End the free ride for tax-exempt credit unions

Credit unions have begun to feel pressure from Congress and the courts over their tax exemption and the expanded powers granted by their deferential regulator. But rather than justify their tax subsidies and embattled expansionism, the credit unions have instead set up a convenient straw man to attack: Wall Street.

With all due respect, Washington has been getting an earful on this issue not from Citigroup and Wells Fargo, but from the community bankers who are harmed by the credit unions’ ever-growing taxpayer-funded competitive advantage. Credit unions are feeling the heat because policymakers are finally beginning to question whether the credit union tax exemption is still justified and are opening their eyes to community banker calls for a level regulatory playing field.

The Joint Committee on Taxation recently calculated the credit union industry’s tax exemption at more than $10 billion through 2021. Unfortunately for taxpayers, the price is only going up, with the annual cost at nearly $2 billion and rising as credit unions pursue unbridled, aggressive growth.

This annual subsidy comes in handy in a competitive financial services marketplace, particularly as the National Credit Union Administration continues finding new ways to increase the powers of the industry it is charged with regulating. The agency has advanced rules expanding credit unions’ commercial lending authority, ignoring statutory restraints on membership and allowing outside investors to leverage the tax subsidy by providing alternative capital. Amid these ongoing efforts, credit unions have become virtually indistinguishable from taxpaying banks.

No wonder Congress is beginning to rethink the tax exemption, which lawmakers established decades ago to enable people of small means with a “common bond” to pool their financial resources. Senate Finance Committee Chairman Orrin Hatch, R-Utah, has expressed concern that credit unions are operating beyond this purpose and has called on large credit unions to report financial information required of other tax-exempt institutions.

Hatch’s proposal comes after NCUA Chairman Mark McWatters admitted in an earlier letter that the industry’s fund insuring credit union deposits would be at risk without taxpayer subsidies. This admission raises questions about the management of the fund, underscoring the need to review and ultimately abolish its sizable taxpayer handout.

Even credit union executives themselves are beginning to question the tax exemption, at least for the largest and most growth-oriented of these financial firms. Apparently, representatives of smaller, community-based credit unions are just as frustrated with the NCUA-assisted expansion of these multistate institutions as community bankers. If it weren’t for all the roadblocks that NCUA has raised to credit union conversions, the answer would be simple: Convert to a taxpaying mutual bank or thrift charter and go about your business.

With the NCUA tied up in court over its efforts to expand the industry’s reach, one might expect the industry to tread carefully, lest it attract more unwanted attention to its government benefits. Instead, they have big plans for our tax dollars — a nationwide marketing campaign. Apparently in the interest of transparency in government spending, the Credit Union National Association recently said it plans to raise $100 million over the next three years to launch an awareness program called “Open Your Eyes to a Credit Union.” There must not be any more football stadium names for sale.

This taxpayer-subsidized investment in the expansion of growth-oriented financial firms should open Washington’s eyes to the need for greater equity and accountability in how our financial services sector is taxed and regulated.

But members of Congress aren’t going to get a straight answer from credit unions about how their industry is pushing the envelope with their tax exemption, and they aren’t going to hear it from Wall Street either. All they need to do is observe in their communities the kinds of services and infrastructure that local community banks help fund through their taxes — a responsibility that credit unions continue to dodge.