Eliminating credit union tax exemption bad public policy

BY STEVE POCIASK

Some banks are asking state legislators and local officials to pass resolutions calling on the U.S. Congress to eliminate the nonprofit status of credit unions, effectively imposing new taxes on the banks’ smallest of rivals. The “ask” smacks of protectionism, the arguments for legislative change are weak, and state lawmakers should not fall for it.

Credit unions are member-owned, not-for-profit institutions that plow each dollar of surplus back to their members — who are consumers. Credit unions have no shareholders, have no equity investors and are served by volunteer boards. Since credit unions plow their retained earnings back into their member-owned entities, there really are no real profits to tax. Instead, credit union members have their benefits taxed at their personal income tax rates. If credit unions are taxed upfront, as banks have suggested, the result would be double-taxation of credit union members.

Banks are for-profit, have private investors and stockholders, can make lavish payments to board members, and dividends to their stockholders. They make profits that are taxable. As for bank consumers, they pay taxes only once in the form of personal income tax, just as credit union members currently do. Paying once is enough.

Will the bank’s plan of eliminating the credit union tax exemption help Americans? The Congressional Joint Committee on Taxation estimated the exemption cost taxpayers $500 million in taxes in 2012. Because credit unions tend to offer higher interest rates on member deposits and lower rates on member loans compared to banks, consumers get $8.1 billion more in benefits than they would get from banks. Therefore, eliminating the nonprofit status of credit unions could cost consumers $16 for every $1 of taxes saved.

That would be a really bad deal for consumers, taxpayers and voters.

Banks are not in need of protection from competition. In fact, credit unions account for only 6 percent of the market’s financial assets, with the remainder being held by banks. Credit unions operate with lower net charge-offs and almost one-third of the delinquency rate of banks, making credit unions a much safer place for consumers to put their savings. Yet, if the taxexemption were eliminated, the consequences would be clear — it would cause member benefits to dissipate, leading credit unions to "demutualize" and reduce them to the same behavior as banks, as well as increasing market concentration for the "too big to fail" banking industry. That would expose taxpayers and depositors to even more risks, not less.

The banks’ goal is this — use the legislative process to destroy competition. Calling on state legislators to pass resolutions in support of higher taxes is the path to achieving this goal. State and federal legislators should not fall for it.

Moreover, public policy should encourage competition and not protect competitors. In the midst of “too big to fail” banks, credit unions provide a necessary choice for consumers. Let them compete in the marketplace for customers and not for public policy favors. PB

Steve Pociask President American Consumer Institute Center for Citizen Research steve@theamericanconsumer.org