Background
Since the Federation’s founding in 1974, our membership has grown to more than 200 credit unions across the United States. With over 1 million primary members, we estimate that more than 2 million people in low-income communities are impacted by the work of community development credit unions (CDCUs). To expand our reach in low-income communities, we have developed and expanded a range of innovative programs to serve faith-based credit unions, to reach Latino immigrants, and to engage at-risk youth.
The Federation’s member credit unions are, in general, the smallest in the movement, with a median asset size of $1.5 million. The largest, however, have grown substantially, to assets that number in the tens of millions, and occasionally more. What unites these credit unions, regardless of size, is their commitment to serving people with very modest and, often, desperate needs for loans; people with limited or impaired credit; and people who offer little or no profit potential for banks. All are cooperatives; like all credit unions, they are driven by a mission to serve, rather than to optimize profit.
Opposition to Taxation
The Federation believes taxation of credit unions would significantly reduce access to affordable credit and financial services to low-income Americans.
1. Taxation would inflict a serious blow on community development credit unions, large and small, impairing the solvency of some and driving others out of business altogether.
Credit unions are required to meet statutory net-worth standards. CDCUs, like other credit unions, build net worth primarily through internal generation of surplus. By the nature of the low-income market they serve, it is especially difficult for CDCUs to generate adequate net worth. Taxing the revenue of CDCUs would make it still more difficult to achieve mandatory net-worth standards. This will add to the pressures, already substantial, toward the merger and liquidation of small credit unions.
2. Taxation would raise the cost of financial services for those Americans who can least afford it.
By raising the cost of doing business, taxation would drive CDCUs and other credit unions to raise prices on their services, and/or decrease service to the least profitable, and most needy, of their members.
3. Taxation would undermine the cooperative nature of the credit union movement as a whole and diminish its contributions to the public good.
The credit union movement is one of the broadest, most successful cooperative sectors in the United States. The cooperative nature of the credit union movement was demonstrated dramatically in its vast outpouring of financial, technical, and human resources to aid credit unions ravaged by Katrina. “Cooperation among cooperatives” is one of the fundamental principles of the credit union movement. Taxation would diminish the resources available for mutual aid within the credit union movement.
4. Taxation based on asset size would unnaturally divide the credit union movement and hinder the ongoing expansion of services to low-income people.
Imposing an arbitrary asset threshold for taxing credit unions would not be an appropriate public policy. During the last several years, the Federation has been encouraged by the growing engagement of “large” credit unions in serving low-income communities. This trend is evidenced by the direct service that these institutions are providing to low-income segments of their membership (e.g., expansion of branches in low-income areas; participation in public-sector affordable housing programs).
Further evidence comes from the support that large credit unions are providing to CDCUs and other small credit unions through the Federation’s “Community Development Partners” program. Large credit unions and small CDCUs in California, Florida, Vermont, the District of Columbia, North Carolina, New York State, and elsewhere have joined forces to provide financial education, develop alternatives to high-cost payday lending, offer new technology, offer free tax preparation in cooperation with the IRS, and more. Our partner credit unions, some of which have assets in the billions, have provided working capital, interest-free deposits, equity donations, loaned staff, technical advice, shared operations, and more to CDCUs. In so doing, they are helping CDCUs expand services to the low-income communities they serve. The Federation believes that taxation would markedly diminish the resources available to expand these services.
Conclusion
Removing the exemption would harm community development credit unions and the millions of Americans who rely on them. It would inhibit the growing, innovative efforts of credit unions of all types and sizes to expand service to low-income communities. The National Federation of Community Development Credit Unions believes that tax exemption should be retained for all credit unions.
