Credit unions were originally created to serve low-income and rural households. That is why they don’t pay federal taxes and are exempt from filing an Internal Revenue Service Form 990, unlike other nonreligious, nonprofit organizations.
But today, credit unions have become one of the fastest-growing segments of the banking sector, gobbling up for-profit community banks left and right. These new behemoths are using their tax subsidy to distort financial markets, evade transparency, and consolidate the banking sector, all while failing to deliver on their original mission. It is time to end the tax subsidy for credit unions.
When former President Franklin D. Roosevelt signed the Credit Union Act of 1934, the idea was that by giving these new entities nonprofit organization status, the federal government could provide a market solution for underserved populations, such as farmers and laborers, often ignored by commercial banks. Former Rep. Henry Steagall (D-AL) said the legislation was “an effort to help citizens solve their own economic problems and meet their own conditions of distress out of their own resources and by their own efforts.” To this end, credit unions were required by law only to serve members who shared a “common bond.”
However, this “common bond” requirement made many credit unions vulnerable to economic downturns. Because they were limited to one industry or one community, a single downturn in a specific industry or community made bankruptcy more likely. To address this problem, Congress passed the Credit Union Membership Access Act of 1998, allowing credit unions to serve multiple industries and communities. For example, the Lake Michigan Federal Credit Union has been expanding into Florida, a state more than 1,000 miles away.
Unshackled by the old “common bond” requirement, credit unions have since gone on an expansion and acquisition spree. Over the last decade, while the number of credit unions has actually fallen by 30%, thanks to consolidation, the assets controlled by credit unions have more than doubled from $1.02 to $2.17 trillion. The main vector for credit union growth has been the acquisition of small for-profit community banks. A record 22 tax-paying commercial banks were bought by credit unions in 2024, and over 100 were purchased by credit unions in the past decade.
Credit unions are not buying up commercial community banks because they suddenly became more efficient or started delivering better services than their competitors. No, the only reason credit unions are growing so fast is the tax subsidy they get from the government in the form of their tax exemption. It is estimated that the tax exemption given to credit unions costs taxpayers $3 billion a year.
If credit unions were actually doing the job they were created to do, then maybe this $3 billion-a-year subsidy could be justified on public policy grounds. But they are not. Research shows that credit union customers are actually more likely to be employed, highly educated, and high-income than the average American. And credit unions are targeting these wealthy customers on purpose.
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Remember the Lake Michigan Federal Credit Union mentioned earlier? When it expanded into Florida, it did not set up shop in low-income communities. Instead, it opened up new mortgage units in places such as Bonita Springs, where the median income is $85,000, 80% of the community is white, and there is virtually no poverty. There is nothing wrong with Bonita Springs. It is a lovely place to live. However, there is no evidence that its residents were underserved by commercial banks before Lake Michigan Federal Credit Union moved in, and there is no reason taxpayers should be subsidizing the community’s financial services.
Credit unions have a proud history of providing needed financial services to millions of Americans. No one is saying they should be outlawed. However, if they are going to be untethered from their original mission of assisting underserved populations, they should compete on an equal footing with other financial institutions, which means paying taxes like everyone else.
