The Federal Reserve Bank of Richmond recently published an article, Credit Unions: A Taxing Question that suggests there is mixed findings as to whether the continuation of the credit union tax exemption is justified.
The paper analyzes the findings of various research papers on the credit union tax exemption.
The paper argues that there are two legislative justifications for the credit union tax exemption -- their mutual structure and their purpose of assisting those of modest means.
The paper points out that "[c]ritics of the credit union tax exemption have long used the repeal of the mutual savings bank tax exemption as evidence that credit unions should lose theirs." However, mutual savings banks lost their tax exemption because they were no longer "self-contained cooperative organizations." Despite the similarities between mutual savings banks and credit unions, the paper states credit unions still retain more of their cooperative qualities than mutual savings banks.
But I would note that the erosion of common bond is undermining the linkage between credit union borrowers and savers.
The paper then examines at the incidence of the tax subsidy. In other words, where does the tax subsidy go?
Citing work by Robert DeYoung and others, the authors found that the majority, but not all, of the tax subsidy was passed through to credit union members in the form of higher deposit rates. The authors also stated that an economically substantial amount of the subsidy was diverted away from credit union members, mainly by hiring too many workers and earning below marketr returns on investment securities.
While the credit union subsidy appears to be flowing to members, the other justification for the tax exemption is that credit unions target those of modest means. The evidence is mixed on whether this policy goal is being met. Credit unions claim that their common bond requirements may result in a selection bias that makes it harder for them to serve people of modest means. However, research looking at large Wisconsin credit unions with broad fields of membership found that large credit unions were targeting wealthier customers, as evidenced by the markets in which they locate branches and the income level of mortgage borrowers.
The paper concludes that "research performed on credit unions and the tax exemption reveals mixed results as to whether, on the whole, credit unions still serve the same purposes today as they did when they were first chartered in the early 20th century."
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The only reason it appears mixed as to whether credit unions are on the original mission is because there are two types of credit unions.
ReplyDeleteOnce you analyze credit unions at a certain size or higher, they're banks.
Below that size they're hybrids. They're wanna be big credit unions (banks) but can't grow or they have given up and are credit unions because they've lost the opportunity to grow.
The asset size is debateable but the discussion starts at $500M.
We ALL know it, we just don't want to lose the tax exemption.
We benefit from Congressional failure.
I don't think asset size is even a particularly good way to draw the distinction.
ReplyDeleteState Employees' of NC is enormous (for a cu) and operates far more like a "real" cu than plenty of these $300 million cu's that aren't really doing anything a bank wouldn't do (except operate efficiently and pay taxes).
that's a good example of why it isn't just size but lacking a better way, its still size...besides name 3 more cus that look like more like SECU and not like a bank with more than say $500m or $1billion in assets. you cant.
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