A new study reports some compelling financial reasons for lawmakers not to close tax loopholes on credit lending institutions.
Economists Robert Feinberg and Douglas Meade analysed the potential economic effect of lawmakers eliminating the credit union tax exemption. They found that removing the exemption would cost the federal government $38 billion in lost income tax revenue and a $142 billion reduction in GDP over the next decade. Eliminating the exemption would also cost the economy some 900,000 jobs.
Congress passed the Federal Credit Union Act (FCUA) in 1934, which stated that credit unions receive a tax exemption because “credit unions are mutual or cooperative organizations operated entirely by and for their members.” Enacted during the Great Depression, the act was aimed at making credit more available to Americans who were down on liquid, cash assets.
Credit lenders are officially chartered institutions with the power to receive deposits, make loans, and provide checking and savings accounts — all at a profit. While they may appear to perform many of the functions of your typical bank, credit lenders are not banking institutions, as they are not backed by Federal Deposit Insurance Corporation.
Twelve million Americans use storefront lenders annually, with the average borrower taking out $375 annually and paying $520 on interest, Pew Research Center reports. The majority of borrowers use credit lenders to cover ordinary living expenses, not on frivolous luxury spending, or even in emergency situations. In fact, when strapped for cash, the majority of credit lending users say they would cut back on spending.
Feinberg and Meade found that, on average, credit lenders outperformed banks because of lower interest rates on loans and higher returns on savings and investment. The net benefit to credit union members of these better loan and deposit rates was estimated to range from $4.4 billion to $6.9 billion annually for the period 2006-2015, the researchers report. Reducing the number of credit lenders in the market by 50 percent would mean an estimated cost of $6.9 billion to $15.7 billion per year in higher loan rates and lower deposit rates.
Overall, the total benefit to consumers of credit unions was $159 billion over the 10-year period of the study, or $16 billion per year.
As it stands, House Committee on Ways and Means Chairman Kevin Brady’s tax reform plan does not include any change to the status of the credit union tax exemption.
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