Banks are gaining some parity with tax-exempt lenders by appealing to lawmakers with arguments that stress economic development and the benefits of a competitive marketplace for loans. Wisconsin has just passed a law that should make banks more competitive with credit unions and Farm Credit System lenders; earlier this year, a law in Kansas became effective which gives banks a way to compete more effectively with FCS institutions.
The Wisconsin Legislature recently passed a biennial budget that includes a provision exempting income derived from farm and commercial loans under $5 million from state income taxes. Gov. Tony Evers, a Democrat, signed the bill on July 5 that was developed in the Republican-controlled legislature.
Although the Governor used his line-item veto to delete at least two other tax cuts in the bill, Evers left the loan income exemption in place, apparently persuaded by the measure’s economic development potential. Although implementation rules are still being written, the provision becomes effective immediately and applies to any qualifying income earned after Jan. 1, 2023. The state estimates the measure will save bankers $30 million per year.
Bankers have sought tax parity with credit unions and Farm Credit for years, and this is both a step forward in Wisconsin and a potential model for other state legislatures around the country. Rose Oswald Poels calls this the biggest legislative victory in her 12 years as President and CEO of the Wisconsin Bankers Association.
WBA and its members argued that decades of income tax disparity have eroded the financial institution competitive landscape in Wisconsin. With credit union assets growing faster than banks in the last decade, six of the state’s 10 largest financial institutions are now credit unions. Oswald Poels notes that credit unions have acquired seven Wisconsin banks in that time.
Banking industry advocates told Gov. Evers that a diverse financial services industry serves the state better than one dominated by credit unions. And, while $30 million is a meaningful hit to the state treasury, it is potentially far less than the amount of state tax revenue that could be lost if credit unions keep buying banks at the current pace. The ability to lend a little more competitively might be just the boost some banks need to maintain their independence.
Two years ago, Kansas passed a law exempting from taxation income generated on agricultural real estate loans and rural housing loans. The law became effective Jan. 1, 2023, and the estimated impact on state coffers is only $4 million to $5 million. Gov. Laura Kelly, a Democrat, signed the legislation passed by the state’s Republican-controlled legislature, saying she believes consumers benefit from a competitive lending marketplace.
Bankers in other states who are concerned about competition from tax-advantaged financial institutions might consider an advocacy strategy similar to the approaches implemented in Kansas and Wisconsin. Regardless of party, lawmakers seem to value a competitive financial institutions marketplace. In two states, they have demonstrated a willingness to take steps to stem damage being caused by tax-advantaged players. My bet is, lawmakers in many other states share similar sentiments.