In tax reform debate, Congress should scrutinize credit union tax exemption


The U.S. Congress is pushing hard on tax reform. Utah Sen. Orrin Hatch is a key leader on this issue. The nation’s tax code badly needs restructuring.

Tax experts agree that the best tax system features low rates and a broad base. It’s better to have a lot of people and businesses paying low taxes, rather than a few people or businesses paying high taxes.

So lawmakers in Congress are properly scrutinizing the many tax breaks that have been dished out over the years to various businesses, industries and special interest groups. Sen. Hatch has said, “Everything is on the table.” Each tax loophole means that other taxpayers are paying extra taxes to make up for the tax loss.

Some of those tax credits and exemptions may be warranted. Others should be eliminated. Some made sense when they were granted, but can no longer be justified.

The tax system is especially unfair when it favors one competitor over another when they are in the same industry providing the same services to the same customers. A tax loophole for one business, but not its direct competitor, distorts the marketplace and creates an uneven playing field.

I believe one loophole that should be carefully scrutinized by Sen. Hatch and his congressional colleagues is the federal income tax exemption granted to large, billion-dollar credit unions. I’ve been concerned about this tax inequity since I worked on this issue years ago during the bank/credit union battles in Utah. (Note: Zions Bank is a sponsor of

When I was employed by the Deseret News many years ago, I joined the Deseret News Employee Credit Union. It was a very small credit union with a few hundred members, governed by a committee of my peers.

In accordance with membership requirements, members had a “common bond”. We worked in the same place. We knew who was a good credit risk and who wasn’t. And we were certainly people of “modest means” (the customer segment credit unions are supposed to serve). Reporters didn’t make very much money. Loans were relatively easy to get, and interest rates were excellent because our non-profit credit union didn’t have to pay income taxes. We were able to get good rates for a home improvement loan or to buy a car. 

In other words, this small credit union fulfilled the traditional role of a credit union and its tax exemption made sense.

Today, however, gigantic multi-billion dollar credit unions are just like banks. They operate like banks. They provide large commercial loans like a bank. There is no meaningful common bond. Almost anyone can join almost any credit union.

Compared to my old credit union, these mega-credit unions are impersonal. They don’t personally know their members as co-workers or neighbors. And their members are no longer just people of “modest means.” Some credit unions are far larger than the community banks they compete with. And community banks often serve low-income neighborhoods better than credit unions do.

The income tax exemption gives large credit unions a significant competitive advantage over tax-paying banks. They can offer lower credit rates and devote more money to expansion.

If the large credit unions with assets over $500 million were taxed like banks, it would mean some $30 billion to $35 billion more in federal tax receipts. In Utah, because all state income tax revenue is devoted to Utah’s schools, taxing just the large credit unions like banks would add about $11.2 million for education. That could provide a helpful raise to Utah’s teachers.

I believe the small, traditional credit unions that serve people of modest means and whose members truly have a “common bond” should retain the tax exemption. 

In his work on tax reform, Sen. Hatch should look carefully at this tax exemption, especially for credit unions with more than $500 million in assets. These big, bank-like credit unions tilt the playing field, don’t contribute to tax coffers, and compete unfairly with tax-paying community banks. It’s a big-business tax loophole that is no longer defensible.