Inside Financial Services

Let’s Tax Credit Unions

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Florida Bankers Association CEO Alex Sanchez wants to know why in the heck credit unions don’t have to pay taxes:

[W]hy doesn’t the Navy Federal Credit Union—with $60 billion in assets, 10,000 employees world-wide and five million members—pay state and federal corporate income taxes? Doing so would help to pay the salaries of the men and women who serve our country. It also would support the defense of the U.S., the needs of children and seniors, and help pay down the $18 trillion national debt.

For almost a century credit unions have been allowed to parade themselves as banks, offering identical services. Unlike banks, they pay no federal or state corporate income taxes. This loophole should be closed.

You’ll get no argument from me that there’s a place for credit unions in the financial system. CUs provide a worthwhile service that’s highly valued by their customers. They tend to get higher consumer satisfaction scores than banks do. Often they’re the best option for populations that traditional banks can’t or prefer not to try to reach. The problem is that the definition of the “common bond” that members of a given credit union are supposed to have has become so broad as to be meaningless. Thus many big credit unions have become sizable financial institutions that are indistinguishable from banks. More from Sanchez:

MidFlorida, the fifth largest credit union in the state—with $2.1 billion in assets—paid an undisclosed amount for the naming rights to an amphitheater in Tampa while developing some of the most lavish office spaces and branches throughout the state. MidFlorida began in 1954 as a small credit union for teachers and today serves approximately 200,000 members who “live, work, worship or attend school” in its Central Florida service area.

My rule of thumb: when you start paying out money to slap your name on a sports arena, you’ve completed your transition from high-minded, communitarian do-goodism to plain old capitalism. I wish MidFlorida well with its arena and its efforts to grow in its market. I just think it ought to pay taxes on its earnings the way the banks it competes against do.

There are plenty more MidFloridas in the credit union industry.  CUs have made a clear, concerted effort to find ways to expand their potential customer base to include basically everyone in the country. Some have set up shell associations and charities that new customers can “join” by paying a token fee. (These rules may be changed.) Yet credit unions somehow don’t have to pay taxes or follow regulation, such as CRA, that for-profit banks do. For me, this isn’t so much about getting new revenues into the maw of the federal government. It’s about fairness. Banks are being forced to compete against CUs on a playing field that’s been significantly tiled in CUs’ favor. When credit unions were small and served tiny niche markets, that was fine. But now that many are turning into large multi-line institutions, they should be forced to play by the same rules banks do.

What do you think? Let me know!

16 Responses to “Let’s Tax Credit Unions”

  1. Mark

    Now there’s something that you and Cam Fine can agree on for sure! Let’s end the 30% subsidy once and for all. Of course, one obstacle might the various federal employee credit unions. For instance, did you know there is a Treasury Department Federal Credit Union?

  2. Fred the Shred

    Hard to argue with taxing credit unions in principle. Thrifts were tax exempt too until 1951. As a practical matter, though, total CU assets are slightly over a trillion while US commercial bank assets are about $15 trillion, so it’s hardly the case that credit unions are eating the commercial banks’ lunch. And it’s not like the commercial banks have a lot of friends on Capitol Hill these days. After all, it wasn’t the credit unions that trashed the global economy.

    • KnowYourNumbers

      Fred — Using the ICBA definition of community bank, the sum of credit union assets is the same as all US community banks. That is where the pain resides.

  3. etoleary

    Tom, you’re right. But it will be one hell of a legislative battle to get this done if in fact it is ever doable. As a negotiating strategy, I’d propose that all CUs either be required to submit to Federal income taxation OR drastically contract the parameters of its “common bond.” They must choose one or the other. If they end up as narrow niche players, that’s fine. If they pay taxes, then that’s good for everyone.

    Short of a major CU failure, the prospects are dim for any meaningful change.

    I wonder if the regulators have any “private” opinions on the quality of credit underwriting compared to commercial banks.

  4. Jerry Fletcher

    Absolutely they should be taxed the same as banks!! Not only do they do the same exact thing as banks do, they also charge the same rates and fees as any bank charges. What rational could anyone have to not have them pay taxes like any other business that provides products and services to their customers.

  5. LET

    Thomas, I prefer the “rule of thumb” that there are basic fundamental differences between credit unions and banks regarding their ownership, mission, method of raising capital, investment options etc. Reducing the difference to a mere marketing strategy, I feel, is not a sufficient case for changing the financial services structure born in this country out of the depression and tested in the latest financial crisis. I would say that it is very hard to argue taxing credit unions in principle or in practicum. You are right Fred, credit unions did not trash the global economy but have certainly had to help pick up the pieces, very expensive pieces.

  6. PureDakota

    So I guess the message is we should only tax institutions that trashed the global economy. I wonder why we tax community banks.

    • LET

      Probably because they are so closely associated in structure as large banks. I would rather see 1000 community banks, helping their local communities, providing local leadership in civic matters and generating decent paying local jobs. This would support the fabric of society much more than one mega bank sucking up the regions resources and concentrating wealth in the very few. I would gladly vote to reduce or eliminate community banks taxes if it meant preserving their place in the community which in turns preserves the fabric of society.

