Congress to consider removing tax-exempt status of credit unions as part of reform legislation

For nearly 90 years, credit unions across the country have enjoyed tax-exempt status as nonprofit organizations.

But that could soon change, as Congress considers removing the tax exemption for credit unions to make cuts to the federal budget as part of new tax-reform legislation.

"For smaller credit unions, and even credit unions of our size too, it would make a significant impact on how we do business," said Michael Kim, the CEO of Eagle Community Credit Union.

Kim said because of the tax-exempt status of credit unions, they're able to provide products that are especially important to underserved communities.

"We provide very similar products and services as a traditional bank," he said. "But unlike a bank that has shareholders and investors, our member owners are the owners of the credit union, and everything we earn in terms of profits or earnings goes back into our credit union.

"And they see that in the form of lower rates in loan products, higher rates in our deposit products."

A recent study conducted by American University along with the Interindustry Economic Research Fund showed that on average, credit unions are able to offer savings accounts with 66% higher interest rates than traditional banks, and real estate loans with interest rates that are 7% lower than traditional banks on average.

"If our credit union tax-exemption would go away, that would be devastating to the industry," said Stephanie Cuevas, a spokesperson for the California Credit Union League.

"Right now we have a model where there's for profit banks and not for profit credit unions, that creates competition. Take away the tax exemption, now credit unions are saying, 'How are we going to balance our books?'"

Michael Kim said that some credit unions could be driven out of business if forced to pay a 21% federal income tax rate. They'd be forced to determine whether to lay off employees, or charge its members higher rates, or both.

The House Ways and Means Committee is scheduled to discuss the tax-exempt status of credit unions at a meeting on May 12.