For fraternals, a teachable moment…

If you didn’t read the following guest editorial in The Wall Street Journal by an official from a state banking trade group calling for the repeal of the credit unions’ tax exemption, you really should. I’ve included the full text of the piece here and underlined those sentences that made my ears perk up.

I’m not re-printing this editorial to trigger a panic in the fraternal community. I fully understand that the justification for the tax exemptions for fraternals and credit unions are fundamentally different. We have a social mission; they do not. Moreover, we’re awfully good at fulfilling that social mission and giving back much more in direct financial support and organized volunteerism than the U.S. Treasury would ever take in by taxing us.

Nonetheless, a superficial comparison of fraternals and credit unions would yield some striking similarities – not the least of which is the requirement for members of each to have a common bond – that could result in public policymakers to call for a closer investigation of the value and validity of the fraternal exemption.

While this editorial is clearly a shot across the bow by the banking industry for a renewed effort to repeal the credit union tax exemption, I view it as a “teachable moment” for fraternals. And the lessons that all of us should take away from this message are:

  • Examine the legitimacy of your common bond – We all know that some of our traditional bonds (ethnicity being paramount) have eroded over time. But that doesn’t mean that your society can’t refresh its bond to focus on a well-defined set of shared values that make membership more attractive to younger members who want to enhance the quality of life in their communities.
  • Document your society’s “social good” – I know it’s difficult to collect accurate data on all your local chapters’ volunteer events and direct financial support of causes and programs that enhance the quality of life in the communities they serve. I know you get tired of the Alliance asking you for this data. But documenting this information is the single most important way we can demonstrate the incredible impact we have in communities across the country to state and federal lawmakers.
  • Participate in Alliance political engagement activities – Every society must make the effort to establish a meaningful connection with the state and federal legislators in the district where their home office is located, as well as those districts with a significant number of local chapters and members. Every society should require that local chapter leaders make an effort to communicate with their state and federal lawmakers, and invite them to participate in meaningful community service events in their districts. And every society should build a database of the connections between members and public policymakers so that, when the time comes to reach out and communicate with lawmakers on a particular issue, we are ready to move in a moment’s notice.
  • Understand the “divide and conquer” strategy – If you read the WSJ guest editorial you will see clearly that the banks are trying to separate the large credit unions from the small ones by calling for the repeal of the tax exemption only for credit unions with more than $500 million in assets. The fraternal community is simply too small to be a house divided. We must stand together if your voice is to heard.

Thoughts and comments on this issue?  Share them with all readers here or send them to me in a privately at jannotti@fraternalalliance.org.

Credit Unions Shouldn’t Get a Free Ride
By Alex Sanchez, President and CEO of the Florida Bankers Association
The Wall Street Journal Guest Editorial
Wednesday, August 15, 2018

The problem with modern American credit unions boils down to a simple question: Why should a family of four pay more income taxes than a $90 billion financial institution? That’s the total amount of assets held by Navy Federal Credit Union. Yet it is exempt from federal and state corporate income taxes, as well as sales taxes (and, in my home state of Florida, intangible taxes). This is corporate welfare.

Credit unions were first recognized nationally in a law signed by FDR in 1934. The original intent was to allow people with a common bond—coworkers, neighbors and so forth—to pool their resources and provide credit to one another. But this idea of a common bond, which is still technically required by law, has been stretched beyond recognition. MidFlorida, my state’s fifth-largest credit union (with $3.1 billion in assets), was founded in 1954 as Polk County Teachers Credit Union. In 1997, MidFlorida expanded its charter to cover “anyone who lived, worked, worshipped or attended school” in its growing service area. Today it has nearly 300,000 members.

The number of credit unions with more than $1 billion in assets has dramatically increased, from 13 in 1994 to more than 304, according to data from the American Bankers Association. Navy Federal, the nation’s largest, has more than 14,000 employees. Yet these institutions pay hardly any taxes, unlike the banks they are often competing with.

As a result, credit unions are able to pour money into advertising. Golden 1 in California, with $11 billion in assets, paid $120 million for the naming rights to the new Sacramento Kings arena. MidFlorida paid an undisclosed sum for the naming rights to an amphitheater in Tampa. CFE Federal Credit Union, with $1.7 billion in assets, paid $4 million to put its name on the basketball arena at the University of Central Florida. San Diego County Credit Union, with $8 billion in assets, paid $500,000 for the naming rights to what is now known as SDCCU Stadium, which hosts an annual college football bowl game.

Is this what Congress intended for credit unions to do with their tax-exempt status? Purchase the naming rights for stadiums and arenas? Lawmakers ought to eliminate this outdated and abusive tax loophole for large credit unions. A similar action was taken decades ago on mutual savings banks. Lawmakers revoked their tax exemption in 1951 when it became clear they were actively competing with taxable financial institutions.

Congress ought to keep the tax exemption for smaller credit unions that serve customers with a genuinely tight common bond—say, a well-defined group of company employees, church members or university faculty. Credit unions that reach $500 million in assets should lose the exemption. So, should credit unions of any size that compete head-to-head with banks by offering commercial and business loans or services like wealth management.

This plan is fair to all sides. It would ensure that small credit unions can continue to fulfill their original purpose—while forcing those, like Navy Federal, that have outgrown the old model to compete on equal terms and pay taxes like the rest of us.

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