As the Illinois General Assembly continues to grapple with the state’s budget deficit, a statewide “big bank” trade association has undertaken a media campaign to pursue taxation of Illinois’s credit unions. This is a bad idea for several reasons.
The state’s credit unions, which by law are exempt from income taxes, have emerged as a tempting target for tax revenue. But stripping credit unions of their tax-exempt status won’t deliver the revenue Illinois needs. Worse, such a move would pick the pockets of almost three million state residents who rely on credit unions to provide them with affordable financial services.
Credit unions are member-owned, democratically run financial cooperatives. Aside from extending credit — especially to individuals of modest means — they provide a variety of low-cost financial services, including checking accounts and home mortgages.
Credit unions typically offer loans with lower interest rates than those at for-profit banks – and pay higher returns on savings. A new five-year auto loan at the average credit union, for instance, runs 2.82 percent. That same loan at a bank posts a 4.18-percent monthly interest charge.
The average personal savings account at a credit union comes with an interest rate of 0.22 percent. That’s nearly double the average bank’s savings interest rate. Likewise, the average twelve-month CD from a credit union has an interest rate that’s 50 percent higher than a similar bank CD.
But the feature that most distinguishes credit unions is their not-for-profit status. For more than 100 years, credit unions have existed solely to serve their members and their communities, not to amass profits for stockholders.
The board of directors at a credit union serves voluntarily – elected from among the membership, by the members.
As not-for-profit, member-owned entities, credit unions are exempt from federal and state income taxes. They pay property, sales, and payroll taxes, just like other firms. But all excess revenue goes back into the credit union in the form of lower rates and more affordable services for members.
This “people helping people” approach to financial services helps explain why credit unions have become so popular in recent years. As new bank fees have proliferated, for instance, Americans have moved to credit unions in droves. Last year alone, credit unions nationwide added more than 2 million net new members – the biggest annual net member growth in 15 years.
Today, more than 96 million persons belong to credit unions.
At the same time, these cooperatives have stayed true to their historical mission of serving low- and middle-income folks. Two of the three largest credit unions nationwide serve members of the military and their families exclusively. And while 40 percent of Americans are credit-union members, credit unions hold just 6 percent of the nation’s assets.
If lawmakers decide to tax not-for-profit credit unions like for-profit banks, credit unions will start to resemble for-profit banks. In short order, fees and interest rates will go up. After all, because credit unions are member-owned, a tax on them really amounts to a tax on the members themselves.
Here in Illinois, a tax on credit unions would deprive their almost three million middle-class members of over $274 million in benefits.
Unfortunately, the economic pain would not be confined to just these three million people. One analysis puts the full economic impact of credit-union taxation at nearly $500 million.
That’s because credit unions promote competition in the financial services marketplace. Credit unions’ low loan interest rates and high rates of return on deposits force banks to moderate their fees and charges.
If credit unions had to suddenly pay taxes, the cost of borrowing for everything from education to automobiles to houses would shoot up.
Illinois’s finances may be in dire straits. But a tax that puts a half-billion-dollar hit on the state economy — with those of modest means bearing much of the direct cost — is an economic loser.
Daniel D. Plauda is president/chief executive officer of the Illinois Credit Union League.