City council hears, but takes no action, on presentation supporting credit union tax

By Travis Gulbrandson

The Vermillion City Council was reticent about passing a resolution in support of the full taxation of federal credit unions and farm credit system institutions.

The council was urged to do so in a presentation by Lynn Peterson, senior vice president of CorTrust Bank in Yankton during its special meeting Monday afternoon.

Council member Howard Willson said that decision should be left up to Congress.

“I don’t think we can sit here and decide who should and who should not pay taxes, but I don’t see anything wrong with asking (Congress) once again to take a look at it,” Willson said.

Upon questioning, Peterson did acknowledge a professional disadvantage between banks and credit unions.

“I don’t think it’s up to the city council to decide whether or not that competitive disadvantage should be allowed,” council member Tom Davies said.

However, Peterson said he was not addressing the council as a banker, but as a taxpayer.

“We’re just here to present some information, and if you feel the same way the rest of the public and people within my industry feel, you will possibly sign a resolution,” he said.

Community banks in South Dakota pay a 35 to 39 percent rate of taxation on their net income, Peterson said.

“Currently, at this point, credit unions in South Dakota … pay zero federal income tax, they pay zero state sales tax and they pay zero bank franchise tax,” he said. “They do pay property tax, they do pay payroll tax, but everybody else does the same, as well.”

This is putting a “big, big tax disparity” within the South Dakota General Fund, he said.

“Of the 35 to 39 percent that … we’re being taxed on, 6 percent stays in the general fund in the form of a bank franchise tax,” Peterson said. “All financial institutions in South Dakota are subject to this tax except credit unions and farm credit services.

“Farm credit services pays a nominal tax between 1 and 5 percent of total income. Combined, these two industries are a $5 billion industry in South Dakota,” he said.

The groups had “around $95 million of net income” in 2012, Peterson said.

“We’re missing out on a big chunk of income to the state of South Dakota to come back to the general fund,” he said. “Those funds are paid into the general fund, and then they’re kicked back to the cities, counties and schools through the South Dakota treasury.”

By signing a resolution, Peterson said the city council would be asking Congress to have hearings and “try to stop some of this leaking that’s going on.”

“It isn’t about the $5 million that we’re not getting in our state coffers today,” he said. “It’s about the next day … and when that $5 million grows to $8 million, and $10 million, and $20 million. That is how this is working. The larger they grow, the less comes in to our state funds.”

Amy Kleinschmit from the Credit Union Association of the Dakotas said the increase in credit union users can be attributed to any number of factors, such as banks that failed in the economic downturn, the merger of smaller banks or people who were just unhappy with their current financial institution.

But the growth of credit unions is nothing compared to that of community banks in the state, she said.

“South Dakota community banks … have grown to $3.3 billion in the last 10 years. South Dakota credit unions have grown to $2.5 billion, but that has taken 75 years to get to that point,” Kleinschmit said during Monday’s meeting.

Janet Mount, CEO of the Vermillion Federal Credit Union, also attended the meeting, and said there is a place in the world for both banks and credit unions to exist.

Mount also explained the various structure differences between the systems, pointing out that there are limitations to credit union loans, on the types of investments they can do and who can become a member.

In addition, all the members of the credit union’s board of directors are volunteers. As such, none of them is paid a salary, she said.

“We have members, we don’t have shareholders,” Mount said. “The money belongs to our members, so any money we make goes back to our membership, whether it’s in the form of dividends paid back to them or services we offer.”

Council member Kelsey Collier-Wise said that if the issue was about tax equality or getting more revenue in the tax stream, she was concerned the argument could be applied to any group with a tax exemption.

“We have a lot of farm co-ops, non-profit organizations, obviously, and one of the things we’ve talked about a lot are these tax-exempt municipal bonds,” Collier-Wise said. “That’s the same argument that’s being used to try and take the tax exemption away from our municipal bonds, which are so important. If the main argument is this equality issue, I worry that that same argument could be applied to any of those other cases.”

Peterson said there isn’t another co-op that competes directly with tax-paying entities.

“There’s not a lot of those that I’m aware of in the state where each industry does almost exactly the same thing, but one’s taxed and not the other,” he said.

Mount urged the council not to sign a resolution.

“If the tax structure changes, most credit unions … would probably have to merge or go out of business,” she said.

Mayor Jack Powell said there are currently no motions to do so, and that the purpose of the meeting was just to watch the presentations by both entities.

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