Should Credit Unions Be Taxed?

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Credit unions are financial cooperatives organized by people with a common bond; they are the
only depository institutions exempt from the federal corporate income tax. As financial
cooperatives, credit unions only accept deposits of members and make loans only to members,
other credit unions, or credit union organizations. Many Members of Congress advocate a
reliance on market forces rather than tax policy to allocate resources. Furthermore, some
Members of Congress are interested in additional sources of revenue in order to either reduce the
deficit, offset the cost of higher federal outlays, or make up for tax cuts elsewhere. Consequently,
the exemption of credit unions from federal income taxes has been questioned. If this exemption
were repealed, both federally chartered and state-chartered credit unions would become liable for
payment of federal corporate income taxes on their retained earnings but not on earnings
distributed to depositors. For FY2008 (October 1, 2007, through September 30, 2008), the
Department of the Treasury estimates that federal taxation of credit unions would yield revenues
of approximately $1.48 billion. Also for FY2009 (October 1, 2008 through September 30, 2009),
the Joint Committee on Taxation estimates that federal taxation of credit unions with assets of $10
million or more would yield revenue of approximately $1.80 billion.
Credit unions differ in some aspects from other providers of financial services, but financial
deregulation continues to lessen these differences. Deregulation has resulted from new legislation
and decisions of regulatory agencies. Proponents of the taxation of credit unions argue that
deregulation has led to vigorous competition between credit unions and other depository
institutions. They maintain that the tax exemption gives credit unions an unfair competitive
advantage over other depository institutions, and there is no market failure that justifies
government intervention with a tax subsidy. Supporters of the tax exemption claim that, despite
deregulation, credit unions are still unique depository institutions. They assert that the purpose of
credit unions is to serve the financial needs of their members rather than to maximize profits.
They argue that taxation would eliminate this service character of credit unions.
On July 23, 2007, and December 20, 2007, the Treasury released two reports concerning U.S.
business taxation and global competitiveness. In these reports the Treasury presented, for
discussion purposes, a proposal to reduce corporate tax rates and broaden the corporate tax base
by eliminating specific business tax preferences, including the tax exemption of credit unions. ^th
Nevertheless, in the 110 Congress, as of January 28, 2008, no legislation concerning the tax
exempt status of credit unions had been introduced.
In the future, technological change and deregulation will likely further increase competition
between credit unions and other depository institutions. The income tax exemption for credit
unions, therefore, likely will be the subject of further debate.
This report will be updated in the event of significant legislative activity or policy proposals.

Concept of a Credit Union...............................................................................................................1
Tax Status........................................................................................................................................3
Deregulation .................................................................................................................................... 5
Arguments For and Against Taxation..............................................................................................7
Debate in the 108^th Congress...........................................................................................................9
Debate in the 109^th Congress...........................................................................................................9
Debate in the 110^th Congress.........................................................................................................12
Report on “Business Taxation and Global Competitiveness”.................................................12
Report on Competitiveness of the U.S. Business Tax System................................................14
Tr ends ......................................................................................................................... ................... 15
Author Contact Information..........................................................................................................16

redit unions are the only depository institutions exempt from the federal income tax.¹
Deregulation is reducing the unique character of credit unions. Many Members of
Congress advocate a reliance on market forces rather than tax policy to allocate resources. C

Furthermore, some Members of Congress are interested in additional sources of revenue in order
to either reduce the deficit, or offset the cost of either higher federal outlays or other tax cuts.
Consequently, the exemption of credit unions from federal income taxes has been questioned. If
this exemption were repealed, both federally chartered and state-chartered credit unions would
become liable for payment of federal corporate income taxes on their retained earnings but not on
earnings distributed to depositors. For FY2008 (October 1, 2007 through September 30, 2008),
the Department of the Treasury estimates that federal taxation of all credit unions would raise ²
approximately $1.48 billion. Also for FY2009 (October 1, 2008 through September 30, 2009),
the Joint Committee on Taxation estimates that taxing only credit unions with assets above $10 ³
million would yield approximately $1.80 billion. Approximately one-half of credit unions have
assets of $10 million or less, but these credit unions hold only about 3% of all assets in the credit ⁴
union industry. The issue of taxation of credit unions is examined in this report by covering the
following eight topics: concept of a credit union, tax status, deregulation, arguments for and ^th^th^th
against taxation, debate in the 108 Congress, debate in the 109 Congress, debate in the 110
Congress, and trends.

A credit union is a nonprofit financial cooperative organized by people with a common bond. As
financial cooperatives, credit unions only accept deposits of members and make loans only to ⁵
members, other credit unions, and credit union organizations. A common bond is a unifying
characteristic among members that distinguishes them from the general public. Every member of
a credit union is an owner and may vote for credit union officers and policies. Credit unions do
not have separate capital stock; instead their capital consists of their members’ shares in ⁶
accumulated reserves. Credit unions cannot raise capital by issuing stock but utilize retained
earnings to finance expansion. Credit unions are either federally chartered or state-chartered.
Each credit union is governed by a board of directors. The board exercises general supervision
over all functional areas including membership and credit applications, interest rate policies, and ⁷
records. According to the Garn-St. Germain Depository Institutions Act of 1982,
^T^h^e^m^aⁿ^a^g^e^m^eⁿ^t^o^f^a^F^e^deral^credi^t^Uⁿⁱ^oⁿ^sh^al^l^{be b}^y^a^{board of}^di^rect^ors^,^{a su}^pervⁱ^s^or^y
^com^mⁱ^{ttee, an}^d^w^h^{ere t}^h^{e b}^y^l^a^w^s^s^o^prov^{ide, a credit com}^m^ittee.
^T^h^{e s}^u^pervⁱ^s^or^y^co^m^mⁱ^t^t^{ee shal}^l^{be appoi}ⁿ^t^{ed by}^t^h^{e board of}^di^rect^ors^....

¹^A^{ll c}^r^e^d^{it uni}^{ons c}^o^lle^c^t^f^e^de^ra^{l pa}^y^r^{oll ta}^x^e^{s. Fe}^de^ra^ll^y^-^c^h^art^e^r^e^d^an^d^st^at^e-ch^art^e^red^credⁱ^t^unⁱ^oⁿ^s^{are su}^b^j^ect^t^o
^loc^a^l^pr^ope^rty^ta^x^e^{s. Sta}^t^e^c^h^a^r^te^r^e^d-c^r^e^d^{it u}ⁿ^io^{ns m}^a^y^be^subje^c^t^{to a}^d^d^itio^na^{l sta}^t^e^aⁿ^{d loc}^a^l^ta^x^e^s.
²^U.^S^.^E^x^ecu^tⁱ^v^{e Off}ⁱ^{ce o}^f^t^h^{e P}^r^esi^d^en^t^,^Offⁱ^{ce o}^f^M^aⁿ^a^g^e^m^eⁿ^t^an^d^Bu^d^g^et^,^Aⁿ^a^l^ytⁱ^c^al^P^e^rsp^ectⁱ^ves,^B^u^dg^et^o^f^t^h^e
^Uⁿ^ite^d^State^s^G^o^v^e^r^nm^eⁿ^{t, Fis}^c^al^Ye^ar²⁰⁰⁸^{. (}^W^a^s^hing^to^{n: G}^P^O^,²⁰⁰⁷⁾^,^p.²⁸⁷^.
³^U^.^{S. C}^ong^r^e^s^sⁱ^ona^{l B}^udg^e^t^O^f^fⁱ^ce^,^B^u^dg^et^Op^ti^on^s,⁽^W^a^s^hing^to^n:^G^P^O^,^Fe^b.²⁰⁰⁷⁾^{, p}^.²⁹⁴^.
⁴^Ibid^.
⁵^Ri^ch^ard^P^.^Kessl^er,^Jr.^“Credⁱ^t^Uⁿⁱ^oⁿ^sⁱⁿ^t^h^e¹⁹⁹⁰^s^,^”^C^ons^um^e^r^Financ^e^L^a^w^,^v^o^l^{. 47,}ⁿ^o^{. 1,}^wⁱ^nte^r¹⁹⁹^{3, p. 4.}
⁶^Ibid^.
⁷^O^{lin S}^.^Pug^h^aⁿ^{d F.}^J^e^rry^Ing^r^a^m^,^Credⁱ^t^Uni^oⁿ^s^{: A}^Mo^vemen^t^B^e^c^o^{mes a}ⁿ^Iⁿ^du^st^ry^(Restoⁿ^,^Vⁱ^rgⁱⁿⁱ^a^{, Resto}ⁿ
^Publ^is^hi^ng^C^o^m^p^aⁿ^y^,^Iⁿ^c^{., 19}⁸⁴⁾^,^p.^7.

^A^t^t^h^{eir f}ⁱ^rs^t^m^eetiⁿ^g^af^{ter th}^e^an^nu^al^m^eetiⁿ^g^of^t^h^e^m^e^m^b^er^s^,^th^{e directors}^s^h^{all elect f}^r^o^m⁸
^th^{eir num}^{ber t}^h^{e board of}^fⁱ^cers^s^p^ecifⁱ^{ed i}ⁿ^th^{e b}^y^la^w^s^.
For June 2007, the 8,504 credit unions had 89.6 million members and total assets of $764.4 ⁹
billion. Thus credit unions had an average of $89.9 million in assets. Although most credit
unions are small, some are large. For year end 2005, the 100 largest credit unions had assets of ¹⁰
$1,043 million or more.
Among depository financial institutions, the concept of a common bond is unique to credit
unions. In 1970, the National Credit Union Administration (NCUA) was established by the
federal government to regulate the credit union industry. The NCUA has specified four categories
of common bonds: single occupational, single associational, multiple common bond, and
community. Credit union members in the single occupational category are employed by the same
enterprise, such as the ABC corporation. A credit union in this category may also serve a trade,
industry, or profession, such as all teachers. Members of a single associational category belong to
groups of individuals who participate in activities that develop common loyalties, mutual
benefits, and mutual interests, such as the Knights of Columbus. A single associational group
must sponsor activities providing for contact among members. A credit union with a multiple
common bond consists of a combination of occupational and/or associational groups. Members in
the community category have a common bond based on employment or residence in a geographic ¹¹
area with clearly defined boundaries.
In the late 1970s and early 1980s, serious economic dislocations threatened the financial stability ¹²
of many federal credit unions. Hence, beginning in 1982, the National Credit Union
Administration made a series of administrative rulings that allowed multiple-group federal credit
unions; that is, combinations of existing federal credit unions that do not share a common bond.
In 1990, the American Bankers Association and several small North Carolina banks filed a
lawsuit challenging the NCUA’s approval of a multiple-group field of membership expansion for
federal credit unions. On February 25, 1997, the United States Supreme Court, at the urging of
the Clinton Administration, agreed to hear arguments in the case.
On February 25, 1998, the U.S. Supreme Court ruled in favor of the banking industry. Legislation
was introduced to address the concerns of the credit union industry. On August 7, 1998, the Credit
Union Membership Access Act (P.L. 105-219) was enacted. The act grandfathered all current
federal credit unions (FCUs) and all current credit union members and provided for future
multiple-group formations subject to limitations that the NCUA must consider when authorizing ¹³
charters.

