Credit Unions Don’t Pay Taxes?

Taking a Closer Look at Community Banks and Credit Unions

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. This blog will take a closer look at the history of this tax-exempt status and distinguish between credit unions and community banks. 

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 up 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  thousands of dollars in taxes.  That would be  thousands 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 deposit rates and lower loan 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.”

A recent survey conducted by Morning Consult on behalf of the American Bankers Association reveals that most U.S. consumers lack awareness of the distinctions between banks and credit unions. Interestingly, they tend to perceive credit unions as equivalent to banks in terms of the standards they should meet. The survey found that a substantial majority of respondents, comprising 62%, believe that Congress should explore whether credit unions are delivering sufficient community benefits to justify their existing tax exemption. In contrast, only 14% expressed opposition to such an investigation. Notably, it has been nearly two decades since Congress last convened a hearing to oversee the federal tax exemption granted to credit unions, as highlighted by the ABA.

What is the difference between a community bank and credit union?

Community banks are privately owned, for-profit institutions. They operate with the primary goal of providing banking services to their local communities while generating a profit for their shareholders. Here are some key aspects of community banks:

  • Ownership and Governance: Community banks are typically owned by shareholders, and their decisions are driven by the interests of these shareholders. They are often publicly traded companies.
  • Regulation: Community banks are subject to rigorous federal and state banking regulations. They are required to pay federal and state taxes, including income taxes, as for-profit businesses.
  • Access to Capital: Community banks raise capital through selling shares and generating profits. This capital is crucial for expansion, innovation, and sustaining operations.
  • Customer Focus: Community banks are dedicated to serving the financial needs of their local communities. They aim to provide personalized service and build strong relationships with customers.

Credit unions, on the other hand, are not-for-profit financial cooperatives. They are member-owned and are regulated by different entities than banks. Here are some key aspects of credit unions:

  • Ownership and Governance: Credit unions are owned by their members. Each member has an equal vote in the credit union’s decisions, regardless of the size of their accounts.
  • Regulation: Credit unions are regulated by the National Credit Union Administration (NCUA), a federal agency. Credit unions are exempt from federal and most state income taxes due to their not-for-profit status.
  • Access to Capital: Credit unions rely on member deposits and retained earnings to fund their operations. While they may not have the same access to capital markets, their not-for-profit structure often allows them to offer above market  interest rates on savings and below market rates on loans.
  • Customer Focus: Credit unions have a similar community-oriented approach as community banks. They focus on serving their members’ financial needs and often provide competitive rates and personalized service.

Jarrettsville Federal Community Bank is a mutual chartered bank. Just like credit unions, our bank is owned by our depositors(members). We have no stockholders to pressure us when the stock price drops. Instead, we can make decisions that are best for the bank and our depositors rather than disgruntled stockholders. We are a tax-paying supporter of the communities we serve. 

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 154 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.