Enactment of the Tax Cuts and Jobs Act (TCJA) made important and overdue reforms to both the individual and corporate side of the federal tax code. As a result, taxpayers are seeing bigger paychecks, businesses are accelerating capital investment, and the U.S. economy is firing on all cylinders. Rep. Kevin Brady, architect of the TCJA and Ways and Means Chairman, recently said that the new tax code is “simpler and fairer for Americans of all walks of life.” NTU shares this sentiment and thank Chairman Brady for his hard work on a more equitable tax code.
While the tax code is certainly fairer than it had previously been, there are still plenty of areas in the tax system that deserve periodic scrutiny (and possibly revision) to reflect changing realities of the economy. One such example is the tax “playing field” between banks and federally chartered credit unions. Bankshave taxpaying shareholders and are subject to federal corporate income tax whereas credit unions are exempt from such taxation and some lending regulations - but are required to restrict their membership to only those who share a common bond.
That is not inherently unfair, so long as these institutions are abiding by their mandated common bond regulation. The vast majority of credit unions with small asset holds are sticking to these rules; however, a growing number of policymakers and outside observers believe a few large credit unions may be stretching their advantages to compete directly with banks.
Approved by Congress in 1934, the Federal Credit Union Act provided these institutions with an exemption from the corporate income tax because they are viewed as serving an important national purpose. It was the intent of Congress that the field of membership regulations for credit unions be limited to only depositors or borrowers who share a common bond, such as the same employer, civic organization, or geographic location. The rules were designed, in theory, to ensure that credit unions use their tax advantage to pass along lower borrowing rates and higher savings rates to moderate-income, unbanked customers. However, some credit unions, particularly the larger ones, have loosened most of their field of membership restrictions and now compete with other financial institutions except with a major market edge -- the tax exemption.
In many respects these institutions are practically indistinguishable from community banks in terms of operations and customer base. As the Wall Street Journal noted earlier this week, PenFed Credit Union “advertises ‘Great Rates for Everyone’ despite the common-bond requirement. PenFed also acquired 13 smaller credit unions in a 20-month span between 2015 and 2017, before receiving a regulatory warning about new deals.” It is a similar story at Bethpage Federal Credit Union in New York, where they proudly proclaim on their website: “Everyone is now eligible to become a member of Bethpage Federal Credit Union by simply opening a $5 savings account.”
Surely this was not the intention of Congress.
Even the left-leaning Brookings Institution noted that “‘Everyone’ is the wrong way to define credit union members” and the nonpartisan Tax Foundation believes that reviewing the tax exemption would be “worthwhile.” It is not every day that these two institutions concur in such a strong way.
The National Credit Union Administration (NCUA), the regulator for credit unions, is unfortunately partially responsible for the erosion of the limits that Congress crafted for credit unions, like broadening the field of membership regulation so that an entire state can be considered a community. For example, at Golden 1 Credit Union they say “All Californians can join! If you live or work in California, you are eligible.” By that broad definition 40 million individuals automatically qualify for membership.
And at the NCUA’s meeting in June, the board adopted new rules that continue to water down requirements for well-defined local communities and significant common bonds among members. Issuing a final rule allowing federal credit unions to use a “narrative” as justification for community expansion, rather than relying on statistical data. In essence, these institutions can set their own definition and create their own community, well outside the intent of the Congress. Specifically, the final rule states: “the Board will allow the option for an applicant to submit a narrative to establish the existence of a well-defined local community instead of limiting the applicant to a presumptive statistical community.”
As proponents of taxpayer interests, we concerned about this. That is why earlier this year NTU led a letter signed by nine other free-market, pro-taxpayer groups to the Senate Finance Committee highlighting our concerns. In that April letter, we wrote: “A tax exemption gives these select few credit unions a distinct edge over taxpaying banks and creates an uneven playing field, particularly over smaller community banks, which compete for similar customers… As with any industry, the realm of finances has grown and changed over the past several decades, and it is important for Congress to regularly review the governing tax and regulatory provisions.”
Removing the tax exemption for the largest credit unions would produce a fairer tax system and help level the playing field with other financial institutions. Despite the reasonable restraints established by Congress, some credit unions have found loopholes in the rules that allow them to operate in a gray area. Congress should review this exemption and make certain that these entities adhere to Congress’ intent.