One of the more unique characteristics of American society is the size and scope of our civic sector. The French statesman Alexis de Toquiville famously noted in his 1840 magnum opus “Democracy in America,” “where in France you would find the government or in England some territorial magnate, in the United States you are sure to find an association.”
The simple truth is that Americans don’t trust top-down approach in business or politics. We trust our neighbors, not Big Government or Big Business. That’s a good thing.
Yet, every year, it seems like Big Government and Big Business colluded to propose some wacky idea to stick it to the voluntary sector. In the past, special interest groups have bellyached about the tax-exempt status of churches, hospitals and universities. Fortunately, even the greediest of politicians knows what a public relations disaster it would be to tax those that feed the poor, heal the sick and teach the next generation.
Recently, they’ve moved onto a new target: credit unions. Earlier this month, the American Bankers Association (ABA) sent a letter to the House of Representatives complaining about the $1 billion acquisition of a Georgia bank in March by Vystar Credit Union. The letter claims that such deals are a “[b]ad deal for taxpayers” because “[c]redit unions are exempt from federal and most state income taxes, and when the deal closes, the base is eroded as a taxpayer permanently falls off the income tax rolls.”
The bankers’ attack on credit unions is misleading in its portrayal and misguided in its attack against the civic sector. Credit unions may seem like an easy target since they can deal with large sums of money, but at their core they perform an important civic function. Policymakers should beware of unfounded attacks against their legitimate not-for-profit status for the sake of preserving American community spirit.
First, as Dennis Dollar points out in the Credit Union Times, describing asset acquisition of the Vystar variety as a “credit union buying a bank” is a complete misnomer:
A bank exists through its charter, and no credit union has ever purchased a bank’s charter. That is not even allowed by law. The transaction that has taken place about 35 times over the past eight years, each time upon the initiating decision of the bank as to who its board of directors chooses to sell the bank’s assets and/or deposits to, is not a credit union purchasing a bank. The charter is never sold, nor is it transferred to a credit union.
Second, the size of these bank-to-credit-union transactions pale in comparison to bank-to-bank acquisitions. Since 2012, there have been 39 bank asset sales to credit unions totaling $6.2 billion compared to over 2,000 mergers and acquisitions between banks totalling $2 trillion.
Third, as the Credit Union National Association (CUNA) pointed out in a response letter to the ABA, the state receives plenty of revenue when the transaction happens through capital gains and ongoing afterwards as well through payroll taxes:
[W]hen a bank sells to a credit union, the bank is subject to capital gains taxes for all of the shareholders, and the credit union is subject to the same employment and state taxes that all credit unions pay. In 2020, banks involved in sales to credit unions reported $267,000 in applicable taxes in the previous year while more than $65 million was paid in taxes on capital gains associated with these transactions.
Most importantly, however, credit unions and banks are different animals at their core, despite performing similar functions. As for-profit entities, banks are privately owned or publicly traded, existing to maximize profit for their shareholders. Credit unions, on the other hand, are not-for-profit entities owned by its members. Instead of existing to line their shareholders’ coffers, credit unions typically pass along what would be their profits by offering lower interest rates on loans, charging fewer fees, and offering higher APYs on savings accounts for their members.
Indeed, credit unions serve an important civic function for people who don’t want their money parked in a traditional profit-driven enterprise. President Franklin Delano Roosevelt signed the Federal Credit Union Act into law during the height of the Great Depression precisely to discourage such usury at a time when millions were suffering.
Most credit unions today are organized around a specific community — like the Navy Federal Credit Union as an example, which exists to help those who have served our country. Indeed, credit unions are more likely to be in low-income and ethnically diverse neighborhoods than banks are, according to CUNA research.
America’s civic spirit is something to be celebrated, not censured. Credit unions are an important part of the voluntary sector, making banking more community-focused. Federal and state lawmakers should beware of the misguided attacks of special interest groups for the sake of preserving ethics and choice in the financial system.
• Casey Given is executive director of Young Voices.