Keep the Credit Union Tax Exemption

By Steve Pociask

With deficit reduction firmly on the minds of politicians in Washington these days, some in Congress are now talking about a blank-slate approach that would force a review of every tax deduction and potentially bring about tax reform. One recent suggestion is that tax exemptions for credit unions should be ended and could not survive such a review. However, the benefits provided by credit unions to consumers far exceed the taxes foregone from the tax exemption.

Before I get into the details, here is some background on the issue. Credit unions are member-owned institutions that give each dollar of surplus back to their customers — that is, their members — in the form of lower interest rates on loans and higher rates on deposits. Credit unions have no shareholders, have no equity investors, and are served by volunteer boards. Since credit unions make no profits, there is nothing to tax. Income earned by credit-union members is taxed at the same rates as income earned by bank customers.

However, the proposed elimination of nonprofit status would mean that credit-union members are taxed twice: The first tax would apply to the retained earnings that go to benefit the credit union’s members through better interest rates; and the second would apply to the income members earn.

Things are different for banks. Banks are for-profit, have private investors, can have lavishly paid boards of directors, and pay dividends to stockholders. They make profits that are taxable. However, the consumers who benefit from banking services pay taxes once — just as credit-union members currently do: personal income taxes on interest earned.

The idea of ending the tax exemption is not about lowering the deficit; it is about preventing credit unions from competing with banks. This is obvious enough, given that banks are the ones calling for the taxation of credit unions.

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