  7. govt wastes your money

    I trust my credit union much more than our corrupt money hungry pigs in Washington and those dirty little politicians at the state level with my tax money……And as far as the banks go….its shows the weakness of our judicial system and lack of justice when the CEO pigs that were in charge of the big banks during the financial crisis got off with paying billions of fines (because of those dirtly little politicians they bought off) and did not get locked up. Filthy pigs is an understatement to describe these bankers whose actions led to the middle class in America losing large portions of their life savings>>> Just my musings…..

  8. AGN

    What about anin between solution. Small, well defined common bond CUs pays no taxes. Large CUs with very broad bonds pay taxes. The NCUA should awaken to the inevitable that the bank like business models of credit unions like Navy Federal and Mid-Florida will be exposed and begin to tilt sentiment towards paying taxes. Why not be proactive and design an In between solution, NCUA?

  9. Truth

    The truth is, credit unions do pay taxes. Yes, they are exempt from corporate income taxes, but to say they pay no taxes just isn’t true. Further, while credit unions have grown over the years, to paint them as nothing more than tax exempt banks is likewise a lie. Credit unions nationally make up less than 10% of the entire market share. How could such a small industry be anything but keeping to their mission? Banks aren’t happy with 90+% of the market share, they want 100%! They say they believe there is a place for credit unions, but the only place they see credit unions is out of business, leaving 100 million american consumers with no choice but to switch to banks. When will their hypocrisy and lies end?

    • KnowYourNumbers

      Truth – You have obviously been drinking from the CU kool-aid pitcher. Credit unions have a HUGE tax advantage. If you were running a 100 meter race, a credit union gets a 30 meter head start. There are a number of large credit unions that behave just like banks when it comes to extracting profit from their members. Their senior management teams are lining their pockets with excessive levels of compensation. They are padding their capital accounts instead of returning profit back to members. There should be a means test for taxation based upon asset size and it should be tiered. For example, credit unions over $25 billion pay full taxes, 10-25b pay 75% of the bank tax rate, 1-10b pay 50% of the bank tax rate, 500m-1b pay 25% of the tax rate and those below pay no taxes.

      • Marcos

        Bank on itWith all the hullabaloo relnetcy with too big to fail and people occupying various locales, many folks have started taking a look at who they let hang on to and invest their money. Traditionally, unless you are like my grandmother and hide money in various odd locations throughout your house, you probably keep your . Recently, however, have been surging in popularity. So what exactly is the difference between a bank and a credit union? Well, both hold on to your money for you and offer you easy access to it, but they do differ in some key ways let’s take a look.Credit where credit is dueI’m not going to argue one way or another for which is better, that’s entirely up to you and your banking needs. What I will do is compare and contrast these two types of financial institution, so you can make your own decision. With that said, here we go.BanksCan be nationwide, even worldwideOperate on a for-profit business modelTypically owned by private investorsGoverned by a board of directors chosen by stockholdersOffer business as well as consumer accountsCredit unionsTend to be regionalOperate as a non-profit financial cooperativeOwned by their members, i.e. their account holdersGoverned by a board of directors chosen by the membersStrongly consumer orientedBecause credit unions don’t need to turn a profit, any interest they earn by investing your deposits is returned to you in the form of a member dividend. They also tend to have lower fees and on savings and checking accounts.Banks have their advantages, too. If you frequently travel or work outside of your home region and require physical access to your financial institution, a nationwide bank might be a better option. Yes, you can withdraw money anywhere, from any ATM with a credit union, but if you need to make a deposit when the nearest one is 500 miles away, this may present a difficulty.The payoffObviously, your particular needs will determine which type of financial institution suits your needs the best. Don’t just automatically assume that one is correct for you based on what I’ve written here go and do your research. Find out what banks and credit unions are popular in your area, and talk to people about what they like and don’t like about them. When it comes to money, the best decision is an informed decision.GD Star Ratingloading…

  10. Bohdan Tashchuk

    Hmmm … let me see. A quick Google for “most hated companies” turns up this recent list from Bloomberg:

    1) Goldman Sachs
    2) AIG
    3) Dish Network
    8) Comcast
    9) Charter Communications
    10) Bank of America
    12) Citigroup
    14) JPMorgan Chase
    16) Time Warner
    18) DirecTV

    Five financials and five cable companies.

    I’d be be more receptive to your argument if the “vampire squid” didn’t (deservedly) top this list. As already noted, which banker went to jail for all the malfeasance that occurred?

    Despite Lloyd claiming to be “doing God’s work”, I trust the credit unions more than I trust him. The “little people” need credit unions.

  11. Eddie Sanabria

    Here is great reason to not tax credit unions: CONTINUED GREED BY BANKS IN MANIPULATING AMERICANS

    When was the last time a credit union was fined like this?

    May 20, 2015 USA Today

    Five major U.S. and European banks Wednesday agreed to plead guilty to criminal charges and pay more than $5 billion in collective penalties in sweeping settlements of charges their traders manipulated the $5.3-trillion-a-day foreign exchange currency market for their own profit.

    The Department of Justice and other U.S. and European authorities and regulators said the parent companies of Citicorp (C), JPMorgan Chase (JPM), London-based Barclays (BCS) and Royal Bank of Scotland (RBS) acknowledged their traders manipulated foreign exchange prices of U.S. dollars and euros for several years starting in December 2007.

    • KnowYourNumbers

      Eddie – Orange County’s Credit Union was “fined” today (well actually it just went public today) for charging members overdraft fees when funds were available to cover the check. There’s an answer to your question.

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