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 serve as 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.

CUs 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 on, 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 serve as 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. The amounts banks pay stockholders dwarf their tax bills: Over the past five years, they’ve paid almost $100 billion more to stockholders than in taxes.

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 are banks reporting record growth and profits? In the 12 months ending September 2003, banking institution assets grew more than credit unions have grown since they began operating in the U.S. in 1908: Banking assets grew to $8.95 trillion (a 12-month increase of $672 billion) at the end of September 2003. Total credit union assets at the end of September 2003 were $622 billion.
• A string of record-setting profits makes it difficult for bankers to claim financial harm (with a straight face). Because of this, bankers have begun to focus on different strategies when attacking the credit union tax exemption. Now, with a slow economy, bankers have attempted to sell policymakers on repeal of the credit union tax exemption by citing the potential increases in Treasury revenue that could be gained.
• But a recent study revealed that 80 percent of Wisconsin state banks are using out-of-state shell subsidiaries to reduce their tax liability. In fact, 11 of the state’s top 15 banks paid no state corporate income taxes at all and Wisconsin banks actually reported net loss of more than $200 million.
• Oddly, bankers pursue these strategies 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 2003 there were 2,017 Subchapter S banks, savings banks and S&Ls in the U.S. In all, 97% of these were commercial banks. Seventeen of these institutions have more than $1 billion in total assets, and the largest has $9.3 billion in total assets.
• CUNA estimates that the direct cost to the U.S. Treasury of the elimination of double taxation under bank Subchapter S election will amount to an estimated record of $970 million in foregone taxes in 2003 and $3.8 billion over the past six years. These figures are adjusted for the fact that Subchapter S bank shareholders receive higher dividends (and consequently pay more taxes) than they would if their institutions had not opted for formation under Subchapter S.
• If recent growth rates continue, the total foregone tax revenue due to Subchapter S election by banks will exceed the foregone revenue from the credit union tax exemption by 2006. And if pending legislation becomes law, this schedule will be greatly accelerated.
• 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. Again, not-for- profit credit unions aren’t like banks, which have profits aplenty.

CUs 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. You pay taxes on dividends your credit union accounts earn. And, members of federally chartered and/or insured credit unions had $5 billion in the National Credit Union Share Insurance Fund (NCUSIF) in 2001. This self-sufficient 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.