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!