Credit Union Tax Exemption

Updated December 29, 2008

The 1934 Federal Credit Union Act (FCUA) stated credit unions received a tax exemption because “credit unions are mutual or cooperative organizations operated entirely by and for their members.” Credit unions are eligible for tax exempt status if they met the following criteria:
 

1. Operating on a not for profit basis;
2. Organized without capital stock;
3. Operating for mutual purposes.

In 1998, as part of the findings of the Credit Union Membership Access Act (P.L. 105-219), Congress found that “Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member owned, democratically operated, not for profit organizations, generally managed by volunteer boards of directors, and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.”
 
Credit unions, however, do still pay many taxes and fees, among them payroll and property taxes.  It is also important to note that share dividends paid to credit union members are taxed at the membership level. Critics argue that credit unions today are no different than banks.  The defining characteristics of a credit union, no matter what the size, however, remains the same today as they did in 1937: credit unions are not-for profit cooperatives that serve defined fields of membership, generally have volunteer boards of directors and cannot issue capital stock.  Credit unions are restricted in where they can invest their members’ deposits and are subject to stringent capital requirements.  A credit union’s shareholders are its members (and each member has one vote, regardless of the amount on deposit), while a bank has stockholders.
 
Some policy experts have recently proposed eliminating certain “tax preferences” to promote utility and enable a lower corporate tax rate. However, doing so would be counterproductive because eliminating the credit union federal tax exemption would be tantamount to at tax increase on 90 million working Americans that call themselves credit union members. 

Taxation of Credit Unions Would Harm America’s Consumers

If credit unions were taxed, there are many possible results, over time, for credit union members.  Some of the results include:

• Credit Unions Would Lose their Identity:  By necessity, credit unions would have to increase profits, and customer service would likely suffer.
• Rates and Fees: If the exemption was repealed, it would adversely impact savings and borrowing rates, as well as increase fees.
• Capital:  Further restraint on the ability to raise capital, potentially impacting safety and soundness.
• Erosion of the Volunteer Base:  As credit unions become “more like banks,” the self-help, volunteer characteristic of credit unions and the community as a whole would become less distinct.
• Conversion to Other Business Models:  Given the significant regulatory burden that credit unions already carry, there is a strong likelihood that the rate of conversions to mutual thrifts would increase, and thus could result in a loss of jobs for credit union employees and a disappearance of credit unions as a financial services option to many Americans.