Should Credit Unions Be Taxed?
Prepared for Members and Committees of Congress
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were repealed, both federally chartered and state-chartered credit unions would become liable for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
Deregulation .................................................................................................................................... 5
Arguments For and Against Taxation..............................................................................................7
Debate in the 108th Congress...........................................................................................................9
Debate in the 109th Congress...........................................................................................................9
Debate in the 110th 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 ththth
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,
The management of a Federal credit Union shall be by a board of directors, a supervisory
committee, and where the bylaws so provide, a credit committee.
The supervisory committee shall be appointed by the board of directors....
1 All credit unions collect federal payroll taxes. Federally-chartered and state-chartered credit unions are subject to
local property taxes. State chartered-credit unions may be subject to additional state and local taxes.
2 U.S. Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget of the
United States Government, Fiscal Year 2008. (Washington: GPO, 2007), p. 287.
3 U.S. Congressional Budget Office, Budget Options, (Washington: GPO, Feb. 2007), p. 294.
5 Richard P. Kessler, Jr. “Credit Unions in the 1990s,” Consumer Finance Law, vol. 47, no. 1, winter 1993, p. 4.
7 Olin S. Pugh and F. Jerry Ingram, Credit Unions: A Movement Becomes an Industry (Reston, Virginia, Reston
Publishing Company, Inc., 1984), p. 7.
At their first meeting after the annual meeting of the members, the directors shall elect from 8
their number the board officers specified in the bylaws.
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
8 P.L. 97-320, Sec. 111 and 112.
9 Credit Union National Association, Monthly Credit Union Estimates, June 2007, p. 5, available from
http://advice.cuna.org/download/mcue.pdf, visited Aug. 31, 2007.
10 Credit Union National Association, Top 100 Credit Unions, Year-End 2005, pp. 8-9, available from
11 National Credit Union Administration, Chartering and Field of Membership Manual (Washington, March 2003), pp.
12 The U.S. Government provided no financial assistance to the credit union industry. In contrast, the cleanup costs of
the thrift industry in the 1980s and early 1990s was $124 billion according to Federal Deposit Insurance Corporation
13 CRS Report 98-933, Credit Union Membership Access Act: Background and Issues, by Pauline Smale, p. 1. This
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
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.
report is available on request from the author.
14 For an explanation of the contents of this legislation, see CRS Report RS22661, Credit Union Regulatory
Improvements Act of 2007 (CURIA), by Pauline Smale.
15 U.S. Department of the Treasury, Comparing Credit Unions with Other Depository Institutions (Washington, Jan.
15, 2001), p. 28.
16 “The Tax Exemption Through the Ages,” Credit Union, Jan. 1986, p. 9.
17 U.S. Congress, Joint Committee on Taxation, (Prepared for use of the Committee on Ways and Means and the
Committee on Finance), Tax Reform Proposals: Taxation of Financial Institutions (Washington: GPO, 1985), p. 43.
18 Kenneth R. Biederman and John A. Tuccillo, Taxation and Regulation of the Savings and Loan Industry (Lexington,
MA: Lexington Books, 1976), p. 5.
19 National Credit Union Administration, Letter of Exemption, Alexandria, Va., revised May 2003.
20 Pugh, pp. 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 Most developed nations with value-added taxes exclude financial services from taxation because it is not
administratively practicable to measure value-added received by customers.
22 In theory, it might be argued that since members are also equity owners of credit unions, a portion of income and
benefits accruing to stockholders is actually distributed credit union equity-like earnings, and simply taxing retained
earnings would apply tax to only a part of income from equity-like investment. However, it is not administratively
feasible to assess the value of these distributed equity-like benefits, and proposals to tax credit unions have been limited
to applying the corporate income tax to retained earnings.
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 overview of the taxation of life insurance, see CRS Report RL32000, Taxation of Life Insurance Products:
Background and Issues, by Andrew D. Pike (consultant).
24 CRS Report 94-744, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, by M. Maureen
Murphy, pp. 1-2. This report is out of print but available on request from the author.
