Monday, November 9, 2009

Study: Uniform Tax Exemption Flawed, Creates Perverse Incentives

A study, An Economic Policy Analysis of the Tax Subsidy for Credit Unions, by William Kelly, Jr. through the Prochnow Foundation at the Graduate School of Banking has recommended replacing the current blanket tax exemption for credit unions with more targeted tax credits that focus credit unions on their public mission of serving people of modest means.

William Kelly is a professor of economics and finance at Grinnell College and previously was senior economist for the Credit Union National Association (CUNA) and the director of Center for Credit Union Research at the University of Wisconsin-Madison.

The study estimates that the annual taxpayer subsidy to credit unions is about $2 billion per year. The bulk of that subsidy is skewed towards higher income credit union members. According to the study:
• 61 percent of credit union benefits go to households with incomes over $95,000;
• 29 percent go to households with incomes of $35,000 to $95,000; and
• 10 percent go to households making less than $35,000.

Kelly writes that the reason why the tax subsidy flows to higher income members is due to its flawed design. “The dollar value of a household’s benefit from favorable interest rates is proportional to the size of the loan or deposit account, and these accounts are larger for more affluent households.”

The study points out that “credit unions differ widely in how well they carry out their Congressionally‐mandated mission to serve 'especially people of modest means', having taxpayers provide a uniform subsidy to all credit unions generates a perverse incentive. The subsidy continues in the same way whether a credit union responds well, poorly, or even opposite to achieving the mission that taxpayers subsidize them to do.”

Therefore, the study concludes that taxpayers would benefit from credit unions paying taxes just like other businesses including cooperatives. Instead of a one-size fits all tax exemption, the study recommends the use of tax credits, which would be targeted at the credit union’s mission of serving people of modest means. For credit unions that are meeting their public policy purpose, the tax credit would offset any tax liability.


  1. I'm curious. Would the ABA be supportive of taxing credit unions as a trade-off for credit unions having the same capital requirements as banks as well as a completely open fields of membership?

  2. Having read that "independent" report, it is bogus. A simple calculation to "determine" a tax subsidy without any analysis or comment about tax-avoidance strategies that could/would be employed by credit unions to reduce any taxes. Those same strategies employed by banks in the past, currently and in the future. No mention of the $150 billion bailout of banks in the earl 1990s and what those funds could have been used for rather than the first bailout of banks. Nothing about the $700 billion of TARP money. Nothing about the billions of taxpayer dollars lost with the bankruptcy of CIT and failure of United Commerical Bank. about a real study of the tax benefits received by financial institutions from an entity 1) not supported by banks or 2) from a university that has the ability to accurately count when aligning itself with other universities for athletic purposes.



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