Pub. 7 2019 Issue 4

www.uba.org 2 T he B ottom L ine Howard Headlee President Utah Bankers Association T he current debate over state tax reform is a perfect example of why Utah is known as the best managed state with one of the top economies in the nation. Our leaders don’t wait for a crisis to have difficult conversations. They look forward, identify problems and deal with them. The current debate revolves around tax base erosion and its impact on key pro- grams. Not everyone will agree on the solution, but the fact that they are trying to address the issue before we are in crisis is impressive. Utah legislators have been tackling tax base erosion for many years. One particularly important example occurred back in 2003 when legislative leaders recognized some state credit unions had begun operating like banks. They studied the issue and despite enormous political pressure they passed a law that required a few of the most bank-like institutions to begin contributing income taxes to our schools. However, to avoid paying school taxes on their millions in profits these fake credit unions ran to the federal credit union charter. Two years later in 2005, the Utah Legislature adopted a resolution to Con- gress urging them to fix the federal law. Legislators understood that every time an individual or a business moved their ac- counts or loans from a bank to one of these fake credit unions, support for our schools and teachers eroded. As usual, the Utah Legislature’s action proved to be visionary. Just last month, the Tax Foundation, the nation’s foremost non-partisan voice on tax policy issued a report that came to the same conclusion. The report determined that: 1. Some [credit unions] have strayed from their original, tax-exempt purpose and are in direct com- petition with their taxed competitors (this is what drives tax-base erosion); 2. In those cases, the exemption cannot be justified on the grounds of sound tax policy, is not neutral and leads to an inefficient allocation of resources (the government is picking winners and losers). You can read the full report at: https:// taxfoundation.org/repealing-cred- it-union-exemption/ The historical record is clear that the pur- pose of the credit union tax exemption was to help the working poor get access to credit, but the Government Accountability Office (GAO) has determined that these fake credit unions are no longer helping the poor. They are building their branches in wealthier census tracks, their members are more affluent than the average bank cus- tomer, and by every measurement, today banks are doing a better job of helping the poor. So why are taxpayers still subsidizing the fake credit unions? Real credit unions play a critical role in our community. By serving people who work together, go to church together or otherwise know each other, real cred- it unions can make loans that a bank can’t. This is because people who share a common bond are more likely to lend to each other; and perhaps most important- ly, when people borrow from those they interact with they are more likely to pay the loan back. This is what the word credit UNION means, and that’s why the law has always required credit unions to oper- ate with a common bond among members. So, when a credit union abandons its com- mon bond, it is abandoning the working poor and should no longer qualify for a tax exemption. Quite frankly, it is no longer a credit union, it is simply a mutually owned bank — and mutually owned banks pay income taxes on their retained profits. That is precisely what the policy adopted by the Utah Legislature in 2003 requires. Today, 75% of the credit union tax subsi- dy is now consumed by 5% of the largest, bank-like credit unions, and it is gener- ating enough tax base erosion around the country that the Tax Foundation has taken notice. Their report reminds us that when it comes to dealing with problems proactively, Utah’s legislature should be commended! n By serving people who work together, go to church together or otherwise know each other, real credit unions can make loans that a bank can’t.