⁸^P^.^L^.^97-³²^0,^Se^c^.¹^{11 a}^nd¹¹^2.
⁹^Cre^d^{it Un}^io^{n Na}^tio^na^{l A}^ssocⁱ^a^tion,^M^ont^hly^Cre^d^{it U}ⁿ^io^{n Estim}^a^t^e^s^{, J}^une²⁰⁰⁷^,^p.^{5, a}^v^a^ila^ble^f^r^o^m
^http:^//a^dv^ic^e^.^c^una^.o^r^g^/dow^nloa^d^/^m^c^ue^.pdf^{, v}ⁱ^s^ite^{d A}^u^g^.^31,²⁰⁰⁷^.
¹⁰^Cre^d^{it Un}^io^{n Na}^tio^na^{l A}^ssocⁱ^a^tion,^To^p¹⁰^{0 C}^r^e^d^{it U}ⁿ^io^ns^{, Ye}^ar^-^E^nd²⁰⁰⁵^{, p}^p^.^8-⁹^,^a^v^a^ila^ble^f^r^om
^http:^//a^dv^ic^e^.^c^una^.o^rg^/.
¹¹^Na^tiona^{l Cre}^d^{it Uni}^oⁿ^A^d^mⁱ^nistra^tion,^C^har^te^rⁱ^ng^an^{d Fie}^l^d^{of M}^e^m^b^e^r^s^h^{ip M}^a^nu^al⁽^W^a^s^hing^to^n,^Ma^r^c^{h 20}⁰³⁾^,^p^p^.
^18-^19.
¹²^T^h^e^U^.^{S. G}^o^v^e^rⁿ^m^e^{nt pr}^ov^ide^dⁿ^o^fⁱ^na^nc^ia^{l a}^s^sⁱ^s^t^aⁿ^c^e^{to t}^h^e^c^r^e^d^it^uni^onⁱⁿ^dus^tr^y^.^Iⁿ^c^o^ntr^a^s^t^{, t}^h^e^c^l^e^a^{nup c}^o^s^t^s^of
^the^thrif^tⁱⁿ^d^u^s^t^ry^{in the}¹⁹⁸⁰^s^aⁿ^{d e}^a^r^ly^1990s^w^a^s^$12⁴^b^illi^{on a}^c^c^o^rding^t^o^Fe^de^ra^{l D}^e^pos^{it I}ⁿ^s^u^ra^nc^e^Corp^ora^tioⁿ
^(FDIC).
¹³^{CRS Rep}^o^r^{t 9}⁸^-9³³^,^C^r^e^d^{it U}ⁿ^io^{n M}^e^m^b^e^r^s^h^{ip Ac}^c^e^s^s^Ac^t:^Bac^k^g^r^oun^d^an^{d I}^s^s^u^e^s^{, by}^P^a^uline^Sm^ale^,^p.^{1. T}^h^is
⁽^c^onti^nue^d.^..)

On March 15, 2007, the Credit Union Regulatory Improvements Act of 2007 (CURIA) was
introduced as H.R. 1537. This act would modernize capital requirements, raise the cap on
member business lending, enhance the ability of credit unions to serve financially underserved ¹⁴
areas, and provide regulatory relief. As of January 15, 2008, this act had 141 cosponsors.

The first credit union in the United States was state chartered in 1909. When the federal income
tax was enacted, state chartered credit unions were not specifically exempt. In 1917 an
administrative ruling by the U.S. Attorney General exempted state chartered credit unions from ¹⁵
federal income taxation. In 1934, Congress passed the Federal Credit Union Act, which
authorized the chartering of federal credit unions. This act contained no federal tax exemption and
allowed states to tax federal credit unions in the same manner as banks. In 1937, Congress
amended the act to exempt federal credit unions from both federal and state income taxes because ¹⁶
of their service to members. Until 1951, all savings and loans (S&Ls) were exempt from federal
income taxes under the same tax code provision. The Revenue Act of 1951 repealed the tax
exemption for S&Ls, but the exemption for federal and state credit unions was continued under a ¹⁷
separate tax code provision. But Congress provided S&Ls a de facto exemption from federal
income taxes by permitting a liberal allowance for bad debt reserves. This de facto exemption
continued until the Revenue Act of 1962, which reduced the liberal allowance for bad debt ¹⁸
reserves.
Federally chartered credit unions are exempt from all taxes (including income taxes) imposed by ¹⁹
any state, territorial, or local taxing authority, except for local real or personal property taxes.
States vary in their tax treatment of state-chartered credit unions. A few states exempt state-
chartered credit unions from their state income taxes. Many states tax state-chartered credit
unions the same as state-chartered thrifts, and several states tax state-chartered credit unions the ²⁰
same as any other business.
Before the passage of the Tax Reform Act of 1986, numerous specific tax preferences were given
to depository institutions (except credit unions, which were and are exempt). The primary
justification for these tax preferences was the extensive regulations imposed on depository
institutions. These tax preferences reduced the effective tax rate on operations of depository
institutions below the effective tax rate on operations of average U.S. corporate businesses.

^(...c^on^tin^ue^d)
^re^{port is a}^v^a^ila^ble^oⁿ^re^q^u^e^s^{t f}^r^om^the^a^u^thor.
¹⁴^For^aⁿ^e^x^plaⁿ^a^tioⁿ^of^the^c^onteⁿ^t^s^of^this^le^gⁱ^s^l^a^tion,^s^e^e^C^R^S^R^e^p^o^r^t^R^S²²⁶⁶^1,^C^r^e^d^it^Uⁿⁱ^on^Re^gu^l^a^tor^y
^Imp^r^o^vemen^t^s^A^c^t^o^f²⁰⁰⁷⁽^C^UR^IA⁾^,^b^y^P^a^ulⁱⁿ^{e S}^m^al^e.
¹⁵^U^.^{S. D}^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^Comp^arin^{g Cre}^d^{it U}ⁿ^io^{ns wit}^h^Othe^{r De}^pository^Iⁿ^stit^utio^ns⁽^W^a^s^hing^ton^,^J^a^n.
^15,²⁰⁰¹⁾^,^p^.²⁸^.
¹⁶^“^T^he^Ta^x^Ex^em^{ption T}^h^r^oug^{h t}^h^e^A^g^e^s^,”^Cre^d^{it Union}^,^J^a^n.¹⁹^86,^p.^9.
¹⁷^{U.S. C}^ong^re^{ss, Join}^{t Com}^m^itte^e^{on T}^a^x^a^{tion, (}^P^re^pa^re^{d f}^o^{r use}^of^the^Com^m^itte^e^{on W}^a^y^s^a^{nd Me}^aⁿ^{s a}ⁿ^d^the
^C^o^m^m^itte^e^{on Fina}^nc^e⁾^,^Tax^Re^f^o^r^m^Pr^opos^als^:^T^a^x^a^ti^on^of^Fin^aⁿ^c^{ial I}ⁿ^s^tⁱ^t^uti^ons⁽^W^a^s^hing^t^{on: G}^P^O^,¹⁹⁸⁵⁾^{, p}^.⁴³^.
¹⁸^Ke^nne^{th R}^.^Bie^d^e^r^m^a^{n a}^{nd Jo}^hn^A^.^T^u^c^c^illo,^T^a^x^a^ti^{on an}^d^Re^gul^a^tion^{of the}^Savⁱⁿ^gs^and^L^o^aⁿ^Iⁿ^du^s^t^r^y⁽^L^ex^ing^t^on,
^MA^{: Le}^xⁱ^ng^{ton B}^ook^s^,¹⁹⁷⁶⁾^{, p}^.^5.
¹⁹^Na^tiona^{l Cre}^d^{it Uni}^oⁿ^A^d^mⁱ^nistra^tion,^Le^tte^{r of}^Ex^e^m^ptioⁿ^{, A}^l^e^x^andr^ia^,^Va^.,^r^e^vⁱ^s^e^{d Ma}^y^2003.
²⁰^P^u^g^h^,^p^p^{. 51-}^52.

Proponents of the Tax Reform Act of 1986 contended that the tax system should be neutral
concerning economic decision making. They believed that the market forces of supply and
demand could more efficiently allocate resources than the tax system; consequently, tax
preferences for specific industries or sectors should be eliminated or curtailed. They argued that
the elimination or reduction of tax preferences would broaden the tax base and permit lower
marginal tax rates; therefore, economic resources would be allocated more efficiently. Financial
deregulation had been reducing both the differences among depository institutions and between
depository institutions and other industries. Thus, tax preferences for depository institutions were
more difficult to justify if the tax system is to be more neutral and resources are to be allocated by
market forces rather than federal regulations. Consequently, the Tax Reform Act of 1986 curtailed
or eliminated tax preferences of depository institutions. The three most important of these tax
preferences were deductions for additions to bad debt reserves, the deduction for interest to carry
tax exempt obligations, and special rules for net operating losses. The more neutral federal tax
system heightened criticism of the tax exemption of credit unions.
How does credit union taxation compare with that of other firms in economic terms? For a typical
corporation, income taxes are paid on income from equity-financed investment whether retained
or paid in dividends. Shareholders (equity owners) pay individual income taxes on dividends and
capital gains taxes on the nominal appreciation (if any) in the value of their stock in the year that
the stock is sold. Income from debt financed investment is tax exempt at the corporate level;
interest paid on bonds is a deductible expense to the corporation but taxable income to
bondholders. Most corporate equity investment is thus taxed twice, debt once.
Commercial banks and thrift institutions are taxed like other corporations except for the tax
treatment of depositors. In compensation for their deposits, depositors receive a mix of interest
payments and free or below cost services. Interest payments received by depositors are subject to
the individual income tax. Free or below cost services are not subject to the individual income
tax, but the cost of providing these services are expenses to the commercial bank or thrift. Since it
is not administratively feasible to allocate the reduced cost of financial services among ²¹
depositors, it is not possible to levy income taxes on these services. Thus, at least part of banks’
income from debt is exempt from both corporate and individual tax. Bank equity income is taxed
twice; debt once, at the most.
Income of credit unions is exempt at the corporate level, whether retained or distributed. And as
with banks, a portion of the income distributed to members in compensation for their deposits,
called member “dividends,” is subject to individual income tax, while the portion distributed as
enhanced member services is not taxed. Thus, in contrast to corporations—including corporate
banks—no credit union income is taxed twice; credit union income is taxed once, at the most,
under the individual income tax. Taxing credit unions in a manner similar to corporate banks ²²
would require, at least, applying corporate tax to retained credit union earnings.

