TAX ATTACK
	The Co-op Treatment
	Editorial Co-op Coharts
	Wisconsin Favorites Pendarvis, Pasties, and Badger Holes

TAX ATTACK
Credit Unions’ Legislative Struggle a Cooperative Warning
by Brett Thompson, president & CEO,
and Chris Olson, director of communications,
Wisconsin Credit Union League

   The cooperative ideal is under fire, and though the attack may be hitting credit unions the hardest, other co-ops may become targets.

   Proposed legislation in several states is threatening credit unions’ tax-exempt status, in fact, their very cooperative nature. Unlike legislative attacks credit unions have fought in the past, this time it’s a highly orchestrated, nationwide effort to eliminate credit unions as a financial alternative for consumers. Ironically, the attacks come at a time when banks themselves are under fire for their own tax avoidance tactics.

   So far, credit unions and their trade associations have prevented or delayed the majority of harmful legislation, but the threat continues. The larger question is whether other cooperatives may be next.

A Succession of Aggression

   For the better part of a year, an all-out assault on credit unions has been coordinated and executed by banking trade groups at both the state and national levels. The goal: to eliminate not-for-profit credit unions’ federal and state income tax exemptions.

    At the national level recently, banks pushed a committee of the National Conference of State Legislatures to consider a measure that would have taxed federal credit unions at the state level. The proposal was rejected.

    Credit unions in at least seven states have been fighting to derail a wide variety of tax proposals. Wisconsin is among additional states where the probability of a tax fight remains high. In fact, Harry Argue, president of the Wisconsin Bankers Association, told a Wisconsin newspaper that it’s not a matter of if the bankers will introduce tax legislation affecting Wisconsin credit unions, but when.

    For the record, state chartered credit unions—which account for all but two of the 300 credit unions in Wisconsin—already pay millions of dollars in payroll, property, personal property, and state sales taxes. They are exempt from only one state tax, the state corporate income tax.

What’s New About the Attacks

   Attacks on credit unions by the banking industry are nothing new. But what’s currently afoot is a highly coordinated, tactical plan to push credit unions into a corner and—if banks have their way—out of business altogether. In fact, the American Bankers Association’s list of its 2003 legislative priorities puts supporting taxation of “expansionist credit unions” (its third highest priority) ahead of “fighting terrorism” (its fourth highest priority).

    The plan likely emerged due to banks’ past failures to persuade Congress to tinker with credit unions’ federal income tax exemption. Congress first granted the exemption in 1937—not because of credit unions’ limited fields of membership, asset size, or type of services—but because they operate without capital stock and are organized and operated for mutual purposes without profit. Congress recognized that credit unions offer consumers a valuable alternative to the for-profit banking system, particularly consumers who were not—and are not—being served by banks. The exemption has been deliberated several times since then, and remains intact today.

    Having no luck at the federal level, bankers developed a new plan: go after credit unions at the state level, where additional revenue from credit unions might be used to shore up spiraling state budget deficits.

‘Divide and Conquer’ Strategy

    The tax proposals thus far have varied widely. Some bills have threatened to impose further studies of credit unions’ tax treatment or their business operations—a way of tying credit unions’ hands from providing services to members and gobbling up their lobbying resources.

   For example, a Utah proposal called for a study of credit unions’ tax treatment, while proposals in New Hampshire and California would have looked at whether to impose regulations on credit unions similar to those imposed on banks when they failed to adequately lend to their customers.

    Yet the overall strategy has remained constant—target only larger credit unions and their activities. A proposal in Iowa, for example, would have imposed a tax on credit unions that have more than $150 million in assets and provide business loans.

    The goal is to fracture credit unions, leaving to the few largest credit unions and their trade associations the task of fighting such proposals. Banks do well by this strategy: credit unions are in a much better position to fight harmful legislation collectively, with nearly 2 million members in Wisconsin and 83 million members nationwide who stand to lose should harmful legislation be enacted.

Banker Hypocrisy Abounds

   The attacks on credit unions seem ill-timed by the banking industry, which itself is under scrutiny for tax avoidance strategies.

