There are many distinguishing differences among credit unions and banks. The most controversial and prominent is the differences in taxation of the two institutions. While banks are required to pay all taxes of any corporation, credit unions are except from having to pay federal and state income taxes. Most banks and associations that govern them are pushing for the federal government to require credit unions to pay full income taxes. The most common arguments in favor of credit union taxation are the unfair market that credit union’s create because of tax exemption, the federal government is loosing valuable income from the tax-exempt status, and if saving and loan cooperatives should have to pay taxes then so should credit unions.
The first reason banks want credit unions to be forced to pay income taxes is to create a fair market of competition between the two institutions. Keith Leggett, a senior economist with the American Bankers Association, argues that community credit unions have a competitive advantage over community banks due to their exempt status. He supports this claim by giving several examples, showing that “over the last 21 years, the market share of household assets controlled by banks and savings institutions fell by more than half, from 27 percent to 12.7 percent,” while credit unions actually grew in assets. He goes on to show that in some communities, credit unions are actually larger than banks and control more of the market. Leggett claims that this control and their success while banks have failed can be attributed to their exempt status. Opposing this argument, credit unions claim that they are completely different institutions than banks and should not be governed and taxed in the same manner. Credit unions claim that it is not an equal comparison when claiming that tax exemption is unfair for credit unions and not banks. Credit union are member owned cooperatives, with a volunteer board of directors, unlike banks who have their shareholder’s and board member’s interests in mind before those of their customers. Credit unions are considered “not-for-profit” because all profit at the end of each period are paid to the members (depositors), rather than shareholders. They also claim that they do not pose any threat to banks, considering credit unions “account for less than 5% of financial assets, and the largest bank alone has assets greater than those of all 9,400 credit unions combined.” These differences put credit unions in a completely different category than banks and the two cannot be compared. I agree with the credit union’s view on this issue, considering their major differences between the institutions causing difficulty in judging the fairness of the rules governing them.
The second major reason that the banking community believes that credit unions should be taxed is the creation a higher income for the federal and state governments. Bankers believe that the extra revenue generated by the government would benefit all citizens and would be a positive move for everyone. Leggett again argues for taxation claiming that the revenue from the income taxes California’s credit unions could exceed $10 million annually, and even more in states such as New York. While he does not give exact figures, he also points out that the federal government would also greatly benefit from income tax revenue of credit unions. While credit unions agree that taxation would give extra revenue for public works, they argue that they are already providing a public good by offering lower loan interests rates and high dividend rates on deposits, specifically assisting lower-income citizens. The Credit Union National Association (CUNA) claims that, if credit unions were subject to income taxes, “customers would be required to pay higher feesand the victims of such pressures would be small loans, financial counseling, and small share draft accounts and loan rebates.” They claim that credit unions would be forced to raise their fees and cause several small credit unions to close their doors to the local communities. Credit unions were chartered, and originally given this tax exempt status because of their services to society, especially to the low-income sectors. While society would profit from credit union’s taxation, it would cause less competition and a loss of valuable services to local and poor communities. Therefore, based on the fact that taxation would do more harm than good to a society, I must agree with the credit unions on this issue.
Finally, banks argue that savings and loans, which are mutual cooperatives in the banking industry, are forced to pay income taxes, and credit unions should be forced to do the same. In a letter to the editor of the Business Review, the CEO of a former saving and loan cooperative, John Scarchilli writes “In 1952, federal legislation was passed that required mutual institutions savings and loans, to start paying federal income taxes.” He also agrees that the industry was concerned with the legislation, but knew that it was needed, and that savings and loans still survive even though this legislation has passed. The credit union community argues this claim by pointing out that while they do not contribute income taxes to the federal and state governments, they also do not ask for any assistance from them, as savings and loans did. The Utah League of Credit Unions explains that “in credit union’s 100-year history, not a single taxpayer dollar has been used to bail out credit unions in financial trouble, as compared to savings and loans. Credit unions fund their own insurance fund through the National Credit Union Administration (NCUA).” Credit unions justify savings and loans paying taxes because they use federal tax dollars to insure themselves, while credit unions do not. For this reason, I must agree with the credit union community on this issue of concerning credit union’s tax-exempt status.
The banking industry is fighting for credit unions to be required to pay income taxes based on the arguments that their tax-exempt status creates and unfair market for competition, governments are loosing valuable financial income due to the exemption, and since savings and loans have to pay taxes, so should credit unions. Credit unions argue that because they are completely different, “not-for profit” institutions, give special services that banks can’t offer, and are not subsidized by the government, they should be exempt from these taxes. After reviewing the facts and the arguments from both sides, I agree with the credit unions. A tax on them would be a tax on credit union members and a blow to communities supported by them.