\-\-\-\--Original Message\-\-\-\--

From: Brad Thaler
\[[[mailto:bthaler@nafcu.org]{.underline}](mailto:bthaler@nafcu.org)\]

Sent: Thursday, April 07, 2005 5:40 PM

To: comments@taxreformpanel.gov

Subject: Federal Tax Reform Comments from the National Association of
Federal Credit Unions

Please find attached a statement from the National Association of
Federal Credit Unions (NAFCU) for the President\'s Advisory Panel on
Federal Tax Reform. It is attached as an MS Word document. We thank you
for the opportunity to submit comments. If there is a problem with this
e-mail, or if you have any questions, please feel free to contact me at
the numbers below.

\<\<NAFCU Tax Reform Panel Statement Final 4-7-05.doc\>\>

Bradford L. Thaler

Director of Legislative Affairs

National Association of Federal Credit Unions

3138 10th Street North

Arlington, Virginia 22201-2149

Ph: (703) 522-4770, ext. 204

Fax: (703) 522-0594

Email: bthaler@nafcu.org

## ![](media/image1.png){width="1.9493055555555556in" height="1.6298611111111112in"}

## 

## Comments of

The National Association of Federal Credit Unions

to the

The President\'s Advisory Panel on Federal Tax Reform

April 7, 2005

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National Association of Federal Credit Unions

3138 10^th^ St. North

Arlington, VA 22201

www.nafcu.org

\(703\) 522-4770

The National Association of Federal Credit Unions (NAFCU), the only
national trade association that exclusively represents the interests of
our nation's federal credit unions, appreciates this opportunity to
comment to the President's Advisory Panel on Federal Tax Reform. NAFCU
is comprised of approximately 800 federal credit unions -- financial
cooperatives from across the nation -- that collectively hold
approximately 66 percent of total federal credit union assets; NAFCU
represents the interests of approximately 26 million individual credit
union members.

We want to take this opportunity to emphasize to the members of the
President\'s Tax Reform Panel the importance of the federal income tax
exemption not just for credit unions but for all who have savings in any
regulated depository institutions, and to urge the panel to support
continuation of the federal income tax exemption for all credit unions
in any recommendations you might make. Credit union critics have
erroneously claimed that some credit unions today are no different than
banks and thus should forfeit their tax exempt status. Such claims
simply don't stand up to close scrutiny. While credit unions -- like all
financial service providers -- have evolved and grown over the years to
meet the changing financial services needs of their members, the basic
structure, philosophy and guiding principles of credit unions remain the
same today as when the federal tax exemption was granted to credit
unions in 1937. Congress reaffirmed this fact just seven years ago, when
as part of Section 4 of the "Findings" contained in *the Credit Union
Membership Access Act* (P.L. 105-219) Congress declared that:

> "Credit unions, unlike many other participants in the financial
> services market, are exempt from Federal and most State taxes because
> they are member-owned, democratically operated, not-for-profit
> organizations generally managed by volunteer boards of directors and
> because they have the specific mission of meeting the credit and
> savings needs of consumers, especially persons of modest means."

As part of that legislation, the Treasury Department was asked to
examine credit unions and their role in the financial services
marketplace, including "the potential effects of the application of
Federal laws, including Federal tax laws, on credit unions in the same
manner as those laws are applied to other federally insured financial
institutions." The Treasury Report (*Comparing Credit Unions with Other
Depository Institutions*, U.S. Department of Treasury, January 2001)
found that credit unions were, indeed, serving their purpose and that
there was no reason -- or recommendation -- to remove the Federal tax
exemption from credit unions. This position was supported by then
candidate and now President George W. Bush in 2000, when he stated
"...as part of my overall commitment to lower taxes and provide more
opportunities for working Americans, I support continuing the tax-exempt
status of credit unions\". It was also supported by both candidates in
the 2004 presidential elections and just reaffirmed by President Bush's
Administration as recently as last month when Treasury Secretary John
Snow made comments in support of the credit union federal income tax
exemption before a credit union audience.

Consumer advocates have also recognized and supported the tax exempt
status of credit unions. In the fall of 2003 the Consumer Federation of
American (CFA) examined the tax status of credit unions and reaffirmed
these points in a study entitled "Credit Unions in a 21st Century
Financial Marketplace". In the study CFA concluded, among other things,
that:

-   The benefits that credit unions deliver to the public far exceed the
    costs, as measured by the tax exemption, through lower cost services
    and paying higher interest rates; and,

-   The value of tax breaks enjoyed by banks is "far greater, in
    absolute and relative terms, than the value of the credit union tax
    exemption."

Furthermore, even bankers have admitted that credit unions' influence in
the market has led them to better serve their customers. An article in
the January 31, 2005 issue of the *American Banker* newspaper entitled
"Feeling Heat from Deposit Competition" reported that "Zions Bancorp
\[of Salt Lake City, Utah\] was one of the many large regional banks
that while making record profits for the 4^th^ quarter of 2004 and for
the calendar year, gave in to deposit pricing pressure in the fourth
quarter \[of 2004\]." The article continued: "Zions said pressure from
other banks and specifically credit unions in Utah prompted it to raise
rates on money market accounts by 20 basis points late in the fourth
quarter."

The loss of the federal tax exemption would seriously threaten the
fundamental nature of not-for-profit credit unions and significantly
change the role that they play in the consumer financial services
marketplace. Almost all federally insured credit unions must build their
capital reserves through retained earnings, and all are prohibited from
accessing the open capital markets by law. As noted by former NCUA
Chairman Dennis Dollar in a letter to The Honorable Sheryl Allen (a
member of the Utah State House of Representatives) regarding potential
safety and soundness implications from the taxation of credit unions in
that state: "... it is certain that any resulting net worth
considerations that might arise (from taxation) could indeed become a
significant issue ... \[as a result of\] credit unions having their
retained earnings negatively impacted \[by taxation\]." Furthermore, any
taxes imposed on credit unions would be passed directly to their members
in the form of lower savings rates, higher borrowing rates and/or higher
fees. Finally, credit unions boards and management would be driven to
make decisions in a manner similar to banks, with the end result being a
decision-making process driven by tax considerations or other issues
rather than what is in the best interest of members. As a result, a very
unfortunate consequence could be a shift in orientation to
profit-motivated interests, instead of providing low-cost financial
services to member-owners.

> In summary, the basic structure, philosophy and guiding principles for
> credit

unions, large and small, remains the same today as it was in 1937; i.e.,
they continue to be member-owned, democratically-controlled,
not-for-profit organizations generally managed by volunteer boards of
directors with the mission of meeting the credit and savings needs of
consumers, especially persons of modest means. Thus, we believe there is
more than ample justification for continuing the federal income tax
exemption for *all* credit unions and that the President's Advisory
Panel on Federal Tax Reform should support continuing the federal income
tax exemption for all credit unions, regardless of size, charter type,
field of membership or services offered.