MIDLAND, Mich.—While many speculate on the impact of removing the credit union tax exemption, few have crunched the numbers. Now one credit union CEO has done the math—and believes he’s found a solid answer.
“I've seen a number of articles and statements about what would happen if we lose our tax exemption,” said Michael Goad, CEO of the $2.4-billion Dow Credit Union. “However, I have not seen anybody show the math behind what they are saying. And many of the statements, I believe, may have been overreactions. While we're all trying to prevent the tax exemption from being removed, I think we need to make sure we're using clear language that balances out to the actual numbers.”
Goad acknowledged he is more concerned today than in years past about the possibility of credit unions losing their tax exemption.
“The Trump Administration is definitely looking to broaden the tax base. And, also, because of the success of our industry, I think we're more visible now,” Goad said. “If we do lose our tax exemption, I do think one reason is we have been a victim of our own success. Credit unions have clearly taken a lot of market share in the retail banking space.”
Goad said he has read several articles that assert the credit union business model would not be viable if the tax exemption were lost.
“Other statements claim that paying taxes would have a direct impact on the safety and soundness of CUs,” Goad said. “I know these claims are well-intentioned, but they are over-statements and mistakes.”
Goad noted he has worked for two publicly traded banks and was the CFO of a privately owned bank that paid taxes and dividends to shareholders, competing with credit unions that did neither.
Retain Significant Advantage
“And, still, I have not seen anyone lay out numbers,” Goad said. “And the numbers show that even without the tax exemption—which I strongly believe should be preserved—credit unions retain a significant strategic advantage over banks because of our cooperative/mutual ownership structure and our commitment to put member-owners first.”
Goad’s math:
“The tax exemption is only about one-third of the strategic advantage that CUs have over for-profit banks in pricing,” Goad said. “A typical for-profit bank makes a pre-tax return on assets of about 1.25%. After the 20% federal income tax, it makes an after-tax ROA of 1%. But then, they pay out dividends of approximately 50% of earnings to the external shareholders. After paying out dividends that leaves .50% of its ROA in retained earnings to support asset growth.”
Goad added that credit unions not only do not pay federal income taxes (.25% of ROA), they also don’t pay dividends to external shareholders (.50% of ROA).
“Our cooperative ownership model means that our members are our owners, and all of the benefits stay with them,” he said. “That .75% structural advantage means better rates, services, and fees for our members. Together the tax exemption and the cooperative ownership model result in a structural pricing advantage of approximately .75% of ROA—.25% due to the tax exemption and .50% due to our cooperative ownership structure.”
If the movement lost its tax advantage, that would remove one-third of the industry’s structural advantage, Goad noted.
“This is similar to the insurance industry where several mutual insurance companies are owned by their policyholders. These mutual insurance companies—such as New York Life, Northwestern Mutual—talk of the ‘power of mutuality’ because they prioritize their policyholder/owners, not third-party shareholders,” Goad explained. “Mutual insurance companies and their shareholder-owned competitors both pay taxes, but there is a clear advantage for the policyholders of the mutual because dividends aren’t paid to outside shareholders, which means greater value for their policyholder/owners. The same would hold true in the banking world if credit unions were to lose the tax exemption.”
Bigger Target?
CUToday.info asked Goad if credit union mega mergers, such as the combination of $12-billion Digital FCU and $17-billion First Tech FCU, and high-profile sports sponsorships, such as a $4-billion Northwest FCU’s multi-million-dollar deal with the Washington Commanders, have placed a bigger target on the movement’s back.
“I understand where people can question some of the larger marketing deals. But that doesn't mean these credit unions are wrong,” Goad said. “What they chose to do is simply part of their credit union’s strategy. I agree, it does put us more on Washington’s radar, when people ask what's the difference between that credit union that is paying $1 million for a marketing sponsorship and the local community bank. But, again, what these credit unions are choosing to do is not wrong.”
If the tax exemption is lost, there may be some credit unions that consider converting to a bank, Goad acknowledged.
“About 20 years ago, just after the Federal Credit Union Act was updated, there were several credit unions that tried to convert to a bank, and their memberships did not agree,” Goad said. “Since then several of those credit unions created plenty of capital through retained earnings because they had very good business models, and they grew earnings and they grew their balance sheets, and they have had a very wonderful run over the last 20 years. So, nobody really needed to convert to a bank back then.”