25 Dean F. Amel, “Trends in the Structure of Federally Insured Depository Institutions, 1984-94,” Federal Reserve
Bulletin, vol. 82, no. 1, Jan. 1996, 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
Federal credit unions generally operate within the same legal framework as other federally
insured depository institutions. Most differences between credit unions and other depository
institutions derive from the structure of credit unions. We found this to be most likely in the
case of safety and soundness rules, where credit union operations interact directly with the
operation of the rules. With regard to enforcement and consumer protection rules, few
differences exist. Credit unions have fewer powers available to them than do banks and
thrifts, but through CUSOs [credit union service organization], credit unions may provide
their members with a panoply of sophisticated financial services and products that rivals the 33
offerings of banks and thrifts.
27 Kessler, p. 10.
28 CRS Report RL30375, Major Financial Services Legislation, The Gramm-Leach-Bliley Act (P.L. 106-102): An
Overview, by F. Jean Wells and William D. Jackson.
30 CRS Report RS21134, Merchant Banking: Mixing Banking and Commerce Under the Gramm-Leach-Bliley Act, by
31 CRS Report 98-933, Credit Union Membership Access Act: Background and Issues, p. 3.
32 Kessler, p. 5.
33 U.S. Department of the Treasury, Comparing Credit Unions with Other Depository Institutions, 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
... counts 137,000 members employed at 1,300 businesses and organizations, ranging from
the Boy Scouts of America to Pier One Imports. At the end of 1996, assets totaled $517 34
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
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 Kenneth N. Gilpin, “Piggy Banks with Muscles,” New York Times, vol. 146, no. 50,715; February 26, 1997, p. B1.
35 Testimony of Jeff Plagge on behalf of the American Bankers Association before the Committee on Ways and Means,
Nov. 3, 2005. Wescom Credit Union’s website is http://www.wescom.org.
36 American Bankers Association, The Morphing of Credit Unions, Washington, 2004, 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
Supporters of the tax exemption point out that
Under changes made to the Internal Revenue Code by the ... Small Business Job Protection
Act of 1996, financial institutions, including banks, thrifts, and their parent holding
companies, ... [are] able to elect Subchapter S corporation status under the Code and
generally receive pass-through tax treatment for federal income tax purposes if certain 46
criteria are met.
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 American Bankers Association, Credit Union Reality Check, 1996, p. 2.
42 Fred Stokeld, “Banks Getting Testy Over Competition from Credit Unions,” Tax Notes, vol. 75, no. 1, April 7, 1997,
43 U.S. Government Accountability Office, Issues Regarding the Tax-Exempt Status of Credit Unions, Testimony
before the House Committee on Ways and Means, Nov. 3, 2005, p. 19.
44 Ibid., p.22.
45 U.S. General Accounting Office, Credit Unions: Financial Condition Has Improved, but Opportunities Exist to
Enhance Oversight and Share Insurance Management, GAO-04-91 (Washington: Oct. 2003), p. 6.
46 Federal Deposit Insurance Corporation, Subchapter S Election for Federal Income Taxes, Financial Institution Letter,
Oct 29, 1996, p. 1. Available at http://www.fdic.gov/news/news/financial/1996/fil9691.html.
The Congress finds the following:
... Credit unions, unlike many other participants in the financial services market, are exempt
from Federal and most State taxes because they are member-owned, democratically operated,
not-for-profit organizations generally managed by volunteer boards of directors and because
they have the specified mission of meeting the credit and savings needs of consumers, 47
especially persons of modest means.
In the 108th 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 unions ought to pay taxes. The playing field has shifted in recent years. We’ve gone
from 20 credit unions with assets of more than $1 billion ten years ago to 83 such institutions
today. More and more we’re seeing credit union advertising touting the benefits of
membership over doing business with a bank. In my view, if they are going to compete with 50
banks then we should do our best to ensure that the competition is fair.
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
In the 109th 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. 105-219, Sec. 2.
48 Marcia Kass, “CUNA Outrage at ABA Priority to Remove Credit Union Tax Exemption Gets Shrug,” Daily Tax
Report, no. 79, April 26, 2004, p. G9.
49 Marcia Kass, “Snow Praises Credit Unions’ Economic Role, Says Administration Opposes Taxing Them,” Daily Tax
Report, no. 35, Feb. 24, 2004, p. G4.
50 Donald E. Powell, “Remarks before the Independent Community Bankers Association,” FDIC Press Release, March
16, 2004, p. 1.
51 “Three Banking Trade Groups Unite to Challenge Credit Unions’ Tax Break,” Daily Tax Report, no. 107, June 4,
2004, p. G5.
