WASHINGTON–The Tax Foundation has issued a research paper calling for the end of the credit union tax exemption.
In an analysis written by Jessica York of the Tax Foundation, an independent tax policy nonprofit, suggested “evidence indicates that the credit union industry has strayed from its original, tax-exempt purpose and is in direct competition with its untaxed competitors,” and added, “The exemption cannot be justified on the grounds of sound tax policy, is not neutral, and leads to an inefficient allocation of resources.”
The paper states the Joint Committee on Taxation (JCT) estimates that the federal tax exemption for credit union income will reduce federal revenue by $1.9 billion in 2019, and that for the five-year period from 2018 to 2022, the JCT estimates the cost at nearly $10 billion.
The paper further argues the original purpose of credit unions shows that they generally have three distinguishing characteristics to justify their exemption from federal income taxes: a restricted customer base, low- and middle-income members, and types of services offered, and that those characteristics are no longer true.
‘Significant Changes’
“Since the inception of the credit union tax exemption, the financial sector has undergone significant changes,” the paper states. “Likewise, research has determined that “the credit union industry has evolved over time such that many of the financial services that credit unions now provide are similar to those offered by banks and savings associations.”
The paper further argues NCUA data show a “long-running trend” of credit unions with at least $1 billion in assets experiencing the most growth in loans, membership, and net worth, with the largest credit unions holding 66% of credit union assets, or $957.8 billion.
“This data shows that credit unions are growing rapidly, which means that the revenue lost from the tax exemption is likewise growing,” the paper states. “Given the changes in the financial sector, it is useful to examine the extent to which credit unions fulfill their original purpose—serving low- to middle-income customers with a common bond and avoiding risky investments in favor of smaller, safer investments—to see whether continued tax exemption is warranted.
‘Not Justifiable’
“The tax exemption for credit unions is not justifiable under principles of sound tax policy, nor under the rubric that lawmakers have used in the past to evaluate the tax-exempt status of financial institutions,” the paper continues. “Credit unions compete with banks for similar customers and offer similar financial services but do so with the benefit of not paying the taxes that their competition must pay. Ending this disparate treatment would improve the neutrality of the tax code and provide revenue that could be used to make pro-growth changes.”
The full report can be found here.