   Recently, the Wall Street Journal pointed out a scheme by some of the nation’s largest banks to channel more than $17 billion into questionable investment funds for little purpose other than sheltering income. Banks purportedly used the strategy to avoid paying hundreds of millions in state taxes.

   An American Banker article spotlighted even more abuses: a scheme by five large U.S. banks to use lease-in, lease-out deals to shelter hundreds of millions of dollars from state and federal taxes. The banks were audited by the IRS as well as state tax agencies, which contend that the shelters have no real economic value other than to create tax benefits.

   In Wisconsin, banks are using similarly shady tactics. An article by the Madison-based Captial Times newspaper pointed out that some 80 percent of state banks have established subsidiaries in Nevada, a state with no corporate income tax. By transferring income-producing assets like mortgages and bonds to these subsidiaries, many of the state’s largest financial institutions no longer pay any state income tax.

Hurtful to Credit Unions, Consumers

    So why is further taxation of credit unions harmful? A tax on credit unions is a tax on consumers. People who belong to credit unions would bear the burden of the tax through higher fees, higher loan rates, and reduced earnings paid on savings accounts.

    Moreover, further taxation of credit unions would undermine the cooperative nature of credit unions. It would increase pressure on credit unions to eliminate free and unprofitable services such as small personal loans (important to people whose alternative may be predatory lenders and check cashers) financial counseling, small checking accounts, and loan rebates. In short, credit unions would look just like banks. And if credit unions are forced to become more bank-like, the annual estimated benefit to members that could be lost nationwide has been estimated at $2 billion in account dividends, $2 billion in lower loan rates, and $1 billion in fees.

   Further taxation could also seriously jeopardize credit unions’ safety and soundness. Because credit unions are owned by their members—not outside stockholders—they have only one method by which to maintain their capital position: through retained earnings. Additional taxation would come out of these funds, which are set aside for unexpected downturns in the economy or unpredictable changes in the marketplace. This has been noted by both state and federal regulators, who’ve warned against taking a “bite” out of credit unions’ stability.

Cooperatives are Natural Targets

    As banks have evolved, they’ve broadened their list of targets. Besides credit unions, they’ve attacked many others over the years: the insurance industry, real estate brokers and the farm credit system. Who next may be subject to their rath is unclear, but cooperatives in general should be on guard. If credit unions are not successful in their fight, cooperatives of all kind may be subject to attack.—Brett Thompson, president & CEO, and Chris Olson, director of communications, Wisconsin Credit Union League.

 

Smaller co-ops have cause for concern

    The credit union situation shows that smaller co-ops should be concerned with tax threats. Though current tax bills target credit unions with $100 million or more in assets, just five years ago the Wisconsin Bankers Association urged Congress to further tax credit unions with $25 million or more in assets, or those that are community chartered. Thus, almost any size or type of credit union may become a target.

Does tax treatment of co-ops hurt for-profits?

   Banks often claim that credit unions’ “more favorable” tax status has hurt their ability to compete. Yet commercial banks netted $24.9 billion in profits during the first quarter of 2003—the largest quarterly earnings ever reported, according to the FDIC. Wisconsin banks have also seen record profitability; their net earnings jumped from around $200 million in 2000 to around $282 million in 2002. In 2003, bank net earnings remained at the near-record level of $277 million.

The Co-op Treatment

A New Solution for Health Coverage Shortfall

   Today in Wisconsin, thousands of farmers and small business owners are living without adequate health insurance for themselves, their employees, and their families. The problem is especially dire in rural areas of the state, where individuals have little access to comprehensive coverage plans.

   A number of studies and surveys conducted over the past several years illustrate just how critical the situation is for Wisconsin farmers. Not surprisingly, the findings show that Wisconsin farmers are much more likely than other Wisconsin residents to have no health insurance. Those who have insurance are more likely than other insured individuals to have inadequate policies that cover only one member of the family or to have high-cost, high-deductible insurance plans that cover only catastrophic illness or injury.

Lawmakers Weigh In

   The Wisconsin Federation of Cooperatives (WFC), which represents a large number of agricultural and small-business interests, has been working with the Wisconsin Legislature on a viable solution to this problem. Bill Oemichen, WFC’s president and CEO, said the federation got involved in the issue of health care because it is the number one concern of many WFC members. In fact, a survey conducted by one WFC cooperative member, FCS Financial Services of Wausau, found that the top concern of agricultural producers in 12 North Central Wisconsin counties is health insurance. Commodity prices, while still a big concern, came in a distant second.

