In the upcoming years, federal lawmakers will explore a range of tax expenditures – likely including the exemption on credit unions – as they try to pare down the budget deficit. On the one hand, credit unions feel that the exemption is justified because they are providing a valuable public service and therefore meet the standards of the tax-exemption. On the other hand, banks believe that the tax exemption gives credit unions an unfair advantage.
Below, Mark Buschur highlights why credit unions want to maintain their tax exemption, while Michael Emancipator offers some counter points to consider.
Mark Buschur: Tax-exemption is an acknowledgement that an organization is relieving some burden that would otherwise fall to federal, state, or local government.
So the question is whether credit unions serve a public purpose and deserve a subsidy. The answer is yes. Credit unions relieve a burden of the public in many crucial ways with their financial services: lower fees, higher returns on savings, and more affordable loans to those who might not have access to credit. Credit unions provide a public service, much like other imperative tax-exempt entities like some child care organizations or the YMCA do.
Some critics argue that if we taxed credit unions, the extra revenue could be used to help pay down the national deficit. If taxing credit unions would vastly improve America’s fiscal standing, perhaps there would be a case for it. This is not the reality.
Taxing credit unions would raise an estimated $3 billion per year, according to The Tax Foundation, a Washington D.C.-based research group. On the national level, $3 billion is trivial, and it would cause many credit unions to really struggle in their current business models. Would it make sense to force credit unions to change their core mission just to increase the federal revenue by about .0013%?
The most common argument heard from banks is that tax exemptions for credit unions is simply not fair. We have two types of organizations that provide similar services but have to play by different rules, banks say. While it’s true that credit unions don’t pay corporate income taxes, they are limited by having membership restrictions and having strict regulations with investment risks.
If credit unions have a clear advantage with the tax-exemption, there would be more examples of banks converting to credit unions. It doesn’t happen. Banks and credit unions have different business models with different goals.
Michael Emacipator: Credit unions haven’t always been tax-exempt. The first credit union in the United States was state chartered in 1909, followed by federally chartered credit unions in 1934, yet federally tax-exempt status wasn’t granted until 1937. In that almost 30-year span, credit unions survived just fine while being taxed. Similarly, thrifts and S&Ls used to be tax-exempt, but in 1951, Congress eliminated their exemption. Yet both financial systems still exist. It stands to reason that even if credit unions were taxed, the industry could still thrive.
Credit unions would likely return more dividends to their members if their tax-exempt status were repealed. According to James Bickley, in a 2005 CRS Report for Congress, credit unions would become liable for payment of corporate income taxes on retained earnings, but not on earnings distributed to members. That means that credit unions would have more of an incentive to return their profits to the member, resulting in likely higher dividend checks.
After the Credit Union Membership Access Act of 1998 was enacted, credit unions were allowed community charters. Many bankers have argued that the Access Act has watered down the “common bond” requirement allowing for credit unions to directly compete for the same customers. Because of these community charters, which are increasingly popular with credit unions, bankers argue that there is even less of a difference between banks and credit unions. Simply for fairness, perhaps credit unions should be taxed just as banks are. Since regulatory easing in the past has created market-growth opportunities for credit unions, then it’s also only fair to ease the regulatory restrictions that are unique to credit unions.
In 1995, before the Access Act was passed, there were only 18 credit unions with at least $1B in assets. Today there are 173 such credit unions. This growth might not be solely attributable to The Access Act, but that regulatory easing very likely had something to do with the growth.
Similarly, if credit unions were taxable, they would probably be much more successful in pushing to ease regulations, and bank lobbyists would lose a weapon in their arsenal in opposition to the easing. Imagine what kind of growth credit unions could experience if they could make uncapped Member Business Loans, lend to whomever they wanted or invest in whatever they chose. Just as the Access Act opened up a huge market opportunity that allowed the credit union industry to rapidly grow in the past 15 years, another act that eliminates even more restrictions could also foster growth. Perhaps that's worth being taxed.