Credit Union Tax Exemption Is Vital for Economic Success

As Americans continue to pick up the pieces from COVID-19, bank lobbyists remain persistent in trying to eliminate competition. These banking trade groups have engaged in spurious attacks on credit unions’ tax exemption, calling for its elimination.

But, what would happen if the tax exemption were eliminated? A new study examines this and found that the absence of the credit union tax exemption would deprive communities of a trusted financial partner and be detrimental to all consumers across the country.

In the wake of the pandemic, credit unions, which are not-for-profit cooperative financial institutions, have clearly shown their commitment to consumers and to the collective goal of fostering a healthy, responsible and successful financial marketplace.

Credit unions are vital to spurring economic growth, especially for American households and mom-and-pop businesses, and operate purely to serve the needs of their communities. Due to their non-profit cooperative structure, credit unions’ tax exempt status has been consistently reaffirmed by the IRS, Treasury Department and even Congress. This allows credit unions to focus on providing consumers with better rates, lower fees, and going above and beyond to serve the communities in which they operate.

A new study from Dr. Robert M. Feinberg of American University and Dr. Douglas Meade of the Interindustry Economic Research Fund found that removing the credit union industry’s tax exempt status would reduce economic activity by a whopping $120 billion over 10 years and cost the federal government $56 billion in tax revenue. The independent study was commissioned by NAFCU.

Even more alarming, removing the tax-exempt status would eliminate nearly 80,000 jobs per year over a decade, undercutting the nascent economic recovery and plunging scores of already struggling working Americans into financial distress.

For these reasons alone, Congress should reject any call to eliminate the credit union tax exemption.

The study also examined the deeply rooted benefits of credit unions.

To add to the long list of reasons why credit unions are advantageous to their 127 million members and consumers as a whole, the study revealed that the tax exemption status benefits all households to the tune of $15 billion annually. The loss of these benefits would be particularly acute in minority and rural communities. Among minority depository institutions, there are currently over three times as many credit unions as there are banks. And while banks have reduced the number of branches in rural areas by 10% since 2012, credit unions have grown their rural branch network over that time.

Feinberg and Meade presented data showing that consumers with savings, checking and money market accounts at credit unions earned interest at a rate that was 61% higher than what would be earned at a bank. Direct benefits to credit union members averaged $7.2 billion annually over the last decade, while non-members who accrue benefit from the competitive influence of credit unions on for-profit institutions saw an even greater $8.1 billion in benefits per year.

In addition, consumers benefit by obtaining better rates on new and used car loans when the loan is obtained through their credit union; credit union rates are 34% lower than bank rates. Credit card and unsecured loan rates are also 10% lower; related to the constantly evolving housing market, real estate loans are 3% lower at credit unions. The study also found that without credit unions, banks would be charging consumers higher rates.

It’s also worth noting that while banks continue to mislead lawmakers on the importance of credit unions’ tax exemption status, they also neglect to point out the tens of billions of dollars in annual tax cuts they receive under the 2017 Tax Cuts and Jobs Act. Not to mention that nearly one-third of banks are Subchapter S corporations that do not even pay corporate income taxes. The banking industry has even accumulated over $240 billion in fines related to consumer exploitation after the 2008 financial crisis, as mentioned in a Keefe, Bruyette & Woods report.

More consumers are opting to meet their financial services needs from credit unions because they’ve seen how credit unions go the extra mile, especially in times of need. During the pandemic crisis, credit unions helped numerous Main Street small businesses, many of which did not have existing banking relationships, access the Small Business Administration’s Paycheck Protection Program.

At a time when financial soundness is at the forefront of economic recovery, protecting consumer choice and promoting competition within financial services is critical. If lawmakers maintain credit unions’ tax exemption status, the benefits will be instrumental in reviving the economy and contributing to the financial success of all Americans.

Dan Berger is president/CEO of NAFCU in Washington, D.C.