Tax Foundation: Eliminating Credit Union Tax Exemption Would Do Minimal Economic Harm

Eliminating the credit union tax exemption would support sound tax policy, a new report from the Tax Foundation found. The paper, released today by the think tank, used the credit union tax exemption as a case study for how corporate loopholes could be reformed. It found that the credit union exemption is a “narrow benefit provided to a single subindustry that results in an inefficient allocation of resources and a tax advantage over banks that offer similar financial services.”

The report noted that the credit union industry started off as a nonprofit endeavor for low-income savers that has evolved into a direct competitor with commercial banks. The credit union industry’s exemption has grown as well and will cost the federal government nearly $25 billion over the next 10 years, according to the report—while credit unions continue to fall short of the congressional mandate to serve lower-income people who lack access to banking services.

“Some provisions…such as the exemption for credit union income, clearly distort economic activity by narrowly targeting tax preferences on one industry,” the report found. “Tax expenditures like the credit union exemption could be reformed and the resulting revenue used to further improve the corporate tax base or pay for new spending.”

Tax Foundation economists estimated that repealing the credit union exemption would have a “negligible long-run effect” on the economy, wages and jobs.