Ending the credit union tax exemption hurts everyone

When it comes to the tax status of banks versus credit unions, there’s a clear understanding of the key differences between these two competing — yet separate — industries.

Credit unions exist to provide provident credit to their members, who are members for life. Yet this often gets muddled in the debate over whether credit unions should pay corporate taxes, as banks have argued for ending the tax exemption that credit unions were built upon to better serve members.

Once again, a recent op-ed calling on Congress to end this critical exemption, got it wrong.

As cooperatives, credit unions aim to provide the best service to their members, no matter what stage in life. Unlike banks, taxpayers do not bear the burden of credit union losses — credit unions themselves do, as they effectively are self-insured through their Share Insurance Fund.

More important, credit unions did not engage in the same types of risky lending practices that brought our economy to its knees in 2008 as the banking industry.

In fact, after the financial crisis, consumers left banks in droves and joined credit unions.

It’s true that credit unions have grown in size, as the other op-ed points out. However, that growth has been a 1.2% increase in market share in the past decade, showing credit unions are still deeply committed to their local communities while also being dwarfed in size by the nation’s banks.

Today, the asset sizes of JPMorgan Chase, Wells Fargo, Bank of America and Citigroup exceed 20 times that of our nation’s largest credit union, but each one of these banks holds more assets than the entire credit union industry combined.

The claim that credit unions are outgrowing banks is completely overblown when taken in the context of the overall marketshare. Even so, credit union growth is positive for all and indicative of good service. Those opposed to such growth are bankers who fear marketplace competition.

The nation’s not-for-profit credit unions drove some $16 billion in economic growth each year, according to an independent study commissioned by the National Association of Federally-Insured Credit Unions in 2017.

But the recent op-ed also calls the credit union tax exemption “outdated” and a “loophole.” Economic data suggests otherwise.

While bankers have cited an Office and Management and Budget report as justification for eliminating credit unions’ tax-exempt status, the fact is eliminating the tax exemption would result in a $38 billion net loss in tax revenue. More so, even if the tax exemption negatively impacted the overall budget, its elimination would be nothing more than a rounding error towards addressing our budget shortfall.

There are numerous differences in the way banks and credit unions operate, and these differences matter. The most important one is that credit unions direct any income back into their institutions for the benefit of all their members. And credit unions do that with restrictions and limitations in place.

Importantly, the op-ed avoids addressing the banking industry’s own loophole: About one-third of U.S. banks enjoy Subchapter-S status so they can distribute untaxed profits directly to shareholders.

Bank customers reap tangible benefits from credit unions' existence in the marketplace. In the 10-year period covered in the NAFCU-commissioned study, the nation's credit unions generated $159 billion in economic growth, and its member benefits were estimated at $56.7 billion.

Had the credit union market share been cut by half, it would cost bank customers an estimated $6.9 billion to $15.7 billion a year in higher loan rates and lower deposit rates.

Lawmakers understand the value of what the credit union tax exemption brings. The recent op-ed attempting to discredit the mission of the credit union industry is fruitless.

Supporting the credit union tax exemption’s end would mean supporting the elimination of billions in economic growth, billions in federal revenue and hundreds of thousands of jobs.