Wednesday, March 12, 2025

Following my Client Update earlier this week on the credit union taxation issue, many of you contacted me and asked for a copy of my white paper – The Case for the Credit Union Tax Exemption – to use for cutting and pasting together a letter to send to your congressman and senators with the negotiations now underway for a tax reform bill in Congress.

In response to your response, I am providing the white paper below.  Feel free to use any of it that you feel might help you construct an effective letter to your member of Congress.

Our recommendation would be that you use an opening paragraph such as the following and then cut and paste your favorite part of this white paper as the body of your letter with some of your own editing to make it sound more like you.

On behalf of ABC Credit Union and its XXXXX members, we would like to ask your support for maintaining the credit union corporate tax exemption based upon the member-owned, not-for-profit cooperative structure of credit unions.  Realizing that tax reform is under consideration in Congress, we encourage you to see the value in maintaining this tax exemption that has been in place since passage of the Federal Credit Union Act in 1934 and has resulted in trillions of dollars in economic benefit over the last ninety years and has positively impacted the financial lives of millions.

 You can send the letter with just the above paragraph for a minimalist approach.  Or you can pick your favorite paragraphs in the white paper below to strengthen your letter before you close with the following:

Thank you for your consideration of this important issue.  ABC Credit Union and our members are appreciative of your recognition of the economic value to our members, communities, state and nation of the credit union tax exemption and encourage you to support its continuation.  If I can answer any further questions, please do not hesitate to reach out to me.

 Now is the time to write such a letter if you are so inclined.  While your own wording is always best, please feel free to utilize the template below from our white paper to help in constructing your letter.

THE CASE FOR THE CREDIT UNION TAX EXEMPTION

The credit union tax exemption is good public policy.  Its continuation will benefit the American economy, small businesses and consumers with lower cost financial services, more investment in their communities and greater competitive choice in the marketplace.

Let’s take a quick look at what the tax exemption is not based upon before we move to the solid reasons why it was originally put in the law and why it remains there.

In place by law since the enactment of the Federal Credit Union Act by Congress in 1934, it is important to recognize that the credit union tax exemption is not based upon a credit union’s size, product offerings or some notion that they were created only to serve low-income members that for-profit banks would rather not have to take the risk to serve.

Further, while credit unions do indeed make a difference in the lives of folks from all walks of life (including those of “modest means” as referenced in the Federal Credit Union Act) and many of those who have often been overlooked by the traditional for-profit banking sector, nowhere in the statute does it say that credit unions are granted their tax exemption solely because they meet that noble social need.  The accomplishment of such a “provident purpose” in the public arena (also a term referenced as a credit union outcome) is a result of the credit union tax exemption impact – not the reason it was granted.

Likewise, even though credit unions have stepped in to fill the credit void for small businesses whose need for $75,000 to buy equipment to start a lawn care company or $120,000 to get a local restaurant started is largely ignored by the for-profit banks who prefer a $200 million shopping center or $450 million office complex business loan, the role credit unions play for the small business community in America is not the justification for the tax exemption.  Again, meeting a growing need for small business credit is a result of the credit union tax exemption, not its reason to be.

Nor were credit unions granted the tax exemption in order that they could be no more than a company’s charitable small donor account entity that also had a very restricted sideline lending program.  Even though some banks prefer this 1930’s version of credit unions, they were not given the tax exemption because they merely provided some employer benefit that banks did not want to provide but were never really expected to impact the lives of their members in a significant way.

Then, if their purpose, size, products, services or target membership is not the reason for the tax exemption, what is the tax exemption truly based upon?  Let’s explore that question a bit.

The credit union tax exemption is based upon one primary factor – the member-owned, not-for-profit cooperative structure of credit unions.