²¹^M^o^st^d^e^vel^o^p^e^dⁿ^a^tⁱ^oⁿ^s^wⁱ^t^h^val^u^e-ad^d^e^d^t^a^{xes ex}^cl^u^d^e^fⁱⁿ^aⁿ^cⁱ^a^l^servi^c^e^s^f^r^o^m^t^a^xatⁱ^oⁿ^b^ecau^{se i}^tⁱ^sⁿ^o^t
^ad^mⁱⁿⁱ^st^ratⁱ^v^el^y^p^r^actⁱ^c^ab^l^e^t^o^m^e^asu^r^{e val}^u^e-ad^d^e^d^recei^ved^b^y^cu^st^o^m^ers.
²²^In^t^h^eo^ry^,ⁱ^t^mⁱ^gh^t^b^e^argu^ed^t^h^at^siⁿ^{ce m}^e^m^b^er^{s are al}^so^eq^uⁱ^t^y^o^wⁿ^e^{rs o}^f^cr^edⁱ^t^uⁿⁱ^oⁿ^s^,^{a po}^rtⁱ^oⁿ^o^fⁱⁿ^co^m^e^an^d
^b^eⁿ^e^fⁱ^t^s^accruⁱⁿ^g^t^o^st^o^c^kh^ol^d^e^rsⁱ^s^act^u^a^l^l^y^dⁱ^st^ri^b^u^t^ed^credi^t^unⁱ^oⁿ^eq^ui^t^y^-lⁱ^k^{e e}^a^rnⁱⁿ^gs,^an^d^si^m^p^l^y^t^a^xiⁿ^g^ret^aⁱⁿ^ed
^e^a^r^ning^s^w^{ould a}^p^ply^ta^x^{to only}^a^pa^r^t^of^inc^o^m^e^f^r^o^m^e^quity^-^like^inv^e^s^t^m^e^{nt. H}^o^w^e^ve^r^,^{it is}ⁿ^o^{t a}^d^mⁱ^nis^t^r^a^tiv^e^l^y
^f^e^a^s^ible^{to a}^sse^{ss the}^v^a^lue^of^the^s^e^dis^t^rⁱ^b^u^te^{d e}^q^uity^-^lik^e^be^ne^f^its^,^a^nd^pr^o^posa^l^{s t}^o^ta^x^c^r^e^d^{it u}ⁿⁱ^oⁿ^s^ha^v^e^be^eⁿ^lim^ite^d
^t^o^app^l^yⁱⁿ^g^t^h^{e co}^rpo^r^at^{e i}ⁿ^co^m^e^t^a^{x t}^o^ret^aⁱⁿ^ed^earnⁱⁿ^g^s.

Finally, this discussion of financial institutions has thus far omitted the tax treatment of another ²³
type of financial intermediary: life insurance companies. Life insurance companies receive
special treatment under the corporate income tax; they are subject to a low level of tax compared
to other financial intermediaries (excepting, of course, credit unions). Further, the earnings of
depositors (i.e., policyholders) are lightly taxed under the individual income tax because the
inside buildup—growth of cash values—on insurance policies is not subject to tax.

Over the past 30 years, most of the distinctions between credit unions and other depository
institutions have been eliminated or reduced because of deregulation; consequently, the
justification for the tax exemption for credit unions has been increasingly questioned.
Proponents of deregulation argue that resources can usually be more efficiently allocated by
market forces than government regulations. They do not advocate the elimination of all
regulations but rather a greater reliance on market forces. Proponents maintain that deregulation
increases competition, which benefits customers through better access to services at lower prices.
Furthermore, deregulation leads to more integrated financial markets, which improves national
economic efficiency. Both federally-chartered and state-chartered credit unions have been
deregulated as discussed in the following section. The discretionary powers of state-chartered
credit unions compared with those of federally-chartered credit unions vary among states.
Deregulation can be divided into price, geographic, and product deregulation. Price deregulation
concerns the loosening or elimination of restrictions on interest rates that depository institutions
may pay on supplies of funds and charge on loans. Price deregulation has caused credit to be
rationed more by price than by availability. Many individual savers benefitted from price
deregulation because they could earn higher interest rates on their deposits.
Geographic deregulation has been particularly important to commercial banks and bank holding
companies, which were prevented by federal and state banking laws from offering full service
interstate banking. The Office of the Comptroller of the Currency made rules that have expanded
intrastate bank branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (P.L. 103-328) authorized nationwide interstate banking through the holding company
format effective September 29, 1995. Effective June 1, 1997, under this law, the federal bank
regulatory agencies may approve mergers between banks in different states unless the home state
of one of the banking institutions has opted out by enacting a law explicitly prohibiting merger ²⁴
transactions involving out-of-state banks that applies equally to all out-of-state banks.
In 1991, the National Credit Union Administration permitted credit unions to share branches, thus ²⁵
giving them an inexpensive way of expanding their geographic coverage. In May 1992, the ²⁶
Office of Thrift Supervision permitted nationwide branching by all thrift institutions.

²³^For^aⁿ^ov^e^r^vⁱ^e^w^o^f^the^ta^x^a^{tion o}^f^lif^e^ins^u^r^a^nc^e^,^s^e^e^C^R^S^R^e^por^t^R^L³²⁰⁰^0,^T^a^x^a^ti^on^of^Life^Iⁿ^s^u^r^a^nc^e^Pr^od^uc^ts^:
^B^a^ckg^ro^un^{d an}^d^I^s^s^u^es^{, by}^A^ndr^ew^D^.^Pⁱ^k^e⁽^c^ons^u^lta^nt)^.
²⁴^{CRS Rep}^o^r^{t 9}⁴^-7⁴⁴^,^T^h^e^Rie^g^le^-^N^e^a^{l Inte}^rstate^Ba^nk^ing^a^nd^Bran^c^h^ing^Effic^ie^nc^y^Ac^t^of¹⁹⁹⁴^,^by^{M. Ma}^ure^eⁿ
^Mur^p^hy^{, pp.}^1-²^.^T^h^is^r^e^por^{t is}^ou^{t of}^prⁱⁿ^{t b}^u^{t a}^v^a^ila^ble^oⁿ^re^q^u^e^s^t^f^r^o^m^the^a^u^thor^.
²⁵^De^aⁿ^{F. A}^m^e^l^{, “}^T^re^{nds in the}^S^t^r^u^c^t^ure^of^Fe^de^ra^lly^Insure^{d De}^po^sitory^Instituti^ons,¹⁹^84-⁹⁴^,”^Federa^{l Reserve}
^Bulle^tiⁿ^{, v}^o^l.⁸²^,^no.^1,^J^a^n.¹⁹^96,^p.^4.

But credit unions still have some restrictions on branching. For example, a federal credit union
may not establish a new branch office for the purpose of adding a group [combining with another ²⁷
credit union through a multiple-group charter].
Product deregulation is blurring the distinctions among products offered by different types of
depository institutions (e.g., checking accounts, credit cards, mortgages, etc.). Product
deregulation has been accelerated by the mergers of some large financial and nonfinancial firms.
Also, many firms have found methods of circumventing existing laws in order to offer additional
financial products. The enactment of the Gramm-Leach-Bliley Act (P.L. 106-102) in 1999
facilitated “affiliation among banks, securities firms, and insurance companies, permitting
financial conglomerates to cross-sell a variety of financial products to their customers (one-stop ²⁸
shopping).” This act also allowed “national and state banks to create financial subsidiaries for
diversification into insurance sales and full-service securities activities under specified ²⁹
conditions.” In addition, this act permitted banking (“financial holding”) companies to invest in ³⁰
nonfinancial businesses for a share of the profits.
Deregulation has resulted in the rapid expansion of most services offered by credit unions. Larger
credit unions tend to offer a wider range of services than smaller credit unions. Deregulation has
been implemented by legislation and rulings by the National Credit Union Administration. But
credit unions, compared to other depository institutions, still have restrictions on their powers to
lend and invest funds. For example, the Credit Union Membership Access Act (P.L. 105-219) ³¹
limits business loans to members to 12.25% of total assets. Also, credit unions may only
“extend lines of credit to their members, to other credit unions, and to credit union ³²
orga niza tions .”
The Treasury compared the basic statutory and regulatory rules applied to depository institutions
across four broad categories: institution powers, safety and soundness, regulatory enforcement
authority, and consumer protection. The Treasury concluded that
^F^e^deral^credi^t^unⁱ^ons^g^eⁿ^e^ral^l^y^operat^e^wⁱ^t^hⁱⁿ^t^h^e^s^a^m^e^l^e^g^a^l^f^r^a^m^e^w^{ork as}^ot^h^e^r^f^e^deral^l^y
ⁱⁿ^su^{red depos}ⁱ^t^o^ryⁱⁿ^s^tⁱ^t^u^tⁱ^ons^.^Mos^t^di^f^f^e^ren^c^e^s^bet^w^eeⁿ^credi^t^uⁿⁱ^ons^an^d^o^t^h^e^r^d^e^p^o^sⁱ^t^o^r^y
ⁱⁿ^st^itu^tioⁿ^s^d^e^rⁱ^v^e^f^r^o^m^th^e^str^u^ctu^r^{e o}^f^cr^ed^{it u}ⁿ^ioⁿ^s^{. W}^e^f^o^uⁿ^d^thⁱ^s^to^b^e^m^o^{st li}^k^e^l^yⁱⁿ^t^h^e
^cas^{e of}^s^a^f^e^t^y^aⁿ^{d s}^oun^dn^e^s^s^r^u^les^,^w^h^{ere credit u}ⁿⁱ^oⁿ^operation^sⁱⁿ^{teract directl}^y^wⁱ^t^h^t^h^e
^o^p^e^r^a^tioⁿ^o^f^th^{e r}^u^{les. W}^ith^r^e^g^a^r^d^to^en^f^o^r^c^e^m^eⁿ^{t an}^d^coⁿ^s^u^m^er^p^r^o^t^ectioⁿ^r^u^{les, f}^e^w
^dⁱ^f^f^e^r^eⁿ^{ces ex}^{ist. Cr}^ed^{it u}ⁿ^ioⁿ^s^h^a^v^e^f^e^w^e^r^p^o^w^e^r^s^av^ailab^l^{e to}^th^e^m^th^aⁿ^d^o^b^aⁿ^k^s^aⁿ^d
^t^h^ri^ft^s^,^bu^t^t^h^rough^C^U^S^O^s^[cr^e^di^t^uⁿⁱ^oⁿ^s^e^r^vⁱ^{ce org}^aⁿⁱ^zatⁱ^oⁿ^]^{, credi}^t^uⁿⁱ^oⁿ^s^m^a^y^provⁱ^d^e
^t^h^ei^r^m^e^m^b^ers^wⁱ^t^h^{a pan}^opl^y^of^s^ophⁱ^s^tⁱ^c^a^t^{ed f}ⁱⁿ^aⁿ^cⁱ^a^l^s^e^rvⁱ^ces^an^{d produ}^ct^s^t^h^at^ri^v^a^l^s^t^h^e³³
^of^f^e^riⁿ^g^s^of^bank^s^aⁿ^{d t}^h^ri^f^t^s^.

