Credit Unions: Unfair Competition

Today’s BNA Daily Tax Report includes a story by Marcia Kass on the Credit Union National Association Governmental Affairs Conference. It should be no surprise that conference participants favor continuing the tax exempt status of credit unions. A half-dozen government officials speaking at the conference apparently agreed on that point. Bill Frist, Senate Majority leader, was one of those officials who reportedly stated: “I absolutely support tax exemption for credit unions today." (To the cynical among us: Will you still love me tomorrow, Bill?) Paul Kanjorski (D-Pa.) was also quoted to say that doing away with tax exemption would be "the worst concept we could have."

As previously discussed in this blog, tax-exempt status for credit unions allows a preferred competitive status against community banks, which have taxable operations. Many credit unions are functionally indistinguishable from community banks in terms of the services offered and demographic traits of their customers.

I don’t know how much tax can be raised from removing this exemption (I’ll welcome a post from anyone who does). Whatever contribution this would make to the national deficit reduction should be secondary to the principle of fair treatment for business operations.
Of course, the trade association for credit unions has another view. Here is their web site if you are interested. http://www.cuna.org/.

This raises another point: grants of special tax exempt status like this one also tend to corrupt the political process. The politically powerful have every incentive to extract rents from those holding special status in order to perpetuate it. (Recall our discussions about Jack Abramoff preying on the special status granted to tribal governments.) That sounds like another reason to level the playing field in this area.

EAM