Policy Documents

Research & Commentary: Credit Union Federal Corporate Income Tax Exemption

October 30, 2013

The banking industry is using current efforts to reform the federal tax code as an opportunity to push for ending the federal corporate income tax exemption for credit unions.

Credit unions have been exempt from the federal corporate income tax since the Great Depression, in order to increase their ability to provide credit to lower-income families. This exemption was granted under the condition that the credit unions be “organized and operated for mutual purposes and without profit,” according to the Internal Revenue Service. The banking industry has argued for decades that this exemption gives credit unions an unfair advantage.

As nonprofit entities, credit unions are required to use any surplus revenue they may generate on their consumers through benefits such as higher interest rates on deposits or lower rates on loans. Since no profits are generated, credit unions have nothing to tax. Steve Pociask of the American Consumer Institute argues ending the tax exemption and nonprofit status of credit unions would impose double taxation on members, with the first tax being applied to the retained earnings from better interest rates and the second applied to the income members earn.

Eliminating the tax exemption could be counterproductive in revenue terms. According to a 2012 report from the National Association of Federal Credit Unions, it would cost the federal government $15 billion in lost tax revenue over the next decade. There also would be a sharp drop in economic growth and employment, around $148 billion in lost gross domestic product, and 1.5 million fewer jobs. Credit unions are among the few financial institutions providing loans to small and medium-sized businesses.

Ending the tax exemption is also likely to push many credit unions to become full-fledged banks, or “demutualize.” This could further reduce lending to those who need it most and put a greater burden on taxpayers, who already carry significant risk from existing “too big to fail” institutions.

While banks have waffled about whether to lend to small businesses clamoring for credit, credit unions have taken up much of the slack, making the loans others will not. Ending the tax exemption would create double taxation and cut off credit to people who need it the most.

The following articles examine credit unions, their tax status, and their effect on the nation’s credit markets.

Banks Pushing for Repeal of Credit Unions’ Federal Tax Exemption
Jim Puzzanghera reports on bankers’ efforts to end the credit union tax exemption. “Bankers say the tax break is an unfair advantage for large credit unions. Now they see an opportunity to get rid of it as lawmakers begin work on a major overhaul of the tax code,” he writes. 

Credit Union Federal Tax Exemption Study
Commissioned by the National Association of Federal Credit Unions, this study documents the benefits of the credit union federal income tax exemption for consumers, businesses, and the U.S. economy.

You Can’t Tax Credit Unions if They Don’t Exist
R. J. Lehmann of the R Street Institute discusses the credit union industry’s likely response to cancellation of the credit union tax exemption.

Keep the Credit Union Tax Exemption
Writing for Real Clear Policy, Steve Pociask of the American Consumer Institute says the evidence suggests credit unions “provide substantially more benefits for consumers than costs for taxpayers, and the tax exemption should be retained.”

Don’t Tax Credit Unions … Or Community Banks, Either
R. J. Lehmann of the R Street Institute examines alternatives to ending the credit union tax exemption. “Perhaps most importantly, from a political perspective, a proposal that links community banks and credit unions arm-in-arm against the behemoth too-big-to-fail institutions that have sucked up hundreds of billions in taxpayer dollars is one that, we expect, just might be able to generate support on both sides of the aisle,” he writes.

Credit Unions: A Theoretical and Empirical Overview
Donal G. McKillop and John O.S. Wilson trace the evolution of the credit union movement. Their study examines credit unions’ objectives and considers efficiency, technology adoption, product diversification, merger, failure, and demutualization. They also explore the regulatory environment in which credit unions operate, regarding interest rate regulation, common bond requirements, taxation, deposit insurance and capital regulation. The paper also considers demutualization and the costs and benefits to credit unions of altering their organizational form.

Credit Unions Make Friends—But Not with Bankers
The St. Louis Federal Reserve examines the legislative and legal history of the battle between credit unions and the banking industry over how and when credit unions are allowed to lend to consumers. 

Can Credit Union Member Business Loans Meet the Need for More Credit to Small Businesses?
Katherine E. Howell-Best of the North Carolina Banking Institute examines whether credit unions can effectively serve the small business market through their member business lending products. 

Credit Unions vs. Banks: The Myth of the Uneven Playing Field
In this study commissioned by the Northwest Credit Union Association, Randall Pozdena and Michael Wilkerson evaluate bankers’ claims that credit unions are essentially operating as commercial banks and should be treated as such, especially as regards corporate income taxation.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.