^(...c^on^tin^ue^d)
²⁶^Ibid^.
²⁷^K^e^s^s^l^e^r^{, p. 1}⁰^.
²⁸^C^R^S^R^e^por^{t R}^L³⁰³⁷⁵^,^M^a^j^o^r^Fi^nancⁱ^a^l^Se^r^v^ic^e^s^Le^gis^l^ati^on,^The^G^r^am^m^-^Le^ac^h-Blile^y^Ac^{t (}^P^.L.¹⁰^6-1^{02): A}ⁿ
^Overvi^ew^{, b}^y^{F. Je}^aⁿ^W^e^{lls a}^{nd W}^illia^m^{D. Ja}^c^k^son.
²⁹^Ibid^.
³⁰^C^R^S^R^e^por^{t R}^S²¹¹³^4,^M^e^r^c^hant^Bankⁱ^ng:^Mⁱ^xⁱ^ng^Ba^nk^ing^a^{nd C}^o^m^m^e^r^c^e^U^nde^r^the^G^r^am^m^-^Le^ac^h-Blile^y^Ac^t^{, by}
^G^a^r^y^Shor^te^r^.
³¹^{CRS Rep}^o^r^{t 9}⁸^-9³³^,^C^r^e^d^{it U}ⁿ^io^{n M}^e^m^b^e^r^s^h^{ip Ac}^c^e^s^s^Ac^t:^Bac^k^g^r^oun^d^an^{d I}^s^s^u^e^s^,^p.^3.
³²^K^e^s^s^l^e^r^{, p. 5}^.
³³^U^.^{S. D}^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^Comp^arin^{g Cre}^d^{it U}ⁿ^io^{ns wit}^h^Othe^{r De}^pository^Iⁿ^stit^utio^ns^{, p. 24.}

Proponents of taxation of credit unions argue that deregulation has caused extensive competition
among depository institutions. These institutions actively compete for deposits by offering the
best terms, including the highest rate of return to depositors. Depository institutions also compete
for borrowers by offering the best loan terms including the lowest interest rates. Proponents of
taxation argue that the concept of the common bond has continued to weaken. For example, the
OmniAmerican Federal Credit Union
^{... cou}ⁿ^t^s^{137,000 m}^e^m^b^ers^e^m^p^l^o^y^{ed at}^{1,300 bu}^sⁱⁿ^e^ss^es^aⁿ^{d org}^aⁿⁱ^zatⁱ^oⁿ^s^{, ra}ⁿ^gⁱ^ng^f^r^o^m
^t^h^{e Bo}^y^S^c^ou^t^s^of^A^m^eri^{ca t}^o^Pi^{er O}ⁿ^{e Im}^port^s^.^A^t^t^h^{e e}ⁿ^{d of}^1996,^as^s^e^t^s^t^o^t^a^l^e^{d $517}³⁴
^m^illioⁿ^....
Another example, the “Wescom Credit Union’s field of membership includes the 16 million ³⁵
people living in Los Angeles, Ventura, Orange, Riverside, and San Bernardino Counties.”
Tax proponents maintain that vigorous competition between credit unions and other depository
institutions justifies the same tax treatment for all institutions. They argue that, for market forces
to allocate resources efficiently, depository institutions should have a level playing field. But, in
this view, the income tax exemption for credit unions gives them a competitive advantage over
other depository institutions. Credit unions pay no income taxes on earnings whether distributed
or retained. Credit unions can earn tax free interest on their retained earnings. Proponents assert
that credit unions have lower operating costs because of their tax exemption. Consequently, credit
unions can pay depositors higher rates of return and charge borrowers lower interest rates. It can
be argued that the income tax exemption for credit unions has enabled them to grow more rapidly
than other depository institutions.
The American Bankers Association (ABA) states that, “Traditionally, credit unions were based on
a simple concept: bring together a closely-knit group of people, pool their resources, and provide ³⁶
small loans for one another.” The ABA argues that the tax exemption has allowed some of these
traditional credit unions to “morph” into “highly competitive financial institutions virtually ³⁷
indistinguishable from banks.” The ABA maintains that “credit unions that have adhered to the ³⁸
traditional principles should continue to benefit from the tax preferences.” But, the ABA argues
that credit unions that have morphed into large, aggressive financial institutions should lose their ³⁹
tax exemption.
Supporters of the credit union tax exemption emphasize the uniqueness of credit unions compared
to other depository institutions. Credit unions are nonprofit financial cooperatives directed by
volunteers for the purpose of serving their members. Credit unions provide many services free or
below cost in order to assist members. These services include small loans, financial counseling,

³⁴^Ke^nne^{th N.}^G^ilpin,^“^P^ig^gy^Ba^{nks w}^{ith Musc}^le^s,”^{New Yo}^{rk Times}^{, v}^o^l.¹⁴^6,^no.⁵⁰^,7¹⁵^{; Fe}^br^ua^r^y^{26, 1}⁹⁹⁷^,^{p. B}¹^.
³⁵^Te^s^tim^ony^{of J}^e^{ff Pl}^ag^ge^oⁿ^be^ha^{lf of}^the^Am^e^r^ic^an^Ba^nk^e^r^s^As^s^o^cⁱ^atioⁿ^be^for^e^the^C^o^m^m^itte^e^oⁿ^W^a^y^s^an^{d M}^e^ans^,
^Nov^.^3,²⁰⁰⁵^{. W}^e^sc^o^m^Cre^d^{it Un}^{ion’s w}^e^bsite^{is htt}^p^://w^ww^.^w^e^s^c^o^m^.^org^.
³⁶^Ameri^can^Ban^k^ers^A^sso^ci^atⁱ^oⁿ^,^The^M^o^rp^hin^g^o^f^Cre^d^{it U}ⁿ^io^ns^{, W}^a^s^h^ing^t^{on, 20}^04,^p.^1.
³⁷^Ibid^{., p. 2.}
³⁸^Ibid^{., p. 3.}
³⁹^Ibid^{., p. 2.}

and low balance share drafts. The NCUA argues that the taxation of credit unions would create
pressure to eliminate these subsidized services. Furthermore, taxing credit unions would raise the
cost of credit to many people without an alternative source of credit. Concern has been expressed
in Congress about the access of lower income families to basic depository services.
The American Bankers Association cites surveys that concluded that members of credit unions
had higher average incomes, higher average educational levels, and a higher rate of home ⁴⁰
ownership than non-members. Hence, the ABA argues that the credit union industry is giving a ⁴¹
faulty image of their membership. Yet an official of the Credit Union National Association cites
a recent survey conducted by Gallup for the ABA that found that the average household income
of bank customers was $51,000 per year compared to $46,000 per year for credit union ⁴²
members. The Government Accountability Office (GAO) found that “the extent to which credit
unions serve persons of modest means is not definitively known because of limited data and lack ⁴³
of indicators.” GAO also concluded that “Federal Reserve Board data suggest that credit unions ⁴⁴
serve a slightly lower proportion of low- and moderate-income households than do banks.”
Supporters of the tax exemption argue that credit unions are subject to certain regulatory
constraints not required of other depository institutions and that these constraints reduce the
competitiveness of credit unions. For example, “credit unions are not subject to the internal
control reporting requirements that the Federal Deposit Insurance Corporation Improvement Act ⁴⁵
of 1991 ... imposed on banks and thrifts.” These restrictions arguably impose an implicit tax on
credit unions.
Supporters of the tax exemption point out that
^Un^{der ch}^aⁿ^g^e^s^m^a^{de to th}^{e I}ⁿ^t^e^rn^{al R}^e^v^eⁿ^u^e^C^{ode b}^y^th^e^{... S}^m^all^Bu^sⁱⁿ^e^s^s^J^{ob P}^r^otection
^A^c^t^of^{1996, f}ⁱⁿ^aⁿ^cⁱ^a^lⁱⁿ^s^tⁱ^t^u^tⁱ^ons^{, i}ⁿ^cl^u^dⁱⁿ^g^bank^s^,^t^h^ri^ft^s^,^an^{d t}^h^ei^{r parent}^h^o^l^dⁱⁿ^g
^com^p^aⁿ^ies^,^{... [are] able to elect S}^u^bch^a^pter^S^corporatioⁿ^s^t^atus^un^{der th}^e^C^{ode an}^d
^g^eⁿ^e^rall^y^recei^v^e^pas^s^-^t^h^r^ough^ta^x^treat^m^eⁿ^t^f^o^r^f^e^{deral incom}^e^tax^p^u^rpos^esⁱ^f^certaiⁿ⁴⁶
^{criteria are m}^e^t.
Thus, a financial institution with a Subchapter S status is generally not subject to the federal
corporate-level income tax. The corporation’s taxable income flows through to its shareholders in
proportion to their stock ownership, and the shareholders pay federal income taxes on their share
of this taxable income.
Supporters of the tax exemption point out that the Credit Union Membership Access Act (P.L.
105-219) states that

⁴⁰^Ameri^can^Ban^k^ers^A^sso^ci^atⁱ^oⁿ^,^Cre^d^{it Uni}^{on Re}^ality^C^h^e^c^k^{, 19}⁹⁶^{, p.}^2.
⁴¹^Ibid^.
⁴²^Fre^d^St^ok^e^l^{d, “}^B^aⁿ^k^s^G^e^tting^T^e^st^y^Ov^e^r^Co^m^p^e^{tition f}^r^om^Cre^d^{it Unio}^ns,”^Ta^x^N^o^t^e^s^{, v}^o^l^.⁷⁵^,^no^.^{1, A}^p^{ril 7}^,¹⁹⁹⁷^,
^{p. 4}⁶^.
⁴³^U^.^{S. G}^o^v^e^rnm^e^nt^A^c^c^ounta^b^ility^O^f^fⁱ^c^e^,^I^s^s^u^e^s^Re^gar^ding^the^Tax^-^Ex^e^m^{pt St}^atus^{of C}^r^e^d^it^Uⁿⁱ^ons^{, T}^e^s^tⁱ^m^on^y
^be^f^o^r^e^the^H^ous^e^C^o^m^m^itte^e^{on W}^a^y^s^a^{nd Me}^aⁿ^s^,^N^o^v^.^3,²⁰⁰⁵^{, p}^.¹⁹^.
⁴⁴^Ibid^.,^p.2²^.
⁴⁵^U^.^{S. G}^e^ne^r^a^{l A}^c^c^ountiⁿ^g^O^f^fⁱ^c^e^,^C^r^e^d^{it U}ⁿⁱ^ons^:^Fin^ancⁱ^a^{l C}^o^nd^it^{ion H}^a^s^Improv^e^d^{, b}^u^{t O}^p^p^o^rtuⁿⁱ^tie^{s Ex}^{ist to}
^Enh^anc^e^O^v^e^r^sⁱ^ght^an^d^Sh^ar^e^Iⁿ^s^u^r^anc^e^M^aⁿ^age^m^e^nt^{, G}^A^O^-^04-⁹¹⁽^W^a^s^hing^{ton: O}^c^t.²⁰⁰³⁾^{, p}^.⁶^.
⁴⁶^Fe^de^r^a^{l D}^e^pos^it^Iⁿ^s^u^r^a^nc^e^C^o^r^p^o^r^a^tion,^S^ubc^h^apte^r^{S Ele}^c^tio^{n f}^o^r^Fe^de^r^a^{l I}ⁿ^c^o^m^e^Tax^e^s^{, Fi}^na^nc^ia^l^Institutⁱ^oⁿ^L^e^tte^r,
^Oc^{t 29,}¹⁹⁹⁶^{, p}^.¹^.^A^v^a^ila^ble^a^t^http://w^ww^.^f^dic^.^g^o^v^/^ne^w^s^/ⁿ^e^w^s/^fⁱ^na^nc^ia^l/19^96/^f^il969^1.htm^l^.

^T^h^e^Co^ngr^e^s^{s fi}^nd^{s t}^h^e^fo^l^l^o^wⁱ^ng^:
^{... C}^r^{edit u}ⁿⁱ^ons^{, un}^li^k^e^m^a^ny^oth^e^{r participan}^tsⁱⁿ^th^e^fⁱⁿ^aⁿ^cⁱ^a^{l s}^e^rv^ices^m^a^r^k^{et, are ex}^e^m^pt
^fr^o^m^F^e^d^e^r^a^l^aⁿ^d^m^o^s^t^S^t^a^t^e^t^a^x^e^s^becau^s^e^t^h^e^y^{are m}^e^m^b^er-o^wⁿ^ed,^dem^o^craticall^y^operate^d,
^no^t^-^fo^r^-^p^r^o^fⁱ^t^o^r^gaⁿⁱ^z^a^tⁱ^oⁿ^s^ge^ne^r^a^l^l^y^ma^na^ge^d^b^y^vo^l^unt^e^e^r^b^o^a^r^d^s^of^directors^an^d^becau^s^e
^th^e^y^h^a^v^e^th^e^s^p^ecifⁱ^ed^mⁱ^s^sⁱ^oⁿ^of^m^eet^ing^t^h^{e credit an}^{d s}^a^vⁱ^ng^sⁿ^eeds^of^cons^um^ers^,⁴⁷
^es^peci^al^l^y^pers^ons^of^m^odes^t^m^eans^.

