Credit Unions, Farm Credit System Should Be Weaned from Taxpayer Subsidies

20130829 CUs and FCS

In case you hadn’t noticed, the credit union industry has been making a big deal lately about its own tax subsidy. The credit unions have led a social media campaign that urges policymakers: “Don’t Tax My CU.” For credit union members who have been recruited into the fight via their Twitter feeds, a taxpayer-funded competitive advantage over taxpaying community banks is apparently something to which their financial institutions should be entitled.

Now, if it seems strange that in this time of fiscal belt-tightening an industry is making hay over the federal tax expenditures that it benefits from, remember that we are in the middle of tax season on Capitol Hill. I’m not talking about the hectic days of TurboTax and W-2s that end in April, but the comprehensive tax code rewrite that is in its initial stages in Congress. The House Ways and Means and Senate Finance committees have begun laying the foundation for federal tax reform, and they have pledged a “blank slate” approach that assumes all special tax expenditures are out the window, at least for now.

So the credit unions’ circle-the-wagons defense of their taxpayer-funded advantage over other financial institutions makes perfect sense. Of course, the policy itself does not.

Tax-advantaged financial firms, including credit unions and Farm Credit System institutions, use their subsidies to compete directly with taxpaying institutions, such as community banks. The result is that their lending comes at a significant cost to taxpayers—an estimated $31 billion over 10 years for credit unions and $1 billion every year for the Farm Credit System.

These institutions operate as “stealth banks,” providing loans and banking services to consumers across the nation. The problem is: they aren’t taxed like banks, which imposes government preferences on our financial markets funded by the taxes that you and I pay.

Perhaps most worrisome for credit unions is that we’ve seen this play out before. In 1951, Congress revoked the tax exemption for savings and loans, mutuals and cooperative banks because it determined that they were operating more and more like commercial banks.

The same should go for credit unions and Farm Credit System institutions, which walk, talk—and lend and invest—a lot like banks. They should be taxed like them, too, so our nation’s financial institutions can operate on a level playing field. Congress should stick to its “blank slate” and not let these costly, unfair and outmoded subsidies back into our federal tax code. Should the credit union tax exemption be preserved, another taxpayer must clearly pay the tab.

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