The U.S. Senate Committee on Finance is a 26-person (14 Republicans, 12 Democrats) committee that oversees federal spending and revenue, specifically with matters relating to taxation. It’s widely considered one of the most powerful committees in Congress.
In an afternoon session on Day 2 of the Governmental Affairs Conference titled The Politics and Policies of Tax Reform and Its Implications to Credit Unions, the credit union tax exemption was the topic of choice.
Moderator Terry West, president and CEO of VyStar Credit Union, and panelists Chris Campbell, the committee’s staff director, and Mark Gerson, a tax lobbyist for Miller Chevalier, spoke for a little less than 75 minutes on how and why the credit union tax exemption could be eliminated.
The Federal Case For Eliminating The Credit Union Tax Exemption
As not-for-profit institutions that exist to serve their member-owners, credit unions are tax-exempt entities. This we know. The federal tax code marks these exemptions as preferences, and by basic way of explanation, the more preferences that exist in the tax code, the higher the overall tax rates. Fewer taxable entities have to pay more, resulting in a corporate tax rate that, as many including Campbell a Republican it should be noted pointed out over the course of the conference, is the highest in the world.
While the U.S. corporate tax rate is ostensibly 35%, complex calculations based on yearly performance cause variations in the rate i.e. not all corporations pay as much as this. But, this steep tax rate results in negative consequences for the overall U.S. economy.
Imagine, for a moment, you own a large corporation headquartered in the United States and you pay a corporate tax rate of 35%. Now imagine that the average corporate tax rate in Europe is 18.6%, which it is. On a simplistic level, based on the tax rate U.S. business are incentivized to take their corporations overseas obviously the decision to do so is much more complex. And once that business is overseas, the U.S. heavily taxes corporations who would try to bring it back to the U.S. With several complicated exceptions, once that money is overseas it’s not coming back. The U.S. has a double tax system. It’s bad for the economy when American businesses leave for other countries. Campbell estimated there is about $2 trillion parked overseas.
It’s crazy not to have that ownership, he says.
Now, lowering the corporate tax rate is a political issue. Democrats would prefer 28% and Republicans 25%, which actually isn’t that large of a partisan divide. But the method for reaching those figures is.
An obvious solution, then, is to eliminate preferences in the tax code. With the revenue gained from eliminating preferences, Congress would, in theory, use that money to buy down the corporate tax rate, keeping more businesses in the country. Campbell was careful to point out that this solution is not simply intended to increase revenue, but to promote economic growth by making the U.S. a more desirable place to do business.
The Tax Reform Process
Ways and Means Committee Chairman, Rep. Paul Ryan (R-WI) has indicated that tax reform is a high priority for the 114th Congress. But substantial changes have not been made to the tax code since the Reagan administration.
Still, the clock is ticking. Tax reform not completed in 2015 will likely wait until 2017 for further serious discussions. No substantial changes are taking place during a presidential election indeed if reforms are not made, look for it to be an important campaign platform, Campbell says.
In January, Senate Finance Committee Chairman Orrin Hatch (R-UT) and ranking member Sen. Ron Wyden (D-OR) announced the launch of five bipartisan Finance Committee Tax Working Groups to research and present potential reforms to the tax code during the 114th Congress.
Each group is co-chaired by a member of each party, looking for consensus solutions. The five working groups are concerned with the following aspects of the tax code: Individual Income Tax, Business Income Tax, Savings & Investment, International Tax, and Community Development & Infrastructure. The credit union tax exemption would fall under Savings & Investment.
There are three phases to the plan: an initial learning phase, where the tax code is thoroughly researched; a public phase where interest groups and individuals can express opinions on changes or impacts of the tax code changes; and a final reporting phase where groups will express recommendations to the committee. The planned completion date of these phases is May. After speaking again with every-day Americans, Congress, and the White House, the committee plans to release a bill by late summer or early fall of 2015.
For credit unions, the elimination of the industry tax exemption could have numerous affects. In February 2014, NAFCU sent one such study to Congress. The committee has also created a non-partisan group that is able to quantify the cost of the proposed changes to the tax code.
We will be able to see the interaction affects of changes to the code, Campbell says.
Tax reform is complex and opposition will be large. To wit, all five of the Democratic congressmen who spoke at Day 2 of GAC came out against the elimination of the credit union tax exemption, each to thunderous applause.