Credit union tax proposal called dangerous step

The chief federal regulator over credit unions said Friday that a recently thwarted proposal in Utah to tax credit unions might be the first step toward a dangerous reduction in credit unions' stability nationwide.

The Utah Legislature last month passed a law forming a two-year task force to study an array of credit union issues, including the possibility of taxation. In its original form, the bill made state-chartered credit unions subject to the state's corporate income tax, as well as a 30 percent "competitive equity fee." Lawmakers who supported the bill said such action was necessary to level the playing field between tax-paying financial institutions and a few aggressive credit unions that they claimed operated outside the bounds of the state's charter. After 14 substitutions, legislators finally agreed on the task force, and a ban on member business lending by three of Utah's largest credit unions.

The battle distressed Dennis Dollar, chairman of the National Credit Union Administration, who said the future looks dark if legislation is eventually passed imposing a tax on state-chartered credit unions.

"I am a former state senator from Mississippi," Dollar said Friday at the annual meeting of the Utah League of Credit Unions. "I am a believer in the right of states to be able to pass their own laws, including their own taxation law. It's a fundamental part of Americans' system of federalism."

Credit union advocates signed off on the final version of the bill. But Dollar said his responsibility is to ensure the safety and soundness of federal credit unions, as well as state-chartered credit unions that are federally insured. Taxing credit unions would endanger the safety and soundness of Utah's credit unions by reducing their net worth and set a dangerous precedent for other states.

"I don't believe that Utah or any state, although they have the right to tax state-chartered credit unions, should do so lightly, without considering the impact that would have on the safety and soundness and long-term financial stability of those credit unions," Dollar said.

The structure of credit unions justifies their tax exemption, Dollar said. And, just as the Girl Scouts of America organization is exempt from taxation on the sale of cookies while for-profit retailers pay taxes on the sale of similar cookies, credit unions' structure qualifies them for tax-exempt status even though they provide similar services and products as banks and other financial institutions.

"It's not the service they provide," Dollar said. "It's not even who they serve. The difference is their structure. One is organized for profit. The other is organized not for profit."