In the 108^th Congress, top officials of trade associations representing credit unions and
commercials banks advocated the interests of their members on the issue of the tax exempt status ⁴⁸
of credit unions. On February 23, 2004, former Treasury Secretary John W. Snow stated that the ⁴⁹
Bush Administration opposed taxing credit unions. On March 16, 2004, Donald E. Powell,
Chairman of the Federal Deposit Insurance Corporation stated that
^{... credit}^uⁿⁱ^ons^ou^gh^{t to pa}^y^tax^e^s^.^T^h^{e play}ⁱⁿ^g^fⁱ^{eld h}^a^s^s^h^ift^e^{d in}^recen^t^y^ears^.^W^e^’^v^e^g^oⁿ^e
^f^r^o^m²⁰^cr^ed^{it u}ⁿⁱ^oⁿ^s^wⁱ^t^h^asse^{ts o}^f^m^o^r^e^th^aⁿ^$¹^b^illioⁿ^ten^y^ear^{s ag}^o^to⁸³^s^u^c^hⁱⁿ^s^tⁱ^t^u^tⁱ^oⁿ^s
^to^d^a^y^.^Mo^r^e^an^d^m^o^r^e^w^e^’^r^{e seein}^g^cr^ed^{it u}ⁿ^ioⁿ^ad^v^e^r^t^isin^g^to^u^tⁱⁿ^g^th^{e b}^eⁿ^e^f^{its o}^f
^m^e^m^b^ers^h^{ip o}^v^{er doin}^g^bu^sⁱⁿ^e^s^s^wⁱ^{th a bank}^{. In}^m^y^vⁱ^e^w^{, i}^f^t^h^e^y^{are g}^oⁱⁿ^{g to co}^m^p^ete^wⁱ^th⁵⁰
^b^aⁿ^k^s^t^h^eⁿ^w^e^s^h^o^u^ld^d^o^o^u^r^b^e^{st to}^en^s^u^r^e^th^{at t}^h^{e co}^m^p^etitⁱ^oⁿ^{is f}^a^ir^.
On June 2, 2004, three major banking trade groups announced that they had jointed forces to
campaign against the tax-exempt status of credit unions. The American Bankers Association, the
Independent Community Bankers Association (ICBA), and the America’s Community Bankers
established the Inter-Trade Credit Union Coordinating Council to campaign against what they
considered to be unfair competitive advantages of credit unions, including their tax exempt ⁵¹
status.

In the 109^th Congress, the tax exempt status of credit unions continued to be debated. On
February 23, 2005, Dale Leighty, Chairman of the Independent Community Bankers Association
(ICBA), stated in a press release that

⁴⁷^P^.^L^.¹⁰^5-²¹⁹^,^Se^c^.^2.
⁴⁸^Ma^rc^ia^Ka^{ss, “}^C^UN^A^Outra^g^e^a^t^A^B^A^P^r^iority^to^Re^m^o^v^e^Cre^d^{it Union}^T^a^x^Ex^e^m^{ption G}^e^{ts Shru}^g^,^”^Daily^Tax
^Re^por^t^{, no}^.⁷⁹^,^A^p^{ril 26}^,²⁰⁰⁴^{, p. G}⁹^.
⁴⁹^Ma^r^c^ia^K^a^s^s^,^“^S^now^P^r^aⁱ^s^e^s^C^r^e^d^{it U}ⁿ^io^ns^’^Ec^o^nom^ic^R^o^le^{, Sa}^y^s^A^d^mⁱ^nis^t^r^a^{tion O}^p^pos^e^s^T^a^xⁱ^ng^T^h^em^,”^Daily^Tax
^Re^por^t^{, no}^.³⁵^{, Fe}^{b. 24}^,²⁰⁰⁴^{, p. G}⁴^.
⁵⁰^D^ona^ld^E.^Pow^e^{ll, “}^R^e^m^a^r^k^s^bef^o^r^e^the^I^nde^pe^nde^nt^C^o^m^m^unity^B^a^nk^e^r^s^A^s^s^o^cⁱ^a^tion,”^{FDIC Pre}^{ss Re}^le^ase^{, Ma}^rc^h
^16,²⁰⁰⁴^{, p}^.¹^.
⁵¹^“^T^hr^e^e^B^a^nk^ing^T^r^a^d^e^G^r^oups^Uⁿ^ite^to^C^h^a^lle^ng^e^C^r^e^d^it^Uⁿⁱ^ons^’^T^a^x^B^r^e^a^k^,”^Daily^Tax^Re^port^,^no^{. 10}^{7, J}^une^4,
²⁰⁰^{4, p.}^G⁵^.

^Giv^eⁿ^th^{e en}^or^m^o^u^s^sⁱ^{ze of}^th^e^tax^s^u^bs^id^y^credit^uⁿⁱ^oⁿ^s^{are receiv}ⁱⁿ^g^,^t^h^{ere s}^h^{ould be clear}
^an^d^so^lid^e^v^id^en^ce^t^h^{at cr}^ed^it^uⁿ^ioⁿ^s^ar^e^f^u^l^f^illiⁿ^g^so^m^e^uⁿⁱ^q^u^{e o}^r^ex^tr^ao^r^dⁱⁿ^ar^yⁿ^eedⁱⁿ⁵²
^today^’^s^hⁱ^g^h^l^y^co^m^p^eti^tiv^e^fⁱ^nan^c^{ial s}^e^r^v^ices^s^e^c^t^or—^y^{et t}^h^a^t^isⁿ^o^{t t}^h^{e cas}^e.
Mr. Leighty was referring to a Tax Foundation report sponsored by the ICBA, which was critical ⁵³
of the tax exempt status of credit unions. In response, the Credit Union National Association
(CUNA) published an analysis of the Tax Foundation report. CUNA defended the tax exempt ⁵⁴
status of credit unions and argued that the Tax Foundation study was flawed.
On March 1, 2005, before the Credit Union National Association, then House Ways and Means
Committee ranking Democrat Charles Rangel asserted his support for the federal tax exemption ⁵⁵
for credit unions. On July 15, 2005, at the National Association of Federal Credit Unions’
conference, a board member counseled representatives of credit unions on how to retain the tax ⁵⁶
exemption for credit unions.
On November 1, 2005, the President’s Advisory Panel on Federal Tax Reform issued its report,
which included two proposals for fundamental tax reform. One proposal would broaden the
income tax base and lower tax rates. The other proposal would eliminate most tax preferences and
shift the current income tax base to primarily a consumption tax base. Neither of these proposals
explicitly recommended the repeal of the tax exempt status of credit unions. Because these
proposals would broaden the tax base, however, it is likely that each proposal would repeal the
tax exemption.
Also on November 1, 2005, Ed Yingling, president and chief executive officer of the American
Bankers Association (ABA), said that the ABA will use the courts to challenge the credit union
tax exemption because the tax exemption gives credit unions an unfair competitive advantage ⁵⁷
over banks, particularly community banks. On November 3, 2005, the Committee on Ways and
Means held hearings concerning the tax exempt status of credit unions. On February 27, 2006, at
a CUNA Conference, former Treasury Secretary John Snow reaffirmed the Bush Administration’s ⁵⁸
support for the income tax exemption for credit unions.
On March 22, 2006, former Chairman of the House Ways and Means Committee William Thomas
sent a letter to Ms. JoAnn Johnson, Chairperson of CUNA, expressing concern about the
independence and objectivity of the NCUA in collecting and analyzing data about the income

⁵²^Robe^{rt T}^.^Z^ung^{, “}^I^CBA^Cite^{s Study}ⁱⁿ^P^u^s^h^t^o^Elim^ina^t^e^T^a^x^Ex^e^m^{ption G}^r^aⁿ^te^{d Cre}^d^{it Un}^io^ns,”^Daily^Tax^Re^port^,
^no.³⁸^{, Fe}^b^.²⁸^,²⁰⁰⁵^{, p}^.^G⁸^.
⁵³^J^o^hⁿ^A^.^T^a^to^m^,^Compe^titiv^e^Adv^ant^age^{: A}^St^udy^{of t}^h^e^Fe^de^ral^Ta^x^Ex^e^m^ption^{for Cre}^d^it^Uni^ons^,^T^a^x^Foun^da^tio^n,
⁽^W^a^s^hing^{ton: T}^a^x^Foun^da^tio^n,²⁰⁰⁵⁾^,²⁸^p^.
⁵⁴^Cre^d^{it Un}^io^{n Na}^tio^na^{l A}^ssocⁱ^a^tion,^C^U^N^A^An^aly^s^is^of^I^C^BA/T^a^x^Fouⁿ^d^a^tioⁿ^Stu^d^y^o^f^the^Fe^de^r^a^l^C^r^e^d^{it U}ⁿⁱ^on^Tax
^E^xemp^tⁱ^oⁿ^,⁽^W^a^s^hing^ton^,^C^U^N^A^{, Ma}^r^c^{h 2}⁴^,²⁰⁰⁵⁾^,^p.^1.
⁵⁵^A^lis^{on B}^e^nne^tt,^“^L^aw^m^a^k^e^r^s^{, O}^f^fⁱ^cⁱ^a^l^s^Ex^pr^e^s^s^Suppor^{t f}^o^r^C^r^e^d^it^Uⁿ^io^{n Fe}^de^r^a^{l T}^a^x^Ex^em^ption,”^Daily^Tax
^Re^por^t^{, no}^.⁴⁰^{, Ma}^rc^h²^,²⁰⁰⁵^{, p. G}⁸^.
⁵⁶^“^N^A^F^C^U^C^ouns^e^l^s^{on R}^e^taⁱⁿ^ing^T^a^x^Ex^em^{ption f}^o^r^C^r^e^d^{it U}ⁿ^io^ns^,”^Daily^T^a^x^Re^port^{, n}^o^.¹³^{7, J}^u^ly^19,²⁰⁰⁵^,^p.
^G7^.
⁵⁷^Ma^rc^ia^Ka^{ss, “}^A^B^A^P^l^aⁿ^{s t}^o^Use^Courts^{to C}^h^a^lle^ng^e^Cre^d^{it U}ⁿ^io^{n T}^a^x^Ex^e^m^{ption, Ying}^li^ng^Sa^y^s^,^”^Daily^Tax
^Re^por^t^{, no}^.²¹¹^,^N^o^v^.^{2, 20}^05,^p.^G⁶^.
⁵⁸^M^a^rci^a^Kass,^“T^r^easu^r^y^S^ecret^ary^Sⁿ^o^w^Re^affⁱ^r^m^{s S}^u^p^p^o^r^t^f^o^{r Cr}^edⁱ^t^Unⁱ^o^{n T}^a^{x E}^x^e^m^p^tⁱ^oⁿ^,^”^Daⁱ^l^{y T}^a^{x R}^e^po^rt^{, N}^o^.
^{39, Fe}^{b. 28}^,²⁰⁰⁶^{, pp}^.^G⁴^-^G^5.