The tax exemption has been essentially based on structure from the very beginning.  Read what Senator George W. Norris of Nebraska, author of the Federal Credit Union Act, said in the congressional record when the Federal Credit Union Act was passed.  Read the remarks of President Roosevelt at its signing.  The service to persons of modest means, the meeting of provident purpose for small depositors and borrowers, the volunteerism at its finest…these were all philosophically expected to be the results of tax exempt credit unions.  These were not the basis of the tax exemption.  The basis was, and is today, their structure.

The bankers often use a tired, worn and inaccurate analogy to say that “if it walks like a duck and quacks like a duck, then it’s a duck” when referring to their opinion that when credit unions get to be a certain size or offer a certain level of products they are “walking and quacking” like a for-profit bank and should be treated as such by the taxing authorities.

The fallacy in this analogy is that the for-profit banking industry does not have a monopoly on financial services.  Congress has extended those services to thrifts, brokerage firms, insurance companies and credit unions.  All have the right to walk and quack like a bank.  The tax treatment enters the equation when the structure of the entity offering the products and services is no longer for-profit.

When a credit union remains true to its not-for-profit, member-owned cooperative structure it is no longer a duck.  Some mistake geese for ducks, but they are structurally different.  So are banks and credit unions.  Again, it’s the structure that makes credit unions geese and not ducks – no matter how much the ducks think geese are the same.

Incidentally, when they were recognized by Congress in 1934 it was clear that credit unions were not expected to remain creatures of the 1930s without the ability to modernize with the times.  As were banks not required to remain under their depression era rules, credit unions were also envisioned to remain vital and vibrant, changing with the times in America and growing to remain relevant to their members while still staying true over the years to their cooperative, member-owned, not-for-profit structure.

You cannot separate the ability to grow and compete in the marketplace from the ability to remain safe and sound.  Simply put, credit unions were created to grow, not to wither away over time.

The increased size, product lines and membership diversification of credit unions over the years were anticipated – and even authorized – by lawmakers who clearly recognized their value in 1934.  But, as has been the case, this modernization was not intended to change the fundamental structure of credit unions as not-for-profit, member-owned financial cooperatives.  It has not.  That definition is what credit unions were in 1934.  And that is what they still are today.

From A.M.E. Church FCU to Navy Federal and in all sizes of credit unions in between, neither the size of assets nor the number of members defines whether they are truly credit unions.  It is their member-owned, not-for-profit cooperative structure that defines all credit unions – large and small.

A credit union doesn’t outgrow its credit union status when it crosses some magic threshold of asset size any more than the American Red Cross loses its non-profit status when it reaches one billion units of blood distributed or when St. Jude’s has its one millionth case of childhood cancer go into remission.  The structure defines its status, not its size and not its competitor’s opinion that it has gotten too big and should no longer qualify as a credit union or deserve its tax status as a not-for-profit cooperative.

In fact, the growth of credit unions over the decades is directly related to their success in serving their member-owners and returning their profits to them in the form of lower lending rates, lesser fees, increased savings rates and more convenient services.  This successful model has brought more credit union members and increased business.

And it is that success, evident in the consumer satisfaction ratings that have seen credit unions exceed their banking competitors for over thirty years, that is driving the banking industry obsession with the credit union tax exemption.

Although they officially opposed it, the credit union tax exemption didn’t seem to bother the banks very much in the early fledgling credit union years of the Forties and Fifties.  But once growth began in the Sixties and Seventies, becoming more dramatic in the Eighties and Nineties, the banks – despite their record profits – decided the credit union tax exemption was a problem for them.

But, when talking about the justification for the credit union tax exemption, I guess you could somewhat paraphrase a political slogan from the 1990’s – it’s the structure, stupid.

Let’s look at the U.S. economy for a few structural parallels.

In almost every industry in America there is a for-profit sector and a not-for-profit sector.  One pays corporate income tax and the other does not.  That tax treatment is structurally based, not product or size based.

