U.S. tax revenue shrinks every time a credit union buys a bank

While the Biden administration is proposing a host of corporate and individual tax increases to fund its nationwide infrastructure plan, the federal tax exemption for more than $1.7 trillion in credit union assets continues to grow.

The latest hit to tax revenues comes with the announcement that the $11 billion-asset VyStar Credit Union in Jacksonville, Fla., is using its tax subsidy and crossing state lines to purchase a $1.6 billion-asset community bank in Jonesboro, Ga. It would be the largest-ever credit union acquisition of a bank.

The impact of the credit union tax exemption is significant. The Joint Committee on Taxation has tallied the annual taxpayer cost at $2 billion per year and rising. While credit unions paid nothing in federal taxes last year, nurses, teachers and cashiers had a total tax liability of more than $56.6 billion, $19.8 billion, and $11.8 billion, respectively.

Credit union acquisitions of community banks only exacerbate the size of the taxpayer subsidy because bank assets become tax exempt when bought by a credit union. According to S&P Global data, there have been 93 acquisitions of the past 19 years —peaking at 21 in 2019 — amounting to a loss of more than $264 million annually in income taxes.

This trend also affects consumers by increasing the portion of the financial services industry exempt from the Community Reinvestment Act, which assesses whether financial institutions are meeting the needs of low- and moderate-income communities. While the CRA applies to community banks and virtually every other depository institution, credit unions are fully exempt.

Further, the credit union industry’s regulator, the National Credit Union Administration, continues expanding the powers of the industry it is charged with regulating. The NCUA has approved rules allowing outside investors to profit from the credit union tax subsidy, repeatedly delayed capital requirements more than a decade after the financial crisis, and allowed credit unions to include wealthy suburbs of metropolitan areas in their fields of membership while leaving out their urban cores.

Most recently, the NCUA has proposed deregulating for-profit companies owned by credit unions even though these companies are not supervised by the agency and are exempt from Federal Credit Union Act consumer protection.

Ultimately, financial services consolidation fed by the outdated credit union tax exemption and lax NCUA oversight reduces the availability of locally based financial institutions, often in communities most in need of them.

Today, less than 10% of credit unions are physically located in an economically distressed community and only 13% are in low- and moderate-income areas, according to ICBA research. In low-income or distressed communities, community banks, which contributed over $12 billion in tax revenue in 2020, outnumber credit unions by a 2-1 margin.

Community banks have also led the response to the coronavirus pandemic, accounting for roughly 60% of Paycheck Protection Program loans and saving an estimated 33.7 million jobs in the first round alone.

It’s not just small banks being threatened by this consolidation trend. Traditional credit unions themselves are declining as larger credit unions expand and account for more of the tax subsidy. Credit unions in every asset category under $500 million lost both members and loans in 2020. Meanwhile, credit unions with over $1 billion of assets comprise 6% of the industry but 75% of its tax exemption.

When credit unions buy banks, they are abandoning the industry’s founding mission of serving people of modest means with a common bond, which was established by Congress to justify the tax exemption itself.

With credit union-bank acquisitions likely to continue, Congress should hold hearings to investigate the impact of this trend and the role of the credit union tax exemption. Lawmakers can get a firmer grasp on what has contributed to this growing trend by requesting a Government Accountability Office study on the evolution of the credit union industry and NCUA supervision.

There is precedent should Congress reconsider the credit union tax exemption. In 1951, Congress revoked the tax exemption for building and loan associations, cooperative banks and mutual savings banks, finding that these institutions operated much like commercial banks and should be taxed accordingly.

As policymakers look for new sources of revenue to fund infrastructure spending, their first stop should be reexamining the credit union tax exemption.