characteristics of credit union members and the compensation of credit union executives.⁵⁹ In his
letter, former Chairman Thomas stated
^...^w^e^{do n}^o^tⁿ^{eed a c}^h^eerl^{eader col}^l^ectⁱⁿ^g^an^{d a}ⁿ^al^y^zⁱⁿ^{g i}ⁿ^f^o^r^m^atⁱ^oⁿ^about^w^h^et^h^e^{r credi}^t
^uⁿⁱ^oⁿ^{s ar}^{e f}^u^l^f^illiⁿ^g^th^{e g}^o^al^{s in}^ten^d^ed^wⁱ^t^h^th^eir^tax^e^x^e^m^p^tⁱ^oⁿ^.^I^ask^th^at^y^o^u^b^e^mⁱⁿ^d^f^u^l^o^f
^y^o^u^r^proper^rol^e^as^anⁱⁿ^depen^d^en^t^an^{d obj}^ectⁱ^v^{e reg}^u^l^at^{or of}^credi^t^uⁿⁱ^on^s^as^y^o^u^m^o^v^e
^f^o^r^w^ard^wⁱ^t^h^y^o^u^r^{data collection}^proj^ect.
^I^also^w^aⁿ^t^toⁿ^o^ti^f^y^y^o^u^t^h^{at I}^a^m^as^kⁱⁿ^g^t^h^{e Go}^v^e^rⁿ^m^eⁿ^t^A^c^co^uⁿ^t^ab^ilit^y^O^f^fⁱ^{ce to}^ex^p^aⁿ^d
^its^c^u^rren^t^re^vⁱ^e^w^o^f^credit^uⁿⁱ^on^{tax ex}^e^m^{ption to i}ⁿ^clu^d^{e a}ⁿ^an^al^y^sⁱ^s^{of t}^h^{e i}ⁿ^depen^d^en^ce
^an^{d obj}^ectⁱ^vⁱ^t^y^o^f^t^h^e^N^C^U^A^{. T}^h^{e N}^C^U^A^’s^vⁱ^gi^l^aⁿ^c^eⁱ^s^cri^tⁱ^cal^t^o^eⁿ^su^riⁿ^g^t^h^orough⁶⁰
^ov^ersⁱ^gh^{t of}^{credit un}^ioⁿ^s^{, as}^w^e^{ll a}^s^{a balan}^{ced an}^al^y^sⁱ^s^of^th^{eir tax-}^e^x^e^m^pt^s^t^at^u^s^.
In November 2006, the National Credit Union Administration released a report titled Member ⁶¹
Service Assessment Pilot Program. The NCUA stated the this report provided “the most ⁶²
conclusive data to date available on the membership profiles of FCUs [federal credit unions].”
The NCUA concluded that their study:
• Demonstrates that FCUs are serving those they have been chartered to serve—
working individuals.
• Confirms the expectation that FCUs designated as low-income, with underserved
areas, or with a community base have better opportunities to serve lower income
groups and individuals and generally have more diverse membership profiles as
compared to FCUs with more restrictive common bonds and fields of
membership.
• Strengthens NCUA’s previous position that changes in membership profiles do ⁶³
not occur immediately—they take time.
But former House Ways and Means Committee Chairman William Thomas stated that the NCUA ⁶⁴
“still has much more work ahead of them with respect to transparency and data collection.” He ⁶⁵
also asserted that the NCUA had “overstated the strength of the results of the report.”
In November 2006, the Government Accountability Office published a report titled Greater
Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation ⁶⁶
Arrangements. The GAO found that

⁵⁹^{Kurt Ritte}^r^pusc^h^,^“^R^e^p^{. T}^hom^a^s^Critic^a^l^of^NCUA^O^f^fⁱ^cⁱ^a^l^{’s Ca}^{ll f}^o^{r Se}^lling^Cong^re^{ss o}ⁿ^Co^nti^nue^{d Ex}^e^m^ption,”
^Daily^Tax^Re^port^,ⁿ^o^.^57,^Ma^r^c^h^24,²⁰⁰⁶^{, p}^.^G¹^.
⁶⁰^L^e^tte^r^f^r^om^Re^pre^s^eⁿ^ta^tiv^e^W^illi^a^m^T^h^o^m^a^s^{, Cha}ⁱ^r^m^aⁿ^of^the^Ho^use^W^a^y^s^a^{nd Me}^aⁿ^{s Com}^m^itte^e^,^{to Ms}^{. JoA}ⁿⁿ
^J^ohns^on,^C^h^aⁱ^r^p^e^r^s^on^of^the^N^a^tiona^{l C}^r^e^dⁱ^t^Uⁿⁱ^oⁿ^A^d^mⁱ^nis^t^r^a^{tion, Ma}^r^c^{h 2}²^,²⁰⁰⁶^.
⁶¹^Na^tiona^{l Cre}^d^{it Uni}^oⁿ^A^d^mⁱ^nistra^tion,^Memb^{er S}^e^{rvice Assess}^men^t^{Pilot Prog}^ra^m^,^N^o^v.^3,²⁰⁰⁶^,⁸⁰^p^.
⁶²^Ibid^{., p. 1.}
⁶³^Ibid^.
⁶⁴^A^lis^{on B}^e^nne^{tt a}^nd^Ma^r^c^ia^K^a^s^s^,^T^hom^a^s^R^e^s^ponds^{to C}^r^e^d^{it U}ⁿ^io^{n R}^e^por^{t, Sa}^y^s^Mor^e^D^a^ta^N^e^e^d^e^d^oⁿ
^Me^m^b^e^r^s^h^ip,”^Daily^Tax^Re^port^,^N^o^v^.²⁴^{, 2}⁰⁰⁶^,^{p. G}²^.
⁶⁵^Ibid^.
⁶⁶^G^o^v^e^rn^m^e^nt^A^c^c^ounta^b^ility^O^f^fⁱ^c^e^,^G^r^e^a^te^r^Tr^ans^p^a^r^e^nc^y^N^e^e^d^e^d^{on W}^{ho C}^r^e^dⁱ^t^Uⁿⁱ^ons^Se^r^v^e^an^d^on^Seⁿⁱ^or
^E^xecu^tⁱ^{ve Co}^mp^en^sa^tⁱ^oⁿ^A^rra^ng^e^m^en^t^{, r}^e^por^{t n}^o^{. G}^A^O^-^07-^{29, N}^o^v^.²⁰⁰⁶^{, 1}⁰³^p.

^N^C^U^A^h^a^{s es}^t^a^blⁱ^s^h^e^{d t}^h^{e l}^o^w^-ⁱⁿ^co^m^e^credi^t^unⁱ^oⁿ^prog^r^a^m^aⁿ^{d al}^l^o^w^e^{d adopt}ⁱ^oⁿ^of
^“uⁿ^d^ers^e^r^v^{ed areas}^{” to in}^creas^{e credit u}ⁿⁱ^oⁿ^s^e^rv^ice^s^{to in}^divⁱ^d^u^als^of^m^odes^t^m^eans^.
^Desp^{ite in}^cr^eased^cr^ed^{it u}ⁿⁱ^oⁿ^p^a^r^ticip^atioⁿⁱⁿ^t^h^es^{e prog}^ra^m^s^an^{d t}^h^{e ex}^paⁿ^s^ion^o^f
^com^m^uni^t^y^ch^art^e^rs^{, t}^h^{e 2004 an}^{d 2001 S}^u^rv^e^y^o^f^C^onsum^er^Fⁱⁿ^aⁿ^cesⁱⁿ^di^cat^{ed t}^h^at^credi^t
^uni^oⁿ^{s l}^a^gge^d^b^e^hi^nd^b^a^nk^{s i}ⁿ^se^r^vⁱⁿ^{g l}^o^w^-^aⁿ^d^m^o^d^e^r^a^t^e^-i^nc^o^m^e^ho^use^h^o^l^d^s^.^N^C^U^A
^o^f^fⁱ^cia^l^{s to}^ld^{GAO th}^{at, g}ⁱ^v^eⁿ^th^{e n}^a^sceⁿ^{t n}^a^t^u^{re o}^f^{its t}^w^oⁱⁿ^itiati^v^e^{s an}^d^t^h^{e relativ}^el^y
^recen^{t s}^hⁱ^f^{t to co}^m^m^uⁿⁱ^t^y^c^h^ar^ters^{, th}^e^y^{did n}^o^t^y^e^{t ex}^{pect obs}^erv^a^{ble ch}^ang^e^sⁱⁿ^th^{e data.}
^A^l^s^o^{, NC}^U^A^recen^tl^y^h^a^s^un^dertak^eⁿ^{a pilot ef}^f^o^{rt to}^{collect data on}^th^{e in}^co^m^e
^ch^aracteris^tic^s^of^{credit u}ⁿⁱ^on^m^e^m^b^ers^.^B^ecaus^e^li^m^{ited data ex}^is^{t on}^th^{e e}^x^teⁿ^t^to^w^h^ich
^{credit u}ⁿⁱ^oⁿ^s^s^e^rv^{e t}^h^os^{e o}^f^m^odes^t^m^eans^,^aⁿ^y^a^s^s^e^s^s^m^e^nt^w^o^u^l^{d be enh}^aⁿ^{ced i}^f^N^C^U^A⁶⁷
^w^e^r^e^to^m^o^v^e^b^e^y^oⁿ^d^{its p}^ilo^t^an^d^s^y^ste^m^aticall^y^co^{llect i}ⁿ^c^o^m^e^d^a^ta.
GAO also stated that “executive compensation for federal credit unions is not transparent, largely
because federal credit unions are not required to publicly file information on executive ⁶⁸
compensation.”