    With the help of Senator Sheila Harsdorf (R–River Falls) and Representative Curt Gielow (R–Mequon), WFC has introduced legislation that would create up to five health care purchasing cooperatives in the state of Wisconsin. The purpose of the legislation is to bring farmers and other small business owners together under a cooperative umbrella that would allow them to negotiate directly with health plans for better coverage.

    The legislation, which has been introduced in the Assembly as Assembly Bill 447 and Senate as Senate Bill 204, would create a program in Wisconsin that is similar to a project currently underway in the state of Minnesota. The Minnesota plan is already helping farmers and small employers in rural areas gain control of runaway health insurance costs and quality issues in that state.

Membership Privileges

    Under the cooperative model, members would be directly involved in all aspects of the health care decision-making process. Benefit plans would be designed according the needs of the cooperative members, and each cooperative would adopt its own criteria for participation. The Wisconsin Federation of Cooperatives could help health care alliances get off the ground, but each cooperative would be independent of one another.

   WFC would seek federal, state, and private grant funding to help with the start-up costs of creating a new cooperative. Federal grant money would also be sought to support a “stop-loss” fund, which would pay a portion of high-cost health claims made by cooperative members. This stop-loss fund is critical to keeping a lid on premium costs and attracting insurers that have, in the past, put a “high-risk” label on farmers and other rural residents.

   That high-risk label is exactly the problem facing all farmers, but especially new farmers who can’t afford start-up costs as well as health insurance for their families.

   “Unfortunately, some members of our farm families have found it necessary to seek employment off the farm because they can’t otherwise obtain or afford quality health care,” Oemichen observed. He said finding a solution is critical to the future of farming and the economic growth of rural Wisconsin.

   The situation is also critical for farmers over the age of 55, who pay a larger percentage of their income toward health insurance. Unfortunately, many older farmers have chosen to forgo health insurance altogether, leaving them without coverage of chronic conditions such as diabetes. In turn, farmers’ quality of life and their ability to continue farming are adversely affected. The legislation sought by WFC would allow cooperative members to spread risk over a larger group of people, which, in turn, would help members gain coverage of primary health care services such as doctor visits and disease management.

Value for Dollars Spent

    Another important component of the WFC health care plan is ongoing data analysis of health care expenditures so that cooperative members know exactly what they are getting for their health care dollar. Members will be informed about the cost drivers affecting their health insurance rates so that they can learn how to control health costs on the front end and avoid double digit premium increases in subsequent years.

   Oemichen said that stabilizing premium rates and increasing the quality of health care coverage for farm families are two of the most important goals of the legislation.

   “Too many farmers pay high premiums, high deductibles, and get nothing from their insurance except catastrophic coverage,” he said. “All families should have access to primary care services such as doctor visits, immunizations, and other preventative health care services.”

   At press time for this month’s magazine, Assembly and Senate committees were working on scheduling public hearings for the legislation.—Melissa Duffy, Wisconsin Federation of Cooperatives

Farmer Health Care Statistics

   A number of different studies have been done on the cost and availability of health insurance for farmers over the past two years, including one completed in late 2002 by the University of Wisconsin Program on Agricultural Studies (PATS). Following are selected statistics from the PATS study and other recent surveys conducted by various organizations.

OTHER FACTS:

Co-op Cohorts
by Perry Baird

   When mergermania swept through large, Midwestern utilities a half-dozen years ago, electric co-ops got behind a legislative proposal that sought to ensure certain consumer-protection standards were in place as a condition of the state’s approval of a merger. The merging utilities howled at the suggestion, pointing out there were so such pre-conditions that co-ops were obliged to satisfy in order to merge.

   Well (the co-ops told the big utilities), if you were to let your customers vote on the merger and you reorganized your business structure so that profits went to your customers instead of stockholders—and, by the way, you were to dispense with stockholders—then maybe there wouldn’t be so much concern about your merger’s impacts.

