In a letter delivered in April to Sen. Orrin Hatch, R-Utah, the National Taxpayers Union (NTU) urges the Senate Finance Committee to evaluate the tax-exempt status for large credit unions.
NTU’s letter falsely characterizes credit unions, their mission, and the statutory rationale for the credit union tax status. The group seems unaware that Congress originally conveyed the federal income tax exemption to credit unions because of their unique ownership structure and special mission.
Credit unions of all sizes remain distinguished by member-ownership, democratic control, and not-for-profit status—a structure that hasn’t changed one bit over their nearly 100 years of existence.
Further, NTU wrongly equates the terms “low income” and “unbanked” with “modest means.” History clearly shows the American credit union movement began as a cooperative effort to serve wage-earning, working-class people, not “unbanked” or “low income” individuals.
This intention was broad, encompassing the masses of average working-class individuals. Congress had multiple opportunities to more narrowly define the term “modest means” since the passage of the original Federal Credit Union Act of 1934 but has never done so.
Since their inception in the early 1900s, a majority of credit unions have operated with narrow fields of membership, many based on occupational groups—therefore having no legal basis for serving low-income or unbanked individuals.
The credit union tax status has absolutely nothing to do with credit union common bond. The original role of the common bond was to control/reduce credit losses in an era when little was known about borrower creditworthiness.
Widespread credit reporting now eliminates the fundamental need for that construct. More important, in today’s modern and rapidly changing economy, regulators have expressed concern over narrow common bonds which can create safety and soundness concerns due to concentration of risk in a single sector, company, or associational group.
Still, that legacy of tightly defined credit union fields of membership, primarily based on employer groups, means that credit unions have disproportionately served wage-earning, working-class people from their beginnings nearly a century ago.
Today, nearly two-thirds of credit unions, serving more than one-half of credit union members, continue to reflect significantly restricted fields of membership, and all credit unions are bound by field-of-membership requirements.
Lost in NTU claims is the fact that larger credit unions are more likely than their smaller counterparts to serve narrow fields of membership.
Credit unions naturally view outreach to unbanked or low-income individuals as desirable. But many of those that do so repeatedly find themselves embroiled in litigation brought on by bankers aggressively seeking to limit credit union service, even though such expansion would directly and significantly help disadvantaged consumers.
Further, NTU’s myth of bank harm arising from charter differences is clearly reflected in two facts:
1. An uneven playing field, if one existed, would produce outsized market share gains for an advantaged class of institutions. However, credit union market share is essentially unchanged over the past quarter century and sits at 7% of depository assets today.
2. One of the defining characteristics of the U.S. depository chartering system is ease of entry and exit. Banks suffering from the uphill battle presumed by NTU are free to convert to a credit union charter, although only two have done so.
The NTU letter also greatly overstates true revenue impacts of taxation because the government estimate of that impact NTU cites doesn’t reflect recent changes to the U.S. tax code. The new tax law includes a permanent reduction in the statutory C corporation tax rate to 21%. This will have the effect of reducing the revenue impact estimates by about 40% relative to NTU claims.
Taxing credit unions would do exceedingly little to address U.S. government budget issues. If credit unions had been taxed in 2017, the receipts (according to last year’s government estimates) would have accounted for only 0.07% of federal spending—which would have funded federal government operations for only seven hours. Going forward, lower corporate tax rates drop that to a little over four hours.
In a similar vein, NTU seems blind to the fact that credit unions and their employees already have substantial tax burdens. Using IMPLAN modeling, CUNA finds that credit unions and their employees directly paid an estimated $4.2 billion in federal taxes and $2.4 billion in state and local taxes in 2016 alone.
Credit unions’ 113 million consumer-owners are likewise saddled with a substantial tax burden. Any new tax on credit unions is an additional direct tax on these consumers. U.S. credit union members paid an estimated $1.6 trillion in state and federal income taxes during the most recent federal tax year.
Changing the credit union tax status would likely result in many credit unions converting to bank charters, essentially eliminating cooperative, member-owned institutions from the marketplace. That would eliminate nearly $11 billion in direct financial benefits to credit union members.
Fewer credit unions also would result in fewer societal benefits. These include reductions in billions of indirect financial benefits that accrue to bank customers and innumerable benefits to the economy arising from the fact that, unlike banks, credit unions serve as a counter-cyclical force during economic downturns.
The credit union tax exemption is one of the best investments government makes in its citizens—and we take every opportunity to remind policymakers of this important fact.
MIKE SCHENK is CUNA’s vice president of research and policy analysis. Contact him at 608-231-4228.