Recently I was on an airplane and struck up a conversation with the gentleman sitting next to me. He was a technology entrepreneur who had started several companies. At some point he asked what I do for a living. I explained what I do, and then he said he did his banking at a credit union. I told him that credit unions were an enemy in many respects to the banking industry. He asked why, and I explained the innate unfairness of two business models providing nearly identical services, but one pays federal taxes and the other does not. I have had this conversation many times over the years with many people, and usually people are abhorred by the fact that credit unions evade taxes, yet they and the companies they work for have to pay. The response of the gentleman on the plane, however, was a first. He explained that he is a libertarian and has spent many hours calculating how he could minimize his tax bill, so it did not bother him at all that credit unions do not pay taxes. In fact, he asked why all banks do not convert to the credit union model so that they, too, can be tax-exempt. A conversation about capitalism and marketplace fairness ensued.
As someone who represents the banking industry before a variety of governmental levels, I continue to be frustrated by our industry’s inability to move the conversation forward legislatively regarding credit union taxation. Last week was highly disappointing. For months, Republicans and Democrats have been debating how to fund a highway bill. One idea promulgated was to decrease the amount of interest paid on reserves that banks are required to hold at the Federal Reserve Bank; that idea was modified to apply only to banks over $1 billion in assets. When banks of all sizes and charters complained about this modification, another idea was put forward, which was to take reserves held by the Federal Reserve Bank. Both proposals, in my mind, are de facto taxes on banks. Last week the House and the Senate agreed on a package that is funded in part by reducing the interest rate paid to banks on the reserves they are required to hold at the Federal Reserve Bank for banks with over $10 billion in assets and to take several billion dollars of the Federal Reserve Bank reserves!
Therefore, banks lost twice. Larger banks lost billions of dollars per year on the interest that will be paid on the reserves they are required to hold with the Federal Reserve Bank, and we all lost part of the safety net of reserves that have been plowed back over the years. A real concern is that banks of all sizes will eventually have their interest rate on reserves reduced commensurate with the over $10 billion banks. While this double loss is troubling, the bill does contain some important regulatory relief measures for community banks, so it is not a total loss.
Credit unions, which pay nothing to fund the federal government, were never mentioned in last week’s discussions. Would someone please explain to me the logic behind our public policy of further widening the inequity that has always existed between banks and credit unions? For my libertarian seatmate on the airplane, it didn’t seem to matter, because he failed to understand that his taxes are steeper because others manage not to pay. We need parity, and this example drives home the point.
– S. Joe DeHaven