Back Down, Bankers – Credit Union Tax Exemption Has Merit (2024)

The bankersare up to their same old shenanigans when it comes totheir attacks on credit unions, as is evidenced in a recent BankThink editorial.

As Congress begins the process of reviewing and rewriting the nation's tax code,the banking industry is crying foul against the nation's credit unions for myriad reasons– all without merit.

They claim the "Blank Slate" tax reform approach being talked about on Capitol Hill should threaten the credit union tax exemption, yet over the district work period in August a number of key lawmakers from across the country threw their support behind credit unions and their 96 million members.

Bankers claim that credit unions' federal income tax-exempt statusprovidesan unfair advantage. Theyalsoclaim that credit unions are getting in the way of their lending and say credit unions don't need access to more capital for their members.

Let'sset the record straight.

Credit unions do pay taxes. Though credit unions are exempt from federal income taxes, they still pay many taxes, like payroll and other state and local taxes.What the bankers aren't telling you is that over one-third ofbanksare Subchapter S corporations and don't pay federal income taxat the corporate level either.

Bankers complain that credit unions have an unfair advantage – if so, why have only two banks converted to credit unions, while over 30 credit unions have converted to banks justin the past 15 years?

Furthermore, while the bankers complain that credit unions are affecting their lending, the truth is far different. Astudy commissioned by the Small Business Administration's Office of Advocacyin 2011found that bank business lending was largely unaffected by changes in credit unions' business lending, and credit unions' business lending can actually help offset declines in bank business lending during a recession. The study shows that during the 2007-2010 financialcrisis, while banks'small business lending decreased, credit union business lending increasedas a percentage of their assets.Clearly, credit unionscontinued to serveMain Streetas banks turned people away.

A report released by the Special Inspector General for the Troubled Asset Relief Program found that of the 332 banksthatparticipatedin the Treasury's small business lending fund program, 137 ofthemused more than half ofthe$4 billion disbursed by the program to help fund their exits from Tarp,not to provide much needed small business loans. Onecommunity bankerdescribedit as "…a bit of a shell game" in a 2011 Wall Street Journal article.

Credit unions benefit all Americans. A 2012 independent study released by the National Association of Federal Credit Unions shows all Americans would lose if the credit union federal income tax exemption were eliminated: There would be 150,000 lost jobs per year, higher loan rates and lower deposit rates for all consumers (not just credit union members) and a net loss of$15 billionover the next decade in federal income tax revenue.

The reality is that the credit union federal income tax exemption benefitscredit union members and bank customers.Credit unions provide a check on banks through their competitive rates and fees. In fact,theexemption results in more than $10 billion in economic benefits annually for all Americans according to NAFCU's landmark study on the value of the credit union tax exemption.

Furthermore, any effort to strip credit unions of their federal income tax exemption will have a drastic and immediate negative impact on more than 5.5 million current andformer militarymembers,their families and survivors. As noted in a 2013 letter to Congressby The Military Coalition, any change in the credit union tax exemption "…would be to the detriment of our armed forces members and their families and, in the long term, to military readiness."

Credit unionsexistto serve their members. Whilecredit union membership has certainlygrown since the passage of the Federal Credit Union Act in 1934, the credit unionbusiness model used then is the sameonein use today.Credit unions aren't in businessfor profit. They are run by their members, for their members – not shareholders. Whatever "earnings" are made at a credit union go right back toits members in the form ofhigher dividends andlower rates and fees.

If the bankers want the advantages of being a credit union, they should convert, not try to destroy a proven,valued business model.

B. Dan Berger is president and CEO of the National Association of Federal Credit Unions.