Sen. Tom Coburn (R-Okla.) recommended eliminating the "unexplainable" credit union tax exemption in a new report on the tax code released on Tuesday.
"Congress should eliminate the tax-exempt status of credit unions as part of comprehensive tax reform, a process by which members of credit unions and non-members alike will undoubtedly benefit from the bounty of enhanced economic growth," Coburn, a member of the Senate Banking Committee, wrote in the report titled, "Tax Decoder."
Coburn called credit unions' tax-exempt status a skewed policy that benefits a select few at the expense of the many, costing taxpayers an estimated $2.1 billion in FY2014 and $11.9 billion from FY2014-2018.
"Supporters of the tax exemption claim that despite deregulation, credit unions are still unique depository institutions. However, the Government Accountability Office notes that 'as the credit union industry has evolved, the historical distinction between credit unions and other depository institutions has continued to blur,'" Coburn's report said.
"Moreover, consolidation in the industry has resulted in the more than 100-fold increase of credit unions with more than $1 billion in assets over the last 20 years. As of 2012, more than half of the total assets held by the industry are controlled by fewer than 200 credit unions (or 2% of all credit unions)," the report also said.
Coburn, who leaves Congress at the end of the year, argued the current credit union model is not consistent with the original justification of the special tax treatment for credit unions.
"Instead, 'the principal justification for the tax exemption would seem to be that it already exists and, therefore, removing it could adversely impact thousands of institutions and their customers,' as noted by the Tax Foundation," Coburn wrote.
Coburn said the power of political constituency and the momentum of the status quo has helped the tax-exempt status survive.
In response to the report, CUNA President/CEO Jim Nussle said Coburn is wrong and uninformed.
"Our tax status is based on the structure of credit unions – as not-for-profit, member-owned, volunteer-led financial institutions. It is not based on the products or services a credit union offers. Sen. Coburn's report also reveals little understanding of how credit unions differ from banks. At a bank, the beneficiaries of the bank's services are the shareholders – who expect as much profit as possible be returned to them from bank customers," Nussle said.
"At a credit union, the member-owners are the beneficiaries. Because of the cooperative ownership structure, any excess earnings of a credit union are redirected back to members in the form of lower loan interest rates and higher savings yields," he added.
Nussle cited CUNA's research showing that credit union members in the year ending June 2014 received financial benefits of nearly $6 billion.
"Further, the competitive pressure credit unions place on the financial services marketplace, for lower loan rates and higher savings return, benefits all consumers," he said.
Nussle mentioned that the American Customer Satisfaction Index ranked credit unions No. 1 in customer satisfaction among financial institutions for the seventh year in a row.
NAFCU President/CEO Dan Berger also responded to the report, firing off a letter to Coburn Wednesday that defended the exemption.
"Altering the tax status of credit unions would have a devastating impact not only on credit union members across the country, but also on consumers and small businesses in general," Berger wrote, citing an independent study commissioned by NAFCU. "Eliminating the credit union tax exemption would result in the loss of 150,000 jobs a year, a shrinking of the GDP, and a net loss of revenue to the federal government."
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