110th CONGRESS, LEGISLATIVE ISSUES A - Z

Why Credit Unions Are Tax-Exempt

Here are just a few reasons

• Credit unions are not-for-profit, democratic, financial cooperatives, owned by their members.
• Credit unions’ boards of directors are mostly unpaid volunteers, elected by members.
• Credit unions, with limitations on who they can serve and restrictions on products and services, also have a social mission to provide service to people of modest means as part of their member base.

Credit Unions Are Different

• Credit unions were created to provide financial services in a democratic, not-for-profit, cooperative manner—that is, with member ownership and control. Those characteristics are the foundation of the tax exemption. Early in the history of credit unions, the U.S. attorney general declared state-chartered credit unions exempt from federal income taxes because they were “organized and operated for mutual purposes [in which an organization’s members share in the profits and expenses] and without profits.” Later, in the 1930s, legislators passed a law to exempt federally chartered credit unions from federal income tax for the same reason. Today, legislators continue to maintain that status because credit unions, while growing and changing, still operate in this unique way.
• Credit unions’ boards of directors are mostly unpaid volunteers, elected by members. Credit unions return all excess income to members, in the form of higher deposit rates, lower loan rates, and lower fees. Credit unions don’t need to create profits to pay stockholders, as do banks.

All Consumers Benefit

• All taxpayers, whether members or not, benefit from the presence of credit unions in the marketplace. Credit union competition helps keep bank and savings and loan prices lower. For example, credit unions offering credit cards now charge an average two to three percentage points lower interest than other lenders. Imagine how expensive other lenders would make credit cards, or auto loans, if they didn’t have to compete with credit union rates.

Banker Double Talk

• Some bankers and their trade associations are asking legislators to tax credit unions. The truth is, a tax hike on credit unions is a tax hike on all American consumers.
• The American Bankers Association says the tax exemption gives credit unions an unfair and unwarranted privilege that puts banks at a competitive disadvantage. If that were true, why have banking assets grown to $12.707 trillion by the end of September, 2007 (up from $4 trillion in 1985). Total credit union assets at the end of September 2007 were $760 billion.
• Oddly, bankers attack credit unions at the same time that bank lobbyists push for more favorable tax treatment for the banking industry that could have the effect of doubling the number of Subchapter S banks already in existence. It also is occurring at a time when the number of banks choosing Subchapter S tax status is significantly increasing. In 1996 there were no Subchapter S banks. By September 30, 2007, there were 2,455 Subchapter S banks.
• On April 30, 2007, the Government Accountability Office (GAO) released a report entitled Information on Selected Issues Concerning Banking Activities. Based on this report, CUNA estimates that banks currently enjoy special tax benefits of between $1.3 billion and $1.9 billion each year. These tax benefits include an excess bad debt reserve provision, a number of tax benefits for lenders, and the use of Subchapter S tax status. Bankers should not be attacking credit unions when they benefit from a host of special interest tax breaks.
• And now the bankers are seeking regulatory and legislative changes to allow banks to organize as limited liability corporations (LLCs), which would provide additional tax advantages and savings to banks and their highly paid shareholders and directors.

Tax Repercussions

• If credit unions paid income tax, the contribution to state and federal treasuries would make not one penny difference in the taxes you pay as an individual. But the effect such taxes would have on how much you pay for credit union loans for cars, education, and houses, or the dividends you earn on credit union savings, would be significant. Just as banks pass along their tax payments in fees and interest rates, so credit unions would have to pass along that expense to members, also in the form of higher fees, higher loan rates, and lower savings dividends. Credit unions, if taxed, also would have to take the money from funds otherwise dedicated to reserves—the cushion protecting all members and the credit union from economic shifts.
• CUNA effectively defended the federal tax exemption for credit unions at a hearing before the House Ways and Means Committee on November 3, 2005. CUNA continues to oppose all attempts to subject credit unions to federal taxation, as well as efforts to use the tax debate to prevent credit unions from gaining regulatory relief.

Credit Unions Contribute Now

• All taxpayers have legitimate concerns about the federal budget deficit, and state deficits as well. Credit unions and members already participate in reducing those shortfalls. Credit union members pay taxes on dividends their accounts earn. And, members of federally chartered and/or insured credit unions had accumulated $6.7 billion in the National Credit Union Share Insurance Fund (NCUSIF) by the end of fiscal year 2006. This self-sufficient deposit insurance fund, another unique feature of the credit union movement, has never asked for nor needed any money from taxpayers, unlike other deposit insurance funds.
• Credit unions are not-for-profit, democratic, financial cooperatives that serve members. As long as that’s true, they’re earning their tax status.

Copyright © 2008 - Credit Union National Association, Inc.