Financial feud: Iowa credit unions call banks' tax claims hypocritical

Iowa credit unions say a campaign by banks to increase taxes on nonprofit credit unions is hypocritical given banks' record of cashing in tax credits to reduce their own tax burdens.

"There are some things the banks don’t like to talk about," said Murray Williams, chief operating officer of the Iowa Credit Union League, "and that’s mitigating their own taxes."

In recent weeks, Iowa banks have waged a public campaign to convince the Legislature to raise taxes on credit unions. The push has found early success in the Iowa Senate, which included tax reductions for banks and tax hikes for credit unions in the $1.2 billion tax cut bill it passed Wednesday evening.

Iowa banks currently pay a 5 percent state franchise tax on profits. Credit unions pay a state moneys and credits tax of 0.5 percent on their legal reserves.

The Iowa Bankers Association believes the bank franchise tax should be levied on the state's credit unions — particularly the largest ones, which earn tens of millions in profits annually. And they've urged taxpayers and lawmakers to question credit unions' not-for-profit status, which they describe as a "subsidy."

But credit unions are using similar logic as they defend their nonprofit status.

► MORE: Iowa bankers push to end credit unions' 'free ride'

Information from the Iowa Department of Revenue shows that Iowa banks claimed 50 tax credits worth nearly $20 million in 2017 — an amount that includes about $15 million in refundable tax credits, which can generate a refund when credits exceed tax liability.

Information from the department shows that three Iowa banks had tax credits in excess of their tax liability. More than half of Iowa credit unions owed no state tax in 2017, data show.

"Banks have done a really good job, as other large corporations have, of trying to find loopholes and ways to mitigate their taxes as much as possible," Williams said. "We’re not suggesting that it’s anything shady or underhanded. More power to them. It's just the hypocrisy of their claim against us about paying our fair share."

John Sorensen, president and CEO of the Iowa Bankers Association, says such rhetoric is "grossly misleading."

Much of the bank tax credits come from the 180 banks that have incorporated as S-Corps, or pass-through entities, which pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes.

Banks with 100 or fewer shareholders can organize as pass-through entities to prevent double taxation, Sorensen said. He noted that more than 90 percent of American businesses are organized as pass-through entities.

"If the credit unions are saying that banks are avoiding taxes through this structure available to small, closely-held business, in my mind they’re offending 90 percent of all the business owners in our country," he said.

Sorensen said credit unions are merely trying to distract from the debate about the value of their own nonprofit status.

"It's a way for them to change the subject, I get it," he said. "But it's not relevant to the question of ... exemptions in Iowa and whether Iowa taxpayers are getting their money’s worth."

Some credit unions 'cannibalize business' in small-town Iowa

The Senate's $1.2 billion tax cut bill includes a provision to create parity between banks and credit unions. The new tax structure would tax bank and credit union profit at 2 percent for the first $7.5 million. All net income above that would be taxed at 4 percent.

Under that structure, banks would pay $17.9 million less annually by 2023, according to a fiscal analysis of the bill from the nonpartisan Legislative Services Agency. Credit unions, on the other hand, would pay $3.1 million more in state taxes by 2023.

The bill passed the Republican-controlled Senate on a 29-21 vote.

Sen. Brad Zaun, R-Urbandale, offered an amendment to rescind the credit union changes, but he withdrew it after saying it lacked enough votes to pass.

"I’ve told the credit unions that I don't support increasing taxes on them, but I have to look at the big picture here," he said, before voting in favor of the bill. "I'm disappointed on the credit union part, but I have to make a decision on the whole bill."

No senators spoke in favor of raising taxes on credit unions Wednesday.

In an interview, Sen. Randy Feenstra, a Republican from Hull and chairman of the tax-writing Ways and Means Committee, said the bill simply aims to provide parity between banks and credit unions.

In recent years, Iowa's big credit unions have increasingly acted like banks, Feenstra said, offering a wide range of products to customers all across Iowa.

"We have the local credit unions in each community, which are wonderful, doing a great job," he said. "Then we have some very significant credit unions trying to cannibalize business in these small towns, going after the small credit unions and small banks."

While the debate has raged for years, he said he only got interested last summer when the University of Iowa Community Credit Union began running newspaper and radio advertisements in northwest Iowa seeking depositors.

"It's like, wait a minute here," he said. "I've got a local credit union. I've got a local bank. Why do they want to go after deposits here?"

Credit unions: Senate tax plan 'nothing but a wolf in sheep's clothing'

The Senate's action has only heightened the public squabble between banks and credit unions.

The largest Iowa-based financial institution, the University of Iowa Community Credit Union, sent a note to members Feb. 23 urging them to contact lawmakers. That note said the proposal would raise taxes on the credit union by $2.2 million per year.

The Iowa Credit Union League also released an aggressive television ad calling Senate Republicans' plan "nothing but a wolf in sheep's clothing."

"Hiding in their supposed tax cut is a tax increase on over half a million Iowans," the 30-second television ad states.

While the Senate moved the bill Wednesday evening, it's unclear how a House tax reform bill will treat credit unions. Iowa Gov. Kim Reynolds has not suggested changing the current credit union tax structure. And she affirmed that position at the Iowa Credit Union League Annual Legislative Conference on Feb. 6.

Even with tax credits, Iowa banks still pay far more in taxes than credit unions, said Sorensen with the bankers association.

In fiscal year 2017, banks owed $53.8 million in franchise taxes, said revenue department spokesman John Fuller. But banks received a total of $18.4 million in tax refunds, he said.

On the other hand, the state collected $740,000 in credit union taxes — an equal amount was remitted to cities and counties by credit unions.

Of Iowa's 93 active credit unions, 59 paid no moneys and credits tax, Fuller said. Those institutions either had no tax liability or wiped out that liability through tax credits.

Sorensen said the banks want equal tax treatment of banks and credit unions, which compete for the same group of customers.

"We're looking at fairness. Obviously we want equity between like taxpayers," he said. "The Senate bill delivers that."

Sorensen noted that any tax credits claimed by banks are available to any Iowa business. And he said they'd be available to credit unions if they were taxed the same as banks.

"We welcome a full review and justification of every tax credit and exemption in Iowa, with the intent of making our tax rates more competitive and broadening the tax base," he said. "These exemptions and credits should only be retained if they are working for Iowa."

'I don’t see where the credit unions have been abusing the banks'

Several Democrats in the Senate on Wednesday spoke in defense of credit unions' current taxation status.

Sen. Tony Bisignano, D-Des Moines, said shareholder-owned banks and member-owned credit unions operate with two distinct models.

"I don’t see where the credit unions have been abusing the banks," he said.

He pointed out that Iowa banks tout 86 percent of the deposits and 95 percent of business loans in the state.

"Wells Fargo, and no disrespect to Wells Fargo — great employer, large employer, appreciated employer — but a very healthy and wealthy corporation," he said. "Wells Fargo is bigger than all 5,800 credit unions in the United States combined. I wouldn't consider (Iowa credit unions) a threat or an up-and-comer to take Wells Fargo out."

Credit unions also point out that banks have enjoyed record profits. And by the league's estimation, Iowa-based banks will save about $152 million annually through federal tax reform.

"From a bank perspective, the part that's most disingenuous is you announce record profits, you quietly mitigate your own taxes to the tune of hundreds of millions of dollars, then you say that credit unions are the bad guys somehow," said Murray, of the credit union league.