Now is the Time to Eliminate the Credit Union Tax Exemption
Tax Exemption Abuse | Quotes of Note | Policy Questions | Taxation Q&As
As Congress examines the affordability of tax exemptions in the face of rising debt levels, it should target the credit union tax exemption, an anachronism whose need has long disappeared. Credit unions' tax exemption was originally linked to their mission to serve people of modest means. But there is evidence that the tax subsidy is going to individuals who clearly do not need subsidized financial services and benefits the largest credit unions. In addition, credit unions continue trying to leverage their tax advantage for more powers like expanded member business lending and ability to use supplemental capital.
If credit unions want to act like banks, they should be taxed like banks.
Plain and simple.
Compelling Facts & Figures
- Credit Unions are now a $1 trillion industry, competition for the same business and offering the same products as community banks. Graph!
- There are now 208 credit unions with more than $1 billion in assets - a large increase from 1991, when only 11 credit unions were this large. Graph!
- A 2006 U.S. Government Accountability Office study found that a bigger portion of credit union customers are upper-income compared to bank customers. Graph!
- Of the $8.6 billion credit union industry profits reported in 2012, three-fourths of those profits were concentrated in credit unions with over $500 million in assets, representing less than 6 percent of credit unions. Graph!
- Since 2001, credit unions have increased the deficit by not paying an estimated $20.5 billion in federal income taxes.
- The credit union tax exemption is expected to be the 17th largest corporate tax expenditure by conservative estimates found in the Office of Management and Budget's Analytical Perspectives.
- An individual tax payer will pay more in taxes each year than all credit unions combined. Graph!
- Decades ago, mutual insurance companies and mutual savings banks, with ownership structures similar to credit unions, lost their tax exemptions, specifically in the 1940s and 50s and continue to operate, and thrive, while paying taxes.
- Canada and Australia, in 1972 and 1994 respectively, repealed their credit union industries' tax exemptions.
Credit Unions Abuse Their Tax Exemption
Borrowing from U.S. Treasury
For decades, credit unions have adamantly opposed paying one dime of federal income taxes and continue to do so. Yet, the credit union industry borrowed more than $29 billion dollars from the U.S. Treasury.
- more than $18 billion to stabilize two failed corporate credit unions through the National Credit Union Administration's Credit Liquidity Facility in 2009 and
- more than $11 billion by the Temporary Corporate Credit Union Stabilization Fund to handle resolution costs of failed corporate credit unions.
More than $5 billion of the borrowed funds remain outstanding, due to the taxpayers.
Abusing Field of Membership Common Bonds
Credit unions, founded by individuals with a common bond, were established to provided financial services to those of low- and moderate-income levels--received a subsidy, in the form of federal income tax exemption, to assist in this mission.
Credit unions commonly stretch their common bond requirement, even advertising that “everyone can join!”
Clearly, credit unions are abusing their tax exemption to grow with blatant disregard for their mandated mission and legal and regulatory requirements. ABA has asked the National Credit Union Administration, the federal credit union regulator, to address this abusive situation.
Expansion of Member Business Lending
Some credit unions are abusing their tax subsidy by abandoning their chartered mandate to serve people of small means and are pursing instead large commercial loans. Overly aggressive credit unions want to take advantage of their tax-exempt status to cherry-pick existing loans from taxpaying community banks.
Quotes of Note
Credit Union Leadership
Read the following to see what credit union CEOs are saying about taxing credit unions:
Historical bipartisan support
"The only impact taxation would have on TDECU is that we will double in size every seven years instead of every five years. So what? The NCUA special assessments prove my point. Last year and for the next nine years, credit unions are paying special NCUA assessments, assessments that have just about the same impact as a 35% tax on credit union net income.
The assessments we paid - and will pay for the next decade - did not drive us to change loan and deposit rates and fees last year, nor will they in the future.
Paying a 35% tax on income would have the same impact on how we price: none, nada, zip."
Ed Speed, former CEO Texas Dow Employees Credit Union, guest opinion in Credit Union Times, 2011
"I have long believed that the original logic of a credit union tax exemption has expired, and that credit unions, like other business cooperatives in the United States, should pay their fair share...The tax exemption that we enjoy does not make us a credit union...I call upon the leaders of our industry to take the bold step of offering to give up our federal income tax exemption..."
Rick Leas, President/CEO Golden Bay Federal Credit Union as reported in Credit Union Times, 2005
"Tax avoidance shouldn't be an industry. Taxes pay for a system of good government. American taxpayers are subsidizing credit union members."
Rob Nicholls, CEO Australian National Credit Union, as reported by Credit Union Times, 2005
Administrations on both sides of the aisle have recommended taxing credit unions as seen in the following quotes:
"There is no reason to continue to distinguish credit unions from other financial institutions. The powers and services of credit unions have expanded greatly over the past several years, so that they are no longer truly mutual institutions with limited common bonds. Credit unions are most analogous to thrift institutions in the functions they perform and thus should be taxed on the same basis."
President Carter's 1978 Tax Program, Department of the Treasury Fact Sheet
"Because of their tax exemption, credit unions enjoy a competitive advantage over other financial institutions such as commercial banks and savings and loan associations. Their tax-exempt status has enabled credit unions to grow rapidly since 1951, when savings and loan associations and mutual savings banks became subject to the corporate income tax...In an economy based on free market principles, the tax system should not provide a competitive advantage for particular commercial enterprises. Credit unions should thus be subject to tax on the same basis as other thrift institutions."
President Reagan's Administration in Tax Proposals to Congress, 1985
“Because of their tax exemption, credit unions enjoy a competitive advantage over other financial institutions such as commercial banks and savings and loan associations. Credit unions have grown rapidly since 1951, when savings and loan associations and mutual savings banks became subject to the corporate income tax.
… In an economy based on free market principles, the tax system should not provide a tax subsidy to particular commercial enterprises or a competitive advantage to those enterprises over others that perform substantially the same functions. Although credit unions were founded to extend short-term personal loans to narrowly defined groups, today large credit unions frequently function more as full-service consumer banks.”
President George H. W. Bush's Budget Proposals, Department of the Treasury General Explanations, 1992
Credit Union Public Policy Questions
Credit unions that bear little resemblance to a traditional credit union are fast growing, aggressive institutions, offering products and services identical to those of taxpaying banks. This new breed of tax advantaged "credit unions" raise the following important public policy questions:
- If there is no practical difference between the new breed credit unions and other financial service providers - either in the products they provide or whom they serve - is preferential tax treatment justified?
- If some credit unions no longer focus on moderate and lower income people, as they are mandated to do, should they retain their preferential tax treatment?
- If not, where should the line be drawn to limit extension of the credit union tax exemption?
- What would be the impact of eliminating credit unions' preferential tax treatment for this new breed of credit unions?