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TAX FOUNDATION STUDY SLAMS CREDIT UNION TAX EXEMPTION

March 01, 2005

The Tax Foundation yesterday issued a paper calling for federal taxation of credit unions. "Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions" says that there is no policy justification for continuing the federal tax exemption of credit unions:

The original legal “field of membership” restrictions
on credit unions were designed to
limit their ability to compete by strictly defining
who could be a depositor and borrower
from a credit union, with the idea that credit
unions would use their tax advantage to serve
low-income borrowers and depositors. However,
over time credit unions have avoided
most of the restrictions, and as a result they
have competed directly and successfully with
other financial institutions in many markets
with a major cost advantage, the tax exemption.
Moreover, there is no solid evidence that
credit unions have turned the subsidy into
service for low-income people.

The study says that the exemption will cost the IRS $31.3 billion over ten years while distorting the markets for financial services.

The Independent Community Bankers of America praised the study:

"More and more studies are piling up, proving that rapidly expanding mega credit unions have no business being tax exempt and the rest of taxpaying Americans get stuck carrying the burden," said Camden R. Fine, president and CEO of ICBA. "As our nation strives to create a more fair and simple tax system and meet our federal budget needs, policymakers at all levels of government can no longer ignore the large and growing tax losses and inequities posed by the $650 billion credit union industry.

The credit union industry demurs:

Our initial reaction to this study, prior to a detailed review, is that it holds major inaccuracies in its principal conclusions that pose serious questions as to the credibility of the whole study.

The Tax Foundation study says

From the perspectives of tax fairness and
sound tax policy, where the least economic distortion
and inefficiency is desired, taxation of credit
unions warrants prompt and genuine consideration
in any tax reform debate.

Efforts to tax credit unions shouldn't expect much help from the White House. President Bush wrote the president of the Credit Union National Association last April to say "I strongly support the tax exempt status of credit unions, and will continue to highlight the important contributions that credit unions make to our financial system." His Treasury Secretary, John Snow, yesterday addressed the CUNA annual conference, which would seem to indicate that the administration continues to be close to the credit union industry.

Prior Tax Update coverage of credit unions here.

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