Iowa’s banks and credit unions are trading barbs over whether the state should require not-for-profit credit unions to pay more taxes.

“We have a circumstance in Iowa where our largest financial institution is a $4.6 billion credit union making $70 million in profits that has been very visible in their effort to expand their business throughout the state of Iowa,” said John Sorensen, president and chief executive officer of the Iowa Bankers Association, referring to North Liberty-based University of Iowa Community Credit Union.

“It’s hard to argue (against) that maybe they should contribute a small amount to services the state of Iowa provides to its citizens.”

Iowa’s banks and credit unions have sparred for years over how the latter should be taxed. But a proposal to treat them under the same tax status moved forward this week in the Iowa Legislature.

Both sides also have started media campaigns in recent months to argue their points.

“I understand that banks are concerned about the growth of credit unions, but credit unions have grown because they have saved Iowans money. I’m wrestling to try to understand why that’s a bad thing,” said Jeff Disterhoft, president and chief executive officer of UICCU.

The debate circles around whether Iowa credit unions, particularly larger ones such as UICCU, should pay more state taxes as they grow and expand their territory. Banks argue larger credit unions are mirroring the size and services of for-profit banks, but still operate as not-for-profits.

Credit unions, however, say they use savings from their not-for-profit status to save members money and the banks just want to tamp down competition.

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Iowa banks currently have to pay a five percent franchise tax while credit unions pay a moneys and credits tax worth 0.5 percent of their reserves. A provision in a Senate bill passed Wednesday would change that to have both banks and credits pay a franchise tax of two percent on the first $7.5 million of annual profit and four percent beyond that amount.

The legislative proposal was a part of the Senate Republican tax bill put forth by Sen. Randy Feenstra, R-Hull.

Feenstra, chairman of the Senate Ways and Means Committee, said he initially did not plan to propose a tax increase on credit unions. After large credit unions, such as the UICCU, started running advertisements in northwest Iowa, though, Feenstra said he thought “things were getting a little out of hand.”

He viewed the ads as the large credit unions going after smaller financial institutions.

“I’m a big supporter of small credit unions and banks. They’re doing what they’re supposed to do,” Feenstra said Friday. “But when you have these mega credit unions coming in and taking all the assets and not giving anything back … this is just an overreach in taking money out of these small communities.”

The state collected $53.8 million in franchise tax revenue from banks in fiscal 2017, according to Department of Revenue data. That tax liability was offset by about $18.4 million in refundable state tax credits purchased and claimed by banks.

Another $20.6 million in franchise tax credits was claimed by shareholders of banks organized as pass-through entities.

From credit unions, the state took in about $740,000 in moneys and credits tax from credit unions last fiscal year. The same amount went to local governments.

In fiscal 2016, a majority of credit unions — 59 out of 93 — paid no moneys and credits tax, either because they had no income tax liability or reduced it to zero through tax credits, according to the Department of Revenue.

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Sorensen praised the Senate bill and said his association’s members only want an equal footing with the credit unions. He pointed to growth at UICCU, which is now the largest Iowa-based financial institution by assets in the state.

UICCU reported assets of $4.67 billion in December. Bankers Trust, the largest Iowa-based bank, had $4.47 billion in assets.

“There is little to no difference between the largest credit unions in our state and any bank in Iowa,” Sorensen said.

He added that large credit unions have extended beyond their traditional borders to territory across the state.

“I get that we do indeed serve people beyond just the University of Iowa, but I’m trying to figure out why that’s bad that we save somebody in Des Moines money,” Disterhoft said. “What the banks seem to be saying is it’s not good to save everybody money, just small groups of people.”

UICCU and the Iowa Credit Union League have said the tax bill is essentially a generous tax cut for banks that dominant Iowa’s market, while putting millions of dollars of increased tax burden on credit union members.

“Certainly from our perspective, the bill was talked about in helping people keep more of their paycheck and reducing tax burden, and for 600,000 Iowa credit union members it does the opposite,” said Justin Hupfer, vice president of government affairs for the Credit Union League.

Any tax increase from the legislation could mean higher fees or decreased loan interest for members, Hupfer and Disterhoft said.

Feenstra called such talk by the credit unions “shameful.”

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“It’s not going to cause any increases. When these organizations are making hundreds of millions of dollars ... it’s not going to hurt anybody’s bottom line or interest rates,” he said.

While the proposal has made it out of the Senate, it may face hurdles in the House of Representatives. House lawmakers have started committee debate on a tax plan put forth by Gov. Kim Reynolds, but her legislation does not includes changes for the tax status of credit unions or banks.

“We look forward to working with both the Senate and the House to pass a bill that cuts taxes and simplifies our complex tax code but does so in a fiscally responsible way,” Reynolds spokeswoman Brenna Smith said in an email.

The chairman of the House Ways and Means Committee, Rep. Guy Vander Linden, R-Oskaloosa, said Friday he is not interested in tax increases, including for financial institutions.

“I have been telling the banks since at least early summer that I could consider lowering their taxes, but I am not in favor of raising taxes on anybody, even credit unions,” Vander Linden said.

l Comments: (319) 398-8366; matthew.patane@thegazette.com