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Tax reform remains concern for credit unions; Baucus retirement could alter prospects

Mon, May 6, 2013

Washington, District Of Columbia

Tax reform is alive and kicking.  Or dead in the water.  Tax reform is being read its Last Rites due to Senator Baucus' retirement.  Or it was given a boost of rocket fuel that is likely to propel it across the finish line.

The fact is, all of the above are true.  Tax reform has become the Washington equivalent of a political Rorschach Test, as forces pro and con are largely viewing the issue as they want to see it, and are making determinations about its viability based on whether they want tax reform to succeed or fail.

House and Senate tax-writing committees have begun preliminary work on drafting bills to overhaul the federal tax code for the first time in 27 years.  The process has been slow and appropriately deliberate.  House Ways and Means has created 11 “working groups” that have divided tax questions into subject matters as diverse as energy, real estate, and financial services.  And Senate Finance set up 10 teams, tasked with developing option papers on how to rewrite the tax code.

Credit union trade groups met with the House Ways and Means Financial Services Working Group in mid-April.  According to both industry and congressional sources in attendance, the meeting went well for credit unions.   Lawmakers and congressional staff probed the rationale for the credit union tax exemption and inquired about how credit unions utilize the exemption to benefit consumers.  According to one participant, Congressmen present said the credit union tax exemption “is not on anyone's list” for elimination.

However, subsequent discussions with Ways and Means Committee staff suggest a potentially worrisome process lies ahead.  Staff adamantly insist that the working groups, such as the one that had an encouraging meeting with credit union lobbyists, are not making policy recommendations. Rather they are fact-finding bodies that will report to the Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI).  Decisions about the contents of a bill will be made at that level in the coming months, and nothing is certain.  “We are starting with a blank sheet,” noted an aide to Chairman Camp.  “Exemptions will have to prove their validity--being already exempted counts for nothing.”

A new wrinkle has also been suggested by Committee staff: an examination of Unrelated Business Income Tax (UBIT).  Currently, state chartered credit unions receive an exemption from taxes on income received through business activities that are “substantially related” to credit unions’ purpose.  While this exemption has come under varying degrees of scrutiny by the IRS in recent years, credit unions have fought back in Wisconsin and Colorado, and won.  Now, a broad UBIT re-write by Congress could result in wider application to all credit unions, state and federally-chartered alike.

Senate efforts to forge reform were dramatically altered by the April 23 retirement announcement by Finance Chairman Max Baucus (D-MT).  Baucus and Camp have been viewed as being generally in sync on the need for comprehensive tax reform, although not necessarily the substance. Their joint leadership was considered to be the linchpin of any successful effort.

The Baucus departure is being parsed for its impact; some, such as former Ways and Means member Phil English (R-PA), said “it helps because it frees Baucus to become a middleman between the Ds and Rs, who are currently as divided as the Grand Canyon on what tax reform should look like.  Baucus now doesn’t have to worry about reelection and can act as a broker. His leverage has increased.”

Others are not as sanguine.  A Democratic Senate Finance Committee staffer commented that “this means Baucus will talk aggressively about reform.  Unfortunately, I think he is in the same position as Camp (who is term-limited as Chairman of Ways and Means), where his work won’t necessarily lead to anything that gets to the floor.  Lame ducks generally don't see their clout increase.”

John McKechnie is a partner at Total Spectrum Government Affairs, and he has over 25 years of experience in the credit union industry.  Prior to joining Total Spectrum, McKechnie served as the Director of Public and Congressional Affairs for the NCUA and, before that, served as CUNA’s chief federal lobbyist.