Back Down, Bankers – Credit Union Tax Exemption Has Merit

The bankers are up to their same old shenanigans when it comes to their attacks on credit unions, as is evidenced in a recent BankThink editorial.

As Congress begins the process of reviewing and rewriting the nation's tax code, the banking industry is crying foul against the nation's credit unions for myriad reasons – all without merit.

They claim the "Blank Slate" tax reform approach being talked about on Capitol Hill should threaten the credit union tax exemption, yet over the district work period in August a number of key lawmakers from across the country threw their support behind credit unions and their 96 million members.  

Bankers claim that credit unions' federal income tax-exempt status provides an unfair advantage. They also claim that credit unions are getting in the way of their lending and say credit unions don't need access to more capital for their members.

Let's set the record straight.

Credit unions do pay taxes. Though credit unions are exempt from federal income taxes, they still pay many taxes, like payroll and other state and local taxes. What the bankers aren't telling you is that over one-third of banks are Subchapter S corporations and don't pay federal income tax at the corporate level either.

Bankers complain that credit unions have an unfair advantage – if so, why have only two banks converted to credit unions, while over 30 credit unions have converted to banks just in the past 15 years? 

Furthermore, while the bankers complain that credit unions are affecting their lending, the truth is far different. A study commissioned by the Small Business Administration's Office of Advocacy in 2011 found that bank business lending was largely unaffected by changes in credit unions' business lending, and credit unions' business lending can actually help offset declines in bank business lending during a recession. The study shows that during the 2007-2010 financial crisis, while banks' small business lending decreased, credit union business lending increased as a percentage of their assets. Clearly, credit unions continued to serve Main Street as banks turned people away.

A report released by the Special Inspector General for the Troubled Asset Relief Program found that of the 332 banks that participated in the Treasury's small business lending fund program, 137 of them used more than half of the $4 billion disbursed by the program to help fund their exits from Tarp, not to provide much needed small business loans. One community banker described it as "…a bit of a shell game" in a 2011 Wall Street Journal article.

Credit unions benefit all Americans. A 2012 independent study released by the National Association of Federal Credit Unions shows all Americans would lose if the credit union federal income tax exemption were eliminated: There would be 150,000 lost jobs per year, higher loan rates and lower deposit rates for all consumers (not just credit union members) and a net loss of $15 billion over the next decade in federal income tax revenue.

The reality is that the credit union federal income tax exemption benefits credit union members and bank customers. Credit unions provide a check on banks through their competitive rates and fees. In fact, the exemption results in more than $10 billion in economic benefits annually for all Americans according to NAFCU's landmark study on the value of the credit union tax exemption.

Furthermore, any effort to strip credit unions of their federal income tax exemption will have a drastic and immediate negative impact on more than 5.5 million current and former military members, their families and survivors. As noted in a 2013 letter to Congress by The Military Coalition, any change in the credit union tax exemption "…would be to the detriment of our armed forces members and their families and, in the long term, to military readiness." 

Credit unions exist to serve their members. While credit union membership has certainly grown since the passage of the Federal Credit Union Act in 1934, the credit union business model used then is the same one in use today. Credit unions aren't in business for profit. They are run by their members, for their members – not shareholders. Whatever "earnings" are made at a credit union go right back to its members in the form of higher dividends and lower rates and fees.

If the bankers want the advantages of being a credit union, they should convert, not try to destroy a proven, valued business model.

B. Dan Berger is president and CEO of the National Association of Federal Credit Unions.