The perennial fight before the Iowa Legislature between two financial-services trade groups is a little like a feud in which distant cousins get together once a year to argue over who got the most in the division of their grandparents’ estate. Nothing ever gets settled, and the bitter feelings between the two sides only deepen.

This year, the Iowa Bankers Association is smarting from the unprecedented purchase of a commercial bank by one the state’s largest credit unions, and hopes that will be enough to persuade lawmakers to take action on a tax equity issue, something it hasn’t been able to accomplish through past lobbying efforts. The IBA has argued for decades that large credit unions that compete with banks by offering similar services should lose their tax-exempt status, and the University of Iowa Community Credit Union’s purchase of Hawkeye State Bank in Iowa City only illustrates the point, IBA President John Sorensen said.

“The acquisition in Iowa City provides added visibility and opened the door for us to educate people about how credit unions have changed,” he said.

The IBA argues that with $162 million in assets, the Hawkeye State Bank was out of the reach of most Iowa commercial banks, whose median asset size is $62 million, but wasn’t beyond the grasp of the credit union, which has $300 million in assets. The acquisition places the University of Iowa Community Credit Union among the state’s 20 largest financial institutions, but it’s still far smaller than Waterloo-based John Deere Community Credit Union, which has $1 billion in assets.

“In order to make that deal, they had to take some of their untaxed profits and plow into reserve funds,” Sorensen said. “Only a few banks in Iowa could make an acquisition like that, and the thing that really is exasperating is that Jeff Disterhoft, the chief executive at Iowa City credit union, said the thing that really drove the acquisition was the commercial book of business.”

The Jan. 24 issue of the Credit Union Weekly trade journal quoted Disterhoft as saying, “One of the major attractions of the bank is its commercial services, particuarly on the deposit side.” In the past five years, Iowa credit unions have increased commercial lending by 137 percent.

IBA-backed legislation introduced last week in the House Ways and Means Committee would eliminate tax-exempt status for credit unions with $100 million or more in assets and require them to pay the federal income and state franchise taxes imposed on banks. It would affect only the nine largest credit unions in the state, and represents a compromise from previously proposed legislation to subject credit unions with assets of $25 million or more to bank taxes.

Iowa Superintendent of Banking Tom Gronstal said legislators are paying attention and many have looked to him for guidance in sorting out the issues.

“There are so many ways you can look at this,” Gronstal said. “Politically, most consumers don’t know or care about it, and there’s no real big political win for anybody to change it.

“From a business standpoint, there’s certainly an inequity when you compare the net revenue for providing financial services, after taxes, between commercial banks and credit unions,” he said. “It depends on if you care there’s an unlevel playing field, if you care enough about that to make a public policy change.”

Gronstal said that though banks may not be immediately endangered because they pay higher taxes than their credit union cousins, the inequity could drive consumers away from them over time.

“If you have two grocery stores that are selling groceries and consumer goods, side by side or in the same town, and one is organized so it doesn’t have to pay an income tax on its net profits, but the other has to pay income tax on its net profits, do you think the one that has to pay taxes is endangered?” he said.

“The one paying taxes has to have a higher gross margin to stay in business. Over time, if they’re providing the same product and service, consumers tend to pick the one with the lower cost. So, are commercial banks endangered? It’s a threat over time, and whether or not they can overcome that threat by providing superior service or whatever other reasons consumers might choose them over a lower-priced alternative.”

Murray Williams, director of public affairs for the Iowa Credit Union League, said the IBA is trying to split his group’s membership by pitting large credit unions against small ones. The crux of the issue isn’t the size of credit unions, he said, but the difference in the way banks and credit unions are oganized.

“It’s not the size, but the structure,” Williams said. “If banks really think we have the advantage, we welcome them to join the credit union world.

“They don’t want to, because they would have to restrict some of the things they do. They would have to severely restrict commercial lending, turn over ownership to customers, not pay their shareholders and have a volunteer board of directors,” he said.

He said the IBA also brushes over the fact that credit unions pay a state moneys-and-credits tax of 0.5 percent on net income after $40,000. In 2002, for example, the University of Iowa Community Credit Union paid $29,898 in moneys-and-credits taxes, $83,293 in state sales taxes and $55,330 in state exam fees, contributions to the state treasury that would disappear entirely if it operated under a federal charter. Williams and others fear more credit unions would become federally chartered if subjected to the same taxes as banks, which pay about 35 percent in federal income tax and a 5 percent state franchise tax.

Also in 2002, Hawkeye State Bank paid $187,000 in state franchise taxes. The Bankers Association is promoting its tax equity legislation as a way to create a new revenue stream for the state, arguing that large community credit unions are virtually indistinguishable from banks, are profitable and healthy, and can afford to give up their tax breaks.