A large debate is currently being engaged within the financial industry as banks and financial institutions across the country are putting pressure on legislatures to revoke the tax exempt status of credit unions across the country. Banks believe that credit unions have become so large, and so competitive, with banks, that to even the playing field, credit unions need to be held to the same tax code that they are held to. Recently, the American Bankers Association has formed the Financial Education and Advocacy Initiative, a 501(c)4, to help advance their agenda. The credit unions have also come together and launched the “DON’T TAX MY CREDIT UNION” campaign.
Credit unions across the nation are reaching greater levels of membership and assets held. With great membership growth throughout 2013, the National Association of Federal Credit Unions is expecting a 5% increase in membership nationwide in credit unions (Panchuk, 2013). Banks are fearful that the rapid increase in economically active population involvement with credit unions will damage their ability to compete in the open market when credit unions have the benefit of not paying taxes. The fundamental theory behind credit unions, of local institutions benefiting small population, is broken by their current large size and stature. Fred Keating, president of the American Bankers Association, commented on the large size of modern day credit unions, “Many tax-exempt credit unions have morphed from serving 'people of small means' to become full-service, financially sophisticated institutions” (Puzzanghera, 2013).
There is also budgetary concerns with the large amount tax revenue that credit unions would create if they were not tax except. Since 1934, Congress has provided a tax exemption for credit unions based on operating as non-profit, organizing without issuing capital stock, and worked for the benefit of their members. This exemption is currently costing the federal government $1.6 billion in tax revenue. With the current growth of credit unions, that amount could rise to $2.2 billion in 2018 (Puzzanghera, 2013). Not only does the tax gap credit unions create a fiscal issue for Congress, supporters of the taxation of credit unions argue that it also creates an unfair regulatory environment for financial institutions. Donald E. Powell, former President and CEO of The First National Bank of Armarillo, TX, and chairman of the FDIC from 2001 through 2005, spoke out about the credit union taxation, “More and more we’re seeing credit unions advertising touting benefits of membership over doing business with a bank. In my view, if they are going to compete with banks then we should do our best to ensure competition is fair” (Tax credit unions).
In accordance with the negatives of credit unions being tax free, it all reflects dated ideals in the crossroad between the financial system and Congress’ power over it. As far back as 1978 has the shift seen in what a credit union real is. Secretary...