How Congress Can Increase Transparency at Blob-Like Credit Unions
Perhaps the best representation of large, modern day credit unions could be compared to the 1950s classic “The Blob” due to their seemingly unstoppable expansion outside of their narrowly-defined banking role. With a deferential regulator turning a blind eye to the abuse of tax preferences, large credit unions are free to swallow anything and everything in their path. Congress should address this unfair advantage before big credit unions absorb the rest of America’s financial services system.
Congress originally granted credit unions a tax exemption in the 1930s due to their small size, limited mission, and strict “common bond” eligibility requirements in order to service customers. In addition, credit unions are not required to file Form 990s for executive compensation, state income tax, the Unrelated Business Income Tax (UBIT), and do not need to meet Community Reinvestment Act requirements.
These exemptions were intended for small depositories, but today, many large credit unions have strayed from their limited mission while still enjoying tax advantages. These large institutions allow virtually anyone to join, and operate (just like their taxpaying competitors) despite not having to pay any tax on their profits. According to a 1951 report from the Internal Revenue Service, if credit unions resembled taxable financial institutions at the time the exemption was put in place, “it seems probable that Congress might not have continued their exempt status.”
At Bethpage Federal Credit Union on Long Island, they tout that “membership is open to anyone with a $5 savings account.” Don’t automatically qualify at Alliant Credit Union in Illinois? No worries, just donate $5 to their charity and you’re in. To cover your donation, “Alliant will now pay you $5 for opening a savings account!”
At the Virginia-based PenFed Credit Union, one of the largest credit unions in the United States, front and center on their website they proudly proclaim PenFed “has great rates for everyone!” There are plenty of similar examples of relaxed membership requirements at credit unions across the nation. So if credit unions are able to serve the general public, are they any different from traditional banks?
Big credit unions have also used their muscle to purchase taxpaying community banks and even marketing firms. Permanently taking taxpaying business entities off treasuries’ tax rolls and shrinking the tax base is a textbook example of poor tax policy. The purpose of the tax code is supposed to be neutral, rather than helping one particular business gain the upper-hand in the free market.
To a reasonable observer, dispensing with membership requirements while buying out banks and other private companies mirrors the activities of traditional banks. So, why then, should credit unions still enjoy special tax exemptions and advantages?
That’s the question federal policymakers are trying to answer. In Washington, there is growing interest on both sides of the aisle to bring transparency and fairness to the tax treatment of multibillion-dollar credit unions. In a letter by then-Senate Finance Committee Chairman Orrin Hatch (R-UT) to the Acting IRS Commissioner last year, Chairman Hatch highlighted the need for greater transparency for the large institutions which have expanded their operations. In that 2018 letter, Chairman Hatch noted “it may be appropriate to expand the information return requirement only to the largest federal credit unions to those with expanded commercial activities or fields of membership.”
Nearly a dozen organizations joined NTU on a letter expressing our support for the Committee’s oversight efforts and calling for a review of the tax exemption for the largest credit unions. To be clear, this review should not be motivated by a desire to fatten the Treasury’s coffers. Rather, a simpler and less burdensome tax system requires constant evaluation of opportunities to streamline the base and reduce rates across the board.
With Senator Chuck Grassley (R-IA) now holding the gavel at the Finance Committee, there is again an opportunity for enhanced oversight and reform. Senator Grassley has a detailed history of advocating for a tax system that is transparent, fair, and ensures everyone operates by the rules of the road. In fact, one of his first actions as Chairman was a letterto the IRS about whether tax-exempt hospitals are adhering to the law to justify their tax-exempt status. Chairman Grassley should continue the oversight work began by sending a similar letter regarding tax exempt federal credit unions.
Chairman Grassley should focus his attention on executive compensation because it is unique for credit unions to not disclose the salaries of top executives, as nearly every other non-profit and not-for-profit must do. Additionally, Form 990 is the main enforcement mechanism to ensure compliance with Section 13602 of the Tax Cuts and Jobs Act, which requires a 21 percent excise tax on not-for-profit executive compensation above $1 million. Tax policy experts can and do disagree on the merits of this tax, but making sure all non-profit entities operate under the same rules would actually increase accountability for Congress to periodically revisit the provision.
We believe that smaller credit unions that strictly follow their membership requirements should not have to do extra paperwork or worry about being taxed. But when only 5 percent of the industry enjoys 75 percent of the tax benefit, it is clear something must be addressed. With mounting evidence that today’s large credit unions are no longer the same institutions of the 1930’s, there is an argument for reevaluating the tax exemption.
The debate surrounding the credit union tax exemption and transparency is much more than just bank versus credit union, it is about ensuring fair compliance with the tax code. Taxpayers hope that under a Grassley Chairmanship, he will continue the difficult but necessary oversight of federal credit unions and pursue course corrections based on evidence rather than emotion. Blobs are frightening things, but sound tax policy never should be.
