The Real Reason Bankers Oppose Credit Unions' Tax Exemption

In a recent BankThink column, American Bankers Association president Frank Keating argues that credit unions are "virtually indistinguishable" from banks and as such should not be exempt from paying federal corporate income taxes. But a key distinguishing characteristic between credit unions and banks is that the beneficiaries of credit unions are the members that they serve, while the beneficiaries of banks are their shareholders. Because of credit unions’ cooperative ownership structure, any excess profits they earn are redirected back to all members in the form of lower loan interest rates and higher savings yields.

In fact, funneling profits back to members is exactly what credit unions were formed to do in the first place — and that is why credit unions have the tax exemption.

Congress gave credit unions an exemption in 1934 based on their cooperative structure and mission to provide people with access to credit for provident purposes such as borrowing to buy a car, a home or to help finance a small business. The goal was to have credit unions compete with the banks to ensure that consumers have access to affordable financial services.

One reason bankers oppose the tax exemption for not-for-profit credit unions may be that they are aware of the foothold that credit unions have established among consumers. Earlier this summer, credit unions reached a landmark 100 million memberships, built on several years of very strong growth. This growth has been driven in part by growing consumer dissatisfaction and distrust of banks in the aftermath of the financial crisis.

Just this week, the Chicago Booth/Kellogg School Financial Trust Index reported that credit unions have a higher trust score than banks. Some 60% of 1,014 respondents in the June survey say they find credit unions trustworthy, while just 30% say they trust big, national banks. The gap "is not just because of the not-for-profit motive of credit unions," the group said in a press release. "People trust more local than national banks and trust more credit unions than local banks."

Perhaps Mr. Keating always comes back to his talking points on taxes because it is easier to criticize credit unions than admit to losing ground to them. The data shows consumers are increasingly turning to credit unions for financial services. Bankers try to change the subject to taxing credit unions, but maybe it is consumers who are really changing the subject — with their feet, by walking into credit unions.

Bill Hampel is interim president and chief executive of the Credit Union National Association.