Rowe: Level Playing Field Needed
Imagine that you own a business with a competitor that is like yours in virtually every way—except your competitor pays no taxes. Or, imagine that your next-door neighbor, who sends his kids to the same public school as yours, pays no property taxes on his home.
This is exactly the situation that more than 6,000 community banks face today. That tax-free competitor is your local credit union. Banks and credit unions offer identical services, from checking and savings accounts to credit cards, home loans and online bill pay.
And yet credit unions pay no taxes on their earnings. The credit union tax subsidy not only creates unfair competition with other financial firms, it also costs taxpayers $2 billion per year — unjustifiable in times of high deficits.
Credit unions have been tax-exempt for nearly a century, because they were originally intended to serve low-income people who were thought not to have access to banks. They were also intended to serve a particular group of people — say, employees of a company or members of a church — with a common bond. This narrowly defined, public purpose was the reason for the tax exemption.
Today, however, credit unions have vastly outgrown their special treatment. Together, they hold over a trillion dollars in assets. More than 200 credit unions have more than
$1 billion in assets, which is larger than 95 percent of our nation’s community banks. Credit unions have enlarged their member bases too, with some “common bonds” stretched to the point that anyone is eligible. And credit union lobbyists have aggressively sought to expand the industry’s commercial lending.
They have used their special treatment to run up large profits —credit unions collected $8.5 billion in profits in 2012 — all tax-free.
As credit unions have grown, they have lost sight of their mission to serve people of limited means.
In fact, credit unions have a worse track record at serving low-income people than banks. One study found that 24 percent of bank customers were low-income compared to
only 14 percent of credit union members.
To make matters worse, nearly half of credit union customers were upper-income, versus only 41 percent of bank customers. Credit union customers are more likely than bank customers to have a college degree and to own their own home. This means that taxpayers are essentially subsidizing financial services for affluent customers. It also means credit unions are being rewarded with a tax break despite failing to fulfill their mission.
Meanwhile, America’s community banks pay more than $4 billion per year in federal taxes. How can competitors in the same industry receive different tax treatment in a free business environment? Credit union lobbyists sometimes say that they deserve special tax treatment because they are owned by their customers. Before 1951, mutual savings banks — which, like credit unions, are owned by their customers — were also tax-exempt. But
Congress decided that mutual institutions had become equal competitors with commercial banks and so revoked mutuals’ exemption. The parallels with credit unions today are uncanny.
The federal government should not be in the business of picking winners and losers through the tax code; instead, it should offer an equal, competitive environment for every entity that offers banking services. Banks welcome honest competition — but fair play only happens on a level playing field. If credit unions wish to compete with banks, then it’s time
for credit unions to pay their fair share.