Tuesday, September 7, 2010

Should Credit Unions Remain Tax-Exempt?

As reported in The Capital Times, banks are again questioning the federal and state income tax exemptions granted to credit unions.  Credit unions have long enjoyed both federal and state exemption based on their status as mutual benefit organizations.  The banking industry is basing its newest challenge on one of numerous recommendations set forth in The Report on Tax Reform Options issued by the President's Economic Recovery Advisory Board - specifically, to eliminate the federal income tax exemption for credit unions, which is projected to cost the federal government approximately $19 billion for fiscal years 2008-2017.  As the report states, the income tax exemption "puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions."  As reported in the article, former IRS Commissioner Kevin Brown reported to the Senate Finance Committee in 2007 that "many tax-exempt credit unions may be hard to distinguish from for-profit banks." 

To further fuel the contentious debate between banks and credit unions, the Advisory Board's Report also mentions as potentially "appropriate," the impostion of corporate income tax on very large banks organized as S Corporations.



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