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Prochnow Foundation study: Credit union tax exemption should be changed

An economic policy analysis of the tax subsidy for credit unions

 

A recent study authorized by the Prochnow Foundation recommends replacing the current tax exempt status enjoyed by credit unions with one that involves using targeted tax credits to force credit unions to focus on their original mission. That mission, for which they were given their tax-exempt status, is to provide financial services to people of limited means.

The study was conducted by William Kelly, Jr., a professor of economics and finance at Grinnell College and previously was senior economist for the Credit Union National Association (CUNA) and the director of Center for Credit Union Research at the University of Wisconsin-Madison. The Prochnow Foundation is associated with the Graduate School of Banking at the University of Wisconsin-Madison.

The study estimates that the annual taxpayer subsidy to credit unions is about $2 Billion a year. The bulk of that subsidy is skewed towards higher income credit union members. According to the study:

 

· 61 percent of credit union benefits go to households with incomes over $95,000;

· 29 percent go to households with incomes of $35,000 to $95,000; and

· 10 percent go to households making less than $35,000.

 

Kelly concludes that the reason the tax subsidy flows to higher income members is because of its flawed design.

“The dollar value of a household's benefit from favorable interest rates is proportional to the size of the loan or deposit account, and these accounts are larger for more affluent households,” Kelly concludes. “Credit unions differ widely in how well they carry out their Congressionally‐mandated mission to serve 'especially people of modest means', having taxpayers provide a uniform subsidy to all credit unions generates a perverse incentive. The subsidy continues in the same way whether a credit union responds well, poorly, or even opposite to achieving the mission that taxpayers subsidize them to do.”

According to the study, taxpayers would benefit if credit unions paid taxes just like other businesses including cooperatives. Instead of a “one-size-fits-all” tax exemption, Kelly says tax credits could be used to target the credit union's mission of serving people of modest means. For credit unions that are meeting their public policy purpose, the tax credit would offset any tax liability.

For more information, send an e-mail to OBA President & CEO Roger Beverage at roger@oba.com. 

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