One of the most important priorities I deal with as chair of the Senate Commerce Committee is to provide a level playing field in Iowa and then get out of the way of competitors. This philosophy is never so clear as when I review the situation between Iowa banks and credit unions. These two entities compete for Iowans’ deposits, loans, and financial service needs. I just said they compete, but they aren’t supposed to compete. They are different entities intended to serve different populations.
We all understand our banks are for-profit corporations. They may be privately owned or publicly traded with stockholders. We all know they offer interest rates for savings to attract dollars, then loan those dollars at a higher interest rate for profit. They provide various financial services and, along with the Federal Deposit Insurance Corp., let you sleep at night not wondering if your money will be burned up or stolen. Banks pay income tax on that profit just like Iowans and other private businesses.
Credit unions are a not-for-profit entity. They were originally created long ago and chartered to serve a very specific, under-served population who couldn’t get service from a normal bank. It may be an employee group, or a specific geographical area. Credit unions offered basic financial services similar to banks, such as savings and checking accounts and personal loans. Because they were chartered to go and serve where banks wouldn’t go, they were given income tax free status, with the intent that profits were returned to credit union members through higher savings interest or lower loan rates. This worked for a long time.
Decades later, it has become clear that credit unions are no longer bound to serve a certain population or geographic area. They have broken out of their original charters and continually file to expand their reach and allowed services. The problem is that they are still not taxed on their profit. This tax inequity is going to tip the board more and more toward the credit unions over time. In the last few years the Iowa Senate passed a bill to tax banks and credit unions equally. The House wouldn’t take it up.
This year I filed a bill to ban credit unions from purchasing banks. It is currently illegal to sell a bank unless the action is approved by the Iowa Banking Superintendent. Last year Green State Credit Union purchased First American Bank with its seven branches. The banking superintendent was not notified and the transaction kept secret until it was too late to stop the sale and customers would have been hurt by reversing the sale.
Here’s the problem and why the credit unions have the advantage: When credit unions look to purchase a bank, they are using untaxed profits to buy the bank and, after acquiring the bank, will not pay taxes on the new profits. This makes their return on investment artificially high. When a bank looks to buy a competing bank, they must use after-tax profits. They start with a 20-40% handicap. Then, if they are successful, they must pay that same income tax on the new profits from the newly purchased business. Their return on investment is naturally lower than a credit union’s, meaning they will not be able to compete over the long run.
I have no problem with credit unions doing what they were designed to do. But among the largest several credit unions in Iowa, that is no longer the case. Level the playing field and get out of the way: that’s what Senate File 530, a bill I filed this year, is designed to do.
Author: Jason Schultz
State Sen. Jason Schultz served three terms in the House prior to being elected to the Iowa Senate. Schultz served seven years in the National Guard and served as volunteer fire fighter for the Schleswig Volunteer FD for 13 years, two years as the department's chief.
