A new economic study sponsored by America's Credit Unions, a credit union trade association, says consumers would pay a steep price if credit unions were to lose their tax-exempt status — an issue that is being considered as part of Republicans' efforts to extend President Trump's 2017 tax cuts.
A study by Robert M. Feinberg of American University and Douglas Meade of the Interindustry Economic Research Fund commissioned by America's Credit Unions finds that removing credit unions' tax exemption would reduce the number of credit unions operating and weaken the competitive pressure they exert on banks and other financial institutions. Among other negative effects, the resulting tax burden on credit unions could cost consumers $234.6 billion over 10 years, they estimate.
"Our analysis indicates that removing the credit union tax exemption would cost the federal government $33 billion in lost income tax revenue over the next 10 years. GDP would be reduced by $266 billion, and 822,000 jobs would be lost over the next decade as well," they write. "The benefit of better credit union loan and deposit rates extends to bank customers as well, due to increased competition. A 50% reduction in the credit union market share would cost bank customers an estimated $11.9 billion to $22.8 billion per year in higher loan rates and lower deposit rates."
While credit unions are established as nonprofit, community-focused institutions providing low-cost financial services, some of the largest credit unions have expanded their scope significantly. Critics — including many bank competitors — say some credit unions have strayed from their original mission of serving specific client bases and extending credit to lower-income borrowers.
Credit unions have never been subject to federal income tax. However, as some credit unions grow larger than many banks and acquire tax-paying community banks, banking industry groups
This issue has gained traction in Congress, with lawmakers calling for hearings on the tax and regulatory disparities between credit unions and banks. While the study assumes all credit unions would lose their tax-exempt status, Congress is considering a
A proposal circulated by the Ways and Means Committee earlier this year suggested subjecting credit unions to federal income tax as part of efforts to offset the cost of extending the 2017 tax cuts. The House Republicans
Feinberg and Meade find that taxing credit unions would raise costs for both credit union and bank consumers due to its anticompetitive effects. They estimate that, over the past decade, credit unions have generated approximately $23 billion annually in direct consumer savings and earnings. The study assumes that removing the exemption would result in a 50% reduction in credit union market share, which they consider a conservative estimate of the likely impact. Their findings align with previous research from Canada and Australia, where eliminating credit unions' tax exemptions led to an even greater reduction in their numbers.
Between 2014 and 2023, they say credit unions offered significantly better rates compared to banks across several financial products. Interest rates credit unions paid consumers on savings, checking and money market accounts were 8 basis points higher than comparable rates offered by banks. Rates on certificates of deposit, individual retirement accounts and retirement accounts specifically for self-employed individuals were 34 basis points, or 87%, higher. Real estate loan rates were 32 basis points lower than banks; credit card and unsecured loan rates were 106 basis points lower — 9% lower than at banks — and car loan rates were 151 basis points lower, 32% lower than at banks.
"These rate differences are highly consequential to households, especially those living at the margins," they write. "For example, a borrower with a $40,000, 60-month auto loan at the average credit union rate over the 2014 to 2023 period would save $1,600 over the life of the loan versus the prevailing bank rate."
The loss of the credit union tax exemption would have wide-ranging economic effects, according to the study. A model by Inforum predicts that eliminating the exemption would reduce personal income and consumer spending, resulting in a $26.6 billion reduction in GDP and the loss of approximately 82,000 jobs annually.
Jim Nussle, president of America's Credit Unions, said the study provided hard evidence of why the tax exemption is crucial for credit unions and the broader economy.
"For 90 years, credit unions have stood the test of time because of the measurable results they bring to communities across the country – many who have been left behind by the banks with few alternatives that are safe, insured and regulated," he said. "This study proves the real impact of the credit union difference, with higher interest rates for savings, checking and money market accounts while providing the lowest rates on real estate and auto loans."
