Hudson Valley Credit Union is touting a record-breaking achievement in the world of credit unions. It has nothing to do with serving their members or helping those in need, as credit unions are legally obligated to do. They are celebrating the largest acquisition of a bank in credit union history.
This is a growing trend among credit unions, not only utilizing their nonprofit status to buy out the competition but also operating and acting like traditional banks. In an era of $2 trillion deficits, subsidizing credit unions is a luxury taxpayers can no longer afford. It’s time for credit unions to lose their tax-exempt status and be put on the same footing as the banks they compete with.
According to the latest available data from the National Credit Union Administration, there are approximately 4,760 federally insured credit unions, 2,980 of which were federal credit unions (state credit unions are treated differently under the tax code than federal credit unions). While the total number of credit unions has declined by 30 percent since 2012, the assets owned by credit unions have more than doubled, from $1.02 trillion to $2.17 trillion.
Furthermore, the number of credit union members has continued to rise. In 2012, credit unions had roughly 94 million members. By 2022, that number had grown to more than 135 million, a 44 percent increase.
By design and by law, credit unions are supposed to focus on people who are “underserved” and of “modest means.” However, studies show that credit unions increasingly serve upper-income families and have a smaller share of low-income customers than banks — credit union members are mostly “employed, high-education, and dual-income individuals.” These studies argue that credit unions have grown so much in size that they are “incapable of serving the ‘underserved’ as the majority of its members.”
The irony that credit unions are still considered “membership-based” institutions should be lost on no one. A self-employed carpenter can join the Navy Federal Credit Union just as easily as a lobbyist can get a debit card from the Congressional Federal Credit Union.
Even though the way credit unions operate bears little resemblance to how most people envision nonprofit organizations, they enjoy the same set of tax benefits from the federal government — and sometimes even better treatment.
Typically, nonprofit organizations must file a special Form 990 federal tax return, which reports on their finances, operations and executive compensation. Federal credit unions are a special class of nonprofit organizations that do not have to file a Form 990 tax return, which makes them less transparent and accountable than other nonprofits.
Credit unions also benefit from both a tax subsidy and a nonprofit subsidy.
The tax subsidy is roughly $3 billion annually, but studies find the combined subsidy is many times the tax subsidy, as much as $21 billion annually. While the nonprofit subsidy is a bit harder to calculate in terms of cost, its impact has more significant macroeconomic consequences.
Additionally, credit unions have ditched their mission of serving the underserved by using their growing assets to buy commercial banks. Over the past 10 years, credit unions have purchased more than 80 banks — and a growing number of credit unions are buying up multiple banks.
That number may seem small, but the trend is alarming. Credit unions have an advantage in purchasing or absorbing these businesses because they tend to be cash-buyers. Due to their special nonprofit treatment, they can accumulate seemingly endless cash without incurring penalties. With more cash on hand, credit unions can usually offer a higher price for purchase because the owners don’t need to worry about the tax implications.
But the federal government should worry about the tax implications. Credit unions are purchasing the assets of the bank, not the charter. Therefore, the assets become part of the nonprofit credit union while what is left of the taxpaying bank is effectively dissolved. Though the revenue losses might be small for government coffers, they are still a troubling consequence of allowing such deals.
It’s clear credit unions no longer serve the underserved, and their original business model is not viable. They must act like banks to survive. It’s time to tax them as such.
Scott Hodge is president emeritus and senior policy adviser at the Tax Foundation, and the author of the forthcoming book, ”Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life.”