WASHINGTON – Credit unions have been snatching customers from banks amid consumer frustration over rising fees and outrage over Wall Street’s role in the financial crisis.
Now banks are fighting back by trying to take away something vital to credit unions — their federal tax exemption.
With fast-growing credit unions posing more formidable competition to banks, industry trade groups are pressing the White House and Congress to end a tax break that dates to the Great Depression.
“Many tax-exempt credit unions have morphed from serving ‘people of small means’ to become full-service, financially sophisticated institutions,” Frank Keating, president of the American Bankers Association, wrote to President Obama last month.
“The time has come to abolish this exemption,” Keating said in the letter, which was part of a blitz that included print and radio ads in the nation’s capital.
Bankers long have complained the tax break is an unfair advantage for large credit unions. Now they see an opportunity to get rid of it as lawmakers begin work on a major overhaul of the tax code aimed at eliminating many corporate exemptions and lowering the overall tax rate.
The exemption cost $1.6 billion this year in taxes avoided and would rise to $2.2 billion annually in 2018, according to Obama’s proposed 2014 budget.
In a 2010 report on tax reform, the President’s Economic Recovery Advisory Board said eliminating the exemption would raise $19 billion over 10 years and remove the credit unions’ “competitive advantage relative to other financial institutions” in the tax code.
Credit unions said the effort to take away their tax exemption was simply an attempt to stifle competition and remove one of the only checks on bank fees for consumers.
And it comes as some in Congress are pushing to loosen regulations on credit unions so they can expand their business further, including legislation that would lift a cap on the amount of money they can lend to businesses.
The tax exemption is crucial to credit unions, which by law can’t raise capital through public stock offerings the way banks can, said Fred R. Becker Jr., president of the National Association of Federal Credit Unions, a trade group with about 3,800 federally chartered members.
“They’ll have to convert to banks, which is what the banks want,” he said. “Then they’d have, for lack of a better term, a monopoly.”
A 2012 economic study commissioned by the trade group found that removing the tax exemption would cost consumers about $10 billion a year through higher fees and interest rates on loans, as well as lower interest rates on savings.
That loss of income would end up costing the federal government $1.5 billion a year in lost tax revenue, the study said.
Under a 1934 law, Congress exempted credit unions from federal income taxes as long as they were nonprofit businesses, organized without capital stock and operated for the benefit of their members.
For decades, most credit unions were small operations, usually serving employees of individual businesses and government agencies.
The industry has grown significantly since the 2008 financial crisis, boosted by outrage over Bank of America’s 2011 plan to impose a $5 monthly fee for debit card use.
Bank of America ditched the plan after protests from customers, lawmakers and the White House. But the controversy led consumer groups to launch an effort to get customers of big banks to switch to smaller institutions.