A Pivotal (Sub)Chapter in Credit Union History

The term “existential threat” has been coming up a bit too often for comfort- and this time it may not be hyperbole.

Credit unions appear to be facing the most credible danger in memory to their longstanding tax exempt status- a byproduct of the relentless hunt for spending reductions to fund an extension of the Tax Cuts and Jobs Act of 2017. The rationale being floated for subjecting credit unions to income tax makes no economic sense and relies on mischaracterizations. Unfortunately, the exercise seems driven by politics and bureaucracy rather than logic.   

As Americas Credit Unions’ Economics Team documented on last week’s BIGCast, the $3 billion of annual revenue the government foregoes via this exemption (credit unions *do* pay $12 billion in real estate, payroll and other taxes) more than pays for itself through $37 billion of documented financial benefits to consumers- including non-CU members. That benefit is irrelevant to lawmakers’ calculus in pursuing its reduction target, however.

Jason Stverak, Chief Advocacy Officer for the Defense Credit Union Council, highlights an even more frustrating inconsistency in a recent CU Insight article. According to Stverak, nearly half of US banks operate as Subchapter S corporations (a structure available to entities with less than 100 shareholders), which allows them to pay no federal tax– the same sin of which many banks accuse credit unions. These banks’ earnings “flow through” to shareholders, who account for them in their personal taxes. Presumably the $37 billion in benefits generated by CUs also create additional consumer taxable income- a portion of this could certainly be validated via 1099-INTs showing higher savings yields.

Stverak also suggests that banks avail themselves of strategies like accelerated depreciation to further reduce their tax bills. Follow this through to its logical (but depressing) conclusion- if deprived of their current tax treatment, would some CUs reincorporate as for-profit Subchapter S orgs and adopt more aggressive accounting tactics? The net result would be virtually no new government revenue, fewer FI market options, and most likely eradication of much of the existing consumer benefit.    

If this battle weren’t enough to occupy credit unions, last week an Executive Order limited the Community Development Financial Institutions (CDFI) Fund to its “minimum statutory functions permitted by law.” This almost certainly translates to a reduction in grant funds available to enable CDFI-certified credit unions and banks to invest in their communities through more affordable loans and financial services.

According to a 2023 NY Fed research paper, credit unions comprised two-thirds of CDFI assets compared to 26% for banks. Americas Credit Unions Chief Advocacy Officer Carrie Hunt reports there are almost 500 CDFI-certified CUs at present. This appears to be yet another case of credit unions- and more importantly, consumers extending beyond direct CU membership- bearing the disproportionate brunt of program reductions.  

These “existential threats” have been top-of-mind in discussions at our recent CU Town Hall sessions. John Best and I plan to build upon this bi-weekly platform to address these issues with the detail they deserve.