Credit Unions Should No Longer Be Tax Exempt

As Congress moves towards extending the expiring provisions of the Tax Cuts and Jobs Act (TCJA), there are many opportunities to simplify the tax code even further. Policymakers ought to create a tax code characterized by equal treatment for businesses. Removing a special exemption for federal credit unions is one way to further simplify how the tax code treats financial institutions.

Ending this tax-exempt status for federal credit unions would help to reduce the deficit. President Trump has voiced support for certain provisions that would do just that. Unfortunately, this resulted in his endorsement for the removal of the so-called carried interest “loophole” for investment managers. Critics of the carried interest exemption have cited the amount of revenue that would be generated if it was removed. However, this provision of tax law is essential for investment managers to reinvest funds into the economy and foster innovation and growth.

Removing the carried interest exemption would generate $6.5 billion against the deficit over a 10-year period. On the other hand, ending the tax-exempt status for credit unions would generate up to $30 billion in additional revenue over the same period. Instead of repealing a part of the tax code that is good for investment and growth, lawmakers can contribute to equity in the tax code. Plus, if permanently extending the TCJA is the aim of lawmakers, this is a commonsense, cost-effective way to offset the associated costs.

As credit unions have become more successful, they have acquired a large amount of other banking institutions in recent years, who are subject to income taxes and income reporting requirements. Credit unions have also increasingly purchased community banks, which are essential to consumers and small business owners. A competitive landscape for community banks allows for personalized and local services. Credit unions absorbing community banks under their tax-exempt status removes those services. Leveling the playing field between these credit unions and the banks they have absorbed would be beneficial for all taxpayers. All financial actors deserve equal regulatory treatment, and carveouts that favor one business over another should be eliminated.

The status quo does not serve the objective of transparency. Federal credit unions do not have to file a 990 form, but state credit unions do. Additionally, federal credit unions argue that their purpose is to serve low-income communities. However, without a requirement to report on this mission or collect data, there is no evidence that they are achieving that objective. If the goal of this administration is to increase transparency, eliminating the tax-exempt status for federal credit unions is just one way to achieve this.

Tax reform should be focused on the creation and maintenance of a simple and equitable tax code. Financial institutions and consumers benefit from tax fairness. There’s no reason to treat federal credit unions differently from other, similarly situated institutions. Regulatory distortions should be eliminated and competition allowed flourish freely. Removing the tax-exempt status from credit unions is one way for lawmakers to continue to create beneficial reform and support all taxpayers.