Tax or No Tax?

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 losing

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 fees…and 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