Removing Barriers Blog

Tax Reform Legislation Passes Senate
Posted December 02, 2017 by CUNA Advocacy

Early Saturday morning, December 2, 2017, the Senate passed the “Tax Cuts and Jobs Act”, which would cut taxes by roughly $1.5 trillion over ten years and would make significant changes to and simplify our nation’s tax laws.  The full House of Representatives passed its tax reform bill last month.  Now negotiators from both chambers will meet in earnest to craft a compromise bill that can pass both bodies before the end of the year.

Both the House and Senate bills would not alter or eliminate the credit union federal income tax status in any way!  This is a huge victory for the credit union movement and an affirmation by the United States Congress of the value proposition of the credit union difference.  This was accomplished against the unified opposition and lobbying force of America’s banks and their $17 trillion in assets! 

The original Senate bill included provisions that would have imposed new Unrelated Business Income Tax (UBIT) requirements on credit unions and the trade associations like those that represent credit unions.  This provision would have imposed UBIT on logo and royalty income that many credit unions and others depend upon … income that is actually in direct relation to their exempt status.  CUNA opposition resulted in this provision being eliminated from the final bill. 

The Senate bill … 

  • Imposes an excise tax on certain non-profit executive compensation, 

  • Eliminates the New Markets Tax Credit, 

  • Would not substantively change retirement savings rules, 

  • Would maintain the current mortgage interest deduction but eliminate deductions for interest on home equity loans.  Also, homeowners would be allowed to deduct up to $10,000 in property taxes.  However, the standard deduction would nearly double. 

  • Would severely limit the deductibility of business loan interest, but would exempt loans made to certain small businesses. 

Credit Union Income Tax Status 

While many other credits, deductions and tax expenditures would be eliminated or scaled back by this bill, the Senate makes no change to the federal tax exemption for state and federally chartered credit unions.  We attribute the preservation of the credit union tax status to an understanding on the part of tax writers that credit unions continue to fulfill their statutory mission to promote thrift and provide access to credit for provident purposes through a cooperative, not-for-profit, structure.     

In 2016, credit unions provided total member benefits equal to $10.2 billion.  In addition, bank customers saved about $4 billion in 2016 from more favorable pricing due to the presence of credit unions in their local markets.  This bill is indeed an affirmation of the good work and positive impact that credit unions make in the communities they serve. 

Executive Compensation 

This bill would impose an excise tax on certain executive compensation provided by tax-exempt organizations.  Tax-exempt entities would be required to pay a 20% excise tax on the first five employees’ compensation that individually exceeds $1 million annually.  The definition of compensation includes cash and the cash value of most benefits.  The excise tax would be paid by the employer on amounts that exceed $1 million annually and would be effective for tax years beginning after 2017. 

This provision was designed by tax writers to create parity with respect to for-profit entities that can only deduct the first $1 million of each individual employee’s compensation for its highest paid executives. 

Retirement Accounts 

Early tax reform discussions on Capitol Hill included consideration of significant rollbacks in the availability of pre-tax contributions to these retirement plans to raise revenues in the legislation.  Massive pushback from many sectors convinced Congress to back off such limits.  The new legislation would make minor changes around the edges of these savings products but would not make substantive changes that would adversely affect Americans saving for retirement.  Therefore, credit unions could expect continued demand for IRAs on their balance sheets and off-balance sheet investment services. 

Mortgage Interest and Property Tax Deduction 

As part of fulfilling the credit union mission, many credit unions originate mortgages, refinance mortgages, and provide home equity loans to their members.  During early tax reform discussions, tax writers considered eliminating the mortgage interest deduction for homeowners in order to help "payfor” other tax cuts.  Ultimately, the Senate Finance Committee decided to preserve the home mortgage interest deduction for existing and new mortgages so mortgage holders would continue to be able to deduct the interest on the portion of their principal residences that are valued at less than $1 million.  However, interest on home equity loans would no longer be a deductible expense. 

The deductibility of state and local property taxes also effects the attractiveness and affordability of home mortgage products offered by credit unions.  Under this bill, individual taxpayers would be able to deduct no more than $10,000 in personal (nonbusiness) property taxes on the itemized portion of their tax returns.  This provision would be effective for tax years beginning after December 31, 2017.  This may slightly retard long-term home price appreciation. 

It is important to note that the deduction of mortgage interest and property taxes, along with other deductions like charitable contributions, are only attractive insofar as one’s deductions exceed the amount of the standard deduction.  The Senate bill would nearly double the standard deduction.  If enacted into law, even those with average sized mortgages might choose the standard deduction in lieu of itemizing the home interest they have paid, depending on whether their itemized deductions will lower their tax bill more than simply taking the new doubled standard deduction.  On the other hand, existing tax law has a provision referred to as the “Pease” limitation, which limits itemized deductions for wealthier taxpayers.  The Senate bill would eliminate this limitation, beginning in tax years after 2017.  


Small Business Loan Interest Deductibility 

Credit unions play a key role in helping solve the credit crunch facing America’s small businesses.  When other lenders have been forced to pull back lines of credit, credit unions have continued to lend and they have the capacity to do more.  Unfortunately, credit unions are unnecessarily restricted from similarly alleviating the credit crunch that grips America’s small businesses by an arbitrary statutory cap on business lending of 12.25% of a credit union’s total assets.  Credit unions have been subject to this statutory cap for nearly 20 years.  However, there is no economic or safety and soundness rationale for this cap.  Prior to 1998, there was no business lending cap.  Credit unions have a long history of offering their members loans to help start small businesses.  In fact, credit unions have been offering business loans to their members since their inception.  The average credit union business loan is approximately $200,000; this means that credit union business loans are used not only to start new businesses but also help credit union members make payroll, stay in business, expand their businesses and stimulate the economy.  Part of making these small member business loans attractive for credit union members is the federal tax deductibility of the interest on these loans. 

This bill would preserve the deductibility of interest on smaller business loans, like the ones credit unions make.  In general, small businesses with average annual gross receipts of less than $15 million over the previous three taxable years would be exempt from new interest deductibility rules.  This provision would be effective for tax years beginning after 2017.