February 28, 2005
WASHINGTON, D.C.—A new study from the Tax Foundation examines the federal income tax exemption enjoyed by credit unions, finding it to be a large, unjustified loss to the Treasury: $31.3 billion over the 10-year period 2004-2013.
The study is, "Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions" by John A. Tatom, Ph.D., Adjunct Scholar at the Tax Foundation and Adjunct Professor in the Department of Economics at DePaul University.
The Credit Union Tax Exemption in a Time of High Deficits
"The U.S. corporate tax rate is one of the highest in the world, and it could be lowered to good effect if some unjustified exemptions were eliminated," said Scott Hodge, President of the Tax Foundation.
"Credit unions were granted a tax exemption almost 70 years ago so that they could serve low-income people who had little access to financial services," Hodge pointed out. "Now credit unions are growing by leaps and bounds, serving middle- and high-income people. Why should the exemption continue?"
The Diminishing Legal Restrictions on Credit Union Membership and Lending Practices
Prof. Tatom’s review of the tax exemption’s history found that the original legal "field of membership" restrictions on credit unions were designed to limit their ability to compete with taxpaying financial firms. By strictly defining who could be a depositor and borrower at a credit union, Congress intended credit unions to use their tax advantage to serve low-income people.
Over time credit unions have avoided most of the restrictions, and as a result they have competed directly and successfully with other financial institutions in many markets with a major cost advantage, the tax exemption. As a result, credit unions have rapidly consolidated, merged and broadened their geographic markets, all the while maintaining their tax exemptions.
Do Credit Unions Turn Their Tax Savings Into Service for Low-Income People?
Despite the original mission of credit unions to serve low-income people, Tatom finds no solid evidence that credit unions have done so. In fact, most credit unions have an occupational bond that requires members to be employed, often in industries with relatively high-wage jobs.
Conclusion: Repeal the Exemption
Tatom concludes that the principal justification for the tax exemption is just that it already exists.
"Under current law, as it is being enforced, there is no good policy argument based on equity or efficiency for maintaining the tax exemption," he concludes.
The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.
View the full study here.
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