By Jason Stverak
Recent commentary has claimed that federal credit unions are “cashing in” on a supposed double tax exemption – namely, their federal tax-exempt status and their ability to receive Community Development Financial Institution (CDFI) Fund support. This view mischaracterizes the purpose of credit unions’ tax status and their participation in community development programs.
The credit union tax exemption is not a loophole or unfair advantage. Far from “grifting” taxpayers, credit unions deliver enormous value to the very communities and modest-income consumers they were created to serve.
Unlike banks, credit unions are not-for-profit cooperatives with no outside shareholders. They are member-owned and democratically governed, meaning every customer is also an owner. All earnings are reinvested back into serving members – through lower loan rates, higher savings yields, and reduced fees – rather than paid out as stock dividends.
Ever since the Federal Credit Union Act of 1934, credit unions have been tax-exempt “not because of their size or scope, but because of their structure and purpose as member-owned cooperatives.” Lawmakers reaffirmed this in the Credit Union Membership Access Act of 1998, explicitly recognizing that credit unions “provide an essential public service and operate on a fundamentally different model than for-profit financial institutions.”
Benefits To Members And Communities
Because of their tax status and mission-focus, credit unions are able to return extraordinary value to everyday Americans.
Collectively, credit unions deliver an estimated $37 billion every year in direct financial benefits to their members in the form of better rates and lower fees. That works out to roughly $220 in savings per member per year compared to using a bank. These consumer benefits dwarf the forgone tax revenue.
In fact, one economic analysis found the roughly $2.9 billion annual “cost” of the credit union tax exemption yields over $297 billion in economic output – a return of more than $100 for every $1 of federal revenue forgone. Far from burdening taxpayers, the credit union model strengthens the economy and helps working families.
It’s clear that “taxing credit unions would effectively raise costs for millions of working families while weakening financial access for military communities” – exactly the people credit unions are meant to serve.
Staying True To The Mission: Serving Modest Means And Underserved Areas
Today over 2,500 credit unions carry a federal low-income designation, serving 73 million members often of modest incomes. Additionally, more than 400 credit unions are certified CDFIs, serving nearly 20 million Americans in distressed urban and rural communities.
These institutions concentrate on areas and populations that for-profit banks often neglect – from remote rural towns and inner-city neighborhoods to military bases and school campuses.
The very fact that so many credit unions have qualified as CDFIs is proof that they continue to focus on low-income and underserved populations in line with their founding mission. Rather than operating “outside the bounds” of their mandate, credit unions are frequently the only financial lifeline in financial deserts where traditional banks choose not to operate.
Essential Services On Military Bases
Many military installations are served by on-base credit unions that provide accessible accounts, affordable loans, financial education, and even emergency assistance to servicemembers and their families.
These are often remote locations or tight-knit communities that megabanks ignore. Thanks to the tax exemption, these credit unions can operate on thin margins and still remain present on bases.
If that status were removed, many smaller credit unions would be forced to close branches on military bases and in underserved areas, cutting off troops and veterans from safe financial services and leaving them vulnerable to predatory lenders. Protecting the credit union tax exemption means protecting financial opportunity for millions of Americans, especially those who serve our country.
The Truth About CDFI Funding: Investing In Communities, Not “Double Dipping”
A recent op-ed suggested a conflict in credit unions being both tax-exempt and recipients of CDFI Fund grants – calling it a “dual subsidy.”
This is a misunderstanding of both the law and the purpose of the CDFI program. The Community Development Financial Institutions Fund was created in 1994 with the goal of “promoting economic development in distressed urban and rural communities”.
Congress specifically made credit unions eligible for CDFI certification alongside banks and other lenders, recognizing that credit unions often have the closest ties to, and strongest track record serving, those underserved areas.
In practice, hundreds of credit unions have earned CDFI status by meeting strict benchmarks for serving low-income populations. The result is that credit unions now account for roughly 65% of all CDFI assets nationwide, a testament to their deep involvement in community development finance – not an abuse of the system, but rather evidence that they are effective vehicles for funneling resources to the communities Congress intended to help.
It’s true that federal credit unions are deemed “instrumentalities” of the government for tax purposes, and CDFI regulations say a CDFI cannot be a government instrumentality.
However, this is largely a technical classification. Federal credit unions are independent, member-owned cooperatives – they are not government agencies or government-funded entities.
The Treasury Department and CDFI Fund have long recognized credit unions as eligible CDFIs despite the tax-code wording, precisely because credit unions function as private community-focused organizations. Even the U.S. Treasury under the current administration has acknowledged the important role that the CDFI Fund and CDFIs play in expanding access to capital…[They] are a key component of supporting Main Street America and that the goal should be strengthening these programs’ impact for underserved communities.
Banks Enjoy Tax Breaks Too – Often Far Larger than Credit Unions’
Banks have the option to organize as Subchapter S corporations to avoid corporate income tax at the entity level – a benefit credit unions cannot use.
Over 2,000 banks (more than one-third of all U.S. banks) take advantage of this, avoiding an estimated $1.8 billion in taxes in 2022 alone by using Subchapter S status. Moreover, the 2017 corporate tax cut legislation slashed banks’ tax rates from 35% to 21%, delivering a roughly $28.8 billion annual windfall to the banking industry. In total, large for-profit banks reap well over $20 billion per year in tax breaks and exploit the tax code to minimize or eliminate their tax bills – far more than the roughly $3 billion/year tax expenditure for all credit unions.
The entire credit union sector holds about one-tenth the assets of the banking sector – roughly $2 trillion vs. $24 trillion in assets for banks. Many banks are huge, profit-driven corporations that pay out earnings to wealthy shareholders.
If Congress is to examine credit unions’ tax status in the name of fairness, it must also scrutinize the myriad tax strategies and loopholes banks enjoy.
Stripping credit unions of their tax exemption or cutting them off from CDFI support would further tilt favor of big banks, at the expense of ordinary Americans. The likely outcomes have been studied and are alarming:
- Estimates show over $10 billion per year in direct benefits to consumers would be lost in the form of worse pricing on financial products.
- Facing new tax burdens, many smaller credit unions (particularly in rural areas or on military bases) could close or be forced to merge, unable to survive on thin margins. This would create “financial deserts” in communities that currently rely on not-for-profit credit unions.
- To offset taxes, remaining credit unions might have no choice but to cut back on the very programs that distinguish them – free financial counseling, first-time homebuyer workshops, small-dollar emergency loans, educational programs.
- Big banks would face less pressure to keep their rates low and fees fair, which means all consumers could end up paying more for financial services.
- New tax burdens could force layoffs or branch closures, resulting in job losses and reduced economic activity in communities that can least afford it. Overall U.S. economic growth would take a hit– analysts project that eliminating the credit union tax exemption would shrink GDP by approximately $266 billion over the next decade and cost the economy 822,000 jobs.
Let’s keep credit unions free to fulfill their mission of serving those of modest means, rather than hobbling them with new taxes or misguided restrictions. The losers in such a scenario wouldn’t be credit union “fat cats” – there are none – but everyday people and communities across the nation.
Protecting credit unions’ tax status is pro-consumer, pro-competition, and pro-community, and it deserves to be preserved.
Jason Stverak is Chief Advocacy Officer at the Defense Credit Union Council.