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Credit unions serve as not-for-profit cooperatives; Banks elect Subchapter S to avoid taxes

Monday, Nov 26, 2012

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Credit unions were first exempted from federal income tax in 1917 because of their unique structure as not-for-profit financial cooperatives. Contrary to what some banks may suggest, credit unions pay property, payroll, and sales taxes. Yet while banks decry the credit union tax exemption, almost one out of three banks elect Subchapter S status under the Internal Revenue Code to avoid federal income taxation. In Illinois, that’s $38 million in diverted tax dollars. These for-profit Sub-S banks also pay dividends and fees — not to customers, but to directors/investors/stockholders who may or may not be depositors — to the tune of $1 billion. This is far in excess of the estimated federal income tax credit unions would pay. In contrast, credit unions return net revenue to their members. The banker argument against the credit union tax exemption is simply disingenuous. If banks really believed that credit unions operate with an unfair competitive advantage, they would restructure their institutions to credit union charters. None would, however, because doing so would expose them to becoming democratically controlled, locally-owned financial cooperatives governed by their very own volunteer members that put people before profits — all the virtues that define the credit union difference.

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