Subchapter S banks are not like credit unions

CBA continues its support of AB 1226, despite mischaracterizations from CCUL

SACRAMENTO - March 19, 2003 - The California Bankers Association (CBA) issued the following statement in response to the California Credit Union League's opposition to AB 1226 (Montanez), which would mandate a study of anti-competition, as a result of tax structures, between banks and credit unions.

"The California Bankers Association (CBA) is very supportive of AB 1226, authored by Assembly Member Montanez. This bill would require the Legislative Analyst's Office, an objective third-party, to study the possibility of anti-competition concerns between banks and credit unions based on credit unions' tax subsidy.

"The California Credit Union League recently called the CBA's support of this study 'hypocritical,' claiming that Subchapter S banks enjoy tax subsidies similar to credit unions, which just isn't the case. One hundred percent of the income from a Subchapter S bank is taxable, regardless of whether or not the income is retained (reinvested in the institution) or distributed to shareholders.

"The only income from a credit union which is taxable is that which is distributed to its shareholders. Any income retained by the credit union escapes taxation. It is no wonder that many credit unions choose to retain earnings and focus on growth. The tax law encourages credit unions to keep the money instead of returning it to their members or shareholders.

"The CCUL has likened the existence of 18 Subchapter S banks in California to the existence of nearly 600 credit unions in the state, and has also tried to convince Californians that these institutions are the same, that they pay the same kind of taxes and the same amount in taxes. Until they pay taxes on their retained earnings, these comparisons are completely inaccurate.

"California's banks believe that reasonable taxes are an appropriate and acceptable cost of doing business, and also serve as a way to contribute to the stability and economic health of California's diverse economy. Though operating almost exactly like banks, credit unions seem to believe that others should pay for the services they enjoy. We disagree.

"The banking industry firmly believes that if credit unions want to look and act like banks, they should be subject to the same rules, regulations and responsibilities that banks are. Removing the tax subsidy for credit unions would generate, at minimum, a half a billion dollars annually for the State of California. Now that we are facing the largest statewide budget deficit in the nation's history, it seems ridiculous that the credit unions are unwilling to at least study the possibility of removing this tax subsidy."

Information about CBA
Established more than 110 years ago, the California Bankers Association (CBA) is one of the largest state banking trade associations in the country. CBA leads the way in developing relevant educational and legislative solutions to some of California's more pressing financial and banking issues, including financial privacy, predatory lending, usage fees, and financial elder abuse. CBA's membership includes more than 280 of California's commercial, industrial and community banks and savings associations.