Understanding the Tax Exemption

Thursday, July 11th, 2013

You may have heard about a recent push by some large banks and bank lobbying groups to pressure Congress to end credit unions’ exemption from federal taxes. Bankers and their lobbyists in favor of cancelling the exemption claim it gives credit unions an unfair competitive advantage. Credit unions and many independent financial experts favor preserving the tax exemption, saying the exemption allows credit unions as we know them to exist and provide an alternative to for-profit banks. At Salal, we think it’s important for our members and the public to be informed about this issue so you may decide for yourself and take action if you feel action is warranted.

Why are credit unions exempt?

Credit unions aren’t required to pay federal taxes because CUs serve a necessary public service: created for those of modest means, CUs lend to many who find it difficult or impossible to get affordable credit from a bank. The federal government determined this function was sufficient to warrant a tax exemption; in return, CUs maintain their not-for-profit status and reinvest profits in ways that benefit their members.

Banks, on the other hand, are for-profit and have stockholders who are entitled to a percentage of the bank’s profits.

What would happen if the exemption were repealed?

Unlike banks, not-for-profit credit unions are prohibited from raising capital through public stock offerings—you won’t find Salal CU listed on the NYSE anytime soon! Credit unions make money from serving members: the more products and services members use, generally, the more profitable the credit union is. And those profits are then returned to the members in the forms of lower and fewer fees, better rates, and better infrastructure. If forced to pay federal taxes, many credit unions would close or become banks, reducing options for borrowers.

In September 2012, the National Association of Federal Credit Unions commissioned a study* on the economic benefits of the credit union tax exemption. Dr. Robert Feinberg, Professor of Economics at American University, and Dr. Douglas Meade, Director of Research at the Interindustry Economic Research Fund concluded that “removing the credit union tax exemption would cost the federal government $15 billion in lost income tax revenue over the next 10 years. GDP would be reduced by $148 billion and 1.5 million jobs would be lost over the next decade as well.” The losses, according to the report, would be primarily due to lack of competition to banks and the inability of many would-be borrowers to secure appropriate credit.

Without competition, it would be easier for banks to raise interest rates on loans and lower returns on deposit products such as certificates, savings accounts and money markets. Credit unions charge lower and fewer fees—without CUs to provide customers with an alternative, bank fees would likely rise.

Finally, the ability of the public to have a voice in the decisions made by their financial institutions would be curtailed. Credit unions are managed by volunteer Boards of Directors; members are invited to annual meetings where credit union business is discussed and nominees are voted on for positions on CU Boards and Committees. Every adult member who is primary on an account has a vote in a credit union. There is no equivalent voice in the banking industry.

What can I do to help?

First, become educated about the difference between banks and credit unions. There are considerable resources available for you to explore all sides of the issue, and we encourage you to become familiar with all arguments for and against the exemption. If you decide this is an issue you wish to be involved with, you can find action steps listed on Don’t Tax My Credit Union’s website.*

At Salal, we agree that credit unions such as ours provide an invaluable public service. We make it possible for a broader range of people to access vital financial services, and we provide a real alternative to for-profit banks. We are our membership in a way that no bank can duplicate, and we’re proud to serve our members and our communities.

*Please be advised that by clicking hyperlinks, you are leaving Salal Credit Union’s website. Links are provided as a courtesy. Salal Credit Union does not endorse or control the content of third party websites.

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