As legislators and policymakers work to reduce overall deficits, tax reform is likely to play a major role. Bank lobbyists are once again putting pressure on Congress to remove credit unions’ federal tax exemption. This move will significantly impact how credit unions operate and hurt the communities they serve.
Currently, credit unions nationwide pay billions annually in state and local taxes, property taxes, and payroll taxes. However, because credit unions are not-for-profit financial cooperatives, we do not pay federal taxes on earned income or profits. The reason is that credit unions return profits back to our members – you!
Understanding the Proposed Tax Change
The proposed revision to the federal tax exemption for credit unions is significant because it eliminates the tax status that separates credit unions from banks. That’s kind of our whole thing – we’re different from banks!
Banks pay federal taxes on profits because they are for-profit financial institutions. Credit unions are not-for-profit, meaning our earnings are returned to our members through perks like lower loan rates, higher savings yields, and eliminated fees.
If credit unions were to lose this tax exemption, we would be lumped in with banks under the federal tax rule despite operating under entirely different business models and core values. There would be little incentive left for credit unions to operate as we currently do, and some institutions might be unable to afford to keep their doors open.
As a member, removing this exemption isn’t just a tax on your credit union – it’s a tax on you.
Credit Unions vs. Banks: What’s the Difference?
As a credit union member, you’re likely already aware of many differences between credit unions and banks. Some of these reasons may be why you decided to become a member!
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Profits
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Credit unions are not-for-profit financial cooperatives that return earned income back to their members. When a credit union earns income, it generally does three things with it:
Operations: Funds are invested in new products and services, employing more staff to better meet members’ needs, expanding branch locations, enhancing account security, combating fraud, and more.
Retained Earnings: Credit unions cannot accept capital funds from outside investors like banks. Consequently, they tend to hold higher levels of retained earnings than banks to help weather economic downturns.
Member Perks: The largest portion of earned income is returned to members through various benefits – which make credit unions so attractive to consumers. These perks include lower loan rates, higher savings yields, lower and eliminated fees, and many services provided at no cost.
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Banks are for-profit financial institutions. Their primary purpose is to earn favorable returns for their owners or stockholders – placing the focus on profit-earning activities. You’ll often notice that banks tend to charge more and higher fees on accounts and services, loans cost more when compared to credit unions, and savings yields are lower.
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Owners
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Credit unions are financial cooperatives. That means every member is part owner of the credit union and has an equal say in how the credit union operates. Members can vote for those who serve on the Board of Directors and provide input on which products and services are offered to members.
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Banks are for-profit entities that are controlled by either stockholders or private owners. Customers tend to have little say in operations as profit-generating activities are the priority.
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Members vs. Customers
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Credit unions serve specific groups of people. Depending on the credit union, they might serve a specific employer group, such as the United States Postal Service or the United States Military, multiple employer groups (small-to-mid-sized businesses) within a set location, or those who live, work, or attend school in certain counties or zip codes.
Many credit unions also provide membership to “underserved” areas. Banks tend to bypass these areas because they might not be as profitable or pose a greater risk in lending.
Because of their focused membership, credit unions tend not to be nationwide institutions. You likely won’t see branches for your credit union in every state.
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Banks serve the financial needs of customers – generally, anyone can join a bank without specific membership requirements. This flexibility allows them to expand and grow rapidly – leading to a handful of supersized banks controlling large portions of the financial markets.
How Tax Changes Will Affect the Credit Union – And You
Credit unions currently serve over 140 million members throughout the country. Removing the federal tax exemption on credit unions will ultimately become a tax increase for all these members – including you.
Requiring credit unions to suddenly pay federal taxes on earned income will likely force changes in how they operate. Unfortunately, those changes might reduce many of the financial benefits that draw millions of Americans to choose credit unions for their banking needs. Instead of access to lower loan rates, lower fees, and higher savings yields, many of those benefits will shift to Uncle Sam in the form of taxes.
How You Can Stand Up Against Credit Union Taxation
Credit unions across the nation are asking for your help. America’s Credit Unions, a credit union advocacy organization, has made getting involved quick and easy. It’s as easy as 1-2-3!
Tell policymakers: Don’t tax my Credit Union – it’s a tax on me!
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Take action at: https://DontTaxMyCreditUnion.org
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Select your representatives by entering your contact information on the form.
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Send your message using the pre-written email or compose a personalized version.
We’re Here to Help!
Like thousands of fellow credit unions across the country, we take great pride in our ability to serve the financial needs of our members. We know the financial perks members experience can strengthen their livelihoods and move them closer toward their goals. We do not want our efforts to better our community to change.
If you have questions about the proposed tax changes or want to learn more about how you can help take a stand against credit union taxation, we’d love to hear from you. Please stop by the Credit Union or call 410-687-5240.