Should Credit Unions Have to Pay Income Tax?

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The American Bankers Association, the lobbying group that represents America’s banking industry, has recently launched an ad campaign across Washington D.C. aimed directly at the nation’s credit unions. The print version of the campaign is to the point, reading simply:

“Today credit unions are a $1 trillion industry that pays no income tax. That’s nearly $2 BILLION every year that could help shrink the federal deficit. Now, credit unions want even more perks. It’s time to end credit unions’ indefensible and outdated special treatment. Enough is enough.”

I think it’s worth noting the irony in such a campaign, given that the for-profit banking sector has recently benefitted from unprecedented amounts of government support. Then again, it shouldn’t come as a surprise to find lobbying groups seeking advantages for its members — it’s kind of their job. (Also it should be remembered that the ABA represents banks of every type and size, not just those that have benefitted from TARP and implicit guarantees.)

But what exactly is the ABA’s problem with credit unions? Earlier this month, bipartisan legislation was introduced in the House of Representatives that would increase the limit on the amount credit unions can lend to their small business members. This is an area where community banks compete directly with credit unions, so it’s understandable that the bank lobby would take umbrage at any effort to allow credit unions to compete more for that business.

(MORE: Uh-Oh: Banks and Credit Unions Peddling Payday Loans)

And it’s not difficult to understand the banks’ argument, either. After all, credit unions are exempt from corporate income tax, a policy that puts them at a distinct advantage because credit unions can undercut taxed banks on the prices of their loans and other services.

So who’s right here? Should credit unions be able to increase the amount of business loans they issue? Or should we keep that restriction — and, for that matter, get rid of the credit union tax exemption altogether?

Credit unions have been exempt from paying income tax since 1916, when the income tax was first instituted, because they are, “organized and operated for mutual purposes and without profit.” Credit unions were also given this advantage because, like Grameen Banks, they were often the sole source of financing for disadvantaged communities whose members had few assets and no way to prove their creditworthiness.

This is the reason that credit union membership has traditionally been restricted to groups that had a single “common bond” — to members of local labor unions, for example, or specific ethnic communities. These common bond requirements were actually used as substitutes for collateral or other credit risk mitigation efforts. Joining a credit union owned by people who already knew you well meant you could more easily prove your creditworthiness. And borrowing from members of your immediate community meant it was more likely you’d pay back the loan.

But accessing banking services is generally much easier for many Americans, and over time the common bond restriction has been eased by Congress. Many credit unions still require members to belong to a certain community, but others do not. As a result, many credit unions look a whole lot like community banks, except for the fact that they funnel their profits back to their customers (really their owners) in the form of higher interest payments on deposits, lower fees, and the ability and willingness to offer reasonably-priced financial services to business and individuals in low income communities.

(MORE: Can a Payday Lending Start-Up Use Facebook to Create a Modern Community Bank?)

This last reason is the only compelling argument I find for allowing credit unions to keep their tax-exempt status. By any measure, there is still dire need in certain communities for access to affordable financial services. According to a recent report from the Pew State and Consumer Initiatives, approximately 12 million borrowers spend $7.4 billion on payday loans each year, saddling themselves with exorbitant interest payments that often drive them deeper into debt. This fact alone should tell us that there is a desperate need for more credit unions who take this role seriously, and taxing credit unions will mean there will be fewer serving communities that need them most.

But not all credit unions focus intently on bringing banking services to low-income communities. Which brings us back to the question of whether Congress should increase the statutory limit on credit union business lending, from 12.25% of the credit union’s assets to 27.5%. How this change will further credit unions ability to fill their public purpose is difficult to see. Fred Becker of the National Association of Credit Unions argues that the measure is needed to increase lending to small businesses, and that this lending will help further the economic recovery. But the problem with the economy generally isn’t that banks are unwilling to lend to businesses — commercial and industrial lending is up sharply in recent quarters. The economy’s problem right now is lack of demand for businesses’ products and services, and easing regulations on credit unions won’t change that.

In addition, 70% of credit unions make no small business loans whatsoever, and just a small portion of credit unions who make member business loans are hitting their lending limits. What’s more, loans up to $50,000 don’t count towards the cap. So the case for raising the cap, which was instituted to promote credit union stability and to focus credit unions on their traditional role of promoting access to consumer financial services, feels a bit shaky to me. With so many millions of Americans relying on check-cashing services and payday lenders, shouldn’t Congress be focusing on policies that aid credit unions in helping those folks?

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53 comments
jhot321
jhot321

How can you justify depositors with over $50,000 putting their money in credit unions?  I thought they were for people with less resources; however working in the financial industry, many individuals with big bucks are going to credit unions due to the higher rates created by their tax exemption.  So in essence, taxpayers are funding higher interest rates on deposits for rich people.   


