NEW YORK–A former chief economist of the U.S. Department of Labor who is now an adjunct professor at George Washington University has called for an end to the credit union tax exemption.
Writing in U.S. News & World Report, Diana Furchgott-Roth said that one “principle of taxation is treating similar businesses in a similar manner. That does not always happen, and tax reform presents the opportunity to get it right. For instance, credit unions are exempt from income taxes, even though they function in a similar manner to banks, which are taxed. This makes no sense.”
Although the first credit union began operating in the U.S. in 1909, Furchgott-Rott said credit unions were “set up in the 1930s as small community organizations, when many people had limited access to capital.” She went on to say the Federal Credit Union Act in 1934 limited CU membership to people having a “common bond,” before noting the Credit Union Membership Access Act of 1998 provided for “additional expansion.”
Today, said Furchgott-Rott, 281 CUs have assets of more than $1 billion and “even though these institutions account for 4% of credit unions, they take up about three quarters of the tax benefit.”
“One reason for the tax-exempt status was for credit unions to return funds to members,” wrote Furchgott-Rott. “Some are using the funds for this purpose. Others, however, are using them for mass marketing and aggressive growth that should not be subsidized by taxpayers.”
As examples, Furchgott-Rott pointed to the $120-million sponsorship by The Golden 1 Credit Union in California of the NBA’s Sacramento Kings, and of Navy Federal’s commercials that appear during broadcasts of Monday Night Football, which she said are “advertising tactics similar to for-profit corporations such as Apple, McDonald's and GM.”
Furchgott-Rott said the CU tax exemption is supposed to enable credit unions to provide lower-cost loans and credit to low- and moderate-income households, but cited a GAO analysis she said found that credit unions served a slightly lower proportion of households with low or moderate incomes compared to banks. To illustrate her point, she said Wings Financial CU advertises loans for “toys” such as private aircraft and boats, while Technology CU will underwrite mortgages up to $8 million while providing portfolio management services.
Finally, Furchgott-Rott noted credit unions have been buying banks, with Florida’s Achieva Credit Union setting up a consulting service on such acquisitions, which she said is “no different than corporate inversions, except that no company has moved to Ireland.”
“Credit unions were originally given tax-exempt status so that they would service lower-income individuals, because banks were not doing so,” wrote Furchgott-Rott, who is also a senior fellow at the Manhattan Institute. “The situation has now changed, and the tax law should change with it. As Congress proceeds with tax reform, members should consider uprooting this outdated exemption and no longer picking winners and losers. Taxpayers should not have to subsidize a credit union's name on a stadium, or people's purchases of aircraft and boats.”