New research in support of the banking industry’s argument for eliminating the tax-exempt status credit unions once again has put credit union advocates on the defensive.
A study conducted by the Tax Foundation, a non-partisan non-profit organization dedicated to providing research and analysis on federal and state tax policies, recently concluded that there is no justification for the nation’s largest credit unions to be tax-exempt.
Specifically, the study concluded that there is evidence indicating that the credit union industry “has strayed from its original, tax-exempt purpose and is in direct competition with its taxed competitors.”
In a research note, Erica York, an economist with the Center for Federal Tax Policy at Tax Foundation, contended that eliminating the credit union tax-exemption increase efficiency in the tax code and provide lawmakers with revenue that could be used to offset other improvements in the tax code. Based on estimates by the Joint Committee on Taxation, the credit union tax exemption cost the U.S. $1.9 billion in missed tax revenue in 2019.
“The tax exemption for credit unions is not justifiable under principles of sound tax policy, nor under the rubric that lawmakers have used in the past to evaluate the tax-exempt status of financial institutions,” York wrote.
Based on the foundation’s research, the nature of credit unions has evolved since they first were granted tax-exempt status in a way that no longer warrants allowing them special treatment under current tax laws.
“Credit unions were granted their tax exemption with the understanding they would provide financial services that were unavailable or difficult to obtain elsewhere to lower-income, unbanked individuals with a strong common bond,” the study states. “However, evidence indicates that credit unions have evolved since their exemption was granted and now closely resemble other financial institutions that are subject to the corporate income tax. The exemption for credit unions is not justifiable on the grounds of sound tax policy.”
A recent Harris Poll commissioned by the Florida Bankers Association determined that 68 percent of Americans “think it is unfair that credit unions with $500 million or more in total assets are exempt from paying state and federal income taxes.” Additionally, the poll revealed that 70 percent would support legislation requiring that country’s largest credit unions to pay federal and state income taxes.
Credit union advocates have adamantly defended their member institutions’ tax-exempt status against assertions that it should be eliminated – whether based on independent research or anecdotal evidence presented by the banking industry.
National Association of Federally-Insured Credit Unions (NAFCU) Vice President of Legislative Affairs Brad Thaler attested to the economic benefits of the tax exemption in a recent letter to Congress.
“The fact is that the total estimated benefit credit unions provide the greater economy totals over $16 billion a year,” Thaler wrote. “Eliminating the credit union tax exemption would result in the loss of 900,000 jobs over the next decade, a shrinking of the GDP and a net loss of revenue to the federal government.”
Thaler asserted that legislators should be weary of banker-supported attacks on credit unions, stating that they distract from banks’ own wrongdoing, which has been documented in numerous regulatory enforcement actions. He also noted that banks saw a hefty tax break from the Tax Cuts and Jobs Act.
Additionally, he contended that bankers and their allies should “focus their resources on issues that can help the entire financial services community, such as consumer protection, regulatory relief and creating a national data security standard for those who do not currently have one, including retailers and others who handle consumer financial data.”