States Lose when Credit Unions Acquire banks
Recently, there has been a flurry in bank acquisitions by credit-unions, which has caused many to question the relevance taxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
Credit unions are eligible for incentives worth up to $1000 1010. Credit unions are exempt from federal and state taxes except for local property tax. When a credit union buys a bank, the state or local government can lose a large amount of tax revenue that was paid by the bank. A tax preference originally designed to level the playing field now has the opposite effect, creating preferences for one class of financial institutions even though the distinctions between credit unions and banks are increasingly blurred.Federal chartering of credit unions began during the Great Depression when Congress created a corporate
tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. Tax exemptions are used to exempt certain income, revenue or taxpayers from taxation.
is used to support the institutions’ intended goal to provide financial services to low-income individuals who are unbanked with a “common bond” (e.g. a corporate credit union or a credit union of a government agency). Low-income earners had to use more expensive or risky alternatives to traditional banking because they could not access it. In many ways, credit unions were seen as a means of leveling the playing field, and tax exemptions were intended to facilitate broader access to financial services, which may have been unprofitable through traditional banking channels.Many argue that in the decades since the exemption began, credit unions have strayed from their original mission. Credit unions, unlike other financial institutions, are not covered by the federal Community Reinvestment Act. However, they are required to meet the credit needs of their communities by some states. Credit unions often offer better deals than banks because they are paid in cash. This is because bank acquisition costs have to be justified to shareholders. The more cash that is paid, the higher the tax burden on banks structured as C corporations. This will be a problem for those who are distributing to shareholders. Some have called on Congress not to provide federal tax incentives to credit unions in order to make the tax code neutral. Some states are taking action to limit these acquisitions, while others are considering revoking all state tax incentives. Credit union tax exemptions should be eliminated to protect local and state funds and provide additional revenue for states to improve their tax codes.
Regulators have blocked credit union-bank deals in Minnesota, Nebraska and Tennessee in recent years. Others have expressed strong opposition. Mississippi became the first state to ban credit union-bank deals by limiting the types of institutions that may acquire state-chartered banks to those insured by the Federal Deposit Insurance Corporation (FDIC).
Elsewhere, however, credit unions have been on a bank acquisition spree. Since 2011, there have been more than 100 credit-union-bank acquisitions announced in the United States (with deals in more than half of the states). Nearly 40 percent of the deals are in Alabama, Florida, or Michigan. While some deals were canceled or stopped by regulators many were completed, leaving local and state governments with less revenue. The response of state legislatures was mixed. Washington State lawmakers passed legislation that would subject credit unions chartered by the state to a B&O tax of 1.2 per cent if they acquired a bank regulated in the state. The B&O tax is a bad tax policy because it is based on gross revenue. However, the current preference given to credit unions makes it difficult to justify. The West Virginia Legislature also passed House Bill 2693, which, like the Mississippi law requires that any entity surviving an acquisition of a bank chartered by the state be insured by FDIC. On the other hand, a Colorado bill, which ultimately did not advance, would have allowed credit unions to acquire banks, cutting in the opposite direction of policy considerations in most states.
States are not uniform in how they tax financial institutions. Most banks pay a general
corporate tax. The federal and state governments levy a corporate income tax on business profits. Many companies are exempt from the CIT, as they are taxed under the individual income taxes.
or special financial institution taxes (known under different names by the states that levied them). No matter the method used, credit union-bank mergers result in a loss of revenue to the state or local government, even when the financial services are almost identical. This does not include the taxes that banks paid on sales, property, or any other type of tax. This became a topic of conversation when TDECU, a Texas credit union, announced plans to acquire Sabine State Bank and Trust Company in Many, Louisiana. This became a conversation point when TDECU, a Texas credit union, announced plans to acquire Sabine State Bank and Trust Company, based in Many, Louisiana.
According to data from the National Credit Union Administration, a federal agency, total assets in federally insured credit unions rose by $52 billion to $2.31 trillion in 2024. Although the assets held by commercial banks are significantly less than the $24 billion, the potential for base erosion and non-neutrality created by this acquisition should not be overlooked. Acquisitions by credit unions and banks that exempt banking assets’ profits from taxation may have a significant impact on the
taxbase. The tax base is the amount of income, consumption, assets, consumption or other economic activities subject to taxation. A narrow tax base can be inefficient and non-neutral. A broad tax base allows for lower tax rates and reduced administration costs.
.State attempts to
tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit is different from deductions and exclusions, which reduce the taxpayer’s final tax bill by dollar-for-dollar.
unions, or limit their ability of acquiring banks could lead federal charter conversions. Although not a foregone outcome, given the steps and regulations involved, successful conversions may remove the state’s ability to regulate these entities. Credit unions could also retain their tax-exempt status with a federal charter. Credit unions can convert their charters to federal or state for many reasons, including growth. However, preserving a non-neutral tax advantage over their bank competitors, and engaging in acquisitions that leave the state worse off, should not be a motivation for or permitted by conversion.States cannot act alone to reverse the distortionary results of preferencing credit unions. Congress should revisit the assumptions that support the federal credit union exemption and the consequences of the policy. States are unable to tax federally chartered credit Unions, but they can tax state-chartered Credit Unions. This means that they miss out on the opportunity to invest in reforms which could benefit both residents and businesses. The original intention behind the tax preferential was to level out the playing field. Ironically, removing the tax preference could achieve that goal. Stay informed on the tax policies impacting you.
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