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1 John A. Tatom, Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions 1 (2005)

handle is hein.taxfoundation/taxfaaab0001 and id is 1 raw text is: Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions by John A. Tatom, Ph.D. Executive Summary This study evaluates the federal tax exemption for credit unions. It reviews the industry's history, its unique exemption, the motivation behind this tax treatment, the eroding case for special treatment, the size of the tax break and its effects on credit unions, their competitors, and their members. President Bush has recently named a prestigious commission on tax reform to be chaired by former Senators Connie Mack (R-FL) and John Breaux (D- LA), so a fresh examination of the federal credit union tax exemption is indeed timely. Tax Loss to the Treasury Credit unions are growing rapidly, and so is the associated tax loss to the federal Trea- sury caused by their exemption. Indeed, the tax loss over the five-year period 2004-2008 is estimated in this study to be $12.6 billion. Extended over the typical ten-year federal budget window, the tax loss reaches $31.3 billion. The size of the tax loss is substantially higher than estimates prepared by govern- ment arbiters including the Office of Management and Budget or the Congres- sional Budget Office. The Tax Exemption's Originaljustification This tax exemption has been in law for almost 70 years because of the original con- cept of credit unions' cooperative ownership. The original legal field of membership re- strictions on credit unions were designed to limit their ability to compete by strictly defin- ing who could be a depositor and borrower from a credit union, with the idea that credit unions would use their tax advantage to serve low-income borrowers and depositors. How- ever, over time credit unions have avoided most of the restrictions, and as a result they have competed directly and successfully with other financial institutions in many markets with a major cost advantage, the tax exemp- tion. Moreover, there is no solid evidence that credit unions have turned the subsidy into service for low-income people. Who Benefits from the Tax Exemption? Corroborated by other studies of credit unions and banks, the direct and indirect evidence gathered for this study shows that the equity holders of credit unions receive the tax saving as unusual returns. These unusual returns do not show up as relatively high dividends, however. Instead, they occur as unusually large retained earnings accumulated John A. Tatom is an Adjunct Scholar at the Tax Foundation and Adjunct Professor in the Department of Economics at DePaul University. His past affiliations include Head of Country Research and Limit Control for the Chief Credit Officer at UBS in Zurich, Principal Emerging Market Economist for UBS, and Research Officer at the Federal Reserve Bank of St. Louis. The Tax Foundation would like to thank the Independent Community Bankers of America for their support of this study.

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