America's community banks in danger of extinction due to credit union tax loophole

Congress must decide soon if it supports—and wants to maintain—the role that community banks play in our nation’s economy. Many on Capitol Hill are on record about how much they like and support community banks. Yet, no action is being taken to close one of the most outdated and abusive tax loopholes: the exemption enjoyed by credit unions which has far outlived its usefulness and intended purpose.

In 1994, there were only 14 credit unions in the nation that were $1 billion or larger. Today, there are 300 and growing. Meanwhile, according to FDIC official records, the number of  banks in our nation is at the lowest point in recent history. From a high of 18,033 in 1985, there were 5,477 as of the third quarter of 2018.

While the credit union industry argues that FDIC banks hold more in deposits than they do, the true and real comparison should be made between community bank and credit union deposits. For instance, in one of our largest urban areas in Florida, the Tampa Bay region with more than 4 million residents, Suncoast Credit Union, $9 billion in size, is larger than all community banks in the region combined. Yet Suncoast pays $0 in state and federal corporate taxes. This is an abuse of the nation’s tax code.

Congress continues to allow corporate welfare for credit unions like Navy Federal, which is nearly a $100 billion financial institution. It’s about time for credit unions to pay their fair share of state and federal corporate business taxes to support the needs of our great nation. Navy Federal Credit Union reported $1.4 billion in net income in 2018 and a $0 tax payment; this form of corporate welfare must come to an end. Our national debt now exceeds $22 trillion.

Congress decided in the 1950s that tax-exempt savings and loan institutions (S&Ls) were really just tax-exempt banks. That tax loophole was closed. The same decision could now apply to roughly 20 percent of credit unions.

Most credit unions have remained true to their original charters’ intent and should remain tax exempt. But, those credit unions that want to be bank-like, such as Navy Federal or Golden 1 Credit Union (a $20 billion-dollar institution that agreed to pay $120 million for 20 years to buy the naming rights to an NBA arena) should lose their tax-exempt status.

Congress cannot have it both ways, publicly proclaiming support for community banks while allowing corporate welfare for credit unions to continue. Credit unions, awash in cash because of their tax-exempt status, are buying banks in cash deals. Since 2012, credit unions have purchased 29 banks. In Florida alone in the past 12 months, credit unions have purchased seven banks.

Credit unions are taking tax-paying banks off the tax rolls and merging them into large, corporate and complex tax-exempt credit unions. As these banks merge into the credit unions, it is resulting in the annual loss of tens of millions in tax monies. Those tax dollars could pay for the needs of our nation. Do we want a family of four or a small business to pay more in state and federal taxes than a multi-billion-dollar credit union?

The claim by credit unions that they are returning earnings to their members and communities is ludicrous, outrageous and preposterous. Credit unions are exempt from the Community Reinvestment Act (CRA) regulations which require banks to reinvest in their communities. (When CRA regs were enacted more than 50 years ago, credit unions were minor players in the marketplace.)

Death of the community banks?

Community banks play a vital and critical role in our nation’s economy. According to the Small Business Administration, small businesses make up:

• 99.7 percent of U.S. employer firms;
• 64 percent of net new private-sector jobs; and
• 49.2 percent of private-sector employment.

With nearly 50 percent of all Americans working for small businesses, and almost 50 percent of all business loans coming from community banks, this sector of the banking industry must remain strong and vital. How can banks that pay 21 percent in federal corporate taxes, plus any state business tax, fairly compete in the marketplace with tax-exempt credit unions?

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If Congress continues to kick this can down the road, Main Street will suffer. Inaction by Congress is unacceptable. Not closing this outdated credit union tax loophole may eventually cause the death of community banks. If that happens, the only place our children and grandchildren will see a community bank will be in the Smithsonian, and that will truly be a sad day for America.

Alex Sanchez is president and CEO of the Florida Bankers Association which has membership of small, regional and large financial institutions that together employ tens of thousands of Floridians, safeguard more than $500 billion in deposits and extend more than $135 billion in loans.