The next month will be one in which Congress finally gets down to brass tacks on what the tax reform bill long talked about will actually look like. While most of the tax provisions of the 2017 Tax Cuts and Jobs Act can be made permanent without any offsetting tax increases (thanks to the “present policy” baseline Congress has adopted), that’s not true for everything in the bill. Several essential pro-growth tax reforms (full business expensing, immediate research expensing, and parity for business interest deductions) are not part of the “present policy” baseline. Neither is the ransom that must be paid to blue area Republicans in the form of a higher personal state and local tax (SALT) deduction for itemizers. Neither is the package of “new Trump” tax cuts on tips, Social Security benefits, and overtime.
Those non-present policy baseline tax cuts must either be temporary and allowed to expire in the ten year window, or if Congress wants to make some or all of them permanent, Congress must find offsetting tax increases to do so. Reports are that the pro-growth trifecta of expensing, research, and interest is going to be the priority for permanent policy, which means finding billions of dollars per year in offsets.
In such an exercise, Congress should look at any number of tax provisions which are counterproductive or have outlived their usefulness. Near the top of that list is the tax free treatment of credit unions, especially large credit unions. According to Congress’ Joint Committee on Taxation, ending the tax loophole for credit unions would raise $3 billion to $4 billion annually, money that would be much better allocated to pro-growth tax relief.
Functionally, there is no longer any difference between credit unions and banks. They each offer very similar products–checking and savings accounts, mortgages, car loans, credit cards, etc. While credit unions are technically restricted to providing services to members of a limited group, they have made it so easy to become a member of that group that the distinction between members and non-members is functionally meaningless. In fact, banks and credit unions are so similar that credit unions used their tax-free advantage to buy 11 community and regional banks in 2024 alone.
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Take as an example the U.S. House of Representatives’ in-house credit union. In order to become a member, any of the following will do: being an employee of the U.S. House of Representatives; being an employee, member, or student of one of 100 “select employer groups,” which is pretty much every association you can think of; if you live, work, or study in the Beltway area; or if you are a family member (defined as “spouses, children, step-children, siblings, step-siblings, parents, step-parents, grandparents, grandchildren, and those persons living in the same household and maintaining a single economic unit”) of any of the above. Even then, if those many, many open doors aren’t good enough for you, you can join the Friends of the National Arboretum for free and get credit union membership. Yes, they will take anyone.
Ask anyone not in the industry to tell the difference between a bank and a credit union, and they cannot unless “credit union” or “bank” is literally in the name on the door.
Credit unions compete directly with banks, all of whom pay the corporate income tax or the even higher tax rate imposed on S-corp banks. It’s not unusual to have a small community bank (which pays taxes) directly across the street from a credit union (which is tax free), offering the same products. Of course, the credit union’s tax-exempt status gives them the ability to pay higher interest rates on savings accounts and CDs, and quote lower interest rates on mortgages and car loans and credit cards. The tax code is picking winners and losers for absolutely no good reason.
Credit unions can grow very large–the biggest ones like Navy Federal Credit Union, State Employees Credit Union, and PenFed (combined assets under management: $265 billion) routinely take out national television ads, sponsor college bowl games, and attach themselves to stadium naming rights. Scott Hodge, former president of the Tax Foundation and perhaps the conservative movement’s leading light on the need for non-profit tax reform, points out that 444 credit unions each have at least $1 billion in assets under management.
It’s bad enough that credit unions don’t pay taxes like their twins the banks have to do. They also don’t even need to file the same tax returns that much smaller non-profits have to file with the IRS. I am the president of the Center for a Free Economy (CFE), a very small 501(c)(4) conservative non-profit and advocacy group. I’m also the treasurer of the Arlington Latin Mass Society (ALMS), an even smaller 501(c)(3) with a self-explanatory mission. Despite being hundreds of times smaller than any of the 444 credit unions that Hodge identified, and infinitely smaller than the “big three” I listed above, CFE and ALMS are required to file a lengthy Form 990 every year with the IRS (and have it open for public inspection and uploaded to many websites that have 990 information), or we lose our tax-exempt status. But a federally-chartered credit union (which most are, especially the biggest) have no tax filing or public disclosure requirement at all!
This is a joke on taxpayers, and it should end. The credit union loophole is a dinosaur of 20th century tax policy and makes no sense in the modern financial services landscape. It should be repealed and used to help pay for permanent, pro-growth tax reform that helps everyone, not just a narrow special interest group.
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