In 1934, Congress passed the Federal Credit Union Act, allowing not-for-profit credit unions a federal tax exemption status with the purpose of making credit available to "people of small means." It gave those who needed loans an alternative to banks that would not lend to them.
But many in the commercial banking industry believe that credit unions have become not-for-profit banks that just don't pay federal tax.
Assuming Congress takes a clean-slate approach to tax reform in coming months, it could soon withdraw credit unions' not-for-profit category. Senate Finance Committee Chairman Max Baucus, D-Mont., and Sen. Orrin Hatch, R-Utah, have asked senators to advocate for businesses whose not-for-profit status should be kept.
"They are going to have to make their case to Congress to justify to the Senate that they are deserving," said Jim Pishue, president and CEO of the Washington Banker's Association.
This seems like a fair approach to many in the banking industry who believe that credit unions should give up the tax exemption to level the playing field with banks.
"It's not a bank issue anymore," Pishue said. "It's all about taxpayers. They absorb the tax exemption."
Pishue argues that each time a tax exemption is granted to one group, taxes get raised elsewhere to compensate.
"This isn't one industry complaining about another," Pishue said. "This is much larger."
The principle of people helping people has not changed, said Lynn Heider, vice president of public relations and communications at Northwest Credit Union Association, which represents credit unions in Washington and Oregon.
"We are not profit-driven banks," Heider said. "Credit unions do not pay stockholders and there are no profits."
The millions of dollars per year that credit unions pay in payroll, property and sales taxes benefits local communities. If credit unions lose their federal tax exemption status, then the cost of services for members would rise, he said.
In 2012, credit union members in Washington saved about $3 million in fees. Averaged out, that breaks down to $111 per credit union household.
"Ask consumers if they want to lose those benefits and I think I know what they will say," Heider said.
Credit unions are cooperative organizations and, unlike banks whose profits pay shareholders, profits at credit unions are cycled back to members who each own a slice of the business.
This is done in the form of lower fees for services including free checking, lower interest rates on loans and higher dividends on savings. Credit unions can provide these services because they hold not-for-profit status.
The national debt is one thing, said Mark Duffy, president and CEO of Everett's Mountain Pacific Bank. "I would think that the other thing is that the credit unions have changed."
Duffy has nothing against credit unions, but when they do business in an area where his bank specializes, such as business loans, then the not-for-profit status gives credit unions an unfair competitive advantage.
"I'm competing with them with the same products and I have to pay taxes if I make a profit and they don't," Duffy said.
Others in the banking industry argue that credit unions are much larger than they were in 1934 because of changes to loosen membership rules. Credit union members used to have to be employed by the company or organization tied to the credit union. Only employees of the Boeing Co., for example, could open an account at Boeing Employees Credit Union. Now anyone can join BECU.
This is not the first time the tax issue has flared up. In 1951 and 1998, the status was argued but preserved.
"The taxation issue has been brought up by banks for years," said Todd Pietzsch, manager of public relations at BECU.
Credit unions have products and services that all large banks have but members own a piece of the credit union and have a vote on how the institutions are run. In areas where credit union membership is high, all consumers benefit because they add competition to the marketplace, Pietzsch said.
"There is a ripple effect. If you are not paying $10 a month to have a checking account then that is $120 a year in your pocket you can save spend or invest," Pietzsch said. "It all adds up."
On the Web
The website www.DontTaxMyCreditUnion.org offers resources for credit union members to voice opinions on not-for-profit status.
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