Should Credit Unions Really Be Tax Exempt?

Two Callahan employees take opposing sides of an old, but still hot, debate.


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.





Oct. 3, 2011


  • its time CUs stop living in the past.........
  • Banks, Savings and Loans and other financial institutions do not have totaaly Volunteer Boards and share holders do not get the one member/one vote ownership credit union members have. If credit unions become taxed, banks, s&l, and other financial institutions should have the same unpaid Board and one member/one vote provisions.
    Jay Flanagan
  • I would also question Mark's assertion that by taxing credit unions, it would force them to alter their core missions. I'd argue that the decision to keep or abandon those core missions can only be determined by the institutions themselves. USAA, a savings bank, has built its business by following many of the same exceptional standards and values that credit unions practice. In this case, taxation is not a barrier to providing its membership with outstanding products or services.
    Jennifer Sosenko
  • This article was very well written, I enjoy the unbiased opinions of both Mark and Michael who clearly work in the CU field, but can still look at this objectively.

    Banks are a sinking ship, so whatever Credit Unions are doing must be right!
    Jackie S
  • In light of today's news that $1.5B Technology Credit Union in San Jose is seeking to convert to a mutual savings bank "in order to serve customers outside its current field of membership and enable it to more easily raise capital," I think that the issue of taxation and what credit unions are forced to give up in order to retain their non-taxed status needs to be more thoroughly discussed. No one LIKES to pay taxes, but what if, by agreeing to be taxed, the benefits of the resulting relaxed restrictions outweigh the roadblocks being experienced in today's confining operating environment?

    We need to be seeing more conversations like this one and be open to the possibility of changing the current structure to have the greater ability to provide much-needed solutions for today's consumers. Compromise can be hard, but it's a much less bitter pill to swallow if you can come out ahead in the long run. If the answer to weigh the options is just a flat-out "no," I think we'll probably be seeing many more conversions in the future.
    Jennifer Sosenko
  • "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." I'm not sure I am buying this, it is kind of fluffy and idealistic. As an average consumer, who happens to be a CU Member, I cannot think of any instance where I could not get a loan elsewhere, or where the benefits from the CU were better.

    Plus, anyone can join a credit union nowadays. The membership restrictions have gotten so loose, it really is not a unique service anymore.

    The argument that $3 Billion in tax revenue is irrelevant is absurd, too. That is the exact mentality that has gotten us in to the mess we are in; everything counts! Plus, if Michael is right, that lifting the tax-exempt status would lead to significant growth, than that $3 Billion would also grow tremendously.

    The banking industry as a whole is definitely in need of some reform and new regulation, no doubt about that. But that does not mean that Credit Unions should get out of paying taxes.
  • "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".

    What a strange way to say interest paid on savings accounts is deductible. Good strategy - pay a dollar in interest to save 25 cents on tax.

  • Some CUs even have national membership through national organizations like the PTA and National Military Family Association.

    By being taxed CUs would also gain flexibility in investments and the ability to raise capital.

    Banks should be careful what they wish for.

    One argument I hate, "It is only $3B" in reference to the amount of taxes that would be raised. There are probably 1000s of similar scenarios, however, when added together the amount adds up.

    Personally, I don't believe it is a tax problem, but things are going to have give on both sides of the aisle.
  • USAA FSB may not be the best example. It is heavily subsidized by the association's Property & Casualty business. It is easier to maintain higher standards when the business need not be financially viable.
    Mike Jones
  • I agree with Mark's comments. Great article. I also feel that if credit unions are taxed that could open up the possibility for other non profit organizations to be taxed.
    skittles jones