DES MOINES — Whether credit unions should be taxed the same as banks remains a point of contention as state lawmakers attempt to reform the state’s tax laws.
Currently, banks pay a 5 percent state tax on income; credit unions do not.
Banks want credit unions to pay the tax.
“What we’re seeking is equity between similarly situated businesses. That’s always been our mantra,” said John Sorensen, president and CEO of the Iowa Bankers Association.
Credit unions, which pay other state taxes but not on their income, say they should not be required to pay the income tax because they are nonprofit entities, and despite their growth, they still represent a small share of the market.
“Banks have been trying to raise credit unions’ taxes for decades,” said Justin Hupfer, with the Iowa Credit Union League. “They’re dominating the market. There’s no unfair playing field.”
State lawmakers are similarly divided.
As the 2018 legislative session winds into its final days, legislators have two significant tasks remaining: craft the state budget, which is required, and reform the state’s tax laws, which is not mandated but is desired by Republicans, who control the Legislature and the governor’s office.
Only the Senate’s version of tax reform would change how financial institutions are taxed. For a bill to pass into law, the three groups must come to an agreement.
The Senate’s bill taxes credit unions. It also adjusts the tax on financial institutions to 2 percent on the first $7.5 million of income and 4 percent on any income above that level.
“The beauty of what’s included in the Senate bill, the tiered tax structure, is so small community institutions pay less in tax than large financial institutions that are headquartered in Iowa,” Sorensen said.
Randy Feenstra, a Republican state senator from Hull who leads the Senate’s committee on tax policy, said the Senate's tax reform bill seeks to create fairness, which is why banks and credit unions would be taxed the same.
“It’s all about financial parity,” Feenstra said. “We believe the largest institutions in our state should be paying some tax.”
Two of the state's three largest financial institutions are credit unions that pay no income tax, according to figures presented by the banking association, citing national financial data analysis company S&P Global Market Intelligence.
The University of Iowa Community Credit Union had $4.7 billion in assets in 2017 and Veridian Credit Union $3.6 billion, according to the figures. The top bank, Bankers Trust had $4.5 billion in assets.
Those credit unions have outgrown the need for the tax break, banking leaders say.
“There is really a small component of credit unions that have gone way beyond what they were intended to provide when they were originally created and when the tax exemption was originally created,” Sorensen said. “They’re both big enough and diverse enough to pay their fair share of taxes, just like every other business does in Iowa.”
But banks still dominate the financial market in Iowa, Hupfer said. Banks control 95 percent of business loans and 86 percent of deposits, according to information published by the credit unions league citing data from financial research companies and the state. Wells Fargo, which is based in San Francisco but has a strong presence in Iowa, is larger than all 5,800 U.S. credit unions, according to the credit unions’ information.
And banks receive their own tax breaks, credit unions point out, including state tax credits and $152 million in relief for Iowa banks as a result of recent federal tax reform. And 180 Iowa banks avoid paying federal income tax by registering as S-corporations, which allows them to pass the income tax onto the company’s shareholders.
Credit unions say they support lowering taxes on banks, but not adding the income tax to credit unions.
“I don’t mind if they want to change the tax rates on banks,” said Pam Jochum, a state senator from Dubuque and the top Democrat on the Senate’s tax policy committee. “I disagree with taxing credit unions like banks because they are organized differently. ... Iowa’s tax laws have always taxed businesses based on how they’re organized.”
If credit unions’ income is taxed, the added cost will fall to credit union members, Hupfer said.
“When anybody’s taxes go up, somebody pays for that ultimately,” Hupfer said. “That means our members would see that cost passed on in the form of higher rates on their loans, lesser interest rates on their savings.”
Feenstra bristled at the suggestion.
“It’s not going to increase anybody’s mortgage. It’s not going to increase anybody’s loan. That’s just being very disingenuous from the credit unions on what they’re trying to sell the public,” Feenstra said. “Frankly, I think they should be ashamed of what they’re saying, because this is such a trivial amount of dollars to them.”
The Senate proposal to tax credit union’s income would add $4.4 million to $4.9 million annually to the state budget over the first four years, according to the state’s nonpartisan fiscal agency.
The proposal also would reduce state revenue from the income tax on banks by $31.3 million to $34.8 million over the same four years, according to the nonpartisan estimates.
Whether any proposal winds up in a final tax reform bill — assuming there is one — remains unclear.
Guy Vander Linden, a Republican House member from Oskaloosa and the chairman of the House’s tax policy committee, said the issue is not a priority for the House or the governor, and think it should be resolved by federal regulations and tax policy, not state laws.
Feenstra prefers the Senate plan because it creates parity and updates a tax code that has not been overhauled in decades. He said the Senate, House and governor’s office are working to find agreement on a tax reform bill, but could not offer a prediction as to what may come of tax laws for banks and credit unions.
“We’ll have to see how this plays out,” he said.