There are for-profit hospitals like HCA and Tenet, while there are not-for-profit hospitals like Ascension, Trinity and Adventist.  All have emergency rooms and CAT-scans.  All serve millions of people.  One is subject to corporate taxation and the other is not.  Why?  It’s the structure.

There are for-profit power companies and not-for-profit rural electric cooperatives.  When the light switch is flipped, the power comes on.  It’s not the product that determines the tax treatment.  It’s not the size because some electric cooperatives are bigger revenue wise than some utility companies.  Again, it’s the structure.

Whether it is Gold’s Gym and the YMCA in work out facilities or Charles Schwab and COOPrinciple in investment services, there are entities offering the same products and services in the marketplace under a for-profit and a not-for-profit structure.

How about Barnes & Noble and the college Co-Op bookstore?  Or Home Depot and the local feed, seed and fertilizer agricultural co-op?

In each case the for-profit firms pay corporate income tax, and the not-for-profit firms do not.  The structure determines the tax treatment – not the size, products or services.

In fact, every for-profit enterprise in America had the option to charter originally as not-for-profit and would be exempt from federal corporate income taxation.  Even today each for-profit U.S. corporation has the opportunity under the law to convert to a cooperative, not-for-profit structure and eliminate their corporate income tax.   Almost none do.

It begs the question, if credit unions have such a competitive advantage over for-profit banks in today’s marketplace, why don’t we see banks converting into credit unions?  The reason is simple.  They want to make a profit.  Nothing wrong with that in a free enterprise system.  But, with making a profit comes the corporate income tax with it.  Again, it’s the structure.

If you took the bankers argument that because credit unions are bigger than they used to be, offer more products than they used to offer and serve a broader base of people than they originally served to its absurd extreme, it would be like the people at Nabisco saying that the Girl Scouts should be taxed like them because they are bigger than they used to be, sell more flavors than they used to sell and offer their cookies to more people than before.  That would be a ludicrous argument because everyone understands that Nabisco sells cookies for profit and the Girl Scouts sell cookies not-for-profit.  It’s not the cookies or their assorted flavors that determines their tax treatment – it’s the structure the cookies are sold under.

As stated earlier, the tax exemption came to credit unions with the Federal Credit Union Act in 1934.  Congress has met every year since then, and the bankers have complained every year to Congress about the supposed unfair advantage credit unions have with the tax exemption even though they have increased bank profits year after year.

And every year Congress, despite the bankers’ ongoing competitive complaint in which they have whined about how much the credit unions were costing them as a result of their tax advantage, has wisely chosen to take no action to remove or restrict the credit union tax exemption.

Therefore, it is safe to conclude that the credit union tax exemption is not a mere congressional oversight that they overlooked and just haven’t gotten around to correcting.  It is not a tax subsidy because, unlike subsidies, not a cent of taxpayer dollars has been sent to directly subsidize any single credit union or group of credit unions – such as was the case with  “too big to fail” TARP bank subsidies.

Now TARP, my friends…that was a tax subsidy.

Credit unions have a tax exemption based on structure, pure and simple.  It is not a subsidy, at least for anyone who truly knows the legal difference between a tax exemption and a tax subsidy.  Interestingly, you would think the recipients of TARP funds would be among those who most recognize that crucial difference.

Essentially, despite its banker critics, history has shown that the credit union tax exemption is sound and well deliberated public policy that has been in place for over eight decades with no serious congressional effort to remove it – even though the powerful banking lobby has favored its elimination each Congress since the Great Depression and have prioritized its repeal for the past thirty years.

Why?  Well, despite the banker claims of some competitor-defined unfair advantage, the fact remains that credit union competition isn’t impacting the ability of banks to make considerable profits, tax exemption or no.  This argument by the banks wanting to see credit unions taxed is because they want to remove the downward pressure on the interest rates they can charge their customers by forcing credit unions to convert to banks as well.  Nothing more, nothing less.

