Letter to House Ways and Means Committee Chairman William Thomas regarding IDAs
November 5, 2003
The Honorable William M. Thomas
House Ways and Means Committee
1102 Longworth House office Building
Washington, D.C. 20515
Dear Chairman Thomas:
Thank you very much for giving representatives of the Credit Union National Association (CUNA) and other proponents of Individual Development Account (IDAs) tax credits an opportunity to explain the purpose behind the transferability of these tax credits as part of the Senate-passed CARE Act legislation. We look forward to working with you and the House Ways and Means Committee's Tax Staff to answer any questions and to address any policy concerns regarding this key provision of the CARE Act.
As you are aware, S. 476 creates IDA tax credits as a means of providing a stable and reliable source of matching dollars to supplement the hard-earned savings of working, low-income families and individuals who want to build assets through the purchase of their first home, start a small business or expand post-secondary education and job training opportunities. The tax credit is designed to act as a "pass- through" to reimburse financial institutions that hold IDAs accounts and who match accountholders' savings contributions (up to a maximum of $500 per year and on a 1:1 matching basis). The bill would allow IDAs to be offered by any financial institution that can currently offer an IRA.
The Senate-passed legislation also provides for the establishment of 300,000 IDA accounts over the next seven years for families and individuals who earn annually less than $38,000 for those filing joint tax returns, $30,000 for heads of households, and $18,000 for a single individuals. There also are numerous program evaluation standards and reporting requirements that must be met before Congress considers extending the tax credit after it sunsets in 10 years.
IDAs are designed to help working, low-income families enter the financial mainstream by using the same successful tax incentive approach that continues to help middle and upper-income families build assets and prepare for the future.
Tax credits for financial institutions are utilized because they are a viable policy option to the politically untenable approach of creating a new refundable individual tax credit, plus they would be preferred because it would facilitate administration since the financial institution holds the IDA where savings and matching dollars would be deposited.
A key component of providing maximum access to IDAs for eligible populations is the need to create a new financial product, similar to an IRA, which can quickly and efficiently be used by working, low-income people. It is also essential for the marketplace to permit all financial institutions, as defined above, to have the same ability to offer this type of asset-building account. However, a tax credit would not be a useful mechanism to reimburse tax-exempt credit unions for matching deposits. The lack of future credit union involvement is particularly troublesome to the IDA community since credit unions hold one out of every six IDA accounts currently in use. (Those credit unions now providing IDAs typically provide matching dollars raised from their local philanthropic communities, such as contributions from private foundations and other charitable organizations. These resources, however, are extremely limited, difficult to raise, and fail to meet the demands of the growing numbers of people who want to open an IDA.)
Therefore, in order to ensure that credit unions will be able to participate in helping to establish the new 300,000 IDA accounts envisioned by the CARE Act, the IDA community suggested, and the U.S. Senate and the U.S. Treasury agreed, to permit the tax credit to be transferable. Under this transferability approach, for example, a credit union could trade their credits to their affiliated Credit Union Service Organization (CUSO), which in turn, would permit the credit union to be a full partner in the IDA initiative. A CUSO is a federally taxable entity, which is a subsidiary of one or more credit unions, and they provide financial services, operational services, and other assistance essential to the successful operation of individual credit unions.
It also is important to note that the Senate-passed language directs the Secretary of the Treasury to promulgate needed regulations to govern the transferability of the IDA tax credits, plus the legislation is very clear that any transferable tax credit is claimed just once and cannot be transferred again to another entity.
While future regulations will govern the exact procedures used to transfer these tax credits, CUNA and the IDA community do not want to see this transferable tax credit abused in any way and both organizations will work very closely with the Treasury Department in helping to formulate regulations so that these tax credits will be used solely to help expand the availability of IDAs to the limit prescribed by law.
CUNA strongly supports the transferability of IDA tax credits as many of the nation's nearly 10,000 credit unions look forward to offering this new and exciting approach to asset building to their eligible members.
Without the ability to receive the credit, and thus receive no reimbursement for matching dollars already provided, it will be nearly impossible for credit unions to offer a portion of the CARE Act's new IDA accounts and will result in the low-income worker who prefers to do business with their local credit union being deprived of starting an IDA at the financial institution of their choice.
Again, we look forward to addressing any questions that you and your staff may have regarding the transferability of IDA tax credits. Your willingness to listen to our views is greatly appreciated.
Daniel A. Mica
President & CEO