After years of fighting to protect the credit union tax exemption, it appears that – at least for now – the movement can rest easy.
The biggest victory for CUs in the tax reform legislation signed into law late last year may be what’s not in the bill: namely, a repeal of the tax exemption.
That’s the word from a number of analysts who spoke to Credit Union Journal, including former NCUA board member Geoff Bacino, who noted that even with a banker-friendly Congress, Treasury Department, president and more, the for-profit banking lobby “didn’t get it done.”
“If the bankers couldn’t get it done now, if I were them, I wouldn’t have a lot of faith that I could ever get it done,” said Bacino, who is a partner in the consulting agency Bacino & Associates.
With the bill signed into law now, there are still plenty of lingering questions around which segment of the population will benefit most, if the bill will create an economic boom, how the bill makes banks more competitive and how different areas of the lending market will be impacted. And the answers to many of those questions will also determine whether credit union members – and subsequently credit unions themselves – will benefit or suffer from the reform legislation.
More fights ahead?
While credit union advocates may be wiping their brows now, Patrick La Pine, president and CEO of the League of southeastern Credit Unions, noted that that CUs should still be on their guard, since a tax reform clean-up bill is likely to come up this spring.
A provision included in earlier versions of the legislation but eliminated in the final version of the bill would have cut back the deduction for deposit insurance premiums. This would have hurt banks’ ability to write off Federal Deposit Insurance Corp. assessments as a business expense.
“The mere fact that it was brought up should concern CUs,” said Bacino. “Because if the bankers lose the ability to write off that, they will really come after CUs hard, and, frankly, they came after CUs hard with this bill.”
Higher-taxed banks will be “more motivated to be more grassroots slanted,” La Pine said. And that could lead to banks adopting some credit union lobbying tactics as a way to get not only the banking community engaged, but also getting bank customers involved in the legislative fight instead of just writing checks to professional lobbyists.
While there aren’t any actively harmful provisions in the final tax bill to CUs, the banking industry was among the winners, said Eric Richard, principal at CU Counsel, PLLC.
The bill is also making banks more competitive, with the largest benefit to banks being a reduction in the corporate tax rate from 35 percent to 21 percent.
“The cost of being a bank has just been reduced by 40% versus a credit union,” said Steve Williams, partner at Cornerstone Advisors. But he doesn’t expect many CUs to convert into banks because of the cut. Credit unions that would be more likely to convert would be those interested in growing fast, especially in business services.
A reduction in the rate for S corporations is a provision that will benefit many smaller banks, noted Richard.
Since CUs are not reaping the benefits of a corporate tax cut, La Pine would like to see something done about the increasing cost associated with compliance. The 20-year tenured league president wants regulatory reform to come up next before Congress.
“I think this session there is an opportunity to push for regulatory reform,” he said. “I have been pleasantly surprised that the Senate Democrats have been willing to say that community banks and credit unions got the shaft coming out of Dodd-Frank.”
But will it grow the economy?
The larger debate surrounding tax reform is whether or not the bill will grow the economy, said John McKechnie, a former NCUA and CUNA staffer and now a senior partner at Total Spectrum in Washington. Whether or not the bill stimulates the economy remains to be seen, he argued, but CUs can encourage economic growth by being sensitive to the consumer. Most of the credit union CEOs McKenchie has talked with have a cautious optimism toward the bill’s effects on the economy, watching to see what shows up on their balance sheets as the law’s various components take effect.
Bacino shared a similar outlook. “If it works, that’s going to be great,” he said. “If it doesn’t, it’s going to add trillions to the deficit.”
It is disappointing, Williams said, that Congress did not tie the corporate tax cut to raises in wages. Some companies, according to Bloomberg reports, have already decided to give extra funds to shareholders rather than to employees.
“The biggest corporate tax cut in history to fuel corporate jobs in America. If it’s really more of a grab, it could be just another negative for the American family,” Williams said.
LSCU's La Pine sees the tax bill producing economic growth if the individuals and small businesses that often bank with CUs take the opportunity to reinvest in business. Smaller credit unions will be more equipped than larger CUs to advise their members about how to make the best use of the extra funds.
The largest issue, Richard said, is which segment of the population will wind up paying more. If the bill does in fact benefit the super wealthy, it’s unlikely that credit union members and subsequently CUs will reap the benefits.
At a dinner at Mar-a-Lago on Dec. 22, President Trump told friends at a dinner, “you all just got a lot richer,” according to a CBS report based on two unnamed sources.
The real estate industry was opposed to provisions related to the mortgage market in the bill, Richard said. Some projections estimate there might be a 10% negative impact on home prices in high-taxed states, like New York and California. “I think the overall consensus from the real estate industry is that it will be negative for the mortgage market,” Richard said.
The bill also has a provision that eliminates the deduction on interest on home equity lines of credit. “It’s going to be hard to market HELOCs in the future,” Richard said.
Increasing the standard deduction may also reduce the motivation for younger home buyers to get into the market since they may not need to increase their deductions, Richard said.
Steve Williams, partner at Cornerstone Advisors, believes that changes to the threshold for mortgage interest deduction will not slow down lending. The threshold for new homebuyers was lowered from $1 million to $750,000. When Williams talked to the Credit Union Journal, at the beginning of the tax reform debate, lawmakers were considering lowering the threshold to $500,000.
The only market that the change may effect is high-end homebuyers, especially those in New York and California. “When I count the 108 million adult households, [the effect] is going to be small,” Williams said.