ARLINGTON, Va.—A new study by NAFCU shows the benefit to U.S. consumers from the credit union federal income tax exemption is $16 billion per year—but it is projecting that annual total to climb as interest rates rise, the trade association says.
As CUToday.info reported, NAFCU commissioned an independent study that shows the benefit to U.S. consumers from the credit union federal income tax exemption is $16 billion per year, or $159 billion over the 10-year period the study examined.
The authors of the study are Robert Feinberg, Ph.D., professor of economics at American University, and Douglas Meade, Ph.D., director of research at Interindustry Economic Research Fund.
In their report, the study authors noted ways banks’ customers benefit from the role credit unions play in the marketplace.
“The benefit of better credit union loan and deposit rates extends to bank customers as well, due to increased competition,” they wrote. “A 50% reduction in the credit union market share would cost bank customers an estimated $6.9 billion to $15.7 billion per year in higher loan rates and lower deposit rates. The total losses to bank customers due to less favorable rates totaled $102.2 billion over the ten-year period examined.”'
Key Drivers
NAFCU Chief Economist and Director of Research Curt Long emphasized that key drivers of the annual consumer benefit are loan volume and the difference in rates between CUs and banks.
“As rates start to rise I believe we will see the gap between credit unions’ more consumer-friendly rates and what banks charge their customers will grow as well,” noted Long. “The benefit to bank customers from credit union rates peaked in 2007 and then came down steadily. Only recently has this benefit again started to rise. The same can be said for the benefit of the CU tax exemption for credit union members.”
Bank customer benefits from the CU tax exemption reached a high of $15.7 billion in 2007, dipped to $14.2 billion in 2008, and then steadily declined each year hitting a low of $6.9 billion in 2013.Those benefits rose to $7.8 billion in 2014 and $7.4 billion in 2015.
CU member benefits from the tax exemption also peaked in 2007 at $6.9 billion, dropped to $6.2 billion in 2008, and fell steadily to a low of $4.4 billion in 2011. In 2014 and 2015 the CU benefits were $6.6 billion in each year.
Long said that due to rock-bottom interest rates that the gap between bank and CD rates has become compressed.
Curt Long, NAFCU
“But as rates rise this gap between credit union and bank rates will widen, allowing credit unions to even more competitively price against banks and increase the annual benefit from the tax exemption,” Long said. “Again, the last time bank customers enjoyed a big benefit from the impact of credit union rates on bank pricing was before the recession. We will begin to see a return to that.”
Long emphasized that the study shows that in markets in which there is a large CU presence, the benefits to bank customers is the greatest. He said the benefits to consumers overall from the CU tax exemption varies a great deal by state, as well. Consumers from larger states received substantial gains from the presence of credit unions in their markets. Over the 10 years the study covered, the largest consumer benefits amounted to $18.8 billion in California, $16.8 billion in New York, $11.3 billion in Texas, $7.7 billion in Virginia, $7.4 billion in Florida, and $6.3 billion in Illinois.
Breaking down consumer benefits by product, from 2006-2015 the study shows that credit union members gained the most from auto loans ($31 billion), while bank customers benefitted the most from real estate loans ($40.6 billion). The next highest savings for bank customers came from unsecured loans and credit cards ($33 billion). That same category also netted credit union members their next-biggest benefit ($9 billion).
Long Shelf Life
Long said he expects that the study will have a long shelf life on Capitol Hill.
“Our lobbyists have started disseminating it around Washington,” he said.
A similar study conducted by CUNA shows that the consumer benefit from the CU tax exemption is $7-$8 billion annually.
Also, As CUToday.info reported, the cost of the credit union tax exemption to the Federal Treasury will be $14.4 billion between 2016 and 2020, according to an estimate included in a new report from the congressional Joint Committee on Taxation.