Given the enormous size of the tax subsidy credit unions are receiving, there should be clear
and solid evidence that credit unions are fulfilling some unique or extraordinary need in 52
today’s highly competitive financial services sector—yet that is not the case.
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
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 Robert T. Zung, “ICBA Cites Study in Push to Eliminate Tax Exemption Granted Credit Unions,” Daily Tax Report,
no. 38, Feb. 28, 2005, p. G8.
53 John A. Tatom, Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions, Tax Foundation,
(Washington: Tax Foundation, 2005), 28 p.
54 Credit Union National Association, CUNA Analysis of ICBA/Tax Foundation Study of the Federal Credit Union Tax
Exemption, (Washington, CUNA, March 24, 2005), p. 1.
55 Alison Bennett, “Lawmakers, Officials Express Support for Credit Union Federal Tax Exemption,” Daily Tax
Report, no. 40, March 2, 2005, p. G8.
56 “NAFCU Counsels on Retaining Tax Exemption for Credit Unions,” Daily Tax Report, no. 137, July 19, 2005, p.
57 Marcia Kass, “ABA Plans to Use Courts to Challenge Credit Union Tax Exemption, Yingling Says,” Daily Tax
Report, no. 211, Nov. 2, 2005, p. G6.
58 Marcia Kass, “Treasury Secretary Snow Reaffirms Support for Credit Union Tax Exemption,” Daily Tax Report, No.
39, Feb. 28, 2006, pp. G4-G5.
characteristics of credit union members and the compensation of credit union executives.59 In his
letter, former Chairman Thomas stated
... we do not need a cheerleader collecting and analyzing information about whether credit
unions are fulfilling the goals intended with their tax exemption. I ask that you be mindful of
your proper role as an independent and objective regulator of credit unions as you move
forward with your data collection project.
I also want to notify you that I am asking the Government Accountability Office to expand
its current review of credit union tax exemption to include an analysis of the independence
and objectivity of the NCUA. The NCUA’s vigilance is critical to ensuring thorough 60
oversight of credit unions, as well as a balanced analysis of their tax-exempt status.
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—
• 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
• 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 Ritterpusch, “Rep. Thomas Critical of NCUA Official’s Call for Selling Congress on Continued Exemption,”
Daily Tax Report, no. 57, March 24, 2006, p. G1.
60 Letter from Representative William Thomas, Chairman of the House Ways and Means Committee, to Ms. JoAnn
Johnson, Chairperson of the National Credit Union Administration, March 22, 2006.
61 National Credit Union Administration, Member Service Assessment Pilot Program, Nov. 3, 2006, 80 p.
62 Ibid., p. 1.
64 Alison Bennett and Marcia Kass, Thomas Responds to Credit Union Report, Says More Data Needed on
Membership,” Daily Tax Report, Nov. 24, 2006, p. G2.
66 Government Accountability Office, Greater Transparency Needed on Who Credit Unions Serve and on Senior
Executive Compensation Arrangement, report no. GAO-07-29, Nov. 2006, 103 p.
NCUA has established the low-income credit union program and allowed adoption of
“underserved areas” to increase credit union services to individuals of modest means.
Despite increased credit union participation in these programs and the expansion of
community charters, the 2004 and 2001 Survey of Consumer Finances indicated that credit
unions lagged behind banks in serving low- and moderate-income households. NCUA
officials told GAO that, given the nascent nature of its two initiatives and the relatively
recent shift to community charters, they did not yet expect observable changes in the data.
Also, NCUA recently has undertaken a pilot effort to collect data on the income
characteristics of credit union members. Because limited data exist on the extent to which
credit unions serve those of modest means, any assessment would be enhanced if NCUA 67
were to move beyond its pilot and systematically collect income data.
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
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 110th 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
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
The current business tax base includes an array of special provisions that reduce taxes
for particular types of activities, industries, and businesses. These provisions take the form of
exclusion from income, deductions allowed or enhanced from what otherwise would be
allowed, preferential tax rates, income deferral, and tax credits. Some of these provisions are
intended to ease tax compliance and administration, such as allowing cash accounting for
small corporations, but others were intended by Congress to encourage particular types of
activity. The premise underlying many of the special provisions is that they promote
activities that have spillover effects, or address various externalities or market failures.
