Credit Unions Don’t Pay Taxes?

That’s right, credit unions don’t pay taxes.  When I tell people that, they are almost always surprised.  I find it interesting that it continues to be such an unknown fact.

As President and CEO of Jarrettsville Federal, a true community bank, it is incredible to me that credit unions have been allowed to not only expand their membership requirements, to almost anybody, but they have also been allowed to offer the same products and services as tax-paying banks.  Recently, they have aggressively entered the business lending market too.

Why did Credit Unions get this tax except status?

An Internal Revenue Service (IRS) document from 1979 provides some explanation for why lawmakers decided credit unions should be tax-exempt. It can be summed by these three reasons: that credit unions would 1) help unbanked, lower-income people, 2) restrict their customer base, and 3) avoid high-risk, high-return investments.

Through the years, these three reasons are no longer pinnacles of most Credit Unions structure.

Because they don’t pay taxes, they are able to offer higher interest rates on deposits and lower rates on loans.  Jarrettsville Federal, as a tax-paying bank, must compete with them and there are several in Harford County, Maryland.

Over the last three years, Jarrettsville Federal paid a little over $1 million in taxes.  That would be $1 million of less expenses for a credit union of the same size.  No wonder they can pay higher rates!  If Jarrettsville Federal didn’t have to pay taxes, we would too.  In fact, we would not only pay higher rates, but we would also be able to give more back to the community.

There are definitely two sides to the this story, and an article from American Banker, does a nice job of representing the Credit Unions perspective as well.

“As banking advocates see it, when a not-for-profit credit union has what they see as a rapidly expanding field of membership and leads a large loan syndication for which it likely competed against taxpaying banks, then it probably should not be exempt from paying taxes.”

“Credit unions have countered that, true to their mission, they pass the savings on to their members in the form of higher rates on deposits and lower rates on loans.”

Think about it the next time you consider opening an account or taking out a loan with a credit union.

Jarrettsville Federal has been in business and paying taxes for over 150 years.  You will be supporting a company that generously gives back to the community, pays competitive deposit rates, has great mortgage rates and options and has the best mobile banking system anywhere.

Also, consider contacting your representative in Congress.  New legislation is needed.  If credit unions are going to continue to be allowed to expand their membership and offer the products and services of banks, they should pay taxes.