The dollar value of the credit union tax exemption

Why and how credit unions are exempt from income taxes, as well as the specific classification of credit unions in the IRS tax code—all of that is discussed elsewhere. This article seeks to quantify how much in income taxes credit unions would pay if their tax status changed, and in turn how much credit union members would pay.

Unless otherwise noted, all figures are for 2023. Sources: NCUA, State of Utah, United States Government, NAFCU.

State taxes

The state of Utah does not levy an income tax on credit unions. If the Utah state legislature were to have credit unions pay income tax, only state-chartered institutions would pay, because Federal credit unions have a blanket state income tax exemption.

If Utah were to require state-chartered credit unions to pay income tax, the amount in taxes generated in 2023 would have been $781,977. Since by state law income taxes are used to fund education, and based on the annual education budget for Utah, those taxes could fund education for less than 49 minutes.

What if all credit unions based in Utah were to switch to a state charter, and the income tax exemption for credit unions were removed, how much would those credit unions pay in Utah state income taxes?

  • State income taxes: $28,734,499
  • Days of education funded by those taxes: 1.24
Federal taxes

If the federal income tax exemption were removed, credit unions would pay the following in federal income tax:

  • Utah credit unions: $123,734,462
  • All USA credit unions: $3,217,398,332

The above figures are based purely on credit union net income, and do not include any tax-evasion strategies–tactics that banks and most other companies employ.

Note that the Federal government valued the 2022 credit union tax exemption at $2,170,000,000.

How long the federal government could operate if it taxed credit unions:

  • Based on net-income taxes: 4.13 hours
  • Based on government estimate of expenditure: 2.79 hours

The credit union tax exemption is listed as 56th largest on the size of all tax expenditures, out of about 165 expenditures. The CU tax expenditure is 0.1893% of all expenditures. The largest expenditure (exclusion of employer contributions for medical insurance premiums and medical care) is 82 times larger than the CU expenditure.

A tax on credit unions is a tax on members

If credit unions paid federal taxes, credit unions would need to earn more net income to pay for those taxes. This would cost each credit union member in the United States $23 (just for federal taxes).

If Utah credit unions paid federal income taxes and state income taxes, it would cost each member $40.73. Utahns belonging to more than one credit union would pay that for each credit union they belonged to. Households with multiple credit union members at the same or different credit unions would pay that amount for each membership at each credit union. Households have the potential to pay hundreds more in taxes.

The $40.73 is the equivalent to a monthly $3.39 fee on a checking account. Most credit unions provide checking accounts to their members for free.

Notably, the net income for credit unions in 2023 was lower than in 2022, and 2022 was lower than 2021, due to market and economic forces. All of these tax figures would have been higher—including the tax burden on consumers—in 2021. 2022’s $3.61 monthly fee would have been $4.35 in 2021.

Return on investment of CU tax exemption

Because the credit union tax exemption leaves more money in the pockets of consumers (both credit union members and bank customers), consumers have more to spend. When they spend it, it becomes income for someone else to spend—and the cycle continues. This has an effect of generating more taxes throughout the economy by creating jobs and increasing GDP.

A 2021 NAFCU study[1] found that the credit union tax exemption generates $5,600,000,000 in other taxes.

The federal government put the tax expenditure for 2021 at $3,070,000,000

That means that granting credit unions a tax exemption generates 182% more in taxes than it would generate directly. That is, for every dollar in income tax not collected from credit unions, the government gets $1.82 down the line.

Ultimately, the credit union income tax exemption benefits government and consumers–credit union members and bank customers. The only ones who don’t benefit are bank stockholders.