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Why credit unions are tax exempt

Credit unions have always been exempt from federal income tax because legislators recognized that they are mutually owned organizations operated entirely by and for their members. Moreover, credit unions are not-for-profit, democratically-controlled cooperatives that have no capital stock and rely heavily on volunteers.

Congress encouraged the success of the credit union movement in order to bring financial services to people who were unable to obtain them elsewhere, and to foster the development of a system of financial cooperatives that would serve as a valuable alternative to the traditional "for profit" banking system. Over the years, legislators have repeatedly deliberated, reviewed, and reaffirmed the tax-exempt status, because credit unions — while growing and changing — continue to operate in this unique way.

Credit unions should stay tax exempt

Taxation would not create a "level playing field"

Banks and their trade associations have attacked credit unions' tax-exempt status. They argue that all financial institutions should operate on a "level playing field," which they define as all institutions paying federal income tax. However, the structure of credit unions and banks is fundamentally different, so taxing credit unions would not make credit unions and banks "level."

As previously mentioned, credit unions are mutually owned cooperatives. Once expenses are paid and reserves are set aside, credit unions return any profits to their members in the forms of lower loan rates, higher savings rates, and new and improved products and services.

And, since credit unions earn no profit, taxes would come out of the reserve cushion they are required to maintain for unexpected downturns in the economy or unpredictable changes in the marketplace. In turn, credit union managers would be pressured to eliminate free and unprofitable services, such as small loans (which most other financial institutions won't make), financial counseling, and small share draft/checking accounts.

"Leveling the playing field"

If banks want to create a "level playing field," they should stop paying their boards of directors, stop generating profits for a relatively small group of stockholders, and start giving their customers authority to participate in their governance.

The tax exemption has nothing to do with a credit union's size, the services it offers or the members its serves. Credit unions deserve their tax-exempt status because of their not-for-profit, democratically controlled cooperative structure.

All consumers benefit from credit unions

Banks want to eliminate credit unions' tax-exempt status because they know it would eventually mean the end of credit unions as they are known today. In short, they are trying to do away with their competition. If banks win, everyone else loses. Credit union members aren't the only ones who benefit from the credit union alternative. All consumers benefit from having credit unions. They keep banks and thrifts "honest" by forcing them to gauge their own rates and services to their credit union competition.

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