The latest taxation flare up

Structural and economic reasons the credit union exemption is a good idea.

The debate about the credit union tax exemption periodically flares up, the most recent episode prompted by remarks by Senator Orrin Hatch (R-UT). (Read NCUA Board Chair Mark McWatters letter in response.) The complaint is that credit unions have evolved into nearly identical financial institutions as banks and, therefore, have an unfair advantage when competing with banks.

The emotion regarding the credit union tax exemption is noteworthy given that other industries have tax exempt not-for-profit participants as well as for profit taxed entities. For example, we have both for-profit and tax-exempt, not-for-profit universities. Another example is hospitals, where for-profit institutions and tax-exempt, not-for-profit organizations also compete in the marketplace. However, like credit unions, non-profit universities and hospitals have their own tax policy challenges: Recent tax reform added a tax on very large university endowments, and many states have tried to revoke the state property tax exemption on hospitals that aren’t providing enough charity care.

The key difference in tax policy between the institutions in these other industries is not that the tax-exempt offer a different array of services compared to their taxable peers. Rather, they have a different ownership structure—a for-profit has owners who receive any profits generated by the organization’s activities, whereas a not-for-profit does not. Credit unions do not have stockholders; they are member-owned. Any and all financial benefits of the credit union belong to its member-owners.


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