As Congress was starting to debate its reconciliation bill in earnest back in March we wrote about a proposal to eliminate the tax exemption provisions for certain credit unions.
Credit Unions’ tax-exempt status was established in The Federal Credit Union Act of 1934. In order to avoid high-risk, high-reward investments, the law includes requirements that Credit Unions limit their depositors to groups holding a common bond—occupation, community, or association, for example.
In the decades since, Credit Unions have grown in popularity and size, this chart shows that “the top 10, top 50 and top 100 credit unions hold combined assets of $431 billion, $832 billion and $1.1 trillion, respectively.”
Competition is of course a staple of sound economic policy that benefits consumers and all Americans. But competition needs an even playing field to function properly.
What has become contentious is that in recent years Credit Unions have eased their membership requirements and accepted customers who do not meet their original qualifications, which are set by the Credit Unions themselves.
Some Credit Unions who have chosen this path seem to be challenging the “common bond” requirement. Thus, they are operating like regular banks, but with a competitive edge over other institutions like community banks that compete for similar customers but are not exempt from corporate income taxes. The result is a market distortion.
That proposal to address this issue ultimately did not make it into the final bill text that was signed into law. However, it garnered enough attention that there is an increasing chance that it comes up again.
The best way for Congress to address this issue is with proper committee hearings. But it is worth stressing that they should do so with the big picture in mind, focusing on broad-based, long-term tax relief to improve economic efficiency to the benefit of all Americans.
