This year marks the 80th anniversary of the Federal Credit Union Act, one of the nation’s most important economic development and financial services laws.
Congress created credit unions in response to the stress on family pocketbooks in the depths of the Depression. Wisely recognizing the need to make family money management as economical as possible, lawmakers included an institutional tax exemption because “credit unions are mutual or cooperative organizations operated entirely by and for their members.”
Today, Congress is hearing special interest suggestions to remove this exemption, despite the festering recession. Doing so would create a new tax burden on the nation’s 96 million credit union members, the vast majority of whom are middle- and lower-income individuals struggling to make ends meet.
It also is a fallacy that credit unions are not taxed already. Federal credit unions pay property taxes, tangible personal property taxes and employee payroll taxes; state-chartered credit unions pay unrelated business income, sales and state franchise taxes as well.
More significantly, members own the credit unions, so individuals pay income tax on the dividends they receive, which are based on the credit union’s earnings in excess of expenses. At CommunityAmerica Credit Union, we are paying members more than $5.5 million this month that is not only taxed, but will be spent at Kansas City area grocery and department stores, restaurants and retail shops. This is the second year in a row that we have given a payout of this size.
Studies show that changing the credit union tax status in Canada and Australia reduced the number of credit unions, diminished financial services competition, raised consumer loan interest rates and lowered deposit interest rates. In our country, the National Association of Federal Credit Unions conducted a similar study in 2012 to see what would happen if the tax status changed here.
That study found that elimination of the credit union tax exemption would reduce U.S. GDP by about $148 billion starting in 2010 for the next 10 years, costing 150,000 jobs a year, or 1.5 million jobs by 2020. Separate research regarding the more than 20-plus Kansas City area credit unions showed that removal of the tax exemption would reduce consumer spending by $6.3 million in Kansas alone, with a similar effect expected in Missouri.
The study also found that credit union deposit rates were 25 percent higher, and car-loan rates were 26 percent lower, than at banks. Total direct benefits to credit union members of these differences were estimated to be almost $43 billion from 2005 to 2011.
Those differentials keep banks honest in a way that benefits all consumers. The study found that a 50 percent reduction in the credit union market share would have cost bank customers almost $30 billion from 2005 to 2011.
Critics claim credit unions should be taxed because of their size, but they forget whom credit unions serve. Credit unions are focused on improving financial success for their members, most of them middle- and lower-income consumers.
Credit union products and services are designed specifically with the small- and medium-budget consumer in mind and are the best option for consumers who otherwise might fall prey to payday lenders or unscrupulous businesses that profit on individuals struggling from paycheck to paycheck.
Though most agree our federal tax system needs work, taxing the one financial institution system serving 96 million Americans is not the way to do it. Congress today should remember the wisdom of its 1934 class of predecessors and ensure that the credit union tax exemption is sustained for the benefit of American consumers.