Credit unions have bought a record number of banks in recent years, including 16 in 2022, 11 in 2023, and several deals announced in the first months of 2024. The $6.9 billion Hudson Valley Credit Union is acquiring Catskill Hudson Bank, the $11 billion Global Federal Credit Union is acquiring First Financial Northwest Bank, the $2.9 billion Advia Credit Union is acquiring NorthSide Community Bank, and the All In Credit Union is acquiring five branches of 22nd State Bank in Alabama,
When credit unions purchase banks, they are removing a taxed business from certain types of tax rolls thanks to policies toward credit unions, including non-profit status and the resulting tax exemption. In 2022, the Joint Committee on Taxation released a report that showed the negative revenue impact of the credit union tax exemption as $14.4 billion between 2022 and 2026. Because this figure does not take into account the increasing number of banks purchased and absorbed by credit unions, this cost will probably be higher. A record 16 banks were bought by credit unions in 2022, and at the current pace that record may be exceeded in 2024.
Many credit unions across the country have shifted away from the original intent of their creation and now rival major financial institutions. As Congress explores options to extend the Tax Cuts and Jobs Act of 2017 and otherwise create a tax code with lower rates and a broader base, it should closely examine the tax status of large credit unions among many other policy options.
Growth of Credit Unions
Modeled on collections of small credit banks created in the 1850s in Germany, credit unions sprouted up across the U.S. at the beginning of the 20th Century. In response to the Great Depression, with the intention of creating more accessible financial institutions for the poor and unbanked, Congress passed the Federal Credit Union Act and subsequent amendments. This legislation allowed the creation of credit unions approved and insured by the federal government and hastened the spread of credit unions. These credit unions were given exemptions from both federal and state income tax.
As of 2022, there were 4,760 federally insured credit unions with assets totaling $2.17 trillion. Though the number of credit unions shrank in the past decade from 6,273, their total assets grew from $780 billion to $2.17 trillion in the same period.
Looser membership standards for credit unions allowed the institutions to grow significantly larger than originally envisioned, but whether that means they serve more underserved or unserved individuals or if they are better at providing services to these groups is unclear. Today, there is little functional difference between credit unions and banks but the congressionally granted tax exemption still stands.
How they function and who they serve
As 501(c)(1) organizations, the majority of credit unions are not required to file Form 990 tax returns like other non-profits. This results in less transparency as to whom the credit unions serve and if they are accomplishing their stated mission. The National Credit Union Administration (NCUA) charters and oversees credit unions, but offers little public transparency despite being an executive agency. The Government Accountability Office (GAO) undertook a study of credit union transparency in 2006 and released their report “Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements.” This report had two major recommendations for the NCUA and credit unions: track and monitor how well credit unions serve low and middle-income individuals and report on executive compensation.
No executive compensation reports have been published in the intervening 18 years. The former recommendation is listed by the GAO as “implemented” but the reality is that NCUA still has yet to open up about how well they achieve their stated purpose. While the Member Service Assessment Pilot program was launched in 2006 and the NCUA established the Outreach Task Force both to review membership profiles and data, none of the data collected by NCUA has been published.
Absent data from NCUA, other sources are needed to show the extent to which credit unions serve low-income customers and the underserved. A 2020 study from the Eastern Economic Journal found that “households who are underserved by the financial services industry
are also less, not more likely, to be members of a credit union. The data shows that more educated and better-off households have a higher likelihood of belonging to a credit union.” Data from the Federal Reserve’s Survey of Consumer Finances has consistently shown that compared to banks, credit unions serve fewer low and moderate-income households. GAO cited this data in testimony before the House Ways and Means Committee in 2005 on oversight of the tax-exempt sector and whether the original basis for the tax exemption for credit unions is still valid.
Despite the lack of evidence for credit unions providing services to the unbanked and underserved, more and more credit unions are granted status as “low-income” institutions. Rather than stemming from the actual socio-economic status of its members, credit unions can achieve this designation by having a majority of its members live in a geographic area that qualifies as low-income.
There are now 422 credit unions with more than $1 billion in assets, which represents more than 9 percent of all federally insured credit unions. That is up from 5 percent of credit unions with $1 billion in assets just four years ago. The growth of credit unions’ assets is further evidence of the shrinking disparities between credit unions and traditional banks.
Conclusion
NTU wrote in 2020 on “growing concerns” around credit unions and overdue scrutiny of their practices from Congress. The trends from four years ago have only become more pronounced. NTU opposes higher taxes and advocates for minimizing tax rates and burdens on businesses. However, a properly functioning tax code requires a fair and equal application of taxes, which involves lowering rates and broadening the base.
The credit unions of today so closely resemble other, taxed financial institutions that their tax-exempt status seems a product of a bygone era. In the 1950s, less than a quarter decade after the passage of the Federal Credit Union Act, the IRS released a report on credit unions. Even then, the IRS found that, had credit unions functioned like other taxable financial institutions (as they increasingly do today), “it seems probable that Congress might not have continued their exempt status.”
Congress should consider repealing or modifying the tax-exempt status of larger credit unions, as part of a comprehensive effort to enact lower across-the-board tax rates and a simpler tax system.