Credit Unions Say “Don’t Tax Me, Tax the Banks Behind the Tree”

December 7, 2012

We haven’t even started the real debate over eliminating unnecessary tax breaks in order to overhaul the tax code and the interest groups whose livelihoods depend on tax breaks are already gearing up to defend their piece of the tax pie.

Today, it's the credit unions saying "not me."

The other day I published a short study identifying the least economically harmful ways of raising revenues for the federal government. One of my recommendations was to eliminate the tax exempt status of credit unions since their tax-free status allows them to unfairly compete against private community banks and larger publicly traded financial institutions.

This was the major finding of a 2005 Tax Foundation study (Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions) that estimated the tax loss to the federal Treasury at $31.3 billion over ten years. Moreover, while credit unions were given their tax exempt status in 1937 to help them serve the poor, our study found that “there is no solid evidence that credit unions have turned the subsidy into service for low-income people.”

Our study concluded that:

Today credit unions continue to grow faster than banks, have little practical limitations on membership, and make business loans that increasingly have no limits on who can borrow, how much or for what purpose. Even the limits that Congress has imposed, as they otherwise removed limits on credit union markets and competition, have broad loopholes and remain under serious challenge by the credit union industry. Today the principal justification for the tax exemption would seem to be that it already exists and, therefore, removing it could adversely impact thousands of institutions and their customers.

We sure got that last point right. Yesterday, I received a letter from B. Dan Berger, Executive Vice President for Government Affairs at the National Association of Federal Credit Unions, who was eager to point out that the benefits that credit unions confer on the economy are far greater than the loss of revenues to the federal Treasury.

According to Berger, the tax loss to the Treasury is only $500 million per year, while a NAFCU-commissioned study “quantifies the benefits to all consumers – both credit union members and bank customers – of having a credit union presence in the financial marketplace at nearly $10 billion per year.” Indeed, the study found that “removing the credit union tax exemption would actually cost the federal government $15 billion in lost income tax revenue over 10 years, due to the negative impact it would have on the economy.”

While the study purports to show the benefits of the tax exemption, what it really does is quantify the built-in cost to consumers of taxing private financial institutions. We know that the real economic cost of business taxes fall either on consumers through higher prices, workers through lower wages, or owners through lower share prices. In the case of financial institutions, the FAFCU study would indicate that the bulk of the benefits of removing the income tax flows largely to consumers.

Thus, it seems to me that if a small tax exemption for credit unions produces 20-times the benefits to consumers and the economy, then imagine the benefits to the economy if we were to exempt all financial institutions from the income tax.


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