There is a maxim, heard in various derivations, that holds a lot of truth: “You get what you incent.” Companies around the world use this concept to encourage sales of specific products or services. Government at all levels, and in many forms, have used incentives to elicit desired behavior. Unfortunately I believe that governments, in particular, often misuse incentives, or fail to end incentive programs when the perceived goals have been reached.
A case in point is the continued tax exemption enjoyed by the credit union industry. Because credit unions were founded to provide limited financial services to groups of individuals who shared a common bond, the federal government provided a tax exemption so that financial services would be available for such persons, especially those of modest means. Today’s credit unions, though, are hardly recognizable from those formed nearly a century ago. The Credit Union Trends Report from CUNA Mutual Group indicates that, in January, more than 300,000 people joined credit unions, loan balances were up 11 percent from the previous year, and savings balances increased 6 percent. While all categories of credit unions grew, the largest credit unions grew four times faster than the smallest credit unions.
Today there are more than 105 million credit union members in the United States, served by under 6,500 credit unions. The banking industry has about the same number of institutions as there are credit unions, but has not shown the same level of growth in customer base as experienced during the past several years by the credit union industry. Yet with all of that growth, plus exemption from federal and generally state taxes, the credit union industry only earned 0.75 percent return on assets last year, compared to the banking industry’s return on assets of 1.03 percent ‒ and banks pay federal and state taxes throughout the country!
Why, then, does our federal taxation policy continue to incent credit union growth at the expense of bank growth? The answer is a bit hard for bankers to understand. Generally speaking, Democrats want to align with policies that support the “little guy,” and credit unions are perceived to both serve the little guy, and be the little guy within the financial services realm. Despite the findings of study after study that disprove that credit unions continue to serve those of modest means, the perception remains.
Another generality is that Republicans are opposed to raising taxes on any person or entity, and thus they are not willing to institute taxes on the credit union industry. Never mind that Republicans are proponents of a level playing field in business, which obviously does not exist in the financial services industry. As someone who has worked on this skewed issue for decades, it is frustrating to have such systemic opposition to correcting this innate unfairness.
I certainly do not know when this issue will be addressed by Congress, but I do believe that the day will come. In the meantime, I fear, we will continue to get what we incent, which is the abnormal growth of the tax exempt credit union industry, largely at the expense of the tax-paying banking industry.
– S. Joe DeHaven