Economists anticipate 2021 will be a banner year for business spending, and it seems the credit union industry wants to hit the ground running. In a recent announcement, the Florida-based Vystar Credit Union agreed to buy the Georgia-based Heritage Southeast Bank, becoming the second credit union-bank acquisition of 2021, the first involving a bank over $1 billion in assets, and the largest such purchase in history. This news is the latest in the concerning trend of many large, multibillion dollar tax-exempt credit unions picking off community banks, and confirms that this practice is likely to continue through the year. Congress must examine how our broken tax code is contributing to the unequal treatment of banks and credit unions before this trend worsens.
Credit unions became viable in the mid-1930s following enactment of the Federal Credit Union Act, which fostered the creation of federally-chartered credit unions. That law, however, set strict guidelines that these institutions have to follow, including serving lower-income households, providing services like small dollar loans that were difficult to obtain at banks, and limiting customers to a restricted set of member eligibility requirements. In exchange, they received special benefits not awarded to other banking institutions. And unlike a bank that has shareholders, credit unions are owned by their customers, and are exempt from corporate, federal and state income taxes and certain lending rules.
Fast forward to today and it's evident that the mission of the modern day credit union has significantly strayed from what was originally envisioned. Now, some of the largest credit unions engage in highly aggressive no longer resemble growth strategies and act as quasi-banks. These institutions operate with relaxed membership requirements that no longer resemble what congress envisioned when it created the charter, and engage in activities unrelated to their core function - all the while not having to pay any tax on their profits. As a report by the Internal Revenue Service notes, if credit unions resembled traditional financial institutions at the time the exemption was put in place, “it seems probable that Congress might not have continued their exempt status.”
Many credit unions have graduated from this model, as the Heritage Southeast and other acquisitions of banks by credit unions underscore. According to data, over the past two decades there have been 93 bank or bank branch purchases. On its face it may sound insignificant, but nearly two-thirds of these acquisitions have occurred since 2017 - 59 in just four years.
The revenue loss from keeping this federal tax exemption is also quite significant. According to the White House, if preserved in its entirety, the credit union tax exemption’s revenue impact will be $22 billion over the next decade. The deal is also bad for Georgia finances, as the state will lose out on millions of dollars in annual revenue since a tax-paying bank now becomes a tax-exempt credit union. On both a state and federal level, if large credit unions continue the trend of purchasing tax paying business and taking these entities off the tax rolls, it will certainly increase the amount of foregone revenue.
The Vystar-Heritage Southeast purchase just happens to be the latest and largest to date but it likely won’t be the last. After years of deference, it is time for Congress to bring attention to this issue and enact legislation to solve this growing problem.
The ideal solution is to do away with the tax exemption (along with other deductions and exemptions scattered through the tax code) and offset this additional revenue to reduce rates across the board so every taxpayer and small business would experience a smaller tax burden. Making this difficult change is arguably a fair and efficient reform to the tax code.
Of course, broadening the tax base to include credit unions may not be politically feasible, so a more realistic approach should be for Congress to not only hold this segment of the financial industry accountable, but also to ensure its prosperity for the long term. Some solutions, as NTU has proposed to the Congress, include transparency enhancement through 990 compliance — which applies to nearly all other types of non-profits — tax parity on acquisitions, unrelated business income tax requirements, increasing the lending cap, and a potential GAO study to evaluate other improvements.
A more thorough discussion that ends with reform will better serve taxpayers, the credit union industry, and other community financial institutions across America. The end goal should be sound tax policy coupled with a smart regulatory structure that works for all constituencies. It might take a bit of work and concessions by everyone affected by potential reforms, but if it is the right policy, it will be worth it.
Thomas Aiello is the Director of Federal Affairs with the National Taxpayers Union, a nonprofit dedicated to advocating for sound tax policy at all levels of government.