You might be aware that traditional banks and credit unions are not friends. As a matter of fact they are so unfriendly that they are participating in a Cold War of sorts.

Fueled and armed, the planes remain grounded; the lobbyists on the other hand, are fully deployed in combat formation.

Since the first American credit union was established in 1909 (St. Mary’s Bank Credit Union of Manchester New Hampshire), several distinct traits exist that enable the government to view them in a more favorable and income tax free light. Over time their evolution to a larger, more inclusive, and regulation relaxed organization, has put banks and bankers into a tizzy.

What is the difference?

• The first and largest difference is structure:
  • Credit Unions
  • are “not-for-profit”, member owned organizations. Not-for-profit means that they operate to serve their members rather than to maximize profits, not to be confused with non-profit charities that rely on donations.
  • usually have unpaid and volunteer boards of directors.
  • earnings are distributed to members through higher interest on deposit and lower rates on loans.
  • Banks
  • are “for-profit”, stockholder owned and employ a paid board.
  • profits are divided among stockholders

• Membership
• Credit Unions
• Under federal and state laws, in order to become a member of a credit union you must be of a select group or geographic location. Today however, there are very few people who would not qualify to join at least one, usually qualifying for many.
• Banks
• Banks have few restrictions on who can become a customer
• Taxes
  • Credit Unions
  • are free from federal income taxes on earnings due

    to their not-for-profit cooperative status

  • Banks
  • are required to pay federal income tax on their corporate profits

Banks are pretty angry with the credit unions’ tax free status and are trying at every corner to have the rules changed. They argue that while 80 years ago credit unions’ focus was indeed on the low-income disenfranchised citizen, today they have grown into a middle and upper income servicing organization, accepting all people, a beating heart being the only qualifying contingent.

Don’t forget that not all banks out there are big behemoths like Citi or Chase, ready to squash the weak guy as he pauses to tie his shoes. Of the approximately 8,500 banks, 6,770 or 79% have assets under $1 Billion. There are plenty of little local guys that are fighting to compete.

Bankers also make the case that all that tax-freeness , guess who pays for it? Yep, you guessed it. Me and you! Savings accounts, checking accounts, ATMs, and all the stuff that goes on behind the scenes are just a series of products created by a company operating in the free market, why should taxpayers subsidize one and not the other? Why any at all?

I know I’ve already busted some heads but think of this example…..

Say Circuit City was owned by it’s customers, one customer is equal to one vote (everyone being equal), only accepted citizens of its’ local city as members, and any earnings realized through sales were distributed to its members (after paying for costs) through lower prices. Earnings are not taxed and fewer government regulations define business operations.

Now, say Best Buy comes to town. It’s owned by anyone who want to purchase shares, each shareholder having influence equal to the proportion of shares they own. Anyone who has money, no matter where they are from, can be a customer. Any profit from sales are distributed to the proportionate shareholders through dividends and appreciated stock value. Profits are taxed and government regulation defines some business operation.

Does the fact that you need money to buy ownership of a publicly traded company, Best Buy in this instance, and only need to be alive and a member to have a say at Circuit City, warrant one being taxed over the other? Should we, Mr. and Mrs. taxmenow, subsidize Circuit City in a roundabout way just because their earnings are distributed to their members and Best Buy’s are distributed to their shareholders?

Credit unions only represent a small chunk (about 6%) of the banking market share, so banks are not exactly backed into a corner yet, but the argument still stands…

Should credit unions remain tax free even though anyone can become a member?

Big, medium, and small banks pour just as much money back into a community through jobs and charitable contributions as a credit union might through providing jobs and member savings, often times much more.

I love a credit union just as much as the next frugal guy, but does the community aspect still warrant the tax free card?

Resources:

• Pro Bank: Credit Union Ruse (image credits too)
• Pro Credit Union: Credit Unions are a good option

• General fact gathering:
• Comparing credit unions and banks
• Small banks, how fragile are they?
• Credit Unions, Wiki
• The Story of Credit Unions
• How Stuff Works: Credit Unions

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Tagged as: Debates