Inside Financial Services

On Credit Unions and Taxes, Some Reader Pushback

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I’ve been a little surprised by the extent of so many commenters’ disagreement with my entirely reasonable assertion, posted here earlier this week, that credit unions should pay income taxes the same way the banks they compete against do. Credit unions essentially do the same thing banks do, after all: they take in deposits, make loans, and provide other financial services. And the “common bond” that is supposed to link credit union members has been made so lax that a number of credit unions have been able to grow into sizable institutions aiming to serve the general public. Simple fairness says that these institutions ought to be paying income taxes.

But as I say, some readers aren’t buying it. They raised a number of objections, few of which, truth be told, I found especially convincing. Here’s a sampling of those comments, with my responses:

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

TKB: Huh? Big banks may be evil or not—certainly a few are run by less-than-utterly-competent managers, I’ll grant you that. The vast majorityare run by outstanding managers. But what does any of this have to do with whether CUs ought to be paying taxes or not? Credit unions are essentially for-profit entities. They tend to do a very good job serving their members. If banks are as evil as you say, CUs’ comparative virtue would be an additional competitive advantage—which means they have even less reason to rely on their non-taxed status.

“I trust the credit unions more than I trust [Goldman Sachs]. The ‘little people’ need credit unions.”

TKB: Actually, the preference among many consumers for credit unions over banks goes unremarked-upon too much. But the numbers are stark. The American Customer Satisfaction Index reports, for instance, that consumers give banks an overall a satisfaction score of 76, on a scale of 1 to 100. The similar score for credit unions is 85. So, yes, when this reader says he trusts credit union more than Goldman, I believe him. But that doesn’t say anything about why CUs’ should keep their special privileges. No one’s arguing that credit unions be abolished. Just that they pay income taxes.

“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.”

TKB: I have no clue what this individual is talking about. I didn’t say CUs pay no taxes. I assume there are property taxes and excise taxes they do pay. Just because CUs pay those taxes is no reason they should be excused from paying taxes on their income, the way their competitors do.

“What about an in-between solution. Small, well-defined common-bond CUs pays no taxes. Large CUs with very broad bonds pay taxes.” 

TKB: Actually, I kind of buy this. Credit unions that are clearly keeping with the industry’s original purpose—people with a narrowly defined common bond banding together to help each other—could be left alone as a compromise. Credit unions have a long and honorable history, both here and in Europe. I’m not so wild-eyed a reformer as to want to tinker with those traditions for no practical reason. And the amount of tax revenues small credit unions would generate would be immaterial. But credit unions who’ve exploited lax rules to morph themselves into de facto full-line banking institutions should be treated like the profit-chasing institutions they’ve become. Which is to say, they should pay taxes on their income, just like the big banks they compete against do.

As I say, this shouldn’t be a difficult issue. The playing field needs to be leveled.

What do you think? Let me know!

9 Responses to “On Credit Unions and Taxes, Some Reader Pushback”

  1. Parkite

    Seems reasonable. Of course, seems reasonable that carried interest s/b taxed as ordinary income, not cap gains, too.

  2. Nevadan

    When credit union employees travel they do not even have to pay the room taxes, etc. that all the rest of us pay on our hotel rooms. That is just ridiculous in my opinion.

  3. Bill Demmin

    I really liked the argument that small well defined CUs should be tax exempt as long as you do the same for small community banks who also serve small well defined markets. But – better yet, why not just level the playing field and tax all financial institutions including all CUs!

    • KnowYourNumbers

      Bill — You are logically correct, but you can’t lump them all together if you want to gain any political traction. You have to separate out the big CU players that really are “banks” and label them as such. There are about 230 CUs with assets greater than $1b. They are 50% of the industry assets. Start by targeting those. You can’t allow a little “mom and pop” credit union get political air time because the public will think all credit unions are like this. Focus on the wolf CUs in sheep’s clothing.

  4. jsc173

    Anyone remember credit unions 30-40 years ago? Do today’s behemoth credit unions that anyone can find a way to be a member of resemble the CUs of the past?

    Didn’t think so.

    It’s like savings banks. They were supposed to be the primary source of housing finance. That didn’t exactly work out well, did it.

    Isn’t the bigger question a much more basic one — what should our government-regulated deposit/lending system be?

    Today, it seems to be a relatively dysfunctional “salad bowl.” If you’re OK with that, you should be happy. If not, what should be done?

  5. Jeff Platter

    Our company works with both community banks and credit unions. It seems to me we are in a standoff. The banks want credit unions taxed and the credit unions want the limits on business lending raised or eliminated, which is strongly opposed by the bank lobby. If the credit unions get taxed, they should also have these caps lifted. Both sides would win.

    • KnowYourNumbers

      Jeff — Agreed. If you pay taxes, you get to play by the same set of rules. Level the playing field in all aspects of operations.

  6. KnowYourNumbers

    Someone please answer this question for me…

    In 2014, banks generated 0.64% in non-interest income as a percentage of assets.

    In 2014, credit unions generated 1.27% in non-interest income as a percentage of assets (almost twice the amount of banks).

    Credit unions may charge lower fees (based upon survey results) but they sure collect a lot more of them.

  7. Regular Consumer

    I have been working in the financial market for a very long time. I give my business to a credit union. I have tried banks, but frankly, the banks don’t measure up for me as a middle class, average person — fees, service, etc. I really believe that part of that difference IS the structure of the credit union, including the non-profit, non-tax status. I understand the banking argument — been following the arguments for 20 years or more — but at the same time, if CU’s are taxed, I’m quite certain that in the end, the benefit that I get out of it as a consumer will be lost.

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