It’s important to know

Credit unions were created to provide financial services in a democratic, not-for-profit, cooperative manner—that is, with member ownership and control. Those unique characteristics are the foundation of the tax exemption. You may not even realize that your credit union is exempt from Federal and most State taxes.

Many bankers and their trade associations are asking legislators to tax credit unions, even though it was only banks that needed and took huge government bailouts. And the truth is, a tax hike on credit unions would be a tax hike on all American consumers.

A Bit of History

The 1934 Federal Credit Union Act (FCUA) stated credit unions receive a tax exemption because “credit unions are mutual or cooperative organizations operated entirely by and for their members.” Credit unions are eligible for tax-exempt status if they meet the following criteria:

  • Operating on a not for profit basis
  • Organized without capital stock
  • Operating for mutual purposes

In 1998, as part of the findings of the Credit Union Membership Access Act (P.L. 105-219), Congress found that, “Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member owned, democratically operated, not for profit organizations, generally managed by a volunteer Board of Directors, and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.”

Still, credit unions do pay many taxes and fees, among them payroll and property taxes. It is also important to note that share dividends paid to credit union members are taxed at the membership level. Critics argue that credit unions today are no different than banks. However, the defining characteristics of a credit union, no matter what the size, remain the same today as they did in 1934: credit unions are not-for-profit cooperatives that serve defined fields of membership, generally have volunteer boards of directors and cannot issue capital stock. Credit unions are restricted in where they can invest their members’ deposits and are subject to stringent capital requirements. A credit union’s shareholders are its members and each member has one vote, regardless of the amount on deposit, while a bank has stockholders.

If they take it away…

So, what would happen if the bankers have their way and the credit union tax exempt status is eliminated? Nothing good. If credit unions are taxed, over time there will be many consequences for credit union members. Possible outcomes include:

  • Credit Unions Would Lose their Identity:  By necessity, credit unions would have to increase profits and customer service would likely suffer
  • Rates and Fees:   If the exemption is repealed, it would adversely impact savings and borrowing rates as well as increase fees
  • Capital:  Further restraint on the ability to raise capital potentially impacts safety and soundness
  • Erosion of the Volunteer Base:  As credit unions become “more like banks,” the self-help, volunteer characteristic of credit unions, and the community as a whole, would become less distinct

Further, the tax exemption helps to ensure that all consumers have competitive choices in the marketplace.

In fact, for every $1 of their tax exemption, credit unions return $10 to consumers in better rates and lower fees. That’s a solid investment in our communities. The reality is, if credit unions were taxed, it’s unlikely members could still see the financial benefits they do now. Just as banks pass along their tax payments in fees and interest rates, if taxed, credit unions would have to pass those expenses along as well. The effect on how much you pay for credit union loans for cars, education, and houses, or the dividends you earn on credit union savings, would be significant.

The value all consumers receive because credit unions are tax-exempt far outweighs the “cost” to the government. If credit unions paid income tax, the contribution to state and federal treasuries would not make one penny difference in the taxes you pay as an individual.

All taxpayers have legitimate concerns about the federal budget deficit and state deficits as well. Credit unions and members already share in reducing those shortfalls: You pay taxes on dividends your credit union accounts earn.

The credit union tax status is one of the highest yielding investments the federal government has made. For more information and to contact your elected representatives in Congress visit  The link opens in a new window and will direct you to a site maintained by the Credit Union National Association (CUNA).