The President’s budget for FY2008 did not propose any change in the tax exempt status of credit
unions. As of January 15, 2008, no legislation has been introduced in Congress concerning the tax
exempt status of credit unions.
In the first session of the 110^th Congress, the U.S. Treasury introduced two major studies
concerning corporate tax reform: “Business Taxation and Global Competitiveness,” and ^st
“Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21 ^th
Century.” These studies may be the basis for legislation in the second session of the 110
Congress.
On July 23, 2007, the U.S. Department of the Treasury held a conference on “Business Taxation
and Global Competitiveness.” The Treasury released a background paper that argued that
^T^h^{e cu}^rren^t^bu^sⁱⁿ^e^s^s^tax^bas^eⁱⁿ^clu^d^e^s^an^arra^y^of^s^p^{ecial prov}^is^ioⁿ^s^t^h^{at redu}^{ce ta}^x^e^s
^f^o^{r part}ⁱ^c^u^l^{ar t}^y^pes^of^actⁱ^vⁱ^tⁱ^e^s^,ⁱⁿ^du^st^ri^es^{, an}^{d bu}^sⁱⁿ^e^s^s^e^s^.^Th^e^s^e^p^r^o^vⁱ^sⁱ^oⁿ^s^t^a^k^e^t^h^e^f^o^rm^of
^ex^cl^usⁱ^oⁿ^f^r^o^mⁱⁿ^co^m^e^{, deduct}ⁱ^oⁿ^s^al^l^o^w^e^{d or enh}^aⁿ^{ced f}^r^om^w^h^a^t^ot^h^e^r^wⁱ^s^e^w^o^u^l^{d be}
^allo^w^e^{d, pref}^eren^{tial ta}^x^rates^,ⁱⁿ^co^m^e^def^e^{rral, an}^{d tax}^credit^s^.^So^m^e^of^t^h^es^e^p^r^o^vⁱ^sⁱ^oⁿ^s^a^r^e
ⁱⁿ^teⁿ^d^{ed to eas}^{e tax}^com^p^lia^{nce an}^{d adm}ⁱⁿⁱ^s^t^ration^,^s^u^ch^as^allo^wⁱⁿ^g^cas^h^accoun^tiⁿ^g^f^o^r
^s^m^al^{l co}^r^p^o^r^atioⁿ^s^{, b}^u^t^o^t^h^e^r^s^w^e^r^eⁱⁿ^teⁿ^d^ed^b^y^C^oⁿ^g^r^es^s^to^en^cou^r^ag^e^particu^l^ar^t^y^pe^s^of
^actⁱ^vⁱ^t^y^.^T^h^{e prem}ⁱ^s^{e un}^derl^yⁱ^ng^m^a^ny^o^f^t^h^{e s}^p^eci^al^provⁱ^sⁱ^onsⁱ^s^t^h^at^t^h^e^y^pro^m^ot^e
^activ^itie^{s th}^a^t^h^a^v^e^sp^illo^v^e^r^ef^f^e^c^t^{s, o}^r^ad^d^r^{ess v}^a^rⁱ^o^u^{s e}^x^terⁿ^alitie^{s o}^r^m^a^r^k^et^f^a^il^u^r^es.
^Un^w^a^r^r^aⁿ^t^ed^ta^x^su^b^s^id^ies^m^a^y^lead^to^th^e^mⁱ^sal^l^o^catioⁿ^o^f^cap^{ital, as th}^e^y^eⁿ^co^u^r^ag^e
ⁱⁿ^v^e^s^t^m^eⁿ^t^decisⁱ^oⁿ^s^bas^e^{d on tax}^c^h^aracteris^tic^s^rath^{er t}^h^aⁿ^econ^o^mⁱ^c^fuⁿ^d^a^m^entals^{, a}ⁿ^d
^ge^ne^r^a^l^l^{y r}^e^d^u^c^e^e^c^o^no^mi^c^gr^o^w^t^h^.

⁶⁷^I^b^id^{., hig}^h^lig^hts^pa^g^e^.
⁶⁸^Ibid^{., p. 6.}

^T^o^g^e^th^er^{, th}^ese^p^r^o^v^isioⁿ^s^su^b^s^tan^t^iall^yⁿ^a^r^r^o^w^t^h^{e co}^r^p^o^r^{ate tax}^b^a^se,^w^h^ich^r^e^q^u^ir^es
^th^{at ta}^x^r^a^te^{s b}^e^hⁱ^g^h^erⁱⁿ^o^r^d^e^r^to^r^a^{ise t}^h^{e sa}^m^e^tax^r^e^v^eⁿ^u^e^{. Fo}^r^ex^a^m^p^l^{e, it i}^s^e^s^ti^m^a^ted
^th^{at t}^h^es^e^s^p^{ecial corporate tax}^prov^is^ioⁿ^sⁿ^a^rro^w^t^h^{e corporat}^{e t}^a^x^bas^e^b^y^roug^h^l^y²⁵
^percen^t^.^If^t^h^{e t}^a^x^bas^e^w^e^re^broa^den^e^{d by}^re^m^o^vⁱⁿ^g^t^h^{ese s}^p^eci^al^provⁱ^sⁱ^oⁿ^s^{, t}^h^{e t}^op
^corpor^at^{e t}^a^x^rat^e^of³⁵^percen^t^cou^l^{d be}^redu^{ced t}^o²⁷^percen^t^,^or,^as^aⁿ^a^l^t^e^rⁿ^a^tⁱ^v^e^,^a^b^o^u^t⁴⁰
^p^e^r^cen^{t o}^fⁱⁿ^v^e^st^m^eⁿ^t^co^sts^co^u^l^d^b^e^w^r^itteⁿ^o^f^fⁱ^m^m^e^dⁱ^atel^y⁽ⁱ^{.e., e}^x^p^eⁿ^s^ed⁾^b^y^all⁶⁹
^b^u^si^ne^sse^s.
The Treasury states that the United States has the second highest statutory corporate tax rate
among countries in the Organization for Economic Cooperation and Development (OECD, an ⁷⁰
organization consisting of most developed countries). The Treasury maintains that broadening
the corporate tax base and reducing the statutory corporate tax rate would improve the global ⁷¹
competitive position of the United States.
The tax expenditures that the Treasury proposes to eliminate includes the “exemption of credit ⁷²
union income,” which is estimated to raise $19 billion during the period FY2008-FY2017. This
$19 billion would equal approximately 1.53% of the total amount of $1,241 billion from the ⁷³
Treasury’s proposed broadening of the corporate tax base. According to a news report, President
Bush is considering a fresh plan to cut tax rates for U.S. corporations to make them more ⁷⁴
competitive around the world.
On July 25, 2007, Daniel A. Mica, President and CEO of the Credit Union National Association,
sent a letter to Secretary of Treasury Henry M. Paulson that expressed concern about the Treasury
report’s listing of the tax-exempt status of credit unions as one of the business tax breaks that ⁷⁵
could be repealed in order to finance a reduction in the corporate tax rate. Mr. Mica stated that
“Such a listing contradicts the 2004 letter to CUNA from President Bush in which he stated, I
support strongly the tax-exempt status of credit unions, and will continue to highlight the ⁷⁶
important contributions that credit unions make to our financial system.” Mr. Mica asserted that
the Treasury report failed to indicate that banks receive substantial tax preferences including the ⁷⁷
corporate tax exemption for Subchapter S banks.
On August 10, 2007, the National Association of Federal Credit Unions (NAFCU) indicated that
in past statements the Bush Administration had supported the credit union tax exemption and ⁷⁸
urged the administration to continue supporting the exemption.
On July 27, 2007, Edward Yingling, an official at the American Bankers Association, sent a letter
to Henry M. Paulson, Jr., Secretary of the Treasury, that stated

⁶⁹^U^.^{S. D}^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^Tre^a^sury^Co^nfe^r^eⁿ^c^e^on^Busi^ne^{ss Tax}^a^ti^on^a^{nd Gl}^ob^{al C}^o^mpe^titiv^eⁿ^e^s^s^,
^B^a^c^k^g^r^ound^P^a^pe^r^,^W^a^s^h^ing^t^oⁿ^{, J}^u^ly^{23, 2}⁰⁰⁷^,^p.^7.
⁷⁰^I^b^id^{., p. 35.}
⁷¹^Ibid^{., p. 1.}
⁷²^Ibid^{. p}^.¹¹^.
⁷³^Ibid^.
⁷⁴^P^e^t^e^{r Backer,}^“Bu^s^h^M^a^y^T^r^y^t^o^Cu^t^Co^r^p^o^r^at^{e T}^a^{x Rat}^e^s,^”^W^a^s^h^ingt^{on Pos}^t^,^A^u^g^.^{9, 2}⁰⁰⁷^,^{p. A}¹^.
⁷⁵^Danⁱ^el^A^.^Mⁱ^ca,^L^e^t^t^e^{r t}^o^S^ecret^a^r^{y o}^f^T^r^ea^su^{ry Hen}^r^{y M.}^P^a^u^l^s^oⁿ^{, Ju}^l^y²⁵^,²⁰⁰⁷^.
⁷⁶^Danⁱ^el^A^.^Mⁱ^ca,^L^e^t^t^e^{r t}^o^S^ecret^a^r^{y o}^f^T^r^ea^su^{ry Hen}^r^{y M.}^P^a^u^l^s^oⁿ^{, Ju}^l^y²⁵^,²⁰⁰⁷^.
⁷⁷^Ibid^.
⁷⁸^N^A^FC^U^U^r^ge^s^B^u^s^h^{to R}^e^a^f^fⁱ^r^m^C^U^Su^pp^or^{t, N}^A^FC^U^ne^w^r^e^le^a^s^e^,^A^u^g^.^10,²⁰^07,^a^v^a^ila^ble^a^t
^http:^//www^.na^f^c^u^.org^/.

^On^beh^a^l^f^of^th^e^Am^erican^B^a^nk^ers^A^s^s^o^ciation^,^I^a^p^p^l^a^u^d^t^h^e^T^r^e^a^s^u^r^y^D^e^p^a^r^t^m^eⁿ^t^’^s^e^f^f^o^r^t^s
^to^lo^w^e^r^co^r^p^o^r^{ate tax}^r^a^tes^to^h^e^lp^m^aⁱⁿ^taiⁿ^U.S.^g^l^o^b^a^{l co}^m^p^etitiv^eⁿ^ess.^T^h^{is i}^s^cr^itica^l^to
^m^aⁱⁿ^t^aⁱⁿⁱⁿ^g^t^h^{e l}^ong-^t^e^r^m^s^t^r^eⁿ^g^t^h^o^f^ou^{r econ}^o^m^y^aⁿ^{d t}^h^{e f}ⁱⁿ^aⁿ^cⁱ^a^l^s^e^rvi^cesⁱⁿ^dus^t^r^y^.
^Iden^tifyⁱⁿ^g^w^a^s^t^efu^l^u^s^es^of^ta^x^pref^eren^ces^is^aⁿ^ex^celleⁿ^t^wa^y^to^m^a^k^e^t^h^{e tax}^s^y^s^t^em^m^o^re
^equ^{itable. On}^{e s}^u^ch^w^a^s^t^e^f^u^l^ta^x^pref^eren^ce—^w^h^ic^h^isⁿ^o^{ted in}^y^o^u^r^{report in}^T^a^ble^2.1—is⁷⁹
^th^{e tax}^e^x^e^m^p^tioⁿ^f^o^r^cr^ed^{it u}ⁿⁱ^oⁿ^s
On December 20, 2007, the U.S. Treasury issued a report titled Approaches to Improve the ^st⁸⁰
Competitiveness of the U.S. Business Tax System for the 21 Century. This report was a follow-^th
up to the July 26 conference report and included the following statement:
^T^h^{ree broad ap}^proach^es^f^o^r^ref^o^r^mⁱⁿ^{g t}^h^{e U}^.^S^.^busⁱⁿ^e^s^s^t^a^x^sy^s^t^e^m^are^ou^t^lⁱⁿ^e^d:⁽¹⁾
^r^e^p^l^acin^g^b^u^sⁱⁿ^e^{ss i}ⁿ^co^m^e^tax^e^s^wⁱ^th^{a b}^u^siⁿ^e^s^s^acti^v^{ities ta}^x⁽^B^A^T⁾^,^a^ty^p^e^o^f^coⁿ^s^u^m^p^tⁱ^oⁿ
^tax^,⁽²⁾^eli^mⁱⁿ^atⁱⁿ^g^sp^{ecial b}^u^sⁱⁿ^e^ss^tax^p^r^o^vⁱ^s^ioⁿ^s^co^u^p^led^wⁱ^t^h^e^ith^er^b^u^siⁿ^e^s^s^ta^x^r^a^te
^r^e^d^u^ctioⁿ^o^r^f^a^ster^w^r^ite^-^o^f^f^o^f^b^u^sⁱⁿ^e^{ss i}ⁿ^v^e^st^m^eⁿ^t^{, p}^o^t^en^tiall^y^co^m^bⁱⁿ^ed^wⁱ^th^t^h^e
^ex^e^m^ptioⁿ^of^acti^v^e^f^o^reign^ea^rn^ing^s^{, a}ⁿ^{d (3) i}^m^ple^m^eⁿ^tiⁿ^g^s^p^ecifⁱ^{c ch}^aⁿ^g^e^s^t^h^at^f^o^cu^s^oⁿ
ⁱ^m^portan^t^s^t^r^u^ct^u^r^{al problem}^s^wⁱ^thⁱⁿ^ou^{r bu}^sⁱⁿ^e^s^s^tax^s^y^s^t^e^m^{. R}^a^th^{er t}^h^an^pres^{ent a}
^particu^l^{ar recom}^m^eⁿ^d^ation^,^thⁱ^s^{report ex}^amⁱⁿ^es^t^h^{e s}^t^reng^th^s^aⁿ^d^w^e^a^kⁿ^e^s^s^e^s^o^f^th^e^v^a^rⁱ^o^u^s
^approach^es^.^T^h^{e v}^a^ri^ou^s^polⁱ^c^yⁱ^d^eas^di^s^c^us^s^e^{d i}ⁿ^t^hⁱ^s^repo^rt^repres^en^t^j^u^s^t^s^o^m^e^of^t^h^e
^approach^es^th^{at cou}^l^{d be c}^oⁿ^s^idered.^T^h^is^{report does}ⁿ^o^{t adv}^o^{cate any}^s^p^ecifⁱ^c
^recom^m^eⁿ^d^ationⁿ^o^{r does}^it^{call f}^o^{r or adv}^aⁿ^c^e^any^le^gⁱ^s^l^ativ^{e pac}^k^ag^{e or re}^g^u^l^a^t^or^y⁸¹
^ch^ang^e^s^.
In the first approach, the proposed business activities tax (BAT) is a subtraction-method value-⁸²
added tax (VAT).
The second approach concerning broadening the business tax base includes a table titled “Special
Tax Provisions Substantially Narrow the Business Tax Base,” which lists the exemption of credit ⁸³
union income. As previously stated in the July 23, 2007, report, for the period FY2008-FY2017,
this table indicates that the amount of revenue that would be raised by eliminating this “special ⁸⁴
tax provision” would be $19 billion. The total estimated revenue yield from eliminating the
business tax preferences (both corporate and noncorporate) would be $1,326 billion, which would
allow a reduction in the top business tax rate (both corporate and non-corporate) from 35% to ⁸⁵

28%.

⁷⁹^“^B^aⁿ^k^e^r^s^G^r^{oup A}^ppla^u^ds^T^r^e^a^s^ur^y^’^s^E^f^f^o^r^t^s^{to R}^e^d^u^c^e^C^o^r^p^or^a^t^e^T^a^x^R^a^t^e^s^,^O^ppos^e^s^Ex^e^m^{pt Sta}^t^us^f^o^r^L^a^r^g^e
^Credⁱ^t^Unⁱ^oⁿ^s^,^”^l^e^t^t^e^{r f}^r^o^m^E^d^w^a^rd^L^.^Yiⁿ^g^lⁱⁿ^g,^o^f^fⁱ^ci^al^o^f^Ameri^c^an^Ban^k^{ers A}^s^so^ci^atⁱ^oⁿ^,^t^o^S^ecret^ar^y^o^f^t^h^{e T}^r^e^a^su^r^y
^H^e^nr^y^{M. P}^a^uls^{on J}^r^.^,^J^u^ly^27,²⁰^07.
⁸⁰^U^.^{S. D}^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^O^f^fⁱ^c^e^o^f^T^a^x^P^o^lic^y^,^Appr^oac^he^{s to Impr}^ov^e^the^Com^p^e^titiv^eⁿ^e^ss^{of t}^h^e^U.S.
^Bu^sin^e^{ss T}^a^{x S}^y^{stem fo}^{r t}^h^{e 21}^st^C^e^ntur^y^{, D}^e^c^.²⁰^,²⁰^07,¹¹⁶^p.
⁸¹^Ibⁱ^d^.^,^p^.ⁱⁱ^o^f^execu^tⁱ^v^{e su}^mm^ar^y^.
⁸²^For^aⁿ^e^x^plaⁿ^a^tioⁿ^of^a^s^ubtr^a^c^tⁱ^on-^m^e^thod^VA^T^,^s^e^e^C^R^S^R^e^por^{t R}^L³³⁶¹^9,^Val^u^e^-^Ad^de^{d T}^a^x^:^{A N}^e^w^U^.^{S. Re}^v^e^nue
^Sour^c^e^?^,^by^J^a^m^e^s^{M. Bic}^k^le^y^,^p^p^{. 3}^-^4.
⁸³^U^.^{S. D}^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^Appr^oac^he^{s t}^o^Impr^ov^e^the^C^o^mpe^titiv^eⁿ^e^ss^{of t}^h^e^U.S^.^B^u^sine^ss^Tax^Sy^ste^m^for
^the²¹^st^C^e^ntur^y^{, p. 48}^.
⁸⁴^Ibid^.
⁸⁵^Ibid^.

On December 21, 2007, in response to the second Treasury report, Daniel A. Mica, President and
CEO of the Credit Union National Association, sent a letter to Secretary of the Treasury Henry
Paulson. In his letter, Mr. Mica stated
^T^o^ach^iev^e^th^e^g^o^{al o}^f^redu^c^e^{d corpo}^r^{ate in}^co^m^e^ta^x^e^s^,^{the paper f}^o^cu^s^e^s^on^repealing
^v^a^rⁱ^o^u^s^b^u^sⁱⁿ^e^ss^tax^b^r^ea^k^s^,^listiⁿ^g^th^e^ex^e^m^p^tioⁿ^o^f^cr^ed^{it u}ⁿ^ioⁿⁱⁿ^co^m^e^a^m^oⁿ^g^t^h^e
^pref^eren^ces^.^A^s^w^e^poi^nt^{ed out}ⁱⁿ^o^u^{r prev}ⁱ^ous^l^e^t^t^e^r,^s^u^c^h^a^lⁱ^s^tⁱⁿ^g^w^h^ol^l^y^coⁿ^t^radi^ct^s^t^h^e
^{2004 l}^e^t^t^e^{r t}^o^C^U^N^A^f^r^o^m^Presⁱ^d^en^t^B^u^shⁱⁿ^w^hⁱ^c^{h h}^e^s^t^at^e^d^{, “}^I^s^u^pport^s^t^rong^l^y^t^h^{e t}^a^x-
^e^x^e^m^p^t^s^t^a^t^u^s^o^f^c^r^e^dⁱ^t^uni^oⁿ^s,^aⁿ^d^wⁱ^l^l^c^o^ntⁱ^nue^t^o^hi^gh^lⁱ^g^ht^t^h^eⁱ^m^port^aⁿ^t^con^t^ri^b^u^tⁱ^ons^t^h^at
^c^r^e^dⁱ^t^uni^oⁿ^s^m^a^ke^t^o^fⁱ^na^ncⁱ^a^l^s^y^st^e^m^.^”
^W^e^h^a^v^e^alread^y^{pointed ou}^{t t}^h^{e i}ⁿ^{appropriate con}^t^ras^t^bet^w^een^t^h^{e report’}^s^s^ileⁿ^{ce o}ⁿ^th^e
^su^b^s^taⁿ^{tial b}^eⁿ^e^fⁱ^t^s^o^f^cr^ed^{it u}ⁿ^ioⁿ^s^to^coⁿ^s^u^m^er^s,^w^h^{ile lau}^dⁱⁿ^g^S^u^b^c^h^a^p^t^er^{S Co}^r^p^o^r^a^tⁱ^oⁿ^s
^an^d^o^t^h^e^r^f^l^o^w^-^t^h^r^o^u^g^h^eⁿ^titi^{es t}^h^{at ar}^{e p}^a^r^t^o^f^w^h^a^t^t^h^{e r}^e^p^o^r^{t calls th}^e^“ⁿ^oⁿ^-^c^o^r^p^o^r^ate
^s^{ector” becau}^s^e^{credit un}^ioⁿ^s^a^r^{e n}^on-^s^t^ock^,ⁿ^o^t-f^o^r-^prof^it^co^operativ^es^t^h^{at operate}^f^o^{r th}^e
^m^u^tu^{al be}ⁿ^e^fⁱ^{t of}^th^eⁱ^r^m^e^m^b^ers^.^T^h^ey^{do n}^o^{t co}^m^p^{ete in}^t^h^e^m^a^r^k^{etplace f}^o^{r inv}^e^s^t^m^eⁿ^t
^f^uⁿ^d^s^wⁱ^t^h^s^t^o^c^k^co^m^p^aⁿ^ie^{s o}^r^o^t^h^e^r^f^o^r^-^p^r^o^fⁱ^t^eⁿ^titie^{s t}^h^at^o^f^f^e^r^a^hⁱ^g^h^er^p^o^t^en^tial^r^e^tu^rⁿ⁸⁶
^th^anⁱⁿ^teres^t^on^{a s}^a^vⁱ^ng^s^acco^uⁿ^t^.
In response to the issuance of the second Treasury report, reportedly Keith Liggett, senior
economist at the American Bankers Association, “applauded the idea of taxing credit union—
especially large ones that have moved away from their mission of serving customers of modest ⁸⁷
means and are morphing into large sophisticated bank-like entities.” Mr. Liggett also reportedly
said “if the subsidy is not going for its purpose, it questions the efficacy of maintaining this
exemption, and if you are going to look at lowering corporate taxes, preferences just really distort ⁸⁸
the allocation of resources.”

In the future, technological change and deregulation may further increase competition between
credit unions and other depository institutions. It should be noted that thrift institutions were
exempt from the federal income tax until 1951. The tax exemption for thrift institutions was
eliminated because Congress felt that the relationship between thrifts and their members had
substantially changed. In the 1980s, 1990s, and through 2007, the credit union industry grew
more rapidly than other depository industries, and this more rapid growth may continue. Since
many believe that an economically neutral tax system requires that financial institutions engaged
in similar activities should have the same tax treatment, the income tax exemption for credit
unions may occasion continuing debate.

⁸⁶^Danⁱ^el^A^.^Mⁱ^ca,^L^e^t^t^e^{r t}^o^S^ecret^a^r^{y o}^f^T^r^ea^su^{ry Hen}^r^{y P}^a^u^l^s^oⁿ^,^D^e^c^.^21,²⁰⁰⁷^.
⁸⁷^R^obe^r^t^B^a^r^b^a^,^“^T^r^e^a^s^ur^y^R^e^por^{t R}^e^ta^ins^N^o^tioⁿ^of^T^a^xⁱ^ng^C^U^s^,^”^A^m^eri^c^aⁿ^B^aⁿ^ker^{, v}^o^l.¹⁷^3,^no.^6,^J^a^{n. 9}^,²⁰⁰⁸^.
⁸⁸^Ibid^.

^Ja^m^e^s^M^.^Bi^c^k^l^e^y
^Sp^{ecialist i}ⁿ^P^u^b^{lic Fi}ⁿ^aⁿ^ce
^jbⁱ^c^k^l^e^y^@^c^r^s^.^l^o^c.^g^o^v^,^7-⁷⁷⁹⁴