Government protection not the answer

By Steve Pociask, The Hill

Some banks are asking state legislators to pass resolutions calling on the U.S. Congress to eliminate the nonprofit status of credit unions, effectively imposing new taxes on the banks’ smallest of rivals. Said differently, “too big to fail” banks – those first to get in line for federal help and bailouts – are coming to a statehouse near you and pleading for government help to raise the cost of their ankle biter competitors.

The “ask” smacks of protectionism, the arguments for legislative change are weak, and state lawmakers should not fall for it.

Credit unions are member-owned nonprofit institutions that plow each dollar of surplus back to its members – who are consumers. Credit unions have no shareholders, have no equity investors, no lavish salaries, and are served by volunteer boards. Since credit unions plow its retained earnings back into its member-owned entities, there really are no real profits to tax. Instead, credit union members have their benefits taxed at their personal income tax rates. If credit unions are taxed upfront, as banks have suggested, the result would be double-taxation of credit union members.

Things are different for banks.  Banks are for-profit, have private investors and stockholders, can make lavish payment to its board members, and pay dividends to stockholders.  They make profits that are taxable.  As for bank consumers, they pay taxes only once in the form of personal income tax – just as credit union members currently do.  Paying once is enough.

If banks feel that credit unions have a competitive advantage, why don’t banks simply become nonprofits or operate in a break-even fashion to avoid taxation?  Furthermore, if banks chose to operate as a Subchapter S corporation, its investors and stockholders could avoid paying dividend taxes. The truth is that banks have chosen not to return its earnings to its customers, and that is its prerogative, but that activity is taxable by choice.

Will the bank’s plan of eliminating the credit union tax exemption help Americans?  A quick cost/benefit analysis shows that taxation would be a bad deal for consumers.  The Congressional Joint Committee on Taxation estimated the exemption costs taxpayers $0.5 billion in taxes in 2012.  Because credit unions tend to offer higher interest rates on member deposits and lower rates on member loans compared to banks, consumers get $8.1 billion more in benefits than they would get from banks.  Therefore, eliminating the nonprofit status of credit unions could cost consumers $16 for every $1 of taxes saved.

That would be a really bad deal for consumers, taxpayers and voters.

Banks are not in need of protection from competition.  In fact, credit unions account for only 6 percent of the market’s financial assets, with the remainder being held by banks.  Over the years, banks have bulked up with the top 100 banks increasing market share of 41 percent in 1992 to 74 percent in 2012.  Being too big to fail, these banks are truly the “double-dealers” of government reliance – taking government bailout money on the one hand and then calling for government intervention to double-tax consumers on the other.  The reality is that the lobby-speak that banks are on an “unlevel” playing field is simply disingenuous and policymakers should not fall for it.

Moreover, the facts show that banks are substantially more risky than credit unions.  Credit unions operate with lower net charge-offs and almost one-third of the delinquency rate  of banks, making credit unions a much safer place for consumers to put their savings.  Yet, if the tax-exemption were eliminated, the consequences would be clear — it would cause member benefits to dissipate, leading credit unions to “demutualize” and reduce them to the same behavior as banks, as well as increasing market concentration for the “too big to fail” banking industry.  That would expose taxpayers and depositors to even more risks, not less.

The banks goal is this – use the legislative process to destroy competition.  Calling on state legislators to pass resolutions in support of higher taxes is the path to achieving this goal.  State and federal legislators should not fall for it.  Competitive alternatives are good for consumers.

This quick analysis provides evidence that credit unions produce substantially more benefits for consumers than costs for taxpayers, and, as a result, the tax exemption should be retained.  Moreover, public policy should encourage competition and not protect competitors.  In the midst of “too big to fail” banks, credit unions provide a necessary choice for consumers.  Let them compete in the marketplace for customers and not for public policy favors.

Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization.  For more information about the Institute, visit

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