I thought we were trying to avoid that... Take a closer look. 

johansezbyteme
johansezbyteme

The ABA can burn in hell. Bankers should have their livers fed to the buzzards.

DevrieParadowski
DevrieParadowski

Has anyone considered how common it is for military veterans to use credit unions as their primary financial institutions?  When young people enlist in the military, they are almost automatically entered into a credit union if they have no bank.  The military credit unions are awesome for veterans.  Taxing them might be kind of a punch in the face to veterans.

DanBurnes
DanBurnes

On the subject of credit unions offering services so that people don't have to use payday lenders or check cashing outlets....the vast majority of credit unions have very strict lending policies similar to banks. While they may make loans in smaller amounts than a bank is willing to make, credit unions are not providing credit to those with terrible credit. Why not? Regulators. If credit unions make these loans, it is natural that their delinquency rates will increase. Regardless of how small the increase, the management and board will come under withering criticism. Since credit unions are also exempt from CRA standards, they have no real incentive to go out on that limb.

DanBurnes
DanBurnes

While credit unions are not as pure as they would lead you to believe, it is unfair to say they cost taxpayers $35 billion. What they did was sneakier. They got their regulator to go to the Treasury. The Treasury then asked the Federal Reserve to print up $35 billion. The Fed provides it to Treasury after Treasury signs an IOU. Treasury loans it to NCUA after NCUA signed a promissory note. NCUA then bails out the wholesale CUs by buying all of their bad investments. NCUA then sues everybody they can find to get some money back. The rest of the money is paid back by high fees invoked on retail credit unions over multiple years. Nutshell, CUs got a very low rate government backed loan with a long time to pay it back. So CUs get the benefit of the federal government without paying normal taxes to support it.

81firebird
81firebird

I find it funny that most people think credit unions were not bailed out. The Feds seized all of the major wholesale credit unions who handled the money end of most of the mortgages credit unions issued leading up to the bubble. They also agreed to buy the toxic assets still on their books. Recent figures the taxpayers ate about $35 billion in the bailout.  Most of the banks paid their bailout funds back in full.

For those who don't think credit unions needed help from the govt because they weren't involved in risky mortgage lending wake up. 

Also one of the things that doesn't add up no matter how you  spin it is what another post mentioned. The main part of  the credit union charter is to provide services to people of modest means.  They are not doing anything more for people of modest means than banks are. In fact they have a much smaller percentage of low income customers than banks do. 

All across the country credit unions have greatly expanded their reach.  Look  around, they are the ones building the huge lavish admin and  branch buildings. You cant listen to the radio without hearing a credit union commercial every five minutes. They are not giving back to their customer/shareholders, they are spending to attract more and more customers, and on overly expensive buildings. What more evidence do you need to know they are operating as money making enterprises under the not for profit shield.

DanBurnes
DanBurnes

Credit unions need to make their argument for continued tax exemption based upon the exemption's value to the financial system and public policy, not comparing it to what others already know is a sweet deal for many banks. Arguing who has the sweeter deal as it relates to low or no taxes does not serve credit unions well. The argument regarding S corps is actually not fair. All S corp profits after loss reserves are distributed and then taxed at the personal tax rate of the owner, or the owner receives a K-1 and pays taxes on undistributed profits. This is not the case in credit unions. Their earnings are placed into capital accounts or undivided earnings that are in many cases far in excess of what regulators determined to be well-capitalized institutions. No taxes are therefore paid. A small number of credit unions do, in fact, distribute some portion of earnings back to members in the form of a bonus dividend or return on interest paid on a loan. Those are heralded in the credit union press for a reason....they are the exception, not the norm. It is more likely that those earnings are used to pay for large executive retirement schemes, expensive conferences, or new administrative buildings.

luvinthislife
luvinthislife

Has any bank lobbyist ever truly stopped to ask their membership this $64 (actually multi-billion dollar) question: "If the income tax exemption for credit unions creates such an unfair advantage, why don't you convert your charter from a bank to a credit union?"  The answer is that doing so would not be in the best interests of the small number of stockholders who own those banks, since they would have to cede their ownership interests over to the institution's entire customer base, who would have the opportunity to become member/owners if it were converted to a credit union.  That is the first major point that this article neglects.  Also the community bankers, who are the ones who have the biggest issue with the credit union tax exemption, already receive extremely preferential income tax treatment via their subchapter-S capabilities.  That already lucrative tax break was broadened even further in recent years, allowing banks with even larger numbers of stockholders to pay no income tax by passing their earnings through to those owners.  That gives them a huge advantage in raising capital for their banks, while credit unions have no such capabilities.  As cooperatives, all of their capital must be internally generated via earnings, which is another main reason for the granting of their income tax exemption.  This is the second major difference that the author missed.

