Is a Battle Brewing?

Deficit-reduction efforts could threaten CUs' tax exemption.

February 21, 2011

It’s baaack: scrutiny in Washington D.C. of credit unions’ federal tax exemption. The question is, to what extent?

The issue has been largely dormant for several years. Even the banks’ carping had been muted due to the financial meltdown and the gazillions in federal dollars required to bail them out.

But already things are shaping up to be different in this Congress, where a wave of new members has made deficit reduction not just a priority, but a mantra. The issue has been brought further into focus by several bipartisan panels, notably the president’s deficit reduction commission, headed by former Sen. Alan Simpson (R-Wyo.) and former Clinton White House Chief of Staff Erskine Bowles. 

The Simpson-Bowles plan calls for deficit reduction of nearly $4 trillion by 2020 achieved through deep spending cuts and sweeping tax reforms. It would eliminate most tax expenditures in favor of lower tax brackets for all—effectively repealing the credit union tax exemption.

Although the commission failed to win the supermajority of 14 votes from its 18 members, its report—and others like it—are having an impact. The report is focusing attention and generating debate, and even support, among influential legislators, and it was welcomed by the president.

“They start the discussion and it becomes a winding path, not a straight line, to a conclusion,” says John Magill, Credit Union National Association (CUNA) senior vice president of legislative affairs. “It makes people nervous—it certainly makes me nervous—when they say ‘everything is on the table’—even deductions for mortgage interest.”

Even if the report isn’t formally recommended to Congress, different groups will pick up the pieces they like and tout them on Capitol Hill. Look for bankers to raise the volume on repealing the credit union tax exemption, even though these same reports would also repeal the Subchapter S tax breaks enjoyed by thousands of community banks.

What concerns Magill isn’t the prospect of an up-or-down vote on the credit union tax exemption. That’s unlikely. “More worrisome is a scenario where they’ll be working on a deficit reduction package and someone will target us in the dark of night at the 11th hour.”

As such, CUNA isn’t allowing deficit reduction reports to go unaddressed. CUNA President/CEO Bill Cheney in letters to the commission and Treasury has explained why the credit union tax exemption remains good public policy. Among his key points: 

Consumers will pay the price.The credit union tax exemption is worth about $1.5 billion a year. But creditunions save their members $7.5 billion ayear—in favorable rates and fees.

Federal tax liabilities could compelmore credit unions to convert to banks, and the banking model of placing stockholder profits over customer concerns. That deprives consumers of a beneficial marketplace choice, and for some it completely eliminates access to reasonably priced financial services.

Taxing credit unions would divert funds that would otherwise be used to build capital and provide a cushion against any future losses. National Credit Union Administration Chairman Debbie Matz recently expressed similar safety and soundness concerns.

“Simply put,” says Cheney, “the credit union tax status is one of the best investments the federal government makes for consumers. Any recommendation to throw this out with the other tax expenditures is short-sighted and ultimately damaging to the American consumer.”

Reinforcing this point to policy makers will be a priority at CUNA’s Governmental Affairs Conference next month and all year long in Hike the Hill visits led by state leagues. 

CUNA also is emphasizing the importance of credit union involvement at the local level. “More than 100 incoming members of Congress are freshmen,” says Magill. “Get to know them, not only in Washington, but in their home districts. Washington visits tend to be far more abbreviated than visits at home, where a legislator’s pace is less frenetic.”

Another reason to act: the bankers themselves. They’ve become more organized. They might not have our grassroots capabilities, but they’re making strides through their many employees and directors.

With deficit reduction looming so large on the congressional agenda, this is not the year to allow the bankers any leg up.

MARK WOLFF is senior vice president of communications for the Credit Union National Association. Contact him at 202-508-6764 or at