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Straight Answers to Nagging Credit Union Taxation Questions

During this time of record federal debt levels, many questions surround the issue of credit unions' continued preferential tax treatment. Straight answers to those questions follow:

Subject: New Report Rejects Credit Union Claims that Cooperative Structure Justifies Tax Breaks

A new report by Ken Kies and Bert Ely directly refutes false claims by credit unions that cooperative structure is sufficient justification for their enormous taxpayer-funded subsidy:

“In 1951, Congress repealed the tax exemption for cooperative and mutual savings banks as well as mutual S&Ls because those institutions were in ‘active competition’ with taxable institutions.  Congress found that they had evolved into institutions whose ‘investing members are becoming simply depositors, while borrowing members find dealing with a savings and loan association only technically different from dealing with other mortgage lending institutions.’ … In fact, the credit union tax exemption should be repealed today for the very same reasons the tax exemptions for similar entities were repealed decades ago – it is no longer justified by market realities and confers an unfair, taxpayer-funded advantage to certain competitors in the financial services arena.”

Tax Exemption for Credit Unions: An Unjustifiable $10 Billion Tax Expenditure 

Kenneth J.Kies is Managing Director of the Federal Policy Group, LLC. Bert Ely is the principal at Ely & Company, Inc. September 2013

Subject: New Report Argues That As Credit Unions Have Evolved, So Should Their Tax Treatment

A new report by Ken Kies and Bert Ely finds that credit unions are now largely indistinguishable from banks and therefore should pay corporate taxes just like banks:

“Credit unions have moved sharply away from their original mission while growing substantially in size. As a consequence, they now closely resemble, and vigorously compete with, banks. Yet banks pay federal income taxes, while credit unions do not. This multi-billion dollar tax subsidy confers a substantial competitive advantage that no longer has any policy or economic justification. All credit unions should pay federal corporate income taxes.”

Tax Exemption for Credit Unions: An Unjustifiable $10 Billion Tax Expenditure 

Kenneth J.Kies is Managing Director of the Federal Policy Group, LLC. Bert Ely is the principal at Ely & Company, Inc. September 2013

Subject: Ask Credit Unions These Tough Questions

Credit unions are in town with one sole purpose: Lobbying Congress to maintain their huge government subsidy provided to them at taxpayer expense. Here are four questions you should ask these credit unions:

  • If there is no practical difference between large, sophisticated credit unions and banks – either in the products they provide or whom they serve – is their $2 billion/year tax break justified?
  • If other cooperatives are taxed – like mutual savings banks and mutual insurance companies – why should credit unions retain their preferential tax treatment?
  • If some credit unions no longer focus on moderate and lower income people, as they are mandated to do, should they retain their tax subsidy?
  • Are credit union lobbyists saying they can’t compete and won’t survive without a government handout?

Subject: Happy Anniversary to the Credit Unions

On June 26, 1934, President Franklin D. Roosevelt signed into law the Federal Credit Union Act. Credit unions in 1934 were based on a simple concept: bring together a closely-knit group of people, pool their resources, and provide small loans for one another. The focus was on inpiduals with limited resources who might not otherwise have access to financial services. It gave credit unions a special and unique place in our financial system.

However, today’s credit union industry bears little resemblance to the institutions envisioned by FDR when he signed the Federal Credit Union Act. A new breed of credit union has emerged that is distinct from a traditional credit union. With the freedom to seek new markets almost without restriction and to offer a full range of banking and financial products, many aggressive credit unions have leveraged their tax advantage to grow rapidly. In fact, the credit unions are now a trillion-dollar industry, consisting of 208 credit unions with more than $1 billion in assets – each larger than 90 percent of all banks.

Moreover, the focus on people of small means, which was clearly enunciated in the preamble to the Federal Credit Union Act, has largely disappeared at these large, sophisticated credit unions. Today, these institutions are more interested in offering wealth and asset management services and expanding their ability to make large commercial loans rather than making credit availability for provident purposes to people of small means.

While many credit unions have grown up, they still cling to their Depression-era tax treatment. The time has come to end the tax exemption for these large, sophisticated credit unions that bear little resemblance to the institutions when the Federal Credit Union Act became law.

Q. Why are banks ready to congratulate a credit union?

A. The first credit union in four years may soon graduate to becoming a bank. HarborOne Credit Union, with $1.87 billion in assets, received approval from the National Credit Union Administration and the Massachusetts Pision of Banks to switch to a bank charter. Now it is just waiting for the Federal Deposit Insurance Corporation to process its application.

The next step for credit unions acting like banks is graduation to the taxpaying banking sector, as HarborOne stated in their notice to switch charters:

"As a credit union, HarborOne is exempt from paying federal and state income taxes. Following the Conversion, HarborOne would pay federal and state income tax. Based upon its extensive analysis, the Board of Directors believes (1) this tax impact would be more than offset by the enhanced earnings capacity through increased commercial and small business lending and (2) by adding more customers with an expanded marketing area."

If credit unions want to act like banks, they should become banks. Plain and simple.

Q. Do all credit unions want to preserve the $1 trillion industry's tax exemption?

A. No.  While we know that the credit union industry's trade associations have made it their top priority to preserve credit unions' exemption from federal income taxes, some credit union CEOs are rethinking that approach.

Tom Dorety, CEO of the $5.2 billion Suncoast Schools Federal Credit Union in Tampa, Florida, recently wrote in the Credit Union Times that credit unions need to "think about a proactive approach" by proposing a tax plan for credit unions in exchange for expanded lending powers.

If credit unions want to act like banks, they should pay taxes like banks.  Plain and simple.

Q. Who benefits from the credit union tax exemption, a Top 20 corporate tax loophole?

A. Large credit unions. The credit union tax exemption – worth nearly $20.5 billion since 2001 – specifically favors large credit unions with more than $500 million in assets.  These credit unions are at least three times larger than the median sized bank, represent only 6 percent of all credit unions, and had more than three-fourths of credit union industry profits in 2011.


What's more, a 2006 Government Accountability Office study found that credit unions primarily serve middle and upper income customers, not the people the exemption was designed for.

It’s time to eliminate the large credit union tax exemption!

Q. Does the credit union tax exemption result from their ownership structure, as credit unions claim?

A. No.  Decades ago, Congress made a tough decision to eliminate the tax exemption of mutual financial institutions, which were structured similarly to today's credit unions.  At that time, mutual savings banks and insurance companies had outgrown their original purpose and competed directly with taxpaying institutions.

It was not an easy decision, but Congress soon realized that removing their tax exemption would not drive mutuals out of business.  In fact, mutual savings institutions are healthy, well-capitalized, and profitable, and they have paid about $6 billion in corporate income taxes since 2000.  Similarly, credit unions will continue to operate and thrive when they pay federal income taxes.

If credit unions want to act like banks, they should be taxed like banks.  Plain and simple.

Q. Why are taxpaying households still subsidizing a trillion dollar industry?

A. That's a good question, particularly given the current challenges in managing the federal debt.

Credit unions don't pay federal income taxes, despite being a $1 trillion financial services industry; This costs the U.S. Treasury about $2 billion each year in foregone tax revenues, while hard working Americans foot the bill. This bill will continuously grow as credit unions become larger.

There are 195 large credit unions with more than $1 billion in assets – that's larger than 90% of banks. Banks, like households, pay taxes. It’s time for credit unions to do so as well.

Now is the time to eliminate the $2 billion annual credit union tax subsidy.