Banks Urge Congress to Review Credit Union Exemption

February 21, 2018

Bank associations representing every state in the country sent a letter to Senate Finance Committee Chairman Orrin Hatch (R-Utah) on Tuesday, encouraging Congress to review the tax exemption given to credit unions. Unlike banks, which are subject to corporate income taxes, credit unions are exempt; but the exemption, which dates to the Great Depression-era, has been under increasing scrutiny as the financial sector has changed over the last several decades. As the letter emphasizes, it would be useful for lawmakers to reexamine the extent to which credit unions currently fulfill their original, tax-exempt purpose and to resolve any occurrences of special tax treatment.

As we have written previously, credit unions were exempted from paying corporate income taxes in 1934, with the understanding that they would: 1) help unbanked, lower-income individuals, 2) restrict their customer base, and 3) avoid high-risk, high-return investments. The Joint Committee of Taxation estimates that exempting credit unions from taxation for fulfilling this purpose will cost $2.9 billion in 2018 in terms of lost corporate income tax revenue.

An indication that Congress might revisit the exemption came earlier this year, when Chairman Hatch sent a letter to the National Credit Union Administration (NCUA), the federal agency that regulates credit unions. In it, he expressed concern “that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose.” It went on to outline several ways that credit unions seem to have strayed and requested that the NCUA provide information to help the committee better understand the agency’s oversight of credit union activity.

It was the Chairman’s letter that prompted 52 state bankers associations to urge congressional review of the credit union tax exemption issue. In their letter to the Chairman, they say there is no reason certain “credit unions, which act and look just like the taxpaying banks they compete with, should be completely free of income taxation,” and that the exemption’s “public policy justification disappeared long ago.” They explain that over the past decade, certain credit unions have undergone significant growth in size and in scope, appear to have little distinction from banks, and largely engage in activities like that of their taxed competitors. The bankers associations suggest that Congress should resolve any instances of special treatment by applying the tax code equally to all financial institutions that engage in similar activities.  

If, after receiving information about the NCUA’s oversight activity, Congress finds that certain credit unions have strayed from their intended function and now resemble taxed banks, their exemption would represent a disparity across similar economic activity created by the tax code. This shows the importance of regular congressional review of all tax expenditures, as it could reveal areas in need of reform.

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