As explained elsewhere, retained earnings are the only way for credit unions to grow. An added expense means they retain fewer funds to feed their capital ratio, and therefore must grow more slowly.

The alternative is to earn more income to make up for the added expense. Where does this “earned income” come from? Consumers, of course! This would cost each credit union member $40.73 per year. This is equivalent to a $3.39 monthly checking account fee.

Many smaller credit unions, which generally do not earn as much net income as larger credit unions, would struggle to maintain positive return on assets, and would likely find it necessary to merge with another institution.

A greater change may come in how credit unions view their mission.

The income tax exemption comes with a sense of responsibility. All credit unions understand that it’s a privilege to have the exemption, and as a result it adds weight to the cooperative nature of credit unions.

The income tax exemption, in effect, says to credit unions, “Society values you and the service you provide. It’s something special. You serve a unique function in our economy and culture. Therefore, you’re not required to pay income taxes.”

It sounds fluffy and trivial in a world of cutthroat business, but it matters.

Without the income tax exemption credit unions could maintain their cooperative structure and remain different than for-profit financial institutions, but the path to switching to a for-profit company has one less barrier than before. Those who discount the cooperative philosophy believe that a mass exodus from the credit union charter would occur.

The truth is that the cooperative philosophy would keep many credit unions as credit unions. Certainly, some would switch to a bank charter, but many would remain credit unions—at least for now. But, the for-profit lure would likely erode the credit union philosophy over time, and slowly draw credit unions after it. The tax exemption functions as a rudder to help keep credit unions on their correct course.

Consider that, generally, a cooperative business structure is available for just about any kind of business. However, how many cooperatives are out there? There are many, to be sure, but they are certainly in the vast minority. The ones that exist are obvious because they’re so rare. The tax exemption that credit unions enjoy adds a strong support to the reason to remain a cooperative—it’s a protection against the lure of profits.

Ultimately, over many years, the lack of an income tax exemption would cause some credit unions to switch to a bank charter, and others to lose financial viability. It is likely that, in the long run, the loss of the tax exemption would spell doom for the industry. Industry opponents, who stand to gain plenty from the demise of credit unions, know this. Ending the income tax exemption is a great way to boost their bottom lines, and so they push for it.