   Naturally, those suggestions went unheeded.

   The largest and potentially most troublesome of the utility mergers pending at the time was subsequently abandoned, and the legislation wasn’t pursued. But the central theme of the co-ops’ argument continues to have merit: not-for-profit, democratically run organizations do rate special consideration under business law.

Attack Mode

   Our main feature story this month describes a relentless campaign by banks and their allies to strip cooperative financial institutions—credit unions—of a beneficial tax status. As the story notes, Congress first granted credit unions’ corporate income tax exemption in 1937 because the co-ops operate without capital stock and function for mutual benefit without profit. In short, if there’s not profit, what income is there to tax?

   For those banking interests arguing that credit unions have been afforded undue preferential treatment in the financial marketplace, we could easily draw on the suggestion offered to utility-merger partners in 1997: “Well, you folks could simply reorganize as cooperatives.” We’d even help you do it. Being member-controlled and not-for-profit will earn you some well-deserved benefit under state and federal law. And your customers will be grateful.

   We won’t hold our breaths waiting for a positive response.

Cooperatives’ Collaboration

   Cooperative organizations are obliged to follow a series of seven guiding business principles, one of which specifies that cooperatives of all types work together for mutual benefit. That’s why we offer the credit union perspective on the pages of an electric cooperative magazine. It’s also why we report in another of this month’s feature stories about cooperative efforts to bring affordable health-care coverage to an underserved rural population (click here)

   A recent survey that samples thousands of adult Americans showed more than two-thirds believing that businesses owned by the people who use their goods and services are more trustworthy than those that do not.

   Mutual benefit and trust are what we celebrate each October during the Co-op Month observance. Read about how members have organized in two other cooperative sectors to aggressively help satisfy and continue meeting consumers’ requirements for reasonably priced, high-quality services.

Pendarvis, Pasties, and Badger Holes

   For a delightful shot of Wisconsin history laced with the customs of early Cornish miners—the original “Badgers,” so-named because they burrowed into the earth in search of lead—head to Pendarvis State Historical Site in Mineral Point.

   There, you will learn about the lives and customs of these miners and their families, who flocked to Wisconsin in the 1830s and ’40s to capitalize on the “lead rush” in progress there. Expert stonemasons as well as deep-shaft miners, the immigrants from Cornwall, England, built homes and small cottages from local limestone. The area they settled, in what is now Mineral Point, was soon dubbed “Shake-Rag-Under-the-Hill” because the women summoned their husbands to dinner by shaking cloths from their doorways.

   Though lead production eventually dropped, the miners turned to zinc, a by-product of lead mining. By the end of World War I, however, the lead and zinc market collapsed, and the Cornish miners abandoned their homes to seek employment elsewhere.

   In 1935, nearly a century after the Cornish built their cottages, Robert Neal and Edgar Hellum determined that they would save at least one of these historic homes before they could all be razed. They restored the first, called it Pendarvis, and subsequently turned it into a restaurant. It became the world-famous Pendarvis House, serving pastries filled with meat and potatoes, called “pasties,” and other simple Cornish fare. This venture funded their efforts to restore other Cornish homes and to furnish them with authentic antiques and miners’ tools. Today, the Wisconsin State Historical Society owns these restored homes and adjacent gardens, collectively called Pendarvis. Costumed interpreters help visitors envision the everyday lives of the Cornish families who once lived and worked there.

   Adjacent to the Pendarvis site, and accessible from the Pendarvis parking lot, is the 43-acre Merry Christmas Mine Prairie, a joint venture of the Wisconsin Historical Society and the Wisconsin Conservation Corps. Walking trails in the restored prairie habitat includes indigenous grasses and native flowers. It includes the Merry Christmas Mine, one of the world’s largest zinc mines; early crevice mines; and many “badger holes” dug by miners to access ore deposits near the surface.

   Pendarvis is located at 114 Shake Rag Street and is open from mid-May through October 31, 10–5 daily (purchase tickets by 4 p.m.). The Merry Christmas Mine Prairie is open year-round, free of charge. For further information, call 608/987-2122 or visit www.wisconsinhistory.org/sites/pend/.—Linda Hilton