Iowa Bank Sale to Credit Union Would Benefit Consumers and Increase State Tax Revenue

DES MOINES — First American Bank’s recent decision to sell seven of its branches to GreenState Credit Union will lead to an increase in state tax revenue for Iowa and more money in consumer’s pockets, research shows. If First American Bank customers had been members of GreenState Credit Union last year, the State of Iowa would have received more than $250,000 in additional tax revenue. Further, the 10,000 bank customers impacted by this transaction would have earned an additional $8.4 million on their deposits in 2018.

“The Iowa Bankers Association appears to operate under the idea that ‘if you say it enough, it must be true.’ The facts are clear: this bank sale to a credit union will result in more tax revenue paid to the State of Iowa and millions of dollars in Iowans’ pockets,” said Murray Williams, President and CEO of the Iowa Credit Union League. “By becoming credit union members, there is significant value returned to the pockets of hard-working Iowans instead of going to bank stockholders. This does not even account for the better loan rates these new members will enjoy at a credit union.” 

The additional $8.4 million that could have been earned on customer deposits in 2018 is due to the credit union paying higher interest than the bank. This money would have been subject to individual state income tax and generated approximately $500,000 in new tax revenue. In addition, GreenState would have paid an additional $150,000 in state tax on its legal reserves.

By comparison, First American Bank reported total state income tax accrued of $323,000 in 2018. First American Bank is structured as a Subchapter S bank, which means it is exempt from federal corporate income tax and its shareholders receive a state tax credit available only to those banks. 

“I have reviewed what I believe to be a conservative assessment of the income and tax implications of the proposed sale of First American Bank branches to GreenState Credit Union. Because of the unique ownership of credit unions, this sale, if approved, should generate higher tax revenue to the state,” said Dr. Keri Jacobs, Associate Professor of Economics and Iowa Institute for Cooperatives Endowed Economics Professor at Iowa State University. “The fact that the credit union is paying higher average interest on deposits than the bank is an important factor. Bank customers, as credit union members, will experience higher interest income on deposits than before the sale, and potentially even greater than the pass-through income allocated to owners of First American Bank. Further, those members will pay tax on the additional interest earned. The credit union must pay additional state tax on its increased legal reserves, which works to offset the lost franchise tax from the bank. On net, the state should receive a net increase in tax revenue and more depositors will benefit from increased interest income if the transaction is approved by regulators.”

While this transaction would result in more taxes paid to the state and more dollars in Iowans’ pockets, bankers are successfully reducing their own tax burden while celebrating record profits.

In Iowa, nearly two-thirds of Iowa-domiciled banks take advantage of the Subchapter S status, which has allowed them to avoid paying $76 million in federal corporate income taxes. In 2018, Iowa banks reported $1.1 billion in record profits and paid $589 million in cash dividends to owners of Iowa-domiciled banks. The owners of those Subchapter S banks saved $34 million in federal individual income tax payments on their dividends last year as a result of federal tax rate reductions.

“History has proven that facts don’t stop bankers from continuing their decades-long misinformation campaign against credit unions. Iowans understand bankers’ true motivation behind these attacks and appreciate the choice and competition credit unions provide as a valued alternative in the marketplace,” said Williams. 

As not-for-profit, financial cooperatives, Iowa credit unions serve 1.3 million members and help them save more than $100 million annually by returning earnings to members through better rates and fewer fees than other financial institutions. 

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The Iowa Credit Union League is the trade association that represents the interests of Iowa credit unions and their more than one million members. Credit unions are not-for-profit, financial cooperatives owned and operated by their members. Iowans use their credit union membership to receive higher interest rates on savings and lower interest rates on loans. For information on Iowa credit unions, visit www.IowaCreditUnions.com. 

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