Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Wednesday, July 20, 2016

Credit Unions Do Good Work, So Why Is BC Hobbling Them?

The B.C. government will this year begin the phaseout of a long-standing special tax status for credit unions. Don't feel awkward if this is the first you've heard of it. The event is not mainstream news, but will impact communities across the province. Credit unions employ, loan and give locally; distribute profits to their customers/members, and sometimes alone provide financial services to our smaller towns. They achieve all those virtues in the face of competition from a Canadian banking industry that is among the most concentrated in the world. It may be asking too much to put this issue front of mind when you go to vote in May 2017, but I believe the continued prosperity of our credit unions deserves your full attention.

First, a quick backgrounder. In 1972, the Canadian government introduced a budget measure to tax credit unions at small business rates. This was intended to offset the inability of credit unions to obtain equity financing in the capital markets, a tool frequently employed by the banks. In 2013, the Harper government lost track of that logic and began a phaseout of that special status, which will be completed in 2017. The federal tax rate for credit unions will go from 11 per cent to 15 per cent on most (or all) of their income. B.C., Saskatchewan and Ontario, who had similar tax programs in place, were faced with the decision to follow suit or stand by their credit unions. Saskatchewan and Ontario held their ground. B.C. has not. Instead, B.C. is on course to phaseout the small business treatment of credit unions over five years, starting in 2016. By 2020, the B.C. tax rate will more than quadruple from 2.5 per cent to 11 per cent.

There is another bit of background that is also essential to this discussion: the modern ascendance of the big Canadian banks. In 1992, government deregulation under Brian Mulroney allowed banks to move into all four pillars of the financial sector: banking, insurance, securities and trust services. Since then the combined value of Canada's Big Five banks has gone from $28 billion to $385 billion, and they account for over 85 per cent of the country's banking assets.

With that landscape in mind, this is a case to make the B.C. special tax treatment permanent:

1. Credit unions are uniquely local economic engines. Profits don't end up in the hands of institutional investors in New York or London, but are distributed to the membership or are donated locally. Every dollar saved is loaned back into the community many times over. Yet as a result of this B.C. government policy, $80 million of additional tax paid between 2016-2020 will result in $1.2 billion less in local loans, according to Central 1 Credit Union.

2. Credit unions serve over 30 small markets in B.C. where the banks aren't even present, such as Masset, Tumbler Ridge and Rossland. Operating in those markets comes with challenging economies of scale. A tax incentive to provide such services is perfectly rational and consistent with government support for remote ferry routes or smaller airports, for example. The tax code should be used more, not less, to bring economic activity to the more sparsely populated areas of our province.

3. Speaking from first hand professional experience, the banks use their scale to their advantage. And why wouldn't they? In banking this means lower costs, easy access to capital and a vast array of revenue streams. The Big Five banks' cumulative asset base is $4.3 trillion. (Reminder: Canada's GDP is $2.0 trillion.) Conversely, B.C. credit union assets, with a membership of 1.9 million customers, total just $66 billion. How's that for a David and Goliath scenario? And a justification for the tax exemption to continue.

4. In 2016, why do countries continue to rally around singular financial capitals far removed from the actual sources of savings that fuel them? If you haven't guessed, I'm talking about Toronto and its 355,000 direct and indirect jobs in financial services, a third of Canada's total in that sector. Meanwhile, the Big Five banks only employ 19,000 in B.C. I unreservedly believe that B.C. deserves a larger piece of the financial industry employment pie. Credit unions, with 42 B.C. corporate headquarters, employ over 9,000. B.C. savings should lead to B.C. jobs.

5. Credit unions are a business model we should embrace. As co-operatives, these firms sit at the intersection of capitalism and fairly distributed benefits. Customers are synonymous with shareholders leading to more inclusive and democratic corporate governance. Because the pursuit of profit is a secondary goal, community donations as a percentage of pre-tax income are six times that of the banks.

Statistically, four in 10 of us are already members of a credit union, so it is not only fair and rational to give this issue some attention, but it may also be in your economic self-interest. Curiously, in November 2015, the B.C. government's Select Standing Committee on Finance and Government Services agreed with a credit union delegation that the special tax status be made permanent (as it did in 2013 and 2014). That recommendation didn't survive the 2016 budget process. I'm really not clear as to why that was the case, whether it was a question of ideological purity (read: survival of the fittest) or an aversion to changing a plan already in motion.

Whatever the reason, it is baffling economic policy to siphon additional money from communities that is otherwise being put to good work by credit unions. On this issue, the most progressive option is to go back to the way things were.

Original Article
Author: Kevin Campbell

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