April 16, 2004

The bankers continue to step up their attack on the credit union tax exemption in Washington, in state capitals and in the media. Below are suggested answers to questions league lobbyists/communicators and credit union officials are likely to hear about the tax exemption.

Why did Congress decide to exempt credit unions from taxation?

Congress elected in 1937 to exempt credit unions from federal income taxes because they are non-profit, mutually owned, democratically controlled institutions that have no capital stock, rely heavily on volunteers and, in many cases, the support of sponsoring companies.

Congress encouraged the success of the credit union movement in order to bring financial services to people who were unable to obtain them elsewhere; and to foster the development of a system of financial cooperatives that would serve as a valuable alternative to the “for profit” banking system.

The tax exemption was deliberated, reviewed and reaffirmed by Congress again in 1951. Then again in 1998. And the reasons to maintain the tax exemption remain true today.

Why should credit unions remain tax exempt?

As not-for-profit cooperatives, credit unions are unique among depository institutions. Taxing credit unions would do more harm than good – not only to credit unions, but to consumers. Credit unions provide a low-cost alternative that keeps bank fees in check.

Unlike the S&Ls, credit unions have never required a taxpayer-financed bailout of any kind. Taxation would jeopardize the resilience, self-sufficiency and essential cooperative nature of credit unions. Since credit unions have no profits, taxation would come out of the reserve cushion that they maintain for unexpected downturns in the economy or unpredictable changes in the marketplace.

Taxation would push credit unions, the most consumer-oriented of financial institutions, toward a stronger bottom-line orientation.

How do consumers gain from having credit unions as an alternative?

Year in, year out, studies show that credit unions, on average, offer the lowest rates on loans and fees and the highest rates on savings. Consumer surveys also show that services at credit unions get higher ratings than do those at banks, S&Ls and other financial institutions driven by profit.

While mostly benefiting credit union consumers (members), the exemption also keeps the banks and thrifts “honest” by requiring them to gauge their own rates and services to their credit union competition. This benefits bank customers as well.

What effect would taxation of credit unions have on consumers?

Consumers would pay higher fees. Taxation would increase the pressure on credit union managers to eliminate free and unprofitable services. Among the victims of such pressures would be small loans, financial counseling, small share draft accounts and loan rebates.

Loan rates would rise and interest on savings, would be reduced. Taxation would encourage managers to seek more profitable” accounts, including more fees.

Finally, the motivation of credit union volunteers would be undermined by taxation. The “not for profit, but for service” credo of the movement would be tempered.

What effect would taxation have on credit unions as cooperatives?

Taxation would greatly diminish credit unions’ ability to take care of their own problems. It would reduce the in-house safety cushion (reserves) that credit unions maintain to protect their depositors.

The entire credit union system is an outstanding example of self-sufficiency at work. This cooperative financial system operates at no cost to the government. By pooling their resources and working together, credit unions manage their own money problems. They finance their own separate regulatory, liquidity and insurance programs and haven’t asked the government for assistance.

What do credit unions do in exchange for their tax exemption?

Credit unions continue to operate as the only not-for-profit, democratic financial institutions. Credit unions are owned and controlled by their members, not outside stockholders.

Credit unions also provide a safe and sound haven for savings; they are prohibited by law from engaging in risky “high-flying” activities – like commercial real estate development, junk bonds, and Third World Loans – that go so many banks and thrifts into deep trouble.

Are credit unions still providing consumers the services Congress expected?

Yes, and more. Congress intended and expected consumers would have an advantage through their credit union, and they do. More than 84 million Americans receive financial services from 10,000 credit unions nationwide. These are the working Americans whom tax reform is supposed to benefit.

Quality individual service is given to all members regardless of their income or the size of their accounts. Services include financial counseling and training in sound saving and borrowing habits. Basic or “lifeline” services are available to credit union members. Members receive low-cost loans and market rates of interest on their savings deposits because of the lower cost of operating credit unions. And many credit union members today are able to take advantage of a full range of financial services as credit unions continue striving to meet their members’ needs.

Credit unions’ operating efficiency is due to credit unions’ not-for-profit status, lack of stockholder payments or board compensation, and reliance on volunteers. Nearly one-quarter of all credit unions have no full-time employees. More than 120,000 volunteers help direct credit union operations.

When Congress granted new powers to credit unions, it was to enable them to deliver services to their members in a modern society. It was not a pre-condition for altering their tax status.

Shouldn’t credit unions do their part to help reduce the budget deficit?

They already do. Credit union members pay taxes yearly on all dividends (interest) earned. Furthermore, in 2003, credit unions contributed $437 million to their federal share insurance fund, bringing to $4.7 billion the total amount of equity in the fund. Credit union payments to this fund reduce the federal deficit.

This is one of the best examples of credit unions' self-sufficiency. In stark contrast to the S&L debacle, no taxpayer dollars have ever been used to support the National Credit Union Share Insurance Fund, which is capitalized solely from contributions by credit unions. The National Credit Union Administration, the industry's federal regulator, is also funded by credit unions.

Copyright © 2008 - Credit Union National Association, Inc.