Dispute Rising Over Credit Union Tax Exemption

Published December 10, 2013

Keith Leggett doesn’t dispute credit unions should be allowed tax-exempt status to serve people of modest means. However, Leggett, vice president and senior economist at the American Bankers Association, says credit unions are not holding true to that mission. And because they are not, he says, their tax-exempt status should be revoked.

The debate over the tax-exempt status of credit unions came up recently as part of a possible overhaul of the federal tax code by the Senate Finance Committee. On December 9, the Credit Union National Association quoted House Ways and Means Committee Chairman Dave Camp (R-Mich.) saying a bill wouldn’t come out until February or March.

The committee released the Tax Reform Options Papers in June of 2013. They listed several options including disallowing the tax-exempt status for credit unions. The report cited a Tax Foundation article that proposed eliminating credit union tax exemptions as one of the “least worst options” to raise revenue. The Tax Foundation estimated taxing credit unions would generate between $2 billion and $3 billion per year.

But credit union advocates say benefits of the tax-exempt status outweigh the extra tax revenue the government would bring in if tax-exempt status were stripped away.

More Competitive Rates Claimed

The National Association of Federal Credit Unions commissioned a study in 2012 that reported credit unions offered rates that were as much as 25 percent better on savings deposits and car loans than banks offered. The study also found that bank customers saved money due to the competition from credit unions.

Overall, the study found that U.S. consumers benefitted by $10 billion per year from the presence of tax-exempt credit unions in financial markets.

Credit union advocates say it’s the tax-exempt status that allows them to create such savings.

The 1934 Federal Credit Union Act gave credit unions a tax exemption. Because credit unions are nonprofits, they must use surplus revenues for their members. This allows them to usually offer higher interest rates on deposits and lower interest rates on loans than what a traditional bank may offer.

That would go away without the tax-exempt status, says one credit union advocate.

‘System Would Cease to Exist’

“The credit union system would cease to exist,” says Paul Gentile, executive vice president of strategic communications and engagement at the Credit Union National Association. “Without it, there wouldn’t be much incentive to be a credit union. It would make more sense if they became banks. You would see a very quick end to the credit union system.”

Leggett, however, says if credit unions keep the tax exemption, they should serve more lower-income customers than traditional banks. He says there is evidence that banks are serving more people of modest means.

A November 2006 United State Government Accountability Office (GAO) report stated surveys in 2001 and 2004 found credit unions “lagged behind banks in serving low-and-moderate-income households.” The GAO report also stated limited data existed on the extent of which credit unions served those of modest means.

“Banks are doing a better job serving low and moderate income individuals than credit unions are,” Leggett said.

Banks Say Equal Treatment Needed

If credit unions aren’t serving the people their tax-exempt status was set up to help, should it continue? Leggett asked.

“Credit unions are direct competitors with community banks,” Leggett says. “They are offering the same products and same services and serving the same clientele. You should be treated the same under the tax code. The tax code should not favor one part of the industry relative to another.”

Credit unions, which serve an estimated 98 million people in the U.S., have become an alternative for people who are unhappy with the service provided to them by traditional banks.

Banks have had notoriety for unpopular fees in the past. For example, in September of 2011 Bank of America announced it would charge debit card users a $5 a month fee. About a month later, Bank of America announced it was dropping plans for that $5 fee after an uproar from customers and a lot of media attention.