Banks call for hearing as war flares over credit union tax exemption

The long-running feud between banks and credit unions over the latter’s tax exemption flared again Wednesday with accusations of deception and a call for a Senate hearing.

A top trade group representing community banks called on the Senate Finance Committee to hold a hearing over whether credit unions should still be exempt from corporate income tax. The request followed a letter from the two top credit union lobbyists to Chairman Orrin Hatch (R-Utah) defending the tax exemption.

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The Independent Community Bankers of America (ICBA), a major group for small banks, called on Hatch “to convene a hearing at your earliest convenience to examine the evolution of the credit union industry and the threat it poses to the American tax base.”

“Today’s credit unions are virtually indistinguishable from taxpaying community and regional banks,” wrote ICBA president and CEO Camden Fine. 

“It is widely understood but rarely acknowledged that the tax exemption has outlived its purpose. Now is the time to have that discussion,” Fine wrote.

Credit unions, established as nonprofit cooperatives meant to provide credit and basic financial services to a tight-knit community, are exempt from corporate income tax.

Community banks have long said credit unions have an unfair advantage, insisting small banks serve the same purpose but face steeper regulatory and tax burdens. Banking advocates cite the expanding size of credit unions and scope of services they offer.

The credit union tax exemption is premised on an assumed deep knowledge of their customer base, relatively low-risk portfolio and focus on clients with limited means. Community banks have argued that credit unions have deviated from what Congress decided was worthy of a tax break.

The ICBA praised Hatch earlier this month when the chairman in a letter pressed National Credit Union Administration (NCUA) Chairman Mark McWatters on his efforts to loosen restrictions on credit union activities. Hatch wrote that he’s “concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose.”

Fine’s request followed a joint letter to Hatch from the chiefs of the Credit Union National Association (CUNA) and National Association of Federally-Insured Credit Unions (NAFCU) defending credit unions.

“The banking lobbyists would like the tax status to be limited based on the products or services credit unions offer, the size of credit unions individually and as a sector of the financial services industry,” wrote CUNA president Jim Nussle and NAFCU president Dan Berger.

“But these factors have nothing to do with why Congress originally conveyed the tax status, nor why it continues to be extended. The fact is credit unions’ structure has not changed and they continue to fulfill their mission,” they wrote.

Nussle and Berger denounced a recent letter to Hatch from the State Bank Association, among other statements from banks as “misinformed and downright misleading information about credit unions that we feel we must address.”

Banks and credit unions both say the squabble over the tax exemption poses serious risks to the U.S. financial sector. Bank advocates say the tax exemption threatens smaller firms already drowning in red tape and facing consolidation. Credit union supporters insist the fight is a useless distraction that undermines the push for broader regulatory relief.