Banking

Credit union tax exemption actually benefits taxpayers

At a time when the Biden administration is focused on proposing a trillion-dollar infrastructure plan, the last reform lawmakers should be considering is one that delivers an unexpected financial blow to everyday Americans, Main Street and our economy.

The head of the Independent Community Bankers of America argued in a recent BankThink column that the federal tax exemption for credit unions costs U.S. taxpayers $2 billion each year. That analysis is incomplete.

Eliminating the exemption would forfeit billions of dollars more in economic growth and tax income annually, according to a 2017 study conducted for the National Association of Federally-Insured Credit Unions by Robert M. Feinberg of American University and Douglas Meade of the Interindustry Economic Research Fund.

That’s because credit unions channel their tax exemption to their members in the form of better rates on deposits and lower fees. Credit union members then use those additional funds and savings to generate commerce, growing the economy and creating job opportunities in the process.

While bankers endlessly search for a justification to eliminate credit unions’ tax-exempt status, doing so would result in America losing $38 billion in tax revenue, $142 billion in GDP and 900,000 jobs over the next 10 years, according to the Feinberg-Mead study.

For those reasons and more, any attempt to eliminate the tax exemption should be a nonstarter in Congress.

However, as lawmakers consider reforms to our tax laws, it may be worthwhile for them to consider closing banks’ Subchapter S loophole. Today, about one-third of U.S. banks enjoy Subchapter S status so they can distribute untaxed profits directly to shareholders — hardly a topic the bankers will be willing to discuss.

Another point bank lobbyists like to omit: They received tens of billions of dollars in annual tax cuts under the 2017 Tax Cuts and Jobs Act.

There are clear reasons why credit union members rave about the service they receive. It is because credit unions as community-based institutions genuinely have their members’ best interests at heart, which has been documented time and time again.

Additionally, survey results published in 2018 by Consumer Reports led the authors to conclude: “Credit unions are among the highest-rated services we’ve ever evaluated.”

On the other hand, it took a New York Times article to persuade a major bank to publicly state how it would help its customers coping with the financial ramifications of the 2019 partial government shutdown. This is in addition to the banking industry’s laundry list of consumer abuses, and the more than $240 billion in fines it racked up after the 2008 financial crisis, according to a Keefe, Bruyette & Woods report.

As of today, over 800 credit unions stepped up to participate in the Small Business Administration’s Paycheck Protection Program and provided countless small-dollar loans to communities and small businesses in need.

Among financial institutions below $1 billion of assets, the average credit union PPP loan was roughly $46,000 last year — much smaller than the average bank PPP loan of about $78,000, according to an SBA report. Credit unions have been helping those Main Street and mom-and-pop businesses that need help the most, according to an SBA report.

There is no better example that illustrates credit unions’unwavering commitment to serving our nation’s most vulnerable communities than their increased service to rural communities while large and community banks alike have retreated in droves. Additionally, credit unions serve more low- and moderate-income households than banks do, with better pricing and lower fees.

There are numerous differences in the way banks and credit unions operate, and these differences matter. For these reasons and many more, lawmakers should ditch bank lobbyists’ anti-credit-union propaganda.



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