One of the unresolved conflicts brewing at the end of 2005 involved the continuation of tax exempt status for credit unions. Credit unions enjoy freedom from taxation, while their counterparts in the banking and savings industry must pay. The American Bankers Association has been all over this issue during the past year, as they contend that this exemption gives an unfair advantage to a competitor. Credit unions now lend to much the same clientele as a community bank, especially when you examine the consumer portfolio.
The American Bankers Association estimates the annual tax cost of this exemption could be in the neighborhood of 1.35 billion in FY 2005. That’s small in relation to the deficit, but then again a billion here and there adds up over time. (Too bad we don’t think about spending in this way.)
Other candidates for losing an exemption: hospitals. Health care has also become a business that does not solely involve the goal of charitable works for the sick. When health care organizations include both taxable for profit entities and tax-exempt ones, you know that the purpose of granting tax-exemptions may have become loosened from its historical moorings.
Of course, once you change the tax-exempt status, there are interesting transition issues. For example, if you want to preserve pre-transition gains from tax, you must find a way to value those assets. A recent case on this issue for Blue Cross, Blue Shield organizations can be found here: Capital Blue Cross and Subsidiaries v. Commissioner (3d Cir. December 5, 2005).