DanBurnes
DanBurnes

Big group of credit union CEOs are skiing in Aspen this week. Big discussion is how to maintain their tax exemption. While in Aspen. At a conference. Paid for with tax exempt dollars

CarloSarci
CarloSarci

I have worked for almost 20 years in credit unions and I will tell you that times have changed.

Credit unions are no longer consumer friendly institutions, at least the mid-size / larger ones.

Their executives get paid big bucks, they treat their members as bad as some banks and most profits do not get distributed to members but go for huge executive perks and bonuses.

I no longer keep my account at my credit union. For the first time ever, I now keep all my money at a small bank.

As far as being friendlier than banks, ask anyone that was unable to meet their mortgage payments during the real estate crisis.  They went straight for the throat. No mercy.

As far as taxation, don't believe the not-for-profit marketing story, they are definitely in for the money, it just flows to the top in stealthier ways...

They need to be taxed and pay their fair share.

lemieuxm
lemieuxm

It's ironic that banks who probably pay little to no Federal income tax (because they are multinational and able to move income to tax advantaged countries) are trying to do anything they can to squash credit unions.  Credit unions actually pay some interest on deposits, perhaps the big banks won't be satisfied until they can have all of our deposits at nearly zero interest while they get away with paying little in taxes themselves and taking massive capital injections from the Fed and Treasury.

Not to mention their argument makes little sense...  if credit unions are truly non-profit on a long-run basis, then there will be no corporate profit to tax so including in the tax code should make only small temporal differences in tax receipts.

If you really want to fix the deficit, a combination of spending cuts and tax increases is probably required.  I think eliminating corporate income taxes and increasing personal taxes (on the same high income / high net worth crowd that directly or indirectly owns most of the corporations anyway) to make up the difference makes sense.  This will eliminate most of the transfer pricing, offshore financing, and other tax planning games that companies use.  Alternatively, we could exempt the first $X of annual income (possibly adjusted based on the cost of living in one's zip code) and then apply a flat tax rate to all amounts above such cutoff such that the applicable rate eliminates the deficit.  This might help make Congress really consider what it's spending our money on, as all expenses would be immediately paid for by taxes that the public is probably not too excited about.

Onepatriot
Onepatriot

Reasonably they should have to show they are lending a certain percentage of their deposits, and pay taxes on the rest.  I don't know how they can justify being called non profits if they have opened their doors to the general public and are paying outlandish salaries to their management.

RichyBocaz
RichyBocaz

American Bankers Association? WRONG. US Bankers Ass. America is a continent, not just one country in it.

Doubtom
Doubtom

Anything that the American Banker's Association proposes should automatically be thrown out the window --right after throwing out the banker who proposed it,,,preferably out of the 20th story of the building.  

RobertCope
RobertCope

Again....more to the point: Clearly a mistake to harm the excellent service now provided community organizations that plow earnings back into lower fees for members instead of making profits for bank owners who do not live in most communities they serve and, as the bank owners are already wealthy, they don't need more profit-making at the expense of members of credit unions.

RobertCope
RobertCope

As I belong to a rural credit union that began some decades ago when 7 people each put up 35 dollars to help one another and members yet to join, I observe that credit union with 1000s of members still is a great, less expensive, resource that serves far better than for profit banks, the later plowing prifits back to the already wealthy owners.

Hawkeye249
Hawkeye249

Many years ago Savings Banks were tax exempt.

That was stopped because it gave them an unfair advantage in attracting customers.

Why do so many like their Credit Unions?

Not because they have no other choices, but because their rates and fees are lower.

Why can they offer lower rates and fees?

Because they are tax exempt.


dinnes22
dinnes22

I love my credit union and feel that it is much more invested in it's customers, through it's services, accountability, and rigorous oversight.  Credit unions were not part of the unhinged home loan debacle and have remained focused on remaining pragmatic rather than merely mercenary. 

DanBurnes
DanBurnes

Someone should look into how much the executives make.  Not unusual for them to have multimillion dollar contracts for running a nonprofit.

jhc
jhc

Chris:  Thank you for bringing this article to light.  You say "the last reason is the only compelling argument I find for allowing credit unions to keep their tax-exempt status".  For your information, banks serve for more low to middle income families than do credit unions - 10% more at 41% banks to 31% credit unions.  That leaves 59% of bank customers being middle to upper income and 69% of credit unions customers being middle to upper income (2006 GAO and Federal Reserve Survey of Consumer Finance).  Do those 69% need taxpayer assistance from the rest of us?  I think not, but that is exactly what they're getting when they use a credit union.  End the credit union tax exemption once and for all.

jhc
jhc

The Credit Union free ride has cost the American taxpayer nearly $21 billion since '01.  Closing FDR's New Deal tax loop-hole is about 50 years past due, but who's counting?  I'll tell you who, community bankers, that's who!  Jimmy Carter tried to end it in '78 as did Reagan and Bush I after him, but to no avail.  It's shouldn't even be debatable - they're now allowed to compete head to head with banks at a 40-50% rate advantage. Put that in your business model and smoke it tagart13.

