You may not even realize this, but your credit union doesn’t pay federal (corporate) income tax. The law recognizes that credit unions operate in unique ways that serve the public good and thus merit tax exemption. Individuals in a few organizations (bankers and their trade associations) are asking legislators to tax credit unions. You, as a member and a taxpayer, may wonder if the tax exemption should continue. We think if you know the history and purpose of the exemption, you’ll understand why it’s appropriate that credit unions are and should remain income tax-exempt.
Credit Unions are Different
Credit unions are not-for-profit cooperatives, serving members within defined fields of membership. The field of membership may include employees of a county, school district, company or companies, or members of a church, community, or communities. You and other members are part-owners of your credit union. Your savings are called shares and earn dividends because they’re your share in the credit union. Credit unions were created to provide financial services in a democratic, not-for-profit, cooperative manner-that is, with member ownership and control. Those characteristics are the foundation of the tax exemption, thereby qualifying credit unions for a not-for-profit tax-exempt status.
Stockholders own banks whose primary business objective is to pay those stockholders big dividends. That’s why bank management strives to increase profits to pay stockholders high returns. Bank customers are income sources for stockholders. Banks suggest that taxpayers sacrifice to promote and develop credit unions because they are tax exempt. That’s not the case. In fact, all taxpayers, whether members or not, benefit from the presence of credit unions in the marketplace.
Credit union competition helps keep bank prices lower. For example, credit unions offering credit cards now charge an average three to four percentage points lower interest than other lenders. Can you imagine how expensive other lenders would make credit cards if they didn’t have to contend with the moderating effect of credit union rates? The economic benefit to all consumers, plus long standing support for the credit union way of operating, is why the Consumer Federation of America-an independent consumer body-has identified maintaining the credit union tax exemption as a top legislative priority.
While delivering competitive benefits to consumers, credit unions don’t harm competitors. The ABA says the tax exemption gives credit unions an unfair and unwarranted privilege that puts banks at a competitive disadvantage. If that were true, why are banks reporting record growth and profits? Total credit union assets are a small fraction of total bank assets. Even the General Accounting Office, a federal authority, reports that credit unions “are not a serious competitive threat to taxed competitors.”
Tax Repercussions
If credit unions did pay income tax, the net contribution to state and federal treasuries would make not one penny difference in the taxes you must pay as an individual. But the effect such taxes would have on how much you pay for credit union loans for cars, education, and houses, or the dividends you earn on credit union savings, would be significant.
Credit Unions Contribute Now
All taxpayers have legitimate concerns about the federal budget deficit. Credit unions and members already participate in reducing that shortfall. You pay taxes on dividends your credit union accounts earn. Banks claim tax exemption is related to service offerings, business success, or membership numbers or area. But those elements have nothing to do with the tax status of credit unions. Credit unions are not-for-profit, democratic, financial cooperatives that serve members. As long as that’s true, they’re earning their tax status.
