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A study released by America’s Credit Unions estimated the cost of eliminating the credit union tax exemption would cost consumers about $13.8 billion a year, but it made no attempt to quantify how much tax would be levied on credit unions.
The study was written by two economists with long track histories in the field: Robert Feinberg of American University in Washington, D.C., and Douglas S. Meade, director of Research at Inforum, an economics modeling group in Maryland.
They set out to measure the cost of lost savings to consumers if the tax exemption were eliminated. They based their calculations on the amount of consumer benefits from credit unions offering lower loan rates and higher savings rates, and assumed that the credit union difference would disappear entirely if the tax exemption were removed.
The model estimated the total direct and indirect losses of personal income and consumption would be $13.8 billion per year. That amount, in turn, “would lead to a reduction in GDP of about $26.6 billion per year and employment losses of approximately 82,000 jobs per year over the next decade,” the researchers said.
“This reduction in personal income also leads to a loss of $3.3 billion per year in federal income tax revenue,” they said.
This last point raised the question: How big, after all, is the tax bill for credit unions? That end of the equation is not mentioned in the report, but Curt Long, AmCU’s deputy chief economist, said the OMB estimated it would have been near $3.3 billion in 2023.
A CU Times analysis found the same number by applying the 21% corporate tax rate to credit union net income for the year. Our analysis also tried to see how that level of taxation would have affected credit unions over five years, from 2019 through 2023. We found:
- The 4,690 credit unions would have paid $3.3 billion in taxes in 2023, and a cumulative $17.3 billion over the five years.
- From 2019 to 2023, 65 credit unions fell below the NCUA’s 7% threshold for “well capitalized” credit unions. Applying a 21% tax, 107 credit unions would have fallen below the 7% threshold from 2019 to 2023.
- Returns on average assets would have fallen an average of 18 basis points per year from 2019 to 2023. ROA in 2023 was 0.69%, but would have fallen to 0.54% after taxes.
- Net worth ratios fell an average of 14 basis points per year, or a cumulative 68 bps drop over five years. In 2023, the net worth ratio fell from 10.91% before taxes to 10.23% after taxes.
So, yes, we have numbers. But are they big or small?
“That's a pretty traumatic drop,” Long said of the drop in ROA. “A swing like that from one year to the next doesn't happen outside of a recession.”
Long said that removing tax exemptions led to “a massive reduction in credit unions” in Australia and Canada.
“If you remove the tax exemption, the natural response for credit unions is going to be a migration to banks,” Long said.
“A lot of the benefits that right now are going to households are instead going to go to bank shareholders. And that is going to erode economic activity, which will affect GDP. It will affect jobs,” he said.
CU Times also asked the NCUA of its opinion on the effect of a $3.3 billion tax bill for credit unions if the exemption went away.
In an email, the NCUA sent a response echoing a Jan. 27 statement by NCUA Chair Kyle Hauptman.
“Congress and the states have authority over taxes, for all the various types of not-for-profit entities, credit unions included,” NCUA said. “If the tax exemption for credit unions were removed that would likely have a direct effect on the safety and soundness of credit unions, especially smaller credit unions.”
Contact Jim DuPlessis at [email protected].
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