Last week, we sat down with Community Bankers of Iowa (CBI) CEO, Dave Caris, to have a conversation about the Iowa tax reform bill and its impact on banks, credit unions and the state of Iowa generally, as well as its likelihood of success in the Iowa legislature.

Credit union taxation is an important issue to Iowa banks. Caris noted, “Community banks have no problem with the traditional credit union,” however, “the dramatic growth of mega credit unions” has resulted in credit unions that no longer serve the purpose they were originally intended to serve while remaining free from taxation. Caris pointed out that Iowa’s largest financial institution is now a credit union, and it is not paying any income or franchise tax in the state.

The state legislature is currently considering comprehensive tax reform legislation, and the bill that passed the Senate would impose a franchise tax on credit unions. The measure would treat credit unions and banks alike as “financial institutions,” so both would be taxed identically.

Under the new bill, financial institutions would pay a two percent income tax on the first $7.5 million of income and a four percent tax on anything greater than $7.5 million. This is a decrease to banks’ current franchise tax rate of five percent. Emphasizing that banks do not have an issue paying their fair share in taxes, Caris indicated that the legislature was also given a second version of the bill, which kept the income tax rate for banks at five percent and also taxed credit unions at the same rate. The goal is just to treat credit unions equally, not necessarily cut taxes on banks.

According to Caris, CBI and the Iowa Bankers Association (IBA) are “in a coalition” to get the bill passed. Both organizations are contributing funds to an IBA-developed organization called I-LEAD, which funds a digital marketing campaign that includes TV and radio commercials. In addition to support from CBI and IBA, Caris said that a number of banks have independently contributed to the organization in amounts ranging from $5,000 up to $25,000.

At this point, the tax reform bill has passed in the Senate and is now in the hands of the House of Representatives. However, Caris believes that passage in the House may not come easily. Governor Kim Reynolds has introduced her own tax reform bill, which focuses only on individual tax reform and does not include business tax reform. At this point, the House has indicated that it will work off of the Governor’s tax bill, not the bill passed in the Senate. The challenge will be getting the House to include financial institution tax reform as part of its bill.

If the bill is successful, Iowa would not be the first state to tax credit unions like banks. Indiana, Missouri, Nebraska, Oklahoma and Utah are already doing so. In fact, some Iowa credit unions that do business in both Iowa and Nebraska are paying taxes in Nebraska but not in Iowa. The critical issue, Caris said, is that when a customer leaves a bank to become a credit union customer, the state is losing revenue for no good reason. This is “a problem that is only going to get worse if they don’t do something about it.”