Tax Reform Has Eliminated the Need for Credit Union Favoritism

If Ronald Reagan was right that the “nearest thing to eternal life we’ll ever see on this earth” is a government program, then the second closest thing to eternal life must be a federal tax subsidy.

Credit unions were designed to be nonprofit financial institutions that serve a narrowly defined base of members underserved by traditional banks. Congress approved the federal chartering of credit unions in 1934 during the depths of the Great Depression when many working Americans, such as farmers and blue-collar laborers, had little access to commercial banking. In 1937, Congress exempted federally chartered credit unions from federal income tax and, in most cases, state income taxes.

So what should we make of Golden 1 Credit Union in Sacramento, California, which claims 850,000 members across 38 counties, commits $120 million over 20 years for the naming rights to the arena home of the NBA’s Sacramento Kings, and boasts, “We offer the same products, services, and stability you’d find at a traditional bank”?

By their own admission, Golden 1 Credit Union has all the makings of a commercial bank, albeit one with a federal tax exemption.

Golden 1 is hardly the exception. Navy Federal Credit Union is reportedly the largest credit union in the country with more than 7 million members, over $82 billion in assets, and nearly 300 branches. The State Employees’ Credit Union, based out of Raleigh, North Carolina, has over 2.2 million members, $36 billion in assets, and nearly 260 branches.

Unlike banks, which are either privately owned or publicly traded corporations, credit unions are cooperatives, which means they are nonprofit corporations intended to serve a defined membership base that has a unique “common bond” and return their profits to these members in the form of interest payments or cheaper services.

The common bond determines the “field of membership” that a credit union can draw its members from, such as union members (that is, the Police & Fire FCU in Philadelphia) or the employees of a single company (that is, the Boeing FCU, which has more than 1 million members).

It appears from the way credit unions are marketing themselves that they no longer feel bound by the field of membership restriction, or believe they can stretch the rules to include entire communities or, seemingly, the public at large.

As evidence, you don’t have to look any further than the dozens of credit unions that have stepped up to buy the naming rights to sports stadiums and arenas over the past few years. According to Credit Union Times magazine, the Golden 1 deal for the Kings’ arena is one of the largest for a single-tenant NBA venue. While many Golden 1 members squawked at the deal, one of the selling points was that it would give members “access to venue tours, Fast Pass line access at concession stands, advanced ticket purchases, and discounts on merchandise and games.”

Stadium sponsorships have been a hot topic for Credit Union Times in feature articles such as “Stadium Sponsorship Builds Brand Awareness,” and “3 Keys to Successful Naming Rights Deals.” From these reports, we learn that credit unions have been busy sponsoring stadiums large and small, including “major league stadiums, minor league stadiums, college stadiums and even youth league fields.”

According to the magazine, there were at least two dozen such deals over the past two years, including the Fortera Credit Union’s $2.5 million deal to name Governors Stadium at Austin Peay State University in Clarksville, Tennessee. Other million-dollar deals include the $1 million that Pen Air FCU in Pensacola, Florida, paid for the stadium naming rights at the University of West Florida and the $2 million that USU Credit Union paid for the right to name the stadium at Utah State University.

These trends have not gone unnoticed in Washington. In a recent letter to National Credit Union Administration Chairman J. Mark McWatters, Senate Finance Committee Chairman Orrin Hatch noted “that the credit union industry is evolving in ways that take many credit unions further from their tax-exempt purpose.”

Chairman Hatch is correct in pointing out that credit unions have matured since their origins in the Great Depression and calling into question the roughly $36 billion worth of federal tax subsidies they will receive over the next decade. Since credit unions behave like commercial banks and compete with commercial banks, it makes sense that they should pay income taxes like commercial banks.

To be sure, the threat of losing their exemption will spur credit unions to flood Capitol Hill with dire stories about how such a policy will devastate their members and customers. Indeed, the National Association of Federally-Insured Credit Unions (NAFICU) responded to Hatch’s letter by pointing to a 2017 NAFICU-funded study estimating that repealing their tax exemption would “cost the federal government $38 billion in lost income tax revenue over the next 10 years. GDP would be reduced by $142 billion, and 883,000 jobs would be lost over the course of the next decade as well.”

Such studies amount to one-sided accounting, ignoring the fiscal costs of the taxpayer subsidies to credit unions and the economic impact that their tax-advantaged competition has on taxpaying for-profit banks. And, how is it that repealing the tax subsidy that is already costing the federal treasury some $36 billion over the next decade could “cost” the federal government $38 billion? That makes no sense.

The recently enacted Tax Cuts and Jobs Act (TCJA) closed the gap between the zero income tax rate that credit unions pay and the rates paid by commercial banks and community banks. And those lower income taxes translate into lower interest rates charged by banks, further narrowing the comparative advantage of credit unions.

Most large banks are organized as C corporations and the TCJA lowered their tax rate to 21 percent. Community banks are frequently organized as pass-through businesses, such as S corporations, which pay taxes at the owner level, not the entity level. These businesses were given a 20 percent tax deduction from the highest individual rate they would be subject to (as high as 37 percent). Thus, depending upon how they choose to organize themselves after the removal of their tax exemption, credit unions can compete equally with commercial banks at these lower tax rates.

Credit unions were becoming anachronisms before the enactment of the TCJA, but that status should be declared official now that the tax gap between banks and credit unions has effectively been closed. If they are going to act like banks and subsidize sports stadiums like banks, it is time that they paid taxes like banks.