It is not about demanding a “level playing field” because banks rejected the not-for-profit cooperative model playing field that would have exempted them from federal income taxation when they chartered.  They chose the for-profit playing field at incorporation.  Nothing wrong with that at all.

No one wants to live in a country without the incentive of the profit margin.  And no respectable credit union leader begrudges his or her banking competitors their fairly earned profits from expanded investment options, access to the capital markets, enhanced product authorization – all allowed for banks under the law and denied credit unions – by crying for a “level playing field.”

Credit unions understood, at their time of charter, that they were playing on the not-for-profit, cooperative playing field.  There would be no stock options, highly compensated directors, unlimited business lending, access to tier two supplemental capital, ability to serve anyone who walked in the door and huge paydays when the stock sale takes place.

Credit unions are limited to a specific field of membership.  They are limited in how many business loans they can make.  They cannot access any type of capital source other than retained earnings.  Federal credit unions are limited to a 18% interest rate they can charge.  The restrictions credit unions face with their cooperative structure, under law and regulation, would put them out of business if they had to pay the same corporate tax rate their for-profit competitors had to pay and still retain those restrictions.

Banks want to tax credit unions so they can force them to become banks in order to avoid the restrictions on credit union field of membership, business lending, capital and interest rates.  The bankers know exactly what they are doing by pushing for credit union taxation, and so does Congress.  That is why the credit union tax exemption has stayed in place even though the bankers have been pushing Congress to repeal it for 84 years.

Congress has recognized that credit unions need to modernize and grow.  An independent regulator was put in place in the 1970s by Congress so that not-for-profit credit unions would not be governed by the same agencies that govern for-profit banks.  Expansion into checking accounts, IRAs, SBA lending, community development lending and mortgage lending has all been specifically authorized under congressional action since the 1970s.

In 1998, Congress even overturned a Supreme Court decision sought by banks who wanted to restrict credit union membership back to where it was in the post-depression era with an overwhelmingly approved membership access act that clearly opened the door for broader membership expansion.  The bankers opposed the approved NCUA regulations, which were implemented based on the new congressionally-approved membership expansion law, and were defeated in court when NCUA’s 1999 rules were upheld.

This tax argument is about removing or restricting competition, nothing more and nothing less.  According to an independent third party research project commissioned by the National Association of Federally Insured Credit Unions (NAFCU), American consumers and small businesses saved a total of more than $156 billion over the last ten years because credit unions were in the market and growing.  Interestingly, while credit union members saved $54 billion, over $102 billion of those consumer savings accrued to bank customers because of the fact their banks had to hold down their rates to compete with lower cost not-for-profit credit unions.  Congress has certainly recognized by protecting the credit union tax exemption since 1934 that the American consumer always benefits from more, not less, consumer choice – both for-profit and not-for-profit choice.

Those billions cited above stayed in the local communities of the members, improving their lives and the lives of those around them.  Even without a multiplier effect there is tremendous economic benefit from $156 billion going back into the hands of consumers and small businesses that use both credit unions and banks back in their hometowns and communities.

If you add even a conservative multiplier effect of five times those billions saved when they turn over upon being spent by the consumers and small businesses (and many economists use a seven times multiplier), you would be looking at a potential economic impact of over a half trillion dollars from the credit union tax exemption.

Those are not economic impact numbers that Congress disregards easily just because the banking lobby would like to cripple a competitor.

Interestingly, according to a study commissioned by the Credit Union National Association (CUNA), credit unions indeed pay taxes to support federal, state and local projects.  State chartered credit unions pay unrelated business income tax to the IRS each year.  All credit unions are subject to a 21% excise tax on excess compensation (over $1 million annually), which includes deferred compensation contributions when vested.

Credit unions pay state sales taxes, state and local privilege taxes, property tax.  In fact, annually, credit unions generated about $12.5 billion in federal taxes and $7.8 billion in state taxes through employer, excise and property taxes. And credit union members paid approximately $1.8 trillion in federal and state taxes on both the proceeds distributed and interest earned on their accounts.

