Tax Foundation Calls for Repeal of Credit Union Exemption

The Tax Foundation, a Washington, D.C. based group that touts itself as that the nation’s leading independent tax policy nonprofit, this week released a paper entitled “Repealing the Federal Tax Exemption for Credit Unions.” 

The paper says the credit union industry has strayed from its original tax-exempt purpose and its exemption can no longer be justified.

“Ending the exemption would make the tax code more efficient and provide lawmakers with revenue that could be used to offset other improvements in the tax code,” according to Erica York, an economists at the Tax Foundation and the paper’s author .

York noted that the credit union tax exemption was historically justified by three purposes: serving customers with a common bond and customers with moderate means, as well as providing services difficult to obtain at banks. She cited evidence showing the erosion of common bond, that credit unions are increasingly serving high-income customers and that their services now resemble those offered by banks.

“The tax exemption for credit unions is not justifiable under principles of sound tax policy, nor under the rubric that lawmakers have used in the past to evaluate the tax-exempt status of financial institutions,” she concluded.

Key points the report argues are:  

  • Under current law, the tax code exempts credit unions from paying corporate income taxes. The Joint Committee on Taxation estimates the exemption will reduce federal revenue by $1.9 billion in 2019.
  • Historically, the exemption was justified on the grounds that credit unions would fulfill three purposes: restrict their customer base to people with a common bond, serve customers of moderate means, and provide services that were difficult to obtain at banks.
  • Evidence indicates that the credit union industry has strayed from its original, tax-exempt purpose and is in direct competition with its taxed competitors.
  • The exemption cannot be justified on the grounds of sound tax policy, is not neutral, and leads to an inefficient allocation of resources.
  • Ending the exemption would make the tax code more efficient and provide lawmakers with revenue that could be used to offset other improvements in the tax code.

This is not the first time the Tax Foundation and York have questioned, or challenged the legitimacy of, the credit union tax status.