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When Congress created credit unions in 1934, the Great Depression had crippled the banking system. Families couldn’t borrow, small businesses were closing, and banks were collapsing by the hundreds.
Out of that chaos, credit unions were born to serve people of modest means when no one else would. Because they were nonprofit cooperatives, owned by their members and serving specific employee or community groups, Congress granted them tax-exempt status. It made sense at the time. They weren’t competitors to banks; they were safety nets for people banks couldn’t or wouldn’t serve.
Ninety years later, that safety net looks a lot like a well-upholstered hammock. Credit unions today hold more than $2 trillion in assets. Many offer the same products and services as banks: Home mortgages, business loans, credit cards, and investment accounts. Yet, they still don’t pay income taxes.
Meanwhile, banks, operating under the same regulations and offering the same services, pay billions of dollars in federal and state taxes every year. That tax bill alone creates a substantial disadvantage, especially for small community banks. A bank has to earn roughly 20% to 30% more in pre-tax income to match what a credit union earns tax-free.
In competitive makets, those dollars could fund more local lending, better rates, or higher community investment. Instead, they go to the Treasury while the credit union down the street competes under a lighter load.
The original tax break was meant to help people of modest means. Yet many of today’s largest credit unions have grown far beyond that mission. Some are making multi-million-dollar commercial loans and serving affluent clients. When two institutions provide essentially the same products and services, but only one pays taxes, it’s fair to ask whether the rules still make sense.
It’s unlikely that Congress will change this anytime soon. Politically, it’s a no-win issue. Credit unions now count over 100 million members, nearly one in three Americans. That’s a voting block neither party wants to anger. No politician wants to be accused of “taxing the little guy,” even if that “little guy” happens to be a $10 billion institution sponsoring a professional sports team.
Here’s an interesting thought experiment: What if, instead of taxing credit unions, Congress decided to stop taxing banks? It would have the same result: Fairness and a level playing field. It’s also just as politically unthinkable. Headlines would scream about a “Wall Street giveaway.” Politicians would line up to condemn it.
A theoretical third option might be to enact laws and regulations to return credit unions to their original limited role. This would create a logistical nightmare, in addition to being just as politically impossible as the other two options.
From a purely economic standpoint, imposing taxes on credit unions or ending taxes on banks would have the same outcome. If Congress were serious about fairness, either option would be a logical choice.
Yet our policy debates tend to be driven more by optics than economic logic. We may say we want fairness, but what we often want more is a narrative that feels fair.
As a financial planner, I’m used to reminding clients that fairness and feelings are not the same thing. That is also true with public policy, where the perception of fairness outweighs what would be actual economic equality.
The reality is that both banks and credit unions provide essential financial services to millions of Americans. Both support local economies, both employ people in our communities, and both are subject to regulation. The question that deserves serious consideration isn’t which side is more deserving, it’s whether the rules that apply to them still match the world we live in.
Rick Kahler, MS, CFP®, CFT™, CeFT®, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