Importantly, credit unions pay those taxes even as they operate under the restrictions mentioned earlier in this document.  As they do so, credit unions do not ignore the needs of persons of modest means as do so many for-profit institutions.

According to the same CUNA study referenced above, 61% of credit union members who rely primarily on their credit union as the primary financial institution they use have incomes between $25,000 and $100,000.  That compares quite favorably, particularly since credit unions only have 7% of the total deposit market and banks hold the other 93%, to the banking industry that has 54% of its much larger base of depositors that fall within those middle to lower income standards.

In actuality, it took 140 years for credit unions to grow to a total of $1.5 trillion in assets.  Banks in the United States have grown by almost $1.9 trillion in the last three years alone – a three-year growth record that begs the question of why banks are so concerned with credit unions that have grown, as an industry, over the past 25 years from 5.8% of the deposit market to just above 7%.

Now, back to taxation, let’s look a little deeper at the numbers indicating what level of revenue the federal government would get in return for the losses indicated above that the American consumer would take to make the bankers happy by taxing credit unions.

Credit union taxation at the previous 35% corporate rate was projected to only generate about $2.5 billion a year in tax revenue – a figure that is now projected to be approximately $1.8 billion annually under the new 21% corporate tax rate that began in 2018.  And that minimal amount of tax collection is before the first tax avoidance strategy would be employed by credit unions – a change in business approach that would undoubtedly be costly to those 140 million consumers and small businesses who are members of credit unions when tax strategy begins to become as important as member service strategies (as it has done at many for-profit banks whose customer satisfaction ratings fall consistently below those of their credit union competitors).

Against a federal debt of over $35 trillion, taxing credit unions for less than $2 billion a year in the name of addressing the nation’s debt is like trying to empty the Pacific Ocean with a Dasani water bottle.   With over 140 million members, it is a pretty tough political sell for the bankers to get Congress to potentially anger so many voters for such a small tax revenue return – just to make a handful of local bankers happy.

As we say down South, the juice is just not worth the squeeze politically for a member of Congress seeking re-election.

It is worth noting that the one senator who wrote a letter in 2018 about the timing being right for taxing credit unions didn’t take such a position for forty years he served in the Senate but waited until he announced he wasn’t running for re-election and would have to face his constituents who would pay the higher costs of diminished credit union competition with his home state banks.  His ‘tax the credit unions because they are growing too much’ letter has been met with virtually total silence from his congressional colleagues because almost no one seeking re-election wants to take on the percentage of those 140 million voters who live in their state or district for so little return on their political equity.

That being said, if Congress were to reverse over eighty years of proven public policy advantage to help banks avoid a competitive upward pressure on savings rates and a corresponding downward pressure on their loan rates and fees, there would definitely be an impact on credit unions and their members.

The reason protecting the tax exemption continues to be the holy grail issue for credit unions is a fundamental one.  Knowledgeable observers on both sides of the issue recognize that credit union taxation would be the end of credit unions as we know them.

It is likely that most larger credit unions would convert to banks, if taxed, in order to lose the restrictions on membership, capital access and business lending.  They would reason that, if they were going to be taxed in the same manner as for-profit banks, they deserved the “level playing field” as well.  Credit unions would feel it necessary to get out from under their many structural restrictions if they were going to pay the same tax rates as their for-profit banking brethren.

The banks would, of course, fight any effort to remove those restrictions under the credit union charter – even if there were taxes in place.  After all, the bankers would say, those credit unions who want our advantages in investment authority, products, capital and services can just convert to banks.  And most would, not because they wanted to, but because they would be forced to do so for competitive purposes.

Converting credit unions to banks is what most in the banking industry want to see anyway. This opens the door for the strongest of the banks-converted-from-credit-unions to be purchased over time.

