Tax bill keeps credit union tax exemption, but threat remains

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The credit union industry's longstanding exemption from federal taxation was not altered in the House Ways and Means Committee's most recent draft tax bill, a near-term victory for credit unions — but not a decisive one. 

In a press call Monday evening, America's Credit Unions CEO Jim Nussle confirmed that the House Ways and Means Committee's reconciliation bill — a nearly 400 page draft that will be marked up Tuesday morning — does not include any changes to the credit union tax exemption according to their most recent analysis. 

Nussle attributed the outcome to a six-month coordinated advocacy campaign in which the group generated hundreds of thousands of messages to Congress arguing for the value of credit unions to communities and the political risk of taxing them. 

Nussle stressed the importance of ensuring congressional leaders understand early on that targeting credit unions is both bad policy and bad politics. 

"In the light of day, credit unions will win," Nussle said.

Many in the credit union industry had feared their federal tax exemption could be on the chopping block Tuesday, as House Republicans floated it as a potential offset in legislation to extend the 2017 Trump tax cuts. While the measure did not appear in the most recent draft, exemption's appearance as a possible spending offset suggests the idea is gaining steam in Congress — and could resurface in future negotiations as lawmakers seek ways to pay for the major tax legislation.

Credit unions currently enjoy exemption from federal corporate income taxes, a status that industry advocates argue enables them to serve underserved communities, offer lower rates and return value to members. In recent years, America's Credit Unions and other industry partners have launched an aggressive lobbying campaign, sending joint letters to lawmakers and urging Congress to preserve the exemption. 

A recent study by Robert M. Feinberg of American University and Douglas Meade of the Interindustry Economic Research Fund commissioned by America's Credit Unions found that removing the tax exemption for all credit unions would reduce the number of credit unions operating and weaken the competitive pressure they exert on banks and other financial institutions. The study found that the resulting tax burden on credit unions could cost consumers $234.6 billion over 10 years.

Mark Treichel, CEO of Credit Union Exam Solutions Inc. and credit union regulatory veteran who spent more than 30 years at the National Credit Union Administration, argues that eliminating the credit union tax exemption would be a major misstep.

"Taxing a credit union is equivalent to a tax on its individual members. Consumers need choices and a tax on credit unions would essentially end credit unions, decrease competition to banks and increase costs to all Americans."

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While credit unions are established as nonprofit, community-focused institutions providing low-cost financial services, some of the largest credit unions have expanded their scope significantly. Critics — including many bank industry competitors like the Independent Community Bankers of America — say some credit unions have strayed from their original mission. 

ICBA Senior Vice President for Legislative Policy Alan Keller argues that lawmakers and regulators have increasingly questioned the exemption for good reason. 

"As Congress considers ways to responsibly fund legislative priorities, taxing the largest credit unions — those that operate indistinguishably from taxpaying banks — should be on the table," Keller said. "The largest credit unions that are fueling industry consolidation, engaging in aggressive commercial lending, and sponsoring multimillion-dollar naming rights have clearly outgrown their original mission."

Community reinvestment advocates are a bit less certain. Advocates like Jesse Van Tol of the National Community Reinvestment Coalition says while he understands some of the critiques about the largest credit unions, fully eliminating the tax exemption could have negative effects on institutions — particularly small ones — who remain community-oriented.

"There are some really good credit unions that have stayed true to their roots, particularly low-income community development credit unions, but there are also now a great number of credit unions that are virtually indistinguishable from banks," he said. "[However,] I would not support removing tax exemption overall for credit unions, because I do believe there are very good credit unions and I do believe in the original vision, mission and purpose of credit unions." 

Van Tol added that federal regulator the NCUA should be examining some of the largest credit unions with a more critical eye, including asking whether their actions are consistent with their nonprofit status and consistent with their charter, which among other things requires them to serve folks of modest means. 

Nussle, a former Republican congressman, expressed confidence that the coalition has the votes to block any last-minute amendments targeting credit unions but cautioned that backroom negotiations near the end of the process — especially during final House-Senate reconciliation — remain a risk. 

"At some point in time, there's just two or three people in a room saying, 'OK, we don't have to vote yet to pass this thing. So are we going to get that done?'" Nussle said. "And as you know, there's two sides to that. There's 'You didn't offset it enough, or you didn't put my provision in,' or whatever it is. But in order to get that final 1, 2, 6 votes — whatever it is — in the House and the Senate on the final conference report, leader Thune and speaker Johnson and others are going to sit in a room at 3 in the morning and they're going to discuss this."