The Credit Union Question

The Federal Credit Union Act of 1934 created credit unions and exempted them from income taxes, because these institutions were to serve consumers: “especially people of modest means.” At the time, commercial banks were mostly serving businesses, not consumers. Up to this point, the United States had been a predominantly agrarian society, but had begun its conversion to a manufacturing society, following Henry Ford’s installation of the first assembly line in 1913. As an agrarian society, much bartering took place between merchants and farmers, and consumers had little need for financial services.

As society converted to manufacturing-based, consumers no longer had goods to barter and, therefore, money became the primary currency of exchange. Commercial banks did not adapt quickly to this new world, so the creation of credit unions filled a void. Society accepted the tax exemption in order to gain personal financial services.

Fast forward to today. Banks continue to serve commercial entities, and they serve most individual consumers. One has to question whether credit unions today merit an exemption from income taxes. A 2009 study by William A. Kelly Jr., a former economist for the credit union industry, concluded that credit unions should pay taxes like any other business, but be given a credit against their tax for the portion of their business that serves “especially people of modest means.”

Kelly found that the average credit union customer had a higher income than the average bank customer. It seems obvious that the exemption should be removed.

Aggressive credit unions, however, continue to expect their exemption while trying to increase the level of business loans that they may make. It is past time that federal lawmakers level the playing field between tax-paying banks and tax-exempt credit unions. It is past time that those expansion-minded businesses pay their fair share to support our government.

Now more than ever, with the unbelievable fiscal crisis that the federal government faces, it is time to tax the growing financial institutions called credit unions!

4 Responses to The Credit Union Question

  1. Stephanie says:

    Amen brother! And throw Farm Credit into that mix as well!

    • Stephanie,

      Thanks for the comments. You would be pleased to know that a group of about 30 bankers from Indiana was in Washington, DC this week, and two of the issues we discussed with every lawmaker from Indiana were credit unions’ desire for more business lending powers and the aggressive pricing of lending coming from the Farm Credit Service, the only Government Sponsored Entity allowed to lend directly to the consumer. We are working on it, but things move slowly in DC.


  2. Joe, the IBA or ABA should start a letter writing campaign or petition that all the bankers could sign on this topic.

    • Carol,

      Thanks for your response to the blog. We definitely need a nationwide effort. About 30 bankers from Indiana were in Washington, DC this week and called on all of the Indiana delegation of Senators and Congressmen. We focused much of our attention on the credit union business lending and tax exemption issues. We continue to chip away, and our lack of success has been very frustrating.


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