The smaller credit unions that would be left after the conversions and buyouts would have a very hard time competing, if they are taxed, due to their size and lack of economy of scale.  The result would be exactly what the bankers want – the removal of a lower cost competitor and the increased profits that come from the ability to charge consumers higher interest and fees due to reduced competition.

On one somewhat related issue, it is important to respond to one of the most recent and outlandish claim by bankers – that credit unions purchasing the assets of community banks in a voluntary sale is somehow an abuse of the tax exemption which, as we have seen above, has nothing to do with size and everything to do with structure.

Remember this.  While some were chartered as regular for-profit corporations, the majority of banks that have sold to a credit union over the past seven years had a Subchapter S bank ownership structure.  They were pass-through banks whereby the bank itself did not pay corporate income taxes either.  Why?  Because of their structure.

The earnings at Subchapter S banks pass through to the stockholder who then pay personal income taxes on their share of the earnings.  Sound similar to how credit unions return their earnings above those necessary to remain safe, sound and regulatory compliant for viability to their members who then – yes – pay personal income taxes on their dividends from the credit union.

The majority of the banks being purchased today by credit unions (and there have been approximately 35 of them as of mid-2019) are not only Subchapter S and not directly paying corporate income taxes themselves; but, the stockholder owners of those banks have chosen by their own majority vote to sell their bank not to another bank but to a credit union.

There has been no hostile takeover of a single bank by a taxpayer subsidized credit union, as the banker association groups seem to maintain.  And credit unions, in the case of a Subchapter S bank, are merely bringing the assets of one tax-exempt, pass-through entity into what is essentially another.

These have been in large number voluntary sales of privately-owned banks with fewer than 100 stockholders (the maximum for Subchapter S status) to the purchaser offering them the best return on their investment.  In this free enterprise system that Americans largely treasure and the bankers continue to cry (with their 93% deposit share among federally-insured institutions) that tax-exempt credit unions are somehow violating the principles of by simply operating under the current laws passed by Congress, it begs the question why should bank stockholders not be able to sell their institution to whomever they so choose.

Why aren’t other banks buying them?  Why is the bank offer to purchase another bank not preferable to that of a despised credit union?  Because credit unions have built capital through retained earnings for all of their history while banks have been building a significant amount of their capital through subordinated debt and stock value.  Credit unions are in a position to pay cash when they purchase a bank’s assets because that is what credit union net worth has been built upon – retained earnings.  Because bank stockholders want cash when they sell, not another bank’s leveraged stock value, the credit union purchase offer is often the best on the table.

There is no credit union culprit in the sale of banks to credit unions.  If there is a culprit, it is the greed of bank stockholders wanting the best return on their dollar of investment.  If a credit union can give that and turn those customers who have no vote in how their bank is operated into member-owners with a one-member, one-vote democratic say in how their credit union operates, who is the winner?

Obviously, again, the consumer.

Do not be confused with arguments about a level playing field between member-owned, not-for-profit, tax-exempt credit unions and the unfairly disadvantaged stockholder-owned, for-profit, market-controlling banks.  This is not about leveling the playing field.  It is about the banks desire to own and define the terrain of the playing field – particularly the pricing of financial services that not-for-profit credit unions hold down for the benefit of American consumers

The bankers may from time to time use their moneyed influence to get a third party like the National Taxpayers Union to shed their supposed independence to endorse the banking industry’s effort to stifle their competition.

However, if the laws and rules were made by the bankers, the financial services playing field would be one completely tilted to the advantage of bank stockholders and to the disadvantage of consumers in the loss of a lower cost alternative in the American financial services marketplace – an option that over 140 million Americans have already taken to join a credit union.

With credit union taxation, the banks would win and both consumers and small businesses would lose.  Badly.

Let us know if we can help further with your letter writing campaign.  Hopefully, this is a solid blueprint that you can work from in contacting your congressman and senators.

Until next time.

Dennis Dollar