By Steve Goodenow
As Congress and the president work toward a resolution of the country’s fiscal woes, there is another option to consider: eliminate the federal income tax exemption for large, complex credit unions.
Credit unions are a significant financial player in many Iowa communities, yet contribute nothing in federal income tax. It is not fair that the typical family of four pays an estimated $10,000 a year in federal income taxes, while a multi-billion-dollar credit union pays nothing. Eliminating the tax exemption for the large credit unions would provide another viable revenue source, estimated at about $2 billion annually.
Why change now?
There are important reasons for changing the tax status of credit unions.
First, when large, profitable institutions pay little or nothing toward our country’s staggering federal deficit, all others are required to pay more.
Second, the original purpose for credit unions’ federal income tax exemption no longer applies to many large, banklike credit unions.
The exemption for credit unions was granted in 1934 with the passage of the Federal Credit Union Act. Tax exemptions are typically justified with a civic or social service commitment.
In the case of credit unions, their commitment was to serve people of modest means in return for the exemption.
Since 1934, credit unions have grown well beyond that original mission — and have become a trillion-dollar industry. Many credit unions have more than $1 billion in assets — a size that exceeds more than 95 percent of taxpaying Iowa banks. In fact, of the five largest financial institutions in Iowa, two are credit unions with more than $1 billion in assets.
Credit unions also offer products and services that mirror their taxpaying competitors, and they compete for the exact same customers. While credit unions claim they need the tax exemption to serve the “little guy,” a study by the Government Accountability Office and Federal Reserve shows only 31 percent of credit union customers are in the low- to moderate-income category, compared to 40 percent of bank customers.
The bottom line: This is a taxpayer issue. In these challenging economic times, it’s also an issue our country cannot afford to ignore, with more than $2 billion of potential revenue at stake annually.
Entities with a tax preference should be required to demonstrate they are using their tax exemption for their intended purpose. If a tax exemption is no longer accomplishing its statutory intent, policymakers have an obligation to the taxpaying public to eliminate the tax preference.
This wouldn’t be the first time policymakers have done so. In the Revenue Act of 1951, Congress eliminated a tax exemption for building and loan associations because they were competing directly with taxpaying entities and no longer providing a wider public service.
Now is the time for policymakers to take a similar look at credit unions’ tax exemption.
l Steve Goodenow is chairman of the Iowa Bankers Association. Comments: email@example.com