Credit Union Tax Exemption Kerfuffle Returns

By David Baumann, Editor, Washington Credit Union Daily

Here we go again.

Conservative anti-tax groups say that credit unions don’t deserve their tax exemption.

You’ve heard this before, right?

This time, they say they’ve got new evidence—that credit unions are leveraging their tax exemption to be able to pay outrageous sums of money to purchase community banks. They contend that community banks can’t afford to pay that much for another community bank. And, of course, once a credit union purchases a community bank, it takes that financial institution off the income tax rolls.

Banking trade groups are making the same arguments.

And, late last year, Rep. French Hill, R-Ark., a member of the House Financial Services Committee, asked NCUA Chairman Todd Harper about credit unions purchasing banks. As requested, the NCUA sent Hill a report showing that the number of credit union-bank deals was much lower than the number of bank-bank purchases and credit union-credit union mergers.

But Hill, who is seeking the lead Republican position on the Financial Services Committee in the next Congress, hasn’t made any additional noise about the issue, and so far this year, nobody else has.

Why?

Here’s a secret from inside the Capital Beltway: The taxpayer groups and their banking allies may scream until their face turns blue, but it is highly unlikely that any government official who has the power to affect the tax-exempt status of credit unions is going to do anything about it.

First, there’s the obvious reason. These days, Congress has trouble passing legislation to name a post office after someone, let alone enact complex and controversial tax legislation.

Second, members of Congress like credit unions. Many of them are members of at least one. Take Senate Finance Committee Chairman Sen. Ron Wyden, D-Ore., whose committee would write tax legislation. Wyden is a member of the Senate Federal Credit Union, according to his latest financial disclosure report. Wyden has said that as far as he’s concerned, the tax exemption is safe.

And any change to the credit union tax exemption likely would take 60—not 50—votes in the Senate, because that’s the way the Senate operates these days.

The last lawmaker to openly challenge the credit union tax exemption was former Senate Finance Committee Chairman Sen. Orrin Hatch, R-Utah. In 2018, Hatch asked the IRS to require federal credit unions to file information tax returns in an effort to ensure credit unions were continuing to do the job they were created to do.

Hatch noted that credit unions had changed tremendously since they were created, and he questioned whether the tax exemption was outdated. He added that the IRS could do it on its own without legislation.

It probably was no mistake that Hatch did this the year he was retiring from the Senate. Hatch left the Senate at the end of 2018, and as far as anyone knows, the IRS did nothing.

Then there’s Rep. Randy Feenstra, R-Iowa. When he was in the Iowa legislature, Feenstra chaired the Senate Ways and Means Committee and sponsored legislation that would have removed the state income tax exemption from credit unions.

As he was running for re-election to the U.S. House in 2022, Feenstra said that if re-elected, he would seek a seat on the tax-writing Ways and Means Committee. A super Political Action Committee known as “Friends of Traditional Banking” was so excited about the prospect of Feenstra having a role in tax policy that the lawmaker was one of three candidates the super PAC endorsed in 2022.

As a super PAC, the group does not contribute directly to members of Congress. Instead, it endorses two or three candidates each election cycle and urges its members to contribute to their campaigns.

“Feenstra is being bashed by credit unions who remember what he did to them at the state level and are petrified of what he may do if he stays in Congress,” the group said, in urging bankers to contribute to his campaign. “By supporting Feenstra, FOTB leadership wants to send a loud and clear message that if you have our back in Congress, we'll have yours.”

As expected, Feenstra won his race and got his seat on the Ways and Means Committee.

And how has Feenstra attacked the tax exemption issue since gaining the seat?

He hasn’t.

And so far, nobody else has made noise about the issue.

So, will this tired old issue just fade away? Not a chance.

Don’t get complacent. It will be back.

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