Noah Yosif: Do they know they’re tax exempt?

An ICBA study uncovers how the credit union tax exemption has become unfair to legitimate for-profit financial institutions, credit union members, tax authorities and taxpayers.

By Noah Yosif, ICBA


For years, community bankers have argued that tax-exempt credit unions have moved far beyond their mandate to serve people of modest means.

Now, a new ICBA study, Do They Know They’re Tax Exempt?, is arming community bankers with new data revealing just how shaky the justification for the credit union tax exemption really is—and how it’s created an unfair competitive advantage that hurts the economy and tax-paying community banks.

From outgrowing the initial reason for the exemption, to tabulating the tax burden of the largest credit unions, to uncovering the billions of dollars in exemption mismanagement, ICBA’s deep dive into the data shows how the credit union tax exemption has evolved from a carveout designed to promote equal opportunity to one that has created an unreasonable competitive advantage that hurts community banks, whose activities mirror credit unions in many aspects.

Outgrowing an exemption

Unlike diamonds, tax exemptions are not forever. For years, savings and loan companies, like credit unions, enjoyed a tax exemption. That exemption was eliminated by the Revenue Act of 1951, when regulators recognized that loan and savings companies had grown beyond the bounds of their original mandate, according to a 1979 IRS whitepaper that evaluated the issue.

Credit unions’ tax exemption stems from their similarity to savings and loan companies. Logic dictates that if credit unions evolve in a way inconsistent with their mandate, their tax exemption should be revoked, too.

ICBA’s study shows that credit unions haven’t stuck closely to their mandate of serving people of modest means, restricted fields of membership and avoiding high-risk, high-yield investments. It quantifies just how far credit unions have strayed from this mandate.

An evaluation of credit union activities shows that only a minority of credit unions focus on serving people of modest means. ICBA looked at the consumer credit scores based on credit union auto lending. When it comes to lending to higher-risk consumers—those with credit scores below 659—there isn’t a huge difference between the activities of community banks and credit unions. It’s just 6%.

Quick stat

$2.1 billion

The estimated tax burden credit unions would have been responsible to pay, on average, per year between 2005 and 2018

Credit union applications over the past decade show a large decline in the number of single common bond applications, such as employment or association. Multiple common bonds and community bonds make up an increasing number of credit union memberships. It’s a move that’s technically legal but violates the intended purpose of credit unions.

Credit unions are also engaging in increasingly high-risk activities that aren’t in the best interest of their members. Just look at the recent closure of credit unions engaged in risky taxi medallion lending. Or look at the settlement between the Consumer Financial Protection Bureau (CFPB) and a credit union service organization (CUSO) that provided high-cost loans to students of a for-profit school who didn’t understand the terms and conditions of their loans and weren’t able to afford them. Meanwhile, credit union failures outpaced banks 50% of the time between 2005 and 2018.

Largest credit unions see biggest tax benefit

ICBA estimates that credit unions would have been responsible for paying an average of $2.1 billion in taxes between 2005 and 2018. This well-known figure is on par with estimates from the U.S. Treasury, the Joint Committee on Taxation and the Congressional Budget Office.

Yet ICBA’s study takes it one step further by calculating the estimated tax burden for each individual credit union, uncovering a huge disparity among credit unions. Just 500 credit unions, typically those with more than $1 billion in assets, would have been responsible for 74% of the overall tax burden. These are the same credit unions that are buying community banks and stadium naming rights.

How you can help
Visit icba.org/advocacy/reports to read ICBA’s study or review a list of talking points to help you make your case.

Not all tax savings get passed to consumers

ICBA estimates that between 20% and 30% of credit unions’ tax exemption is lost in mismanagement. That comes to between $500 million and $1 billion a year.

Using a regression model, ICBA calculated how much of the tax exemption was applied to loans, securities, labor and deposits. The good news is that the majority of the tax burden went to deposits and loans, as intended. However, credit unions are channeling a sizable percentage of their estimated tax burden to securities and labor. These include things like high-risk investments, management salaries and employee compensation.

Breaking it down, this means that credit unions aren’t forced to be as efficient as possible with their resources. The credit union mandate that was intended to let them operate below the optimal level of market efficiency was designed to help them serve people of modest means. Yet it creates the unintended consequence of allowing credit unions to be more cavalier with their choices.

ICBA is dedicated to ending this disparity and credit unions’ continual overreaching.


Noah Yosif (noah.yosif@icba.org) is ICBA’s assistant vice president of economic policy and research

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