Jan 01 1991

Taxation of Credit Unions

Report  
Number  
1

This report analyzes the public policy implications of imposing a tax on the net income of credit unions. The historical basis and challenges to the tax exemption are reviewed and estimates of the projected tax revenue from taxing credit unions are presented.

Albert E. Burger,
University of Wisconsin - Madison
Gregory M. Lypny
Concordia University, Montreal, Canada.
Report Number 1

Executive Summary

The report discusses the effects of taxation on credit union members’ incentives taking into account the differences between the mutual, not-for-profit organizational structure of credit unions and those organizations owned by shareholders and operated on a profit basis. Canadian credit unions, which have been subject to taxation since the early 1970s, are studied as a “real world” example of credit unions’ response to taxation. Special attention is paid to the background of taxation of credit unions in Canada, the structure of the tax, and the influence of changes in other social, legal, and economic factors on the behavior of Canadian credit unions.

What is this research about?

The first part of this report reviews the history of tax exemption of U.S. credit unions and analyzes the effect of taxation on credit union members' incentives. Later on, the report examines the impact of taxation on U.S. savings and loan associates (S&Ls) and discusses what can be learned from their experience. The last part of this report examines the experience of the Canadian credit unions which have been subject to taxation since the early 1970s. Special attention is paid to the background of taxation of credit unions in Canada, the structure of the tax, and the influence of changes in other social, legal, and economic factors on the behavior of Canadian credit unions. 

What are the credit union implications?

Until the early 1960s, U.S. credit unions were generally very small, limited financial institutions operating within restrictive common bonds and serving a narrow field of membership. In the 1970s and 1980s, in response to changing economic and social conditions, many credit unions evolved into full-service financial institutions. This evolution has raised so-called "level playing field" issues with other financial institutions that do not have tax exemption. This report focuses on the public policy implications of taxing credit unions.