Credit unions got a big reputational boost during the
financial crisis, as banking customers protested what in their
eyes were reckless lending practices that led to massive bailouts
of traditional banks. Especially in the aftermath of the crisis,
as banks made
numerous attempts to raise fees to recoup
numerous attempts to raise fees to recoup losses, many bank
customers fled to credit unions for relief.
Yet now, banks are trying to fight back. In Congress, bank
lobbyists are waging a battle against
credit-union supporters over whether credit unions should
continue to benefit from a tax exemption they've had ever since
the Great Depression.
The tax argument
Put simply, banks think it's unfair that they have to pay taxes
while credit unions don't. Banks are treated just like any other
profit-making enterprise, and get taxed accordingly. In the case
of the biggest banks, those tax bills can be truly massive.
has allowed for income-tax provisions of $8.9 billion on its
balance sheet over the past 12 month.
's tax provisions have been even greater, at $9.7 billion.
By contrast, credit unions pay no federal tax. With their
member-owned cooperatives, credit unions plow their profits back
into their banking products, offering higher interest rates on
their deposit accounts, and lower rates on loans.
A patchwork of tax rules
Both banks and credit unions have strong arguments for their
respective positions. But the sad truth is that similar
disparities exist throughout the tax code. Consider the
- In the educational industry, most traditional colleges and
universities are exempt from tax. But for-profit educational
pay federal tax on their profits.
, which operates the University of Phoenix, made provisions for
almost $200 million in income-tax expense over the past year.
Some tax advocates have suggested taxing the endowment income
of large universities, which currently falls under their tax
exemptions. Using Yale's $19 billion endowment as an example,
returns of 4.7% in its most recently reported fiscal year would
equate to roughly $900 million in potentially taxable
- In the health-care business, many hospitals are structured
as tax-exempt charitable organizations. Yet, some have argued
that, under Obamacare, the number of uninsured patients will
drop enough to make it difficult for tax-exempt hospitals to
provide enough care to uninsured patients to meet state
regulations governing their charitable status. Private hospital
made provisions for $820 million in income-tax expenses over
the past 12 months.
- In the energy industry, there's been a huge drive among
ordinary corporations to restructure all or part of their
operations to qualify for status as master limited
partnerships. MLPs don't have to pay tax at the entity level,
instead distributing their profits, and leaving unitholders to
bear any tax liability from their operations. Investors in
ordinary corporations end up getting double-taxed, with the
companies themselves paying corporate tax, and shareholders
still paying individual taxes on dividends.
In that light, the tax-exempt status of credit unions doesn't
seem all that peculiar. Arguably, what's unusual about banking is
that more institutions haven't moved to take advantage of the
exemption. Credit unions still make up only a small fraction of
the banking-services industry, with traditional banks having
about 15 times the financial assets that credit unions hold.
Don't fret about credit unions
For-profit banks might not like what they see as a competitive
disadvantage against credit unions. But, given the benefits that
larger banking institutions gain from their relative size,
keeping tax-exempt status for credit unions doesn't seem like an
unfair way of keeping the playing field relatively level.
Investors in for-profit banking institutions also shouldn't
worry about credit unions as a big threat. The fact is that
banks are still highly profitable, yet their stock prices don't
fully reflect their future potential. Bargains of a lifetime
are still available, but you need to know where to look. The
Motley Fool's new report, " Finding the Next Bank Stock
Home RunFinding the Next Bank Stock Home Run," will show
you how and where to find these deals. It's completely free --
click here to get started.
Fool contributor Dan Caplinger has no position in any stocks
mentioned. You can follow him on Twitter @DanCaplinger. The
Motley Fool recommends Wells Fargo. The Motley Fool owns shares
of JPMorgan Chase and Wells Fargo. Try any of our Foolish
newsletter services free for 30 days. We Fools may not all hold
the same opinions, but we all believe that considering a diverse
range of insights makes us better investors. The Motley Fool has
a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a