Big Banks Using Tax Reform to Lobby Against Credit Unions
For decades, the banking industry has resisted the growth of credit unions — nonprofit, cooperative financial institutions owned and operated by their members. Banking industry leaders argue that credit unions have started to infiltrate products and services traditionally provided by banks. Credit unions offer various credit services, such as small business and auto loans, mortgages, and checking accounts.
To counter credit unions’ expansion into the financial services sector, the banking industry is using the recent federal tax reform law to lobby against the federal income tax exemption provided to credit unions. Bankers claim credit unions are similar to mutual savings banks and should therefore be regulated in a similar manner.
Because they increase credit to lower-income families, credit unions have been exempt from the federal income tax since the Great Depression. 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 (IRS). More specifically, in 1979, the IRS outlined three requirements credit unions must fulfill to receive tax exemptions: “1) help unbanked, lower-income people, 2) restrict their customer base, and 3) avoid high-risk, high-return investments.”
As nonprofit entities, credit unions are required to distribute earnings to clients through benefits, such as higher interest yields on deposits and lower rates on loans. And since they generate no profits, credit unions have nothing to tax. However, the banking industry contends that this exemption gives credit unions an unfair advantage.
It is important to note that eliminating their exemption would affect revenue and increase the cost of banking. Many tax experts argue taxing credit unions would impose double taxation on members: first on their capital gains and second on their earned income.
Eliminating the tax exemption could actually reduce revenue and would, according to a 2017 report from the National Association of Federal Credit Unions (NAFCU), “cost the federal government $38 billion in lost income tax revenue over the next 10 years.” A lessened economic role for credit unions, NAFCU argues, would reduce personal income through higher loan rates and lowered deposit rates. The report continues, “GDP would be reduced by $142 billion, and nearly 900,000 jobs would be lost over the course of next decade as well.” Furthermore, the NAFCU estimates a 50 percent reduction in the credit union market share would cost bank customers “an estimated $6.9 billion to $15.7 billion per year in higher loan rates and lower deposit rates.”
In short, ending the tax exemption would force many credit unions to become full-fledged banks, also known as “demutualizing.” Terminating the exemption could reduce lending to those who need it most and further empower big banks considered “too big to fail” during and after the Great Recession.
The economy has slowly improved since the 2008 recession, but undermining credit unions would wreak havoc in the financial sector. Access to credit is an essential component of a thriving market system. Diminished access to credit after an economic downturn makes it even more difficult for businesses to survive and prosper and for entrepreneurs to take risks and foster innovation. Although banks have decreased credit lending to small businesses, credit unions have taken up a great deal of the slack and are making the loans that banks typically do not.
As long as credit unions continue to provide services under the current guidelines, the federal tax exemption is appropriate. Instead of focusing on eliminating credit union exemptions, policymakers ought to reduce or revise unnecessary and burdensome regulations on all financial institutions.
Matthew Glans (firstname.lastname@example.org) is a senior policy analyst at The Heartland Institute.