Bankers’ associations are once again using bogus arguments in an effort to persuade Congress to revoke credit unions’ long-standing tax-exempt status — a move that would generate little tax revenue and hurt millions of Americans.
To understand why credit unions are exempt from federal income taxes, and why bankers’ claims of unfair treatment fall flat, it’s important to remember what makes credit unions special. Unlike most banks, credit unions are member-owned, democratically governed, not-for-profit cooperatives led by volunteer boards of directors with a specific purpose: promoting thrift and improving access to credit for their members, particularly those with modest means. Credit union earnings are passed on to members, not outside investors, and fair compensation practices help maximize these member benefits.
Needless to say, banks operate under a different business model. Banks are for-profit institutions in existence to generate returns for their stockholders, who decide who sits on the board of directors. Banks have no obligation to listen to their account holders or seek to improve their communities. Moreover, many banks organize as S corporations, rather than traditional C corporations, in order to gain substantial tax relief.
Because of their unique ownership structure, credit unions have a special mission to serve their communities, and in adherence to strict financial regulations, they were granted an exemption from federal income taxes nearly a century ago.
It’s also worth keeping in mind the fact that the vast majority of credit unions are small, community-based organizations, while the banking sector has increasingly consolidated in recent years. Today, nearly 5,700 credit unions serve 110 million Americans throughout the country. These credit unions control about 10 percent of all financial assets in the U.S., while the 100 largest financial institutions control 75 percent of the market, up from 41 percent in 1992.
And while credit unions don’t pay federal income tax, they pay plenty of other federal, state, and local taxes, including payroll taxes, sales taxes, and property taxes. Many state-chartered credit unions also pay taxes on their reserves. All told, credit unions paid an estimated $17.1 billion in taxes in 2016.
The Credit Union National Association estimates that stripping credit unions’ tax-exempt status would have generated about $1.7 billion in 2018 — a tiny fraction of the $15 billion in benefits credit unions deliver to society in the form of lower fees, better rates on loans, higher yields on deposits, and superior customer service. To take just one example, account holders pay an average of $72 to credit unions in checking fees annually, compared to $183 collected by banks. In fact, credit union members with low balance accounts paid less in annual total checking account fees than bank customers with high balance accounts, according to a study.
Simply put, revoking credit unions’ tax-exempt status would mean trading small gains in tax revenue for increased volatility among credit unions, a reduction in consumers’ financial choices, and fewer benefits flowing into the economy. Under the financial strain, some larger credit unions would likely become banks, while smaller credit unions might be forced to merge with larger institutions or simply close up shop.
To see what could happen, look to other countries. In Australia, for example, where credit unions lost their tax-exempt status in the mid-1990s, the industry contracted as failure rates climbed and returns on assets plunged. To stabilize, credit unions were forced to implement additional fees and account maintenance changes that left consumers worse off and with fewer financial options.
There’s a reason one in three Americans is a member of a credit union and that credit unions consistently outperform banks in consumer satisfaction ratings: Credit unions deliver valuable services to their members and the economy as a whole. Instead of seeking to cripple a competitor through government intervention, perhaps banks should seek to do more of the same.
Liam Sigaud writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.