Unwarranted tax subsidies may lead to the misallocation of capital, as they encourage
investment decisions based on tax characteristics rather than economic fundamentals, and
generally reduce economic growth.
67 Ibid., highlights page.
68 Ibid., p. 6.
Together, these provisions substantially narrow the corporate tax base, which requires
that tax rates be higher in order to raise the same tax revenue. For example, it is estimated
that these special corporate tax provisions narrow the corporate tax base by roughly 25
percent. If the tax base were broadened by removing these special provisions, the top
corporate tax rate of 35 percent could be reduced to 27 percent, or, as an alternative, about 40
percent of investment costs could be written off immediately (i.e., expensed) by all 69
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. Department of the Treasury, Treasury Conference on Business Taxation and Global Competitiveness,
Background Paper, Washington, July 23, 2007, p. 7.
70 Ibid., p. 35.
71 Ibid., p. 1.
72 Ibid. p. 11.
74 Peter Backer, “Bush May Try to Cut Corporate Tax Rates,” Washington Post, Aug. 9, 2007, p. A1.
75 Daniel A. Mica, Letter to Secretary of Treasury Henry M. Paulson, July 25, 2007.
76 Daniel A. Mica, Letter to Secretary of Treasury Henry M. Paulson, July 25, 2007.
78 NAFCU Urges Bush to Reaffirm CU Support, NAFCU new release, Aug. 10, 2007, available at
On behalf of the American Bankers Association, I applaud the Treasury Department’s efforts
to lower corporate tax rates to help maintain U.S. global competitiveness. This is critical to
maintaining the long-term strength of our economy and the financial services industry.
Identifying wasteful uses of tax preferences is an excellent way to make the tax system more
equitable. One such wasteful tax preference—which is noted in your report in Table 2.1—is 79
the tax exemption for credit unions
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:
Three broad approaches for reforming the U.S. business tax system are outlined: (1)
replacing business income taxes with a business activities tax (BAT), a type of consumption
tax, (2) eliminating special business tax provisions coupled with either business tax rate
reduction or faster write-off of business investment, potentially combined with the
exemption of active foreign earnings, and (3) implementing specific changes that focus on
important structural problems within our business tax system. Rather than present a
particular recommendation, this report examines the strengths and weaknesses of the various
approaches. The various policy ideas discussed in this report represent just some of the
approaches that could be considered. This report does not advocate any specific
recommendation nor does it call for or advance any legislative package or regulatory 81
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
79 “Bankers Group Applauds Treasury’s Efforts to Reduce Corporate Tax Rates, Opposes Exempt Status for Large
Credit Unions,” letter from Edward L. Yingling, official of American Bankers Association, to Secretary of the Treasury
Henry M. Paulson Jr., July 27, 2007.
80 U.S. Department of the Treasury, Office of Tax Policy, Approaches to Improve the Competitiveness of the U.S.
Business Tax System for the 21st Century, Dec. 20, 2007, 116 p.
81 Ibid., p. ii of executive summary.
82 For an explanation of a subtraction-method VAT, see CRS Report RL33619, Value-Added Tax: A New U.S. Revenue
Source?, by James M. Bickley, pp. 3-4.
83 U.S. Department of the Treasury, Approaches to Improve the Competitiveness of the U.S. Business Tax System for
the 21st Century, p. 48.
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
To achieve the goal of reduced corporate income taxes, the paper focuses on repealing
various business tax breaks, listing the exemption of credit union income among the
preferences. As we pointed out in our previous letter, such a listing wholly 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 important contributions that
credit unions make to financial system.”
We have already pointed out the inappropriate contrast between the report’s silence on the
substantial benefits of credit unions to consumers, while lauding Subchapter S Corporations
and other flow-through entities that are part of what the report calls the “non-corporate
sector” because credit unions are non-stock, not-for-profit cooperatives that operate for the
mutual benefit of their members. They do not compete in the marketplace for investment
funds with stock companies or other for-profit entities that offer a higher potential return 86
than interest on a savings account.
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 Daniel A. Mica, Letter to Secretary of Treasury Henry Paulson, Dec. 21, 2007.
87 Robert Barba, “Treasury Report Retains Notion of Taxing CUs,” American Banker, vol. 173, no. 6, Jan. 9, 2008.
James M. Bickley
Specialist in Public Finance