Congress is working to pass fundamental tax reform for the first time in thirty years. Tax reform’s goals include lowering rates and broadening the tax base to stimulate economic growth. This requires difficult decisions involving many cherished deductions, like mortgage interest, student loans and charitable donations. All the while, a few large, dominant credit unions may find their nearly $30 billion, 10-year federal tax subsidy untouched. Nearly every Iowan would agree this outcome is blatantly unfair.
One principle of taxation is treating similar businesses in a similar manner. That does not always happen, and tax reform presents an opportunity to get it right.
During the 1930s Congress exempted credit unions from paying income taxes to encourage their unique mission of serving small groups of consumers of modest means united by a common bond. The writers of that Depression era law would find today’s credit unions unrecognizable. The largest credit unions now serve consumers of above average wealth with little to no common bond. A Government Accountability Office analysis found banks serve more low- and moderate-income households than credit unions. Additionally, in Iowa, only 1 percent of credit union mortgages are made to low-income households, according to Home Mortgage Disclosure Act data.
Instead of helping those for which the tax exemption was intended, credit unions are focusing their efforts elsewhere. For example, the University of Iowa Community Credit Union, once an on-campus financial provider to faculty and students, now has no affiliation with the University of Iowa. With $4.5 billion in assets, the University of Iowa Community Credit Union is the second largest Iowa-domiciled financial institution. Its common bond is the whole state of Iowa and part of Illinois. The University of Iowa Community Credit Union has leveraged its tax exemption to build glitzy new offices near places like Jordan Creek Town Center in West Des Moines, and it has become one of the fastest growing business lenders in the country. The University of Iowa Community Credit Union is one of the most profitable financial institutions in the state of Iowa — making $56 million dollars in net profit last year — all income tax free.
When large credit unions don’t pay taxes, everyone else pays more. Today, 75 percent of the credit union federal tax subsidy goes to 281 credit unions, all over a billion dollars in assets. The tax savings are used to pay large executive salaries, build lavish new headquarters and buy naming rights for sports and meeting venues. These credit unions are nothing more than tax-exempt banks riding on the coat-tails of a few traditional credit unions still adhering to their tax-exempt purpose.
It is disappointing to see an industry that claims such a strong “dedication to community” work so hard to avoid even a modicum of taxation to support those communities. It’s time to stop giving credit unions a free pass. Instead, let’s give credit unions a pathway to citizenship by reforming our tax code to reflect today’s economy, rather than that of the 1930s.