DanBurnes
DanBurnes

Navy Federal, the largest credit union in the country with more than $52 billion in assets, generated more than $760 MILLION in profits last year.  These earnings were not distributed to members who in turn would pay taxes.  They are held in capital accounts that far exceed the amount necessary to cover potential losses due to defaulted loans.  The size, scope and activities of this credit union and others far exceeds what the original supporters of credit unions in Congress intended.  Credit union rates on savings and loans are not regularly significantly less than banks if one shops around.  Time for them to step up.

ZacPetit
ZacPetit

Agree. No union should be exempt from taxation. They all operate as businesses now anyway. Take a look at any of their leaders' pay and tell me it's not true.

johansezbyteme
johansezbyteme

@DanBurnesI had a bankruptcy in 2010. I had *no* problem getting a car refinanced, a year later, from 17.11% (Capital One) to 5.9% (local credit union).

jhc
jhc

Amen brother, a new 6,000 square foot credit union facility in our state's capitol city, home of the highest per capita income in the state.  Yet another example of how credit unions overstep their original purpose by going after the best customers as opposed to the underserved.

johansezbyteme
johansezbyteme

@81firebirdWells Fargo savings account: $300 minimum deposit, pays 0.01%. My local credit union, $25 membership fee, pays 0.20%. And I haven't seen any "lavish" buildings being built by them. Looks like you should stop shilling for the banks, dude.

JonS.
JonS.

As a credit counselor at a credit union it is my sole purpose every day to work with individuals who are of modest means and poor credit to find lending options and work out loans to qualify them for funds. In my position I work with many community members daily (do not have to be credit union members) in search of debt relief, financial assistance resources, and basic financial literacy. There may be Credit Counselor positions at banks but I have not heard of any. I am wondering if we are reaching for more individuals blame because most of us are continuing to feel the strain of this economy. I would like someone to blame too but Credit Unions are not that group.

johansezbyteme
johansezbyteme

@DanBurnes 

Wells Fargo savings pays 0.01%. My local credit union pays 0.20%. And the CU doesn't have a ten-story building downtown like WF does. So much for your fairy tale.

DanBurnes
DanBurnes

@luvinthislife Tired argument that credit union lobbyists have trotted out over the years. To argue that other organizations have fancy tax strategies, so we should not have to pay taxes is not a serious public policy discussion. While there is an argument that credit unions should not pay taxes, it should be based not on how bad banks are, but how the exemptions credit unions receive benefit the credit union, its members, societal goals and the country as a whole more than the dollars that would be collected should they be taxed. If credit unions continue to make a compelling case that the tax exemption is good public and fiscal policy, they will likely maintain their exemption. If their only argument is we deserve it because bankers make lots of money and don't pay much in taxes, they will lose the argument. Not because the argument is not true, but because that is not how policy should be formed.

johansezbyteme
johansezbyteme

@DanBurnes  Good. Glad to see they're enjoying themselves.

jhc
jhc

good for you, you've seen the light and I applaud you.

jhc
jhc

Amen brother!

johansezbyteme
johansezbyteme

@jhc Look at the difference in loan interest between banks and credit unions. Banks can burn in hell for azz-raping people. Real people, that is, not fairy-tale rich folks.

RobertCope
RobertCope

Looks too much like a schill for banking interests. Don't trust the statistics.

RobertCope
RobertCope

Same schill speaking here. Not to trust. Paid by banking interests?

DevrieParadowski
DevrieParadowski

@DanBurnes Not taxing them, though.  Better regulations, may?  Tax penalties for crappy savings, maybe??

EstaNoche
EstaNoche

@JonS. THANK YOU

I lost EVERYTHING due to a combination of the economic collapse and a bad domestic violence situation that included economic dominance.    It's because of my credit union that I was able to get off public assistance, start rebuilding my credit, and even start some modest savings.   I still have to work 45-50 hours a week, and I rent a room like a college kid instead of having my own place... but I'm off public assistance, saving money, and have hope for a future that doesn't include skirting homelessness.   I couldn't have done this without the financial counseling and modest unsecured line of credit I got from my CU. 
Credit Unions help grow the economy from the ground up..  instead of forcing us all to hope that wealth horders will let a little something "trickle down" from the top. 

jhc
jhc

See Carlo Sarci above and wake up and smell the roses.  Veterans of all people, whose pensions depend upon taxpayers, should be the first to see that the credit unioin tax exemption is nothing short of a patriotic affront to America.  Veterans and school teachers are among the most likely to use a credit union yet they depend upon taxpayers for their livelihood.  There's a real disconnect here.