn more on their deposits by giving banks competition from tax-exempt credit unions? If taxpayers and credit unions win, it will be at the expense of banks.
Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com and follow her on Twitter at @gwenmoritz.