Banks and Credit Unions: The Big Debate

By Megan Lehman

Banks and credit unions populate the financial scenery. The difference between the products that the two offer can be nearly unrecognizable. Here in Iowa, however, there is a spotlight shining directly on that difference and the inequality in the taxation of the two financial entities. To understand a little bit more of what we are working with here, let’s examine the basic differences between these otherwise identical institutions.

The differences between credit unions and banks can be broken down by their ownership, objectives, and operations. Banks maintain a board and shareholders, while credit unions are owned by their customers, or as they call them, members. Shareholders benefit when banks are profitable. Credit unions are not-for-profit and claim to return their profits to members.

In my opinion, these are the ways in which banks and credit unions truly differ. While structured in extremely similar ways by these definitions, the outcomes vary. When comparing operations, the differences between the two institutions become harder to distinguish. