Order Code 97-548
Should Credit Unions Be Taxed?
Updated March 22, 2007
James M. Bickley
Specialist in Public Finance
Government and Finance Division

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Should Credit Unions Be Taxed?
Summary
Credit unions are financial cooperatives organized by people with a common
bond; they are the only depository institutions exempt from the federal corporate
income tax. As financial cooperatives, credit unions only accept deposits of
members and make loans only to members, other credit unions, or credit union
organizations. Many Members of Congress advocate a reliance on market forces
rather than tax policy to allocate resources. Furthermore, some Members of Congress
are interested in additional sources of revenue in order to either reduce the deficit,
offset the cost of higher federal outlays, or make up for tax cuts elsewhere.
Consequently, the exemption of credit unions from federal income taxes has been
questioned. If this exemption were repealed, both federally chartered and state-
chartered credit unions would become liable for payment of federal corporate income
taxes on their retained earnings but not on earnings distributed to depositors. For
FY2008 (October 1, 2007, through September 30, 2008), the Department of the
Treasury estimates that federal taxation of credit unions would yield revenues of
approximately $1.48 billion. Also for FY2009 (October 1, 2008 through September
30, 2009), the Joint Committee on Taxation estimates that federal taxation of credit
unions with assets of $10 million or more would yield revenue of approximately
$1.80 billion.
Credit unions differ in some aspects from other providers of financial services,
but financial deregulation continues to lessen these differences. Deregulation has
resulted from new legislation and decisions of regulatory agencies.
Proponents of the taxation of credit unions argue that deregulation has led to
vigorous competition between credit unions and other depository institutions. They
maintain that the tax exemption gives credit unions an unfair competitive advantage
over other depository institutions, and there is no market failure that justifies
government intervention with a tax subsidy.
Supporters of the tax exemption claim that, despite deregulation, credit unions
are still unique depository institutions. They assert that the purpose of credit unions
is to serve the financial needs of their members rather than to maximize profits. They
argue that taxation would eliminate this service character of credit unions.
In the 110th Congress, as of March 22, 2007, no legislation concerning the tax
exempt status of credit unions has been introduced. Also, the President’s Budget for
FY2008 does not propose any change in the tax exempt status of credit unions. In
the future, technological change and deregulation will likely further increase
competition between credit unions and other depository institutions. The income tax
exemption for credit unions, therefore, likely will be the subject of further debate.
This report is a broad examination of the issues underlying proposals to tax
credit unions. It does not track specific legislative proposals. The report will be
updated, however, in the event of significant legislative activity.

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Contents
Concept of a Credit Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Deregulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Arguments For and Against Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Debate in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Debate in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Debate in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Should Credit Unions Be Taxed?
Credit unions are the only depository institutions exempt from the federal
income tax.1 Deregulation is reducing the unique character of credit unions. Many
Members of Congress advocate a reliance on market forces rather than tax policy to
allocate resources. Furthermore, some Members of Congress are interested in
additional sources of revenue in order to either reduce the deficit, or offset the cost
of either higher federal outlays or other tax cuts. Consequently, the exemption of
credit unions from federal income taxes has been questioned. If this exemption were
repealed, both federally chartered and state-chartered credit unions would become
liable for payment of federal corporate income taxes on their retained earnings but
not on earnings distributed to depositors. For FY2008 (October 1, 2007 through
September 30, 2008), the Department of the Treasury estimates that federal taxation
of all credit unions would raise approximately $1.48 billion.2 Also for FY2009
(October 1, 2008 through September 30, 2009), the Joint Committee on Taxation
estimates that taxing only credit unions with assets above $10 million would yield
approximately $1.80 billion.3 Approximately one-half of credit unions have assets
of $10 million or less, but these credit unions hold only about 3% of all assets in the
credit union industry.4 The issue of taxation of credit unions is examined in this
report by covering the following eight topics: concept of a credit union, tax status,
deregulation, arguments for and against taxation, debate in the 108th Congress, debate
in the 109th Congress, debate in the 110th Congress, and trends.
Concept of a Credit Union
A credit union is a nonprofit financial cooperative organized by people with a
common bond. As financial cooperatives, credit unions only accept deposits of
members and make loans only to members, other credit unions, and credit union
organizations.5 A common bond is a unifying characteristic among members that
distinguishes them from the general public. Every member of a credit union is an
1 All credit unions collect federal payroll taxes. Federally-chartered and state-chartered
credit unions are subject to local property taxes. State chartered-credit unions may be
subject to additional state and local taxes.
2 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2008. (Washington:
GPO, 2007), p. 287.
3 U.S. Congressional Budget Office, Budget Options, (Washington: GPO, Feb. 2007), p.
294.
4 Ibid.
5 Richard P. Kessler, Jr. “Credit Unions in the 1990s,” Consumer Finance Law, vol. 47, no.
1, winter 1993, p. 4.

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owner and may vote for credit union officers and policies. Credit unions do not have
separate capital stock; instead their capital consists of their members’ shares in
accumulated reserves.6 Credit unions cannot raise capital by issuing stock but utilize
retained earnings to finance expansion. Credit unions are either federally chartered
or state-chartered. Each credit union is governed by a board of directors. The board
exercises general supervision over all functional areas including membership and
credit applications, interest rate policies, and records.7 According to the Garn-St.
Germain Depository Institutions Act of 1982,
The management of a Federal credit Union shall be by a board of directors, a
supervisory committee, and where the bylaws so provide, a credit committee.
The supervisory committee shall be appointed by the board of directors....
At their first meeting after the annual meeting of the members, the directors shall
elect from their number the board officers specified in the bylaws.8
For January 2006, the 8,978 credit unions had 87.7 million members and total
assets of $698.6 billion.9 Thus credit unions had an average of $77.8 million in
assets. Although most credit unions are small, some are large. For year end 2005,
the 100 largest credit unions had assets of $1,043 million or more.10
Among depository financial institutions, the concept of a common bond is
unique to credit unions. In 1970, the National Credit Union Administration (NCUA)
was established by the federal government to regulate the credit union industry. The
NCUA has specified four categories of common bonds: single occupational, single
associational, multiple common bond, and community. Credit union members in the
single occupational category are employed by the same enterprise, such as the ABC
corporation. A credit union in this category may also serve a trade, industry, or
profession, such as all teachers. Members of a single associational category belong
to groups of individuals who participate in activities that develop common loyalties,
mutual benefits, and mutual interests, such as the Knights of Columbus. A single
associational group must sponsor activities providing for contact among members.
A credit union with a multiple common bond consists of a combination of
occupational and/or associational groups. Members in the community category have
a common bond based on employment or residence in a geographic area with clearly
defined boundaries.11
6 Ibid.
7 Olin S. Pugh and F. Jerry Ingram, Credit Unions: A Movement Becomes an Industry
(Reston, Virginia, Reston Publishing Company, Inc., 1984), p. 7.
8 P.L. 97-320, Sec. 111 and 112.
9 Credit Union National Association, Monthly Credit Union Estimates, 2006, p. 7, available
from [http://advice.cuna.org/download/mcue.pdf], visited March 24, 2006.
10 Credit Union National Association, Top 100 Credit Unions, Year-End 2005, pp. 8-9,
available from [http://advice.cuna.org/], visited March 24, 2006.
11 National Credit Union Administration, Chartering and Field of Membership Manual
(continued...)

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In the late 1970s and early 1980s, serious economic dislocations threatened the
financial stability of many federal credit unions.12 Hence, beginning in 1982, the
National Credit Union Administration made a series of administrative rulings that
allowed multiple-group federal credit unions; that is, combinations of existing federal
credit unions that do not share a common bond.
In 1990, the American Bankers Association and several small North Carolina
banks filed a lawsuit challenging the NCUA’s approval of a multiple-group field of
membership expansion for federal credit unions. On February 25, 1997, the United
States Supreme Court, at the urging of the Clinton Administration, agreed to hear
arguments in the case.
On February 25, 1998, the U.S. Supreme Court ruled in favor of the banking
industry. Legislation was introduced to address the concerns of the credit union
industry. On August 7, 1998, the Credit Union Membership Access Act (P.L. 105-
219) was enacted. The act grandfathered all current federal credit unions (FCUs) and
all current credit union members and provided for future multiple-group formations
subject to limitations that the NCUA must consider when authorizing charters.13
Tax Status
The first credit union in the United States was state chartered in 1909. When
the federal income tax was enacted, state chartered credit unions were not specifically
exempt. In 1917 an administrative ruling by the U.S. Attorney General exempted
state chartered credit unions from federal income taxation.14 In 1934, Congress
passed the Federal Credit Union Act, which authorized the chartering of federal
credit unions. This act contained no federal tax exemption and allowed states to tax
federal credit unions in the same manner as banks. In 1937, Congress amended the
act to exempt federal credit unions from both federal and state income taxes because
of their service to members.15 Until 1951, all savings and loans (S&Ls) were exempt
from federal income taxes under the same tax code provision. The Revenue Act of
1951 repealed the tax exemption for S&Ls, but the exemption for federal and state
credit unions was continued under a separate tax code provision.16 But Congress
11 (...continued)
(Washington, March 2003), pp. 18-19.
12 The U.S. Government provided no financial assistance to the credit union industry. In
contrast, the cleanup costs of the thrift industry in the 1980s and early 1990s was $124
billion according to Federal Deposit Insurance Corporation (FDIC).
13 CRS Report 98-933, Credit Union Membership Access Act: Background and Issues, by
Pauline Smale, p. 1. This report is available on request from the author.
14 U.S. Department of the Treasury, Comparing Credit Unions with Other Depository
Institutions (Washington, Jan.15, 2001), p. 28.
15 “The Tax Exemption Through the Ages,” Credit Union, Jan. 1986, p. 9.
16 U.S. Congress, Joint Committee on Taxation, (Prepared for use of the Committee on Ways
(continued...)

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provided S&Ls a de facto exemption from federal income taxes by permitting a
liberal allowance for bad debt reserves. This de facto exemption continued until the
Revenue Act of 1962, which reduced the liberal allowance for bad debt reserves.17
Federally chartered credit unions are exempt from all taxes (including income
taxes) imposed by any state, territorial, or local taxing authority, except for local real
or personal property taxes.18 States vary in their tax treatment of state-chartered
credit unions. A few states exempt state-chartered credit unions from their state
income taxes. Many states tax state-chartered credit unions the same as state-
chartered thrifts, and several states tax state-chartered credit unions the same as any
other business.19
Before the passage of the Tax Reform Act of 1986, numerous specific tax
preferences were given to depository institutions (except credit unions, which were
and are exempt). The primary justification for these tax preferences was the
extensive regulations imposed on depository institutions. These tax preferences
reduced the effective tax rate on operations of depository institutions below the
effective tax rate on operations of average U.S. corporate businesses.
Proponents of the Tax Reform Act of 1986 contended that the tax system should
be neutral concerning economic decision making. They believed that the market
forces of supply and demand could more efficiently allocate resources than the tax
system; consequently, tax preferences for specific industries or sectors should be
eliminated or curtailed. They argued that the elimination or reduction of tax
preferences would broaden the tax base and permit lower marginal tax rates;
therefore, economic resources would be allocated more efficiently. Financial
deregulation had been reducing both the differences among depository institutions
and between depository institutions and other industries. Thus, tax preferences for
depository institutions were more difficult to justify if the tax system is to be more
neutral and resources are to be allocated by market forces rather than federal
regulations. Consequently, the Tax Reform Act of 1986 curtailed or eliminated tax
preferences of depository institutions. The three most important of these tax
preferences were deductions for additions to bad debt reserves, the deduction for
interest to carry tax exempt obligations, and special rules for net operating losses.
The more neutral federal tax system heightened criticism of the tax exemption of
credit unions.
How does credit union taxation compare with that of other firms in economic
terms? For a typical corporation, income taxes are paid on income from equity-
16 (...continued)
and Means and the Committee on Finance), Tax Reform Proposals: Taxation of Financial
Institutions (Washington: GPO, 1985), p. 43.
17 Kenneth R. Biederman and John A. Tuccillo, Taxation and Regulation of the Savings and
Loan Industry (Lexington, MA: Lexington Books, 1976), p. 5.
18 National Credit Union Administration, Letter of Exemption, Alexandria, Va., revised May
2003.
19 Pugh, pp. 51-52.

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financed investment whether retained or paid in dividends. Shareholders (equity
owners) pay individual income taxes on dividends and capital gains taxes on the
nominal appreciation (if any) in the value of their stock in the year that the stock is
sold. Income from debt financed investment is tax exempt at the corporate level;
interest paid on bonds is a deductible expense to the corporation but taxable income
to bondholders. Most corporate equity investment is thus taxed twice, debt once.
Commercial banks and thrift institutions are taxed like other corporations except
for the tax treatment of depositors. In compensation for their deposits, depositors
receive a mix of interest payments and free or below cost services. Interest payments
received by depositors are subject to the individual income tax. Free or below cost
services are not subject to the individual income tax, but the cost of providing these
services are expenses to the commercial bank or thrift. Since it is not
administratively feasible to allocate the reduced cost of financial services among
depositors, it is not possible to levy income taxes on these services.20 Thus, at least
part of banks’ income from debt is exempt from both corporate and individual tax.
Bank equity income is taxed twice; debt once, at the most.
Income of credit unions is exempt at the corporate level, whether retained or
distributed. And as with banks, a portion of the income distributed to members in
compensation for their deposits, called member “dividends,” is subject to individual
income tax, while the portion distributed as enhanced member services is not taxed.
Thus, in contrast to corporations — including corporate banks — no credit union
income is taxed twice; credit union income is taxed once, at the most, under the
individual income tax. Taxing credit unions in a manner similar to corporate banks
would require, at least, applying corporate tax to retained credit union earnings.21
Finally, this discussion of financial institutions has thus far omitted the tax
treatment of another type of financial intermediary: life insurance companies.22 Life
insurance companies receive special treatment under the corporate income tax; they
are subject to a low level of tax compared to other financial intermediaries
(excepting, of course, credit unions). Further, the earnings of depositors (i.e.,
policyholders) are lightly taxed under the individual income tax because the inside
buildup — growth of cash values — on insurance policies is not subject to tax.
20 Most developed nations with value-added taxes exclude financial services from taxation
because it is not administratively practicable to measure value-added received by customers.
21 In theory, it might be argued that since members are also equity owners of credit unions,
a portion of income and benefits accruing to stockholders is actually distributed credit union
equity-like earnings, and simply taxing retained earnings would apply tax to only a part of
income from equity-like investment. However, it is not administratively feasible to assess
the value of these distributed equity-like benefits, and proposals to tax credit unions have
been limited to applying the corporate income tax to retained earnings.
22 For an overview of the taxation of life insurance, see CRS Report RL32000, Taxation of
Life Insurance Products: Background and Issues, by Andrew D. Pike (consultant).

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Deregulation
Over the past 30 years, most of the distinctions between credit unions and other
depository institutions have been eliminated or reduced because of deregulation;
consequently, the justification for the tax exemption for credit unions has been
increasingly questioned.
Proponents of deregulation argue that resources can usually be more efficiently
allocated by market forces than government regulations. They do not advocate the
elimination of all regulations but rather a greater reliance on market forces.
Proponents maintain that deregulation increases competition, which benefits
customers through better access to services at lower prices. Furthermore,
deregulation leads to more integrated financial markets, which improves national
economic efficiency. Both federally-chartered and state-chartered credit unions have
been deregulated as discussed in the following section. The discretionary powers of
state-chartered credit unions compared with those of federally-chartered credit unions
vary among states.
Deregulation can be divided into price, geographic, and product deregulation.
Price deregulation concerns the loosening or elimination of restrictions on interest
rates that depository institutions may pay on supplies of funds and charge on loans.
Price deregulation has caused credit to be rationed more by price than by availability.
Many individual savers benefitted from price deregulation because they could earn
higher interest rates on their deposits.
Geographic deregulation has been particularly important to commercial banks
and bank holding companies, which were prevented by federal and state banking
laws from offering full service interstate banking. The Office of the Comptroller of
the Currency made rules that have expanded intrastate bank branching. The Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328)
authorized nationwide interstate banking through the holding company format
effective September 29, 1995. Effective June 1, 1997, under this law, the federal
bank regulatory agencies may approve mergers between banks in different states
unless the home state of one of the banking institutions has opted out by enacting a
law explicitly prohibiting merger transactions involving out-of-state banks that
applies equally to all out-of-state banks.23
In 1991, the National Credit Union Administration permitted credit unions to
share branches, thus giving them an inexpensive way of expanding their geographic
23 CRS Report 94-744 A, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, by M. Maureen Murphy, pp. 1-2. This report is out of print but available on request
from the author.

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coverage.24 In May 1992, the Office of Thrift Supervision permitted nationwide
branching by all thrift institutions.25
But credit unions still have some restrictions on branching. For example, a
federal credit union may not establish a new branch office for the purpose of adding
a group [combining with another credit union through a multiple-group charter].26
Product deregulation is blurring the distinctions among products offered by
different types of depository institutions (e.g., checking accounts, credit cards,
mortgages, etc.). Product deregulation has been accelerated by the mergers of some
large financial and nonfinancial firms. Also, many firms have found methods of
circumventing existing laws in order to offer additional financial products. The
enactment of the Gramm-Leach-Bliley Act (P.L. 106-102) in 1999 facilitated
“affiliation among banks, securities firms, and insurance companies, permitting
financial conglomerates to cross-sell a variety of financial products to their customers
(one-stop shopping).”27 This act also allowed “national and state banks to create
financial subsidiaries for diversification into insurance sales and full-service
securities activities under specified conditions.”28 In addition, this act permitted
banking (“financial holding”) companies to invest in nonfinancial businesses for a
share of the profits.29
Deregulation has resulted in the rapid expansion of most services offered by
credit unions. Larger credit unions tend to offer a wider range of services than
smaller credit unions. Deregulation has been implemented by legislation and rulings
by the National Credit Union Administration. But credit unions, compared to other
depository institutions, still have restrictions on their powers to lend and invest funds.
For example, the Credit Union Membership Access Act (P.L. 105-219) limits
business loans to members to 12.25% of total assets.30 Also, credit unions may only
“extend lines of credit to their members, to other credit unions, and to credit union
organizations.”31
The Treasury compared the basic statutory and regulatory rules applied to
depository institutions across four broad categories: institution powers, safety and
24 Dean F. Amel, “Trends in the Structure of Federally Insured Depository Institutions,
1984-94,” Federal Reserve Bulletin, vol. 82, no. 1, Jan. 1996, p. 4.
25 Ibid.
26 Kessler, p. 10.
27 CRS Report RL30375, Major Financial Services Legislation, The Gramm-Leach-Bliley
Act (P.L. 106-102): An Overview, by F. Jean Wells and William D. Jackson, p. 2. This
report is out of print but is available on request from CRS.
28 Ibid.
29 CRS Report RS21134, Merchant Banking: Mixing Banking and Commerce Under the
Gramm-Leach-Bliley Act, by William D. Jackson and Gary W. Shorter.
30 CRS Report 98-933, Credit Union Membership Access Act: Background and Issues, p. 3.
31 Kessler, p. 5.

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soundness, regulatory enforcement authority, and consumer protection. The Treasury
concluded that
Federal credit unions generally operate within the same legal framework as other
federally insured depository institutions. Most differences between credit unions
and other depository institutions derive from the structure of credit unions. We
found this to be most likely in the case of safety and soundness rules, where
credit union operations interact directly with the operation of the rules. With
regard to enforcement and consumer protection rules, few differences exist.
Credit unions have fewer powers available to them than do banks and thrifts, but
through CUSOs [credit union service organization], credit unions may provide
their members with a panoply of sophisticated financial services and products
that rivals the offerings of banks and thrifts.32
Arguments For and Against Taxation
Proponents of taxation of credit unions argue that deregulation has caused
extensive competition among depository institutions. These institutions actively
compete for deposits by offering the best terms, including the highest rate of return
to depositors. Depository institutions also compete for borrowers by offering the best
loan terms including the lowest interest rates. Proponents of taxation argue that the
concept of the common bond has continued to weaken. For example, the
OmniAmerican Federal Credit Union
... counts 137,000 members employed at 1,300 businesses and organizations,
ranging from the Boy Scouts of America to Pier One Imports. At the end of
1996, assets totaled $517 million....33
Another example, the “Wescom Credit Union’s field of membership includes the 16
million people living in Los Angeles, Ventura, Orange, Riverside, and San
Bernardino Counties.”34
Tax proponents maintain that vigorous competition between credit unions and
other depository institutions justifies the same tax treatment for all institutions. They
argue that, for market forces to allocate resources efficiently, depository institutions
should have a level playing field. But, in this view, the income tax exemption for
credit unions gives them a competitive advantage over other depository institutions.
Credit unions pay no income taxes on earnings whether distributed or retained.
Credit unions can earn tax free interest on their retained earnings. Proponents assert
that credit unions have lower operating costs because of their tax exemption.
32 U.S. Department of the Treasury, Comparing Credit Unions with Other Depository
Institutions, p. 24.
33 Kenneth N. Gilpin, “Piggy Banks with Muscles,” New York Times, vol. 146, no. 50,715;
Feb. 26, 1997, p. B1.
34 Testimony of Jeff Plagge on behalf of the American Bankers Association before the
Committee on Ways and Means, Nov. 3, 2005. Wescom Credit Union’s website is
[http://www.wescom.org].

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Consequently, credit unions can pay depositors higher rates of return and charge
borrowers lower interest rates. It can be argued that the income tax exemption for
credit unions has enabled them to grow more rapidly than other depository
institutions.
The American Bankers Association (ABA) states that, “Traditionally, credit
unions were based on a simple concept: bring together a closely-knit group of people,
pool their resources, and provide small loans for one another.”35 The ABA argues
that the tax exemption has allowed some of these traditional credit unions to “morph”
into “highly competitive financial institutions virtually indistinguishable from
banks.”36 The ABA maintains that “credit unions that have adhered to the traditional
principles should continue to benefit from the tax preferences.”37 But, the ABA
argues that credit unions that have morphed into large, aggressive financial
institutions should lose their tax exemption.38
Supporters of the credit union tax exemption emphasize the uniqueness of credit
unions compared to other depository institutions. Credit unions are nonprofit
financial cooperatives directed by volunteers for the purpose of serving their
members. Credit unions provide many services free or below cost in order to assist
members. These services include small loans, financial counseling, and low balance
share drafts. The NCUA argues that the taxation of credit unions would create
pressure to eliminate these subsidized services. Furthermore, taxing credit unions
would raise the cost of credit to many people without an alternative source of credit.
Concern has been expressed in Congress about the access of lower income families
to basic depository services.
The American Bankers Association cites surveys that concluded that members
of credit unions had higher average incomes, higher average educational levels, and
a higher rate of home ownership than non-members.39 Hence, the ABA argues that
the credit union industry is giving a faulty image of their membership.40 Yet an
official of the Credit Union National Association cites a recent survey conducted by
Gallup for the ABA that found that the average household income of bank customers
was $51,000 per year compared to $46,000 per year for credit union members.41 The
Government Accountability Office (GAO) found that “the extent to which credit
unions serve persons of modest means is not definitively known because of limited
35 American Bankers Association, The Morphing of Credit Unions, Washington, 2004, p.
1.
36 Ibid., p. 2.
37 Ibid., p. 3.
38 Ibid., p. 2.
39 American Bankers Association, Credit Union Reality Check, 1996, p. 2.
40 Ibid.
41 Fred Stokeld, “Banks Getting Testy Over Competition from Credit Unions,” Tax Notes,
vol. 75, no. 1, April 7, 1997, p. 46.

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data and lack of indicators.”42 GAO also concluded that “Federal Reserve Board data
suggest that credit unions serve a slightly lower proportion of low- and moderate-
income households than do banks.” 43
Supporters of the tax exemption argue that credit unions are subject to certain
regulatory constraints not required of other depository institutions and that these
constraints reduce the competitiveness of credit unions. For example, “credit unions
are not subject to the internal control reporting requirements that the Federal Deposit
Insurance Corporation Improvement Act of 1991 ... imposed on banks and thrifts.”44
These restrictions arguably impose an implicit tax on credit unions.
Supporters of the tax exemption point out that
Under changes made to the Internal Revenue Code by the ... Small Business Job
Protection Act of 1996, financial institutions, including banks, thrifts, and their
parent holding companies, ... [are] able to elect Subchapter S corporation status
under the Code and generally receive pass-through tax treatment for federal
income tax purposes if certain criteria are met.45
Thus, a financial institution with a Subchapter S status is generally not subject to the
federal corporate-level income tax. The corporation’s taxable income flows through
to its shareholders in proportion to their stock ownership, and the shareholders pay
federal income taxes on their share of this taxable income.
Supporters of the tax exemption point out that the Credit Union Membership
Access Act (P.L. 105-219) states that
The Congress finds the following:
... Credit unions, unlike many other participants in the financial services market,
are exempt from Federal and most State taxes because they are member-owned,
democratically operated, not-for-profit organizations generally managed by
volunteer boards of directors and because they have the specified mission of
meeting the credit and savings needs of consumers, especially persons of modest
means.46
42 U.S. Government Accountability Office, Issues Regarding the Tax-Exempt Status of
Credit Unions, Testimony before the House Committee on Ways and Means, Nov. 3, 2005,
p. 19.
43 Ibid., p.22.
44 U.S. General Accounting Office, Credit Unions: Financial Condition Has Improved, but
Opportunities Exist to Enhance Oversight and Share Insurance Management, GAO-04-91
(Washington: Oct. 2003), p. 6.
45 Federal Deposit Insurance Corporation, Subchapter S Election for Federal Income Taxes,
Financial Institution Letter, Oct 29, 1996, p. 1. Available at [http://www.fdic.gov/news/
news/financial/1996/fil9691.html].
46 P.L. 105-219, Sec. 2.

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Debate in the 108th Congress
In the 108th Congress, top officials of trade associations representing credit
unions and commercials banks advocated the interests of their members on the issue
of the tax exempt status of credit unions.47 On February 23, 2004, former Treasury
Secretary John W. Snow stated that the Bush Administration opposed taxing credit
unions.48 In a letter dated March 31, 2004, to the Credit Union National Association,
Senator John F. Kerry reportedly stated that he would “oppose any efforts to change
the existing tax-exempt status of credit unions.”49 On March 16, 2004, Donald E.
Powell, Chairman of the Federal Deposit Insurance Corporation stated that
... credit unions ought to pay taxes. The playing field has shifted in recent years.
We’ve gone from 20 credit unions with assets of more than $1 billion ten years
ago to 83 such institutions today. More and more we’re seeing credit union
advertising touting the benefits of membership over doing business with a bank.
In my view, if they are going to compete with banks then we should do our best
to ensure that the competition is fair.50
On June 2, 2004, three major banking trade groups announced that they had
jointed forces to campaign against the tax-exempt status of credit unions. The
American Bankers Association, the Independent Community Bankers Association
(ICBA), and the America’s Community Bankers established the Inter-Trade Credit
Union Coordinating Council to campaign against what they considered to be unfair
competitive advantages of credit unions, including their tax exempt status.51
Debate in the 109th Congress
In the 109th Congress, the tax exempt status of credit unions continued to be
debated. On February 23, 2005, Dale Leighty, Chairman of the Independent
Community Bankers Association (ICBA), stated in a press release that
Given the enormous size of the tax subsidy credit unions are receiving, there
should be clear and solid evidence that credit unions are fulfilling some unique
47 Marcia Kass, “CUNA Outrage at ABA Priority to Remove Credit Union Tax Exemption
Gets Shrug,” Daily Tax Report, no. 79, April 26, 2004, p. G9.
48 Marcia Kass, “Snow Praises Credit Unions’ Economic Role, Says Administration
Opposes Taxing Them,” Daily Tax Report, no. 35, Feb. 24, 2004, p. G4.
49 “Kerry, in Letter to CUNA, Defends Tax-Exempt Status of Credit Unions,” Daily Tax
Report, no. 71, April 14, 2004, p. G7.
50 Donald E. Powell, “Remarks before the Independent Community Bankers Association,”
FDIC Press Release, March 16, 2004, p. 1.
51 “Three Banking Trade Groups Unite to Challenge Credit Unions’ Tax Break,” Daily Tax
Report, no. 107, June 4, 2004, p. G5.

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or extraordinary need in today’s highly competitive financial services sector —
yet that is not the case.52
Mr. Leighty was referring to a Tax Foundation report sponsored by the ICBA, which
was critical of the tax exempt status of credit unions.53 In response, the Credit Union
National Association (CUNA) published an analysis of the Tax Foundation report.
CUNA defended the tax exempt status of credit unions and argued that the Tax
Foundation study was flawed.54
On March 1, 2005, before the Credit Union National Association, then House
Ways and Means Committee ranking Democrat Charles Rangel asserted his support
for the federal tax exemption for credit unions.55 On July 15, 2005, at the National
Association of Federal Credit Unions’ conference, a board member counseled
representatives of credit unions on how to retain the tax exemption for credit
unions.56
On November 1, 2005, the President’s Advisory Panel on Federal Tax Reform
issued its report, which included two proposals for fundamental tax reform. One
proposal would broaden the income tax base and lower tax rates. The other proposal
would eliminate most tax preferences and shift the current income tax base to
primarily a consumption tax base. Neither of these proposals explicitly
recommended the repeal of the tax exempt status of credit unions. Because these
proposals would broaden the tax base, however, it is likely that each proposal would
repeal the tax exemption.
Also on November 1, 2005, Ed Yingling, president and chief executive officer
of the American Bankers Association (ABA), said that the ABA will use the courts
to challenge the credit union tax exemption because the tax exemption gives credit
unions an unfair competitive advantage over banks, particularly community banks.57
On November 3, 2005, the Committee on Ways and Means held hearings concerning
the tax exempt status of credit unions. On February 27, 2006, at a CUNA
52 Robert T. Zung, “ICBA Cites Study in Push to Eliminate Tax Exemption Granted Credit
Unions,” Daily Tax Report, no. 38, Feb. 28, 2005, p. G8.
53 John A. Tatom, Competitive Advantage: A Study of the Federal Tax Exemption for Credit
Unions, Tax Foundation, (Washington: Tax Foundation, 2005), 28 p.
54 Credit Union National Association, CUNA Analysis of ICBA/Tax Foundation Study of the
Federal Credit Union Tax Exemption, (Washington, CUNA, March 24, 2005), p. 1.
55 Alison Bennett, “Lawmakers, Officials Express Support for Credit Union Federal Tax
Exemption,” Daily Tax Report, no. 40, March 2, 2005, p. G8.
56 “NAFCU Counsels on Retaining Tax Exemption for Credit Unions,” Daily Tax Report,
no. 137, July 19, 2005, p. G7.
57 Marcia Kass, “ABA Plans to Use Courts to Challenge Credit Union Tax Exemption,
Yingling Says,” Daily Tax Report, no. 211, Nov. 2, 2005, p. G6.

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Conference, former Treasury Secretary John Snow reaffirmed the Bush
Administration’s support for the income tax exemption for credit unions.58
On March 22, 2006, former Chairman of the House Ways and Means
Committee William Thomas sent a letter to Ms. JoAnn Johnson, Chairperson of
CUNA, expressing concern about the independence and objectivity of the NCUA in
collecting and analyzing data about the income characteristics of credit union
members and the compensation of credit union executives.59 In his letter, former
Chairman Thomas stated
... we do not need a cheerleader collecting and analyzing information about
whether credit unions are fulfilling the goals intended with their tax exemption.
I ask that you be mindful of your proper role as an independent and objective
regulator of credit unions as you move forward with your data collection project.
I also want to notify you that I am asking the Government Accountability Office
to expand its current review of credit union tax exemption to include an analysis
of the independence and objectivity of the NCUA. The NCUA’s vigilance is
critical to ensuring thorough oversight of credit unions, as well as a balanced
analysis of their tax-exempt status.60
In November 2006, the National Credit Union Administration released a report
titled Member Service Assessment Pilot Program.61 The NCUA stated the this report
provided “the most conclusive data to date available on the membership profiles of
FCUs [federal credit unions].”62 The NCUA concluded that their study:
! Demonstrates that FCUs are serving those they have been chartered
to serve — working individuals.
! Confirms the expectation that FCUs designated as low-income,
with underserved areas, or with a community base have better
opportunities to serve lower income groups and individuals and
generally have more diverse membership profiles as compared to
FCUs with more restrictive common bonds and fields of
membership.
! Strengthens NCUA’s previous position that changes in membership
profiles do not occur immediately — they take time.63
58 Marcia Kass, “Treasury Secretary Snow Reaffirms Support for Credit Union Tax
Exemption,” Daily Tax Report, No. 39, Feb. 28, 2006, pp. G4-G5.
59 Kurt Ritterpusch, “Rep. Thomas Critical of NCUA Official’s Call for Selling Congress
on Continued Exemption,” Daily Tax Report, no. 57, March 24, 2006, p. G1.
60 Letter from Representative William Thomas, Chairman of the House Ways and Means
Committee, to Ms. JoAnn Johnson, Chairperson of the National Credit Union
Administration, March 22, 2006.
61 National Credit Union Administration, Member Service Assessment Pilot Program, Nov.
3, 2006, 80 p.
62 Ibid., p. 1.
63 Ibid.

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But former House Ways and Means Committee Chairman William Thomas stated
that the NCUA “still has much more work ahead of them with respect to transparency
and data collection.”64 He also asserted that the NCUA had “overstated the strength
of the results of the report.”65
In November 2006, the Government Accountability Office published a report
titled Greater Transparency Needed on Who Credit Unions Serve and on Senior
Executive Compensation Arrangements.66 The GAO found that
NCUA has established the low-income credit union program and allowed
adoption of “underserved areas” to increase credit union services to individuals
of modest means. Despite increased credit union participation in these programs
and the expansion of community charters, the 2004 and 2001 Survey of
Consumer Finances indicated that credit unions lagged behind banks in serving
low- and moderate-income households. NCUA officials told GAO that, given
the nascent nature of its two initiatives and the relatively recent shift to
community charters, they did not yet expect observable changes in the data.
Also, NCUA recently has undertaken a pilot effort to collect data on the income
characteristics of credit union members. Because limited data exist on the extent
to which credit unions serve those of modest means, any assessment would be
enhanced if NCUA were to move beyond its pilot and systematically collect
income data.67
GAO also stated that “executive compensation for federal credit unions is not
transparent, largely because federal credit unions are not required to publicly file
information on executive compensation.”68
Debate in the 110th Congress
As of March 22, 2007, no legislation has been introduced in Congress
concerning the tax exempt status of credit unions. Also, the President’s budget for
FY2008 does not propose any change in the tax exempt status of credit unions.
Trends
In the future, technological change and deregulation will likely further increase
competition between credit unions and other depository institutions. It should be
64 Alison Bennett and Marcia Kass, Thomas Responds to Credit Union Report, Says More
Data Needed on Membership,” Daily Tax Report, Nov. 24, 2006, p. G2.
65 Ibid.
66 Government Accountability Office, Greater Transparency Needed on Who Credit Unions
Serve and on Senior Executive Compensation Arrangement, report no. GAO-07-29, Nov.
2006, 103 p.
67 Ibid., highlights page.
68 Ibid., p. 6.

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noted that thrift institutions were exempt from the federal income tax until 1951.
The tax exemption for thrift institutions was eliminated because Congress felt that
the relationship between thrifts and their members had substantially changed. In the
1980s, 1990s, and early 2000s, the credit union industry grew more rapidly than other
depository industries, and this more rapid growth may continue. Since many believe
that an economically neutral tax system requires that financial institutions engaged
in similar activities should have the same tax treatment, the income tax exemption
for credit unions likely will occasion continuing debate.
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