Community banks battle credit unions over tax exemptions

A federal corporate income tax exemption provided to credit unions is the subject of an ongoing debate with community banks trying to end the benefit and credit unions fighting for its survival.

Congress granted credit unions corporate-income tax exemption status because of the way they are structured as a non-profit, member-owned cooperatives, the National Association of Federal Credit Unions explained.

However, in a recent letter to the Senate Finance Committee and the House Ways and Means Committee, the Independent Community Bankers of America urged the government to eliminate the credit unions’ tax exemption, arguing the firms are virtually indistinguishable from tax-paying community banks.

But NAFCU released a study suggesting an elimination of the benefit would reduce the credit union market share by 50%.

Brad Thaler, vice president of legislative affairs with NAFCU, said, “Everything found in the study is not only a benefit to credit unions, but it also serves as a check on bank rates. Not only would you loose the money that would go to members, but also bank members would see their rates and fees creep up.”

“If the federal corporate income tax exemption was removed, most [credit unions] would convert to banks or just go away,” NAFCU president and CEO Fred Becker said.

As a result, it would raise the cost of real estate loans in the country overall, Thaler explained.

But despite the ICBA’s request, NAFCU’s Thaler said that no member of Congress is proposing to eliminate it and the proposal has never gained traction in the past.

“Credit Unions have effectively no restrictions on membership and offer many of the same products and services as taxpaying banks but enjoy a sizable tax subsidy,” ICBA argued.

In response, Thaler said, “If credit unions have such an advantage, why are they not converting to credit unions? There are so many restrictions.”

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