WASHINGTON — As tax bill negotiations heat up, a provision subjecting credit unions to federal taxes is putting a longstanding but mostly dormant debate back into the spotlight.
Bankers — particularly those who work for the smallest institutions — have long complained that they are competing with credit unions in local markets, and that those credit unions have a tax advantage that's hard for them to beat.
Credit unions are exempt from all taxes except for local real property and personal property taxes because they are organized as member-owned nonprofit organizations. But many bankers argue that since the passage of the Credit Union Membership Access Act in 1998, those nonprofit institutions have begun acting more and more like traditional banks.
"Congress gave credit unions a tax exemption to serve people of modest means, to be different from banks," said Michael Emancipator, a vice president of the Independent Community Bankers of America. "What we've seen since 2000, is credit unions acting no different than taxed banks."
Credit unions maintain that they serve a distinctive purpose from banks, and that their tax status is warranted.
"A lot of the banker arguments relative to competition and unfair advantage and other things are just rhetoric because we have a very different business model, very different investment authorities," said Carrie Hunt, America's Credit Unions chief advocacy officer. "There are real limitations on the credit union business model."
Bankers' newest — and potentially best — opportunity to close that tax gap is the reconciliation process around extending the tax cuts passed by President Donald Trump in his first term. Reconciliation can only be used to resolve differences between House- and Senate-passed versions of spending bills, and importantly requires only a majority vote in Congress, rather than the 60-vote majority required to pass non-spending bills in the Senate. Reconciliation is one of very few avenues for lawmakers to actually pass legislation in a closely divided and contentious lawmaking environment.
Lawmakers are under intense pressure from both the White House and voters to both extend tax cuts for the low-and-middle income earners and to satisfy demands from large business interests and other high earners that their own taxes don't get raised. At the same time, lawmakers are under similar pressure to balance the budget. Some of that funding can be made with funding cuts, but there is not enough government spending for lawmakers to balance the budget with cuts alone. That means they will have to identify items that bring new revenue into the Treasury's coffers.
That leaves a mushy middle that could be impacted by the so-called pay-fors that will have to help balance the lost tax revenue. Republicans floated
Even so, the line item describing credit union taxation in House Republicans' budget is vague, and there are a couple of different forms that taxing credit unions could take. Lawmakers could tax all credit unions on par with banks, or could establish an asset threshold beyond which credit unions could be taxed. Lawmakers could also apply taxes to instances where credit unions acquire a bank.
Early deliberations among leading Republican lawmakers indicate that increased taxes on credit unions' acquisitions of small banks or on the largest credit unions, might be more politically palatable, according to a source directly familiar with the matter. But at this point, they added, most measures are still on the table.
"If not now, then when?" said Jaret Seiberg, a financial services and housing policy analyst for TD Cowen. "This is probably the banking industry's best chance in decades to tackle the credit union taxation conundrum. Yet even with all the tailwinds, it's going to be really hard — and the credit unions are likely to win."
That's because credit unions — perhaps even to a greater extent than community banks — are a powerful lobbying force in Washington.
"The problem here is purely political," Seiberg said. "The credit unions have a lot of clout and they are more passionate about protecting their tax advantage than the banks are in eliminating it."
The tax debate is still in its early stages. In a Truth Social post Wednesday morning, President Trump endorsed a House budget resolution — rather than the much narrower Senate blueprint — that instructs the House Financial Services Committee to find $1 billion in deficit reductions.
If the House's more aggressive resolution is the legislative starting point, that increases the need for lawmakers to include pay-fors like the credit union tax exemption in the final bill.
"Every time there's some sort of tax bill, our friends the bankers like to march out their arguments that we should not have our tax exemption," Hunt said. "We are at the very beginning of an administration, there's a lot of ideas and perspectives and there hasn't been time to test, and there hasn't been any vehicles to really have an avenue for some of those ideas."
Bankers, meanwhile, point to the largest credit unions — the largest of which being Navy Federal Credit Union, which has roughly $180 billion of assets — as an example of the kind of credit union that acts more like a large regional bank than a community lender.
"Acquiring stadium naming rights, private jets — that's not the intention behind the subsidy," Emancipator said.
"Credit unions are larger than ever, their acquisitions of banks have ramped up to record levels," said Alan Keller, senior vice president of legislative policy at ICBA. "Congress is looking for ways to pay for tax cuts, we believe this makes sense from many perspectives."
