The long-simmering debate over the federal tax-exempt status of credit unions heated up once again earlier this year, driven largely by banks and banking associations. They argued that credit unions have evolved far beyond their original mission and now compete directly with tax-paying financial institutions on an uneven playing field.
As credit unions continue to grow in size, scope, and market share, and expand into business lending and commercial banking, opponents are asking a pointed question: Should a multi-billion-dollar institution operating like a bank still qualify for tax-exempt status simply because of its charter?
Yes, they claim, for their organization and purpose differ greatly from banks. Their members and the communities they serve benefit from reinvestment of profits rather than paying taxes.
Although there was significant discussion about revoking the tax-exempt status, the credit unions have prevailed and preserved it. For now.
As an attorney who represents both banks and credit unions, I aim to highlight the arguments on each side.
⚖️ The Legal Foundation: Why Credit Unions Are Tax-Exempt
Credit union profits have been exempt from federal income tax since the Federal Credit Union Act of 1934, which was enacted during the Great Depression to promote thrift and financial inclusion for underserved groups.
The core rationale for this exemption rests on three pillars:
- Mutual Ownership – Credit unions are cooperatives owned by their members, not shareholders.
- Common Bond Requirement – Membership is limited to individuals who share a common affiliation (e.g., employer, geographic region, or association—even though this requirement has broadened extensively in recent decades).
- Mission-Oriented – Credit unions exist to serve members’ financial needs, not to maximize profits.
Because of these principles, the nonprofit status of credit unions has been historically justified, even as many of them now rival banks in size and services.
🏦 The Bank Perspective: Level the Playing Field
Banking associations such as the American Bankers Association and our own Michigan Bankers Association have ramped up their efforts to challenge credit unions’ tax-exempt status. Their argument is simple but powerful:
“If it looks like a bank, lends like a bank, and competes like a bank—it should pay taxes like a bank.”
Banks point to several developments in the credit union industry:
- Explosive growth: Some credit unions now have assets over $10 billion, rivaling regional banks. Over 450 credit unions now exceed $1 billion in assets.
- Expanded commercial lending: Many now offer business loans, credit cards, and mortgage services.
- Aggressive acquisitions: Credit unions are buying up tax-paying community banks, particularly in the Southeast and Midwest.
- Broad membership criteria: The “common bond” rule has been stretched to include virtually anyone in a state or metropolitan area, as noted above.
The concern is not just about fairness—it’s also about revenue. Some estimates claim that credit union tax exemptions cost the U.S. Treasury over $2 billion annually, and some estimates are even higher.
🏛️ Despite Legislative Pressure, Credit Unions Preserve the Status Quo
Earlier this year, there were growing signs of political momentum in the banks’ favor:
- Congressional hearings in both the House and Senate featured testimony questioning the scope of credit union activities.
- Several state banking associations petitioned the Treasury Department and IRS to reexamine the exemption.
- Bills were introduced to impose reporting requirements or restrict credit union eligibility for exemptions.
- The IRS and NCUA (National Credit Union Administration) came under increased scrutiny for allowing broad field-of-membership expansions.
Notwithstanding these pressures, the One Big Beautiful Act which was signed on July 4 preserved credit unions’ tax-exempt status. At least for now.
This was a major win for the industry, thanks to advocacy efforts like the “Don’t tax my credit union” campaign, which resulted in over 861,000 messages to lawmakers.
🔄 Credit Union Response: We’re Still Different and Stay the Course
Credit unions and their advocacy groups praised the new law which preserves their status. In strong defense of their exemption from federal income tax, they argue that:
- Structure matters – As cooperatives, credit unions return profits to members through better rates and lower fees.
- Market share is still modest – Credit unions hold over $2.3 trillion of total financial assets in the U.S.—far less than banks and less than either JPMorgan Chase or Bank of America holds itself.
- They serve the underserved – Many credit unions focus on rural, lower-income, and minority communities.
- Acquisitions are strategic survival tools – Buying banks is a way to grow responsibly, not a sign of mission drift.
Credit unions also point out that unlike banks, they are subject to investment restrictions and business lending caps that limit speculative risk.
🔍 What’s at Stake: Implications for Financial Institutions
This debate is not over. Although the credit union lobby succeeded with this year’s federal legislation, the banking industry remains adamant that the playing field needs leveling. Expect this discussion to continue with intensity on both sides, as the implications are significant.
If the Tax Exemption Is Curtailed:
- Credit unions would face higher operating costs and potentially scale back growth or lending.
- Banks might recapture market share, particularly in the small business lending space.
- The U.S. Treasury could gain billions in tax revenue.
If the Exemption Remains Intact:
- Credit unions will continue to invest their profits in the communities they serve and provide the services their customers expect and preserve the mission they were created to fulfill.
- Credit unions will continue to expand in size and reach, possibly leading to more consolidation.
🧠 Final Thoughts
The tax exemption remains for now, but as credit unions continue to grow and as banks push for reform, the line between cooperative and commercial lender continues to blur. The debate is not over. It’s continuing to evolve, which is why it is important to
- Monitor future legislative activity
- Track credit union acquisitions
- Engage policymakers
- Prepare for regulatory shifts
At Dalton & Tomich, we assist financial institutions, including both banks and credit unions, with documentation, workouts, strategy, and regulatory compliance. Contact us today to discuss your organization’s needs.
