The Federal Deficit And Credit Unions: Why The Tax Exemption May Get Scrutiny

The recent debt ceiling debate (or debacle, depending on your perspective) was, in the parlance of the day, a "teachable moment" for the credit union movement. For one thing, it showed the extent to which Washington has become the embodiment of Parkinson's Law. This corollary to Murphy's Law holds that work expands to fill the time available for its completion. Every important piece of legislation is debated until the clock runs out before a Congressional recess or other deadline.

Second, it should serve as a reminder that the political divide between the two parties is deep and getting deeper, making it harder to pass any legislation, let alone the kind of proactive, positive measures that can help credit unions stay up-to-date in their ability to serve their members. The two parties just don't have much common ground, and obviously don't see value in cultivating it. Finally-and more ominously- the coming focus on deficit reduction presents a clear and present danger for the credit union tax exemption for the first time since 1986.

What prompts this tax-fight concern? The creation of a so-called "Super Committee," mandated by the eleventh-hour agreement in early August to raise the debt ceiling. This committee, formally known as the Joint Select Committee on Deficit Reduction, is tasked with concocting a yet-to-be determined mixture of spending cuts and revenue increases that would lower the deficit by $1.5 trillion. The package is due for completion by Nov. 23, and Congress is obligated to act on these cuts by Dec. 23.

The possible 360-degree review of the tax code by the Super Committee should send a signal to the credit union industry that the next several months may test its political and legislative skills regarding the tax exemption like never before.

Comprised of 12 members of Congress, six from each party and six from each chamber, this Select Committee is tasked with a broad mandate: find a way to cut the deficit. In the first week of the Committee's existence both Democratic and Republican Hill sources indicated that entitlement reform and elimination of tax "expenditures" (Washington-ese for tax exemptions-the expenditure refers to revenues the government otherwise would have received if the exemption were not present) will be discussion items.

While none of these Congressional sources pointed directly to credit unions, it should be noted that the Office of Management and Budget has long considered the credit union tax exemption as a "tax expenditure," something that should prompt a heightened degree of watchfulness.

A Senate Finance committee staffer noted that "Definitions will be critical. Direct tax increases will be vehemently opposed by Republicans, but closing 'loopholes' is another story. Watch the terminology very carefully." Another senior staffer for a member of House Leadership put it a different way: "If the Super Committee would be willing to put the home mortgage deduction on the table, then everything is on the table."

This scenario carries particular risk for credit unions. Designed to be insulated from the kind of political pressure that credit unions would no doubt mount to preserve the tax exemption, this powerful bi-partisan, "everybody gets a haircut" committee could move aggressively to tackle issues otherwise untouchable during regular Congressional deliberations. And no matter how legitimate their arguments, interest groups such as the credit union industry could become marginalized in the face of a national effort to tackle the debt problem.

Showdown At Gucci Gulch
There are no guarantees that the debate will develop like this. Credit unions have an array of good arguments that would be successful, just as they have been in the past, if a more piecemeal approach takes shape.

I was a Congressional staffer during the 1986 tax fight, and can recall how the famous "showdown at Gucci Gulch" came to be. This was the humorous term given to the daily circus outside the House Ways and Means Committee room during the markup of the legislation negotiated by President Reagan and Committee Chairman Dan Rostenkowski, and it aptly described the battles fought by well-heeled lobbyists over the reshaping of the tax code.

But there was a different feel to that 1986 debate. While the debt was universally acknowledged as a problem, a sense of fiscal emergency was absent, and Congress and the Administration followed the ordinary course of business to draft and amend the tax bill. With it came the ordinary horse-trading that resulted in the credit union tax exemption being spared (after being eliminated in the bill's early iterations).

I cannot speculate on how the Super Committee will proceed this fall. There is no shortage of ideas from across the political spectrum about how to reduce the deficit, and regardless of the virtues of these ideas or the Super Committee's special status, policy merits could be trumped by raw political pressure.

The only things I can predict with certainty are that, for the foreseeable future, vigilance by the credit union industry is essential-and that the Thanksgiving and Christmas seasons could be extremely interesting.

John J. McKechnie, III, is senior vice resident with Total Spectrum in Washington, D.C. He can be reached at jmckechnie@totalspectrumsga.com.