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Credit union tax advantage

By David McMillin ·
Saturday, October 15, 2011
Posted: 12 pm ET

Community banks may be struggling to keep up with another side of the banking industry: credit unions.

Earlier this week in testimony before Congress, Sal Marranca, Independent Community Bankers of America chairman, made the case for repealing the tax exemption status that federal credit unions currently enjoy. From the chairman's testimony:

The current tax exemption that credit unions enjoy is directly linked to their original mission of serving individuals of modest means. However, after decades of 'mission creep,' which has resulted in multi-billion-dollar credit unions, that tax exemption can no longer be justified.

Marrana's comments come as the House Financial Services Subcommittee on Financial Institutions and Consumer Credit debates the Small Business Lending Enhancement Act, a piece of legislation designed to increase credit union lending power. The proposal would significantly increase a credit union's ability to approve larger loans for its members.

Community banking institutions and credit unions may appear to be somewhat similar. Both of them tend to be more consumer-friendly, typically offering free checking programs and better interest rates than big banks. Consequently, the two also compete for like-minded account holders, consumers who prefer cost-effective banking to the bank fees that come with the convenience of thousands of ATMs and branches.

However, Marranca's testimony highlights the crucial distinction between the two: profit versus not-for-profit. As the two types of institutions continue to work to attract new personal and small business accounts, it's fair to say that tax exemptions tilt the field in favor of credit unions. While community banks pay state and federal taxes each year, credit unions can put those dollars to use to offer more benefits, services and discounts to their account holders.

I certainly understand Marranca's point of view. Community banks are in arguably the toughest position on the banking playing field. They're competing with one side that features some members who are too big to fail and another side that receives a tax advantage. Still, I can’t side with his request. For every "multi-billion-dollar credit union," I bet there are hundreds of small credit unions that heavily rely on their tax-exemption status.

What do you think? Are some credit unions getting so big that their tax-exempt status should no longer apply?

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October 22, 2011 at 10:51 am

So how many of the people running to credit unions will get turned away because they don't qualify? It better me "most" or the "qualification" doesn't sufficiently limit membership to earn a tax advantage.

October 20, 2011 at 3:50 pm

Cole, Credit Union do have strict rules on what we can do. 25% of the portfolio can business loan and the amount is restricted as well. You must qualify for membership, not everyone walking through the door is able to join.
Wayne-336%? Where did you find that statistic? We do pay taxes in some income but not all. Income from non business activity is taxed.

October 20, 2011 at 2:23 pm

IN response to cypresspower if he thinks that bankers are complaining because its a tough business then what's the problem with credit unions paying their fair share of taxes. Remember whats good for one is good for all. I suspect if you truely think of it the credit union would fine the business very hard without a 336% benefit

October 20, 2011 at 11:15 am

Speaking as a member of a credit union (Share holder), as long as the credit union operates under the originating charter which was approved for tax exempt status fine. However when a CU starts behaving like a bank then its a bank and should follow the rules established for banking. As for complaining bankers, if baking is such a tough business then get out of it and do something else. Otherwise stop whining.

October 16, 2011 at 12:10 pm

If Walmart claimed that they should be tax-exempt because they have low prices, would you think they didn't have an unfair advantage?

October 16, 2011 at 11:32 am

I bank at both my local community bank and credit union, and I can't see where my credit union has an unfair advantage -- as a matter of fact, the community bank offers a wider array of products and better customer benefits. I think the credit union probably makes good use of its tax break to try and keep up.

October 15, 2011 at 3:36 pm

Yes, get rid of the bogus tax-exempt status of credit unions or require strict limits on what they can offer. Balance caps, etc.