Last week, Congress finally took up a bill to reform the tax code. Everyone from seniors, to universities, to homeowners have existing tax deductions that they benefit from on the table for debate. But somehow, one industry’s special status has escaped consideration so far — that of credit unions.
It may surprise a lot of people to learn that credit unions are exempt from federal corporate income taxes. After all, community banks like mine pay federal taxes, and if you look at most large credit unions, they are virtually indistinguishable from banks. Yet, credit unions continue to benefit from an outdated, century-old tax exemption.
Credit unions were first exempted from federal taxes because they were meant to fill a gap in the market. A hundred years ago, it was much harder to find financial institutions in small towns and rural communities, so credit unions were declared exempt from taxes to help provide basic financial services to people of modest means united by a common bond. What the tax exemption was not intended to do was serve as a taxpayer subsidy to billion-dollar institutions that primarily serve the wealthy. But, when you look at credit unions today, that’s exactly what has happened.
According to the National Credit Union Administration, today there are more than 280 credit unions in the U.S. with more than a billion dollars in assets — up from only 10 in the 1990s. Arizona is no exception. There are six billion-dollar-plus credit unions in Arizona, and the $4 billion Desert Schools Federal Credit Union is larger than all but one Arizona-headquartered bank.
But when it comes to credit unions, bigger doesn’t always mean better. Even as many credit unions have grown larger, they have failed to meet their mission of serving people of modest means.
Nationally, only 31 percent of credit unions’ membership are people of low and moderate income, while at banks this share is 40 percent. What’s more, according to the latest Home Mortgage Disclosure Act data, credit unions in Arizona issued only 7 percent of all of their mortgages to low-income people in 2015, and of the 109 Arizona credit unions required to report information on their loans, not a single one made a loan to a low-income person.
Meanwhile, according to the Arizona Freedom Alliance, the Arizona headquartered TruWest Credit Union pays its CEO $1.4 million a year — compared to the $27,000 the average Arizonan makes, which hardly seems like a prudent use of member funds. If you heard someone say, “the CEO of a nonprofit is paid almost a million and a half dollars,” you would probably raise your eyebrows. Well, that’s exactly what is happening here.
And this barely touches on the issue of how these large credit unions are spending their tax-free earnings. Credit unions have very few restrictions on how they can use these funds — everything from big salaries, huge new headquarters, and multimillion-dollar marketing campaigns is currently allowed. Credit unions also plow millions of dollars into lobbying Congress and campaign donations in an effort to shut down the debate about their tax exemption.
Crafting good public policy is often the result of parties on every side giving a little so everyone can gain. The same is true for tax reform. In order to simplify the tax code and lower tax rates for everyone, special interest groups are going to have to give up their tax carve outs.
It’s time for billion-dollar credit unions to start paying their fair share. These aren’t mom and pop institutions anymore. These billion-dollar credit unions are a modern day special interest group, and their tax-exempt status should be on the table for debate.