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Letter: Time for credit unions to start paying taxes

Last month the CEO of Mid-Minnesota Federal Credit Union submitted a letter to the editor, in which he stated the benefits of some legislation that is moving through Congress. The Economic Growth, Regulatory Reform and Consumer Protection Act is a very good bill that would ease some of the regulatory burden on community banks and credit unions. Ultimately, this bill will benefit the consumers, small businesses and the communities these institutions serve. The bill has strong bipartisan support, so we hope it will be signed into law.

Credit unions and community banks are direct competitors. We offer essentially the same products and services to the same potential customers. With respect to this regulatory reform bill, it is fair that both credit unions and community banks should both receive some benefits.

Speaking of fairness, these competitors should also receive equal tax treatment. Many people are surprised to learn that credit unions do not pay federal or state income taxes. Also, federally chartered credit unions are exempt from state and local sales taxes. Both those tax situations need to be reexamined.

Credit unions received their income tax exemption in the 1930s because they served "people of modest means." Credit unions served people with a very tight common bond, people who worked at the same business or lived in the same neighborhood. They pooled their money together, with their deposits funding small consumer loans to other credit union members. Under this model, a tax exemption was justified.

Fast forward more than 80 years, and the credit union industry now controls over $1 trillion in assets. They have drifted miles from their original mission, yet they remain income tax exempt. As an industry, the credit unions are extremely profitable. Individual credit unions have enough money to sponsor college football bowl games and pay for the naming rights on professional sports stadiums. Despite their huge profits, the credit unions vehemently oppose paying a cent in state and federal income taxes to support education, transportation and local services like police and firefighters. That situation simply doesn't pass the smell test.

Additionally, Mid-Minnesota isn't subject to sales taxes, which is a huge benefit on a day-to-day basis. It is even more significant as Mid-Minnesota builds its new building in Detroit Lakes. If any other business built a building, the State of Minnesota would collect sales taxes on all the building materials purchased to construct the building. Mid-Minnesota won't pay a cent.

If there is a response to this letter from a credit union representative, the response will likely make two arguments. First, they will state that banks should not complain because S-Corporation banks don't pay income taxes either. This argument is insulting to all pass-through taxpayers. While an S-Corp. bank doesn't pay taxes directly at the corporate level, like any pass-through entity, the tax obligation passes through to the individual owners. The bottom line is that the income earned by an S-Corp., and any other pass-through entity, is fully taxed. The income earned by a credit union is not. While credit unions like to make that argument, it is completely wrong.

The second argument the credit union industry has used is that credit unions are "not-for-profit." That statement is also incorrect. While credit unions are tax exempt, they are very good at making huge profits. For example, Mid-Minnesota has made over $16 million in profits the past eight years. And they never paid a penny of state or local income taxes on those profits. Every local family and small business that paid income taxes is subsidizing the extremely profitable credit union industry, so that these profitable businesses can continue operating as tax-exempt entities.

If Congress repealed the tax exemption for only the 5 percent of credit unions that have more than $1 billion in assets, it would generate approximately $27 billion in additional tax revenue over the next 10 years. Despite bearing no resemblance to the industry that originally received a justified tax exemption, the credit unions argue for a continuation of their tax exemption.

In the United States of America, businesses pay income taxes. It is time for the credit unions to do the right thing. It is time for the credit unions to start paying their fair share of taxes.—Steve Daggett, president of Midwest Bank