Many people mistakenly believe that banks and credit unions are enemies. This is simply not true. Banks and credit unions have historically worked well together to serve the financial needs of a community. The current political tension revolves around a few institutions that operate like banks but continue to call themselves credit unions to avoid paying taxes on the profits they make and keep from their members.
These are not REAL credit unions as historically defined in law. And these “fake” credit unions hurt real credit unions, community banks, and the schools and communities where they operate. This video explains what is happening:
HISTORY: 1999
Utah’s 3rd District Court ruled that some credit unions were operating beyond the limits of the law. As a result, Utah’s Legislature attempted to modify the law to prevent further inappropriate expansion.
2003The Utah State Legislature attempted to resolve evolving tax disparities between banks and these bank-like credit unions. The Legislature adopted a law that created two distinct categories of credit unions: traditional credit unions serving members affiliated by a meaningful bond, and larger credit unions that had effectively opened their membership to the general public. These larger credit unions were classified as “nonexempt” credit unions, and it was proposed that they would become subject to the state corporate income tax and a federal equivalent tax called a “competitive equity fee” on any profits they did not return to their members.
A legislative task force was created to determine the appropriate rate for the “competitive equity fee”, but before the task force could meet, the four “nonexempt” credit unions in Utah converted to the federal charter. Because federal credit unions operate as instrumentalities of the federal government under section 501(C)(1) of the IRC, they were subsequently shielded from all state and local taxes. Because of this federal policy, the Utah State Legislature was unable to enforce state policy.
2005
In response, the Utah House and Senate adopted
this resolution encouraging Congress to adopt a
“principled, fair and equitable tax structure for financial institutions, including credit unions and commercial banks alike, that allows the states to determine what state and local taxes shall apply to financial institutions whether state or federally chartered.”The resolution states that,
“the Legislature of the state of Utah affirms its decision to differentiate between traditional credit unions and those that have lost a meaningful affinity or bond and encourages Congress to consider a similar approach.”Another portion of the resolution states,
“the Legislature urges Congress to recognize and affirm the authority of states and local governments to determine whether federally chartered credit unions may be taxed the same as state chartered credit unions.” This relates not only to state income taxes but other state and local taxes, such as sales taxes, hotel taxes, car rental taxes, and other local taxes.
Additionally, the resolution describes how the current federal tax policy contributes to the erosion of the state’s tax base, and encourages Congress to
“take into account revenues that may be lost to the state as a result of federal tax policy,” especially on programs such as education.
Finally, the resolution requests,
“if Congress elects to retain the current tax structure for financial institutions unchanged, it provide Utah and other states with a reasoned explanation for maintaining that tax structure without alteration.”This resolution was transmitted to the Speaker of the U.S. House and the Majority Leader of the U.S. Senate 17 years ago. As we have come to expect from Congress, no action has been taken to address this blatant abuse of tax policy that was specifically adopted to “make more available to people of small means, credit for provident purposes” (1934 Federal Credit Union Act).
TODAYBecause Congress has failed to act, every time a person moves from a bank to a credit union, funding for Utah schools is eroded unnecessarily. Utahn’s deserve to be able to bank wherever they choose without having to worry that their decision might harm their local school and teachers, local police & fire personnel, or other essential services. All businesses competing and providing services should be taxed equally on the profits they make. Utahns overwhelmingly agree with this principle.
CLICK HERE for a complete report on the history of credit unions, and how some have exploited the law to operate like banks without paying taxes.