Tax Foundation: Credit Unions Don’t Deserve Tax Exemption
Long-time critic of credit unions contends that U.S. cannot afford lost revenue
Credit unions do not deserve—and the U.S. cannot afford—the credit union tax exemption, Scott Hodge, president emeritus and senior policy advisor at the Tax Foundation, wrote in a scathing report issued this week.
“Fairness and equity demand that credit unions be put on the same tax footing as the banks they compete with,” Hodge wrote in a report titled “After 90 Years, it is Time to Wean Credit Unions Off Tax Subsidies,” and published by the Tax Foundation. He added, “In an era of $2 trillion deficits, subsidizing credit unions is a luxury taxpayers can no longer afford.”
The Tax Foundation, a conservative think tank, has criticized the credit union tax exemption for many years. However, in his new report, Hodge attacked the issue with added vitriol.
He wrote that regulators and lawmakers have permitted credit unions to behave like banks, so “equity, fairness and public finance” require that they be taxed like banks.
Hodge contends that credit unions are supposed to focus on people who are underserved and of modest means, but that the financial institutions are not required to collect or report data showing whether they are fulfilling that goal.
In the paper, Hodge also wrote that:
Mobile and online banking have made the rules governing fields of membership and common bonds meaningless.
Any figures showing the cost of the tax exemption do not paint an accurate picture of how much credit unions actually save as a result of the exemption. Federal credit unions save significant administrative costs by not having to file state and federal income tax returns.
Credit unions are exempt from the Community Reinvestment Act, so they save additional administrative costs.
Studies have shown that competition from credit unions causes banks to reduce their interest rates and fees. Those reduced fees result in lower profits for banks. “Fewer profits mean less staffing, fewer services, and less tax revenues for the government.”
More than half of all credit unions have been designated “low-income” institutions, a meaningless term. “This designation appears to be little more than a signaling device to allow credit unions (and NCUA) to claim they are serving underserved populations without having to provide any documentation to back it up.” The Congressional Federal Credit Union, which serves members of Congress and their staff members, has been a low-income credit union since 2022. Members of Congress are “hardly low-income customers.”
Hodge also expressed concern about the recent trend of credit unions purchasing banks. He wrote that credit unions are “ideal buyers,” since they tend to be all-cash purchasers. Since many community banks are family-owned or have a small number of shareholders, they prefer a cash deal, according to Hodge. He said that credit unions can offer a higher price for a bank purchase since they do not have to worry about tax implications.
Hodge added that in such a deal, the bank is dissolved and becomes part of the nonprofit credit union. “While the revenue losses might not be large for state and federal treasuries, they are still a troubling consequence of allowing such deals,” he wrote.