By Sarah Snell Cooke, Principal, Cooke Consulting Solutions

Credit unions’ value proposition makes loss of the tax-exempt status a moot point, so let’s move on.

That’s what Susan Mitchell, CEO of Mitchell, Stankovic and Associates, had to say during the Underground Collision conference last month. If you have a value proposition that supports member needs, the tax exemption should be off the table, and credit unions can move on to more forward-thinking advocacy.

Don't miss this earlier content from the May 8 Underground Collision on member activation, disruption, collaboration and mergers.

The tax-exempt status has become a ‘let’s cry wolf to unite the community’ call. The bankers have driven credit unions into a defensive stance they follow down the taxation rabbit hole, Mitchell said. And it’s great to have an issue to unite everyone behind, but can’t we also use that unification to pursue a credit union agenda, she pondered.

“I believe we can use the power of unification around issues that are critical to the survival of the industry,” Mitchell advised. “Serving the middle class, valuing people and offering financial services to change lives, enrich families and communities. We have a great story that doesn’t need to be high jacked by the bankers.” 

Educating members of Congress on the reasons behind the tax exemption is credit unions’ foot in the door. “It is about the people we serve in the CU industry,” she said. “That is the story to keep the tax-exempt status.”

Bret Weekes, president/CEO, eDoc Innovations, added that the cooperative ownership structure, member ownership and patronage with democratic control is what makes credit unions unique. “Some argue that without the tax exemption there would be little incentive to retain the cooperative ownership structure, and therein lies the heart of the real issue,” he said.

“In a very practical point of consideration, it is time to consider the total cost associated with maintaining a tax-exempt status,” Weekes advocated. “The data isn’t available in full but certainly hundreds of millions of dollars are spent annually to fund local, state and federal level lobbyist efforts to maintain the status. What if these amounts were reclaimed and used to pay any tax that a well-run credit union might incur?  The alternative is a taxable cooperative that manages to the business model, and leverages the tools available in U.S. tax code to reward members for patronage. How is that different from practical operations today?“

Mitchell agreed. When the corporate restructure took place, the required deposits to the NCUSIF and American Share Insurance were essentially the same as taxes. Capital was initially affected because it was unplanned, but overtime the expense became a necessary evil.  

“If credit unions became taxed, what would be the difference between CUs and banks? Why not just convert? I know many, if not all, large credit unions have this plan in their back pocket just in case,” Mitchell acknowledged. “What would be the difference between the two models? Mission! Banks serve shareholders, credit unions serve members. If that is not at the core of your business model, then there is little difference and your credit union may have more to gain from changing charters. Ask the question – are you a credit union cooperative? This might cause some serious reflection on purpose, passion and differentiation!”

For-profit strategies and tactics by some credit union leaders are not necessarily appropriate if they do want to maintain the tax exemption, Weekes said. “It is the minority that could with scrutiny say, ‘I hold true to the founding principle that we are organized and operated for the mutual purposes of the members and without profit in both word and deed.’  If you doubt this, just look at the topic of mergers and you will quickly see the paradox.

“Is this a bad thing? It depends on your outlook; a valid question however is, ‘Do contemporary financial service models require a for-profit strategy?’”