Credit union tax exemption at stake in new bill

• Congress is debating a bill that could revoke credit union tax exemptions.

• Credit unions warn this could end their nonprofit model and benefits.

• Over 142 million Americans could lose access to lower fees and better rates.

When Congress passed the Tax Cuts and Jobs Act on December 20, 2017, the legislation kept intact the credit union tax exemption.  

Now, there’s developing legislation that could significantly impact credit unions, their members, and their communities. Lawmakers are considering overturning tax exemptions that allow credit unions to offer lower fees, better rates, and savings that credit unions can reinvest in the community.  

As Congress debates the issue, credit unions and their members are engaging with lawmakers to protect the tax exemption. They’re urging Congress to recognize the value credit unions bring to their communities and the negative impact of a tax increase.  

“The tax bill has a lot of different components to it, but the one that we’re most concerned about and could really devastate credit unions is looking at taxing our federal income,” said Members 1st Chief Marketing Officer Karen Roland. “Credit unions by design are not for profit financial cooperatives that serve our members who own us.  

“We exist to make things more affordable to our members. We have lower loan rates, higher savings rates, and fewer fees, and any money we do make covers that. That’s why we’re able to offer better pricing, per se, for our 142 million Americans who are credit union members.”  

Roland noted that credit unions pay taxes, including federal taxes.  

“In 2023, all credit unions paid $23 billion in federal taxes, and that could be payroll taxes, property taxes, etc., and then about $13 billion from a state and local tax perspective,” said Roland.  

The lone exception, Roland remarked, is in the federal income tax area. Because credit unions are not for profit, the exclusion of them not paying taxes on income has been in effect for nearly a century. That tax exempt was reconfirmed by Congress due to the nature of the business model that credit unions are exempt because they’re member owned and are a democratically operated, not for profit organization.  

“That’s really what’s at stake,” said Roland. “We understand what’s going on in Congress and how can we generate more revenue to give back to Americans? But we need to do the math on this. When you look at the value credit unions give back to those 142 million Americans, that equates to $35.9 billion due to lower rates, fewer fees. Currently, we have a 1300% return on investment.  

“If you start taxing us, that impacts every credit union significantly and then there’s no motivation to be a credit union anymore. We look at it as twofold: the value is greater when you do the math to all of the credit union members and we’re hoping Congress sees that once they really look at the impact of the tax they would get opposed to the benefits we provide to all of the member-owners. The second thing is, I don’t know whether the credit union industry would continue to exist. Fundamentally, the not-for-profit model would not exist anymore.”  

Roland stated that the tax exemption issue has come up before, but when lawmakers looked closely at the numbers, the legislation never moved forward, thus preserving the tax exeption for credit unions.  

“The credit union model lets us stay not for profit and give those savings and benefits back to the 142 million Americans,” said Roland.  

Removing the tax exemptions would harm Americans who are credit union members, Roland said.  

“The credit union model is the one thing that makes us different,” said Roland. “It allows us to add more through better loan rates, higher savings rates, lower fees. Sometimes that uniquely positions us to help those who may be in a very rural area, who may be of lesser means, or have credit issues that sometimes banks aren’t able to help.  

“Sometimes the people who need it most, we can work with because we’re a little more localized, can provide them better savings in a lot of cases compared to a bank.”  

Roland said the impact credit unions have on their communities extends beyond finances.  

“All of the credit unions in this area that I can think of have such a grassroots network where we give sponsorships and small grants to small nonprofit organizations,” said Roland. “We provide good services within our communities because that’s where our members live. We want to make sure their communities are strong.  

“We just want to be able to continue to offer them competitive, affordable financial services. If you start taxing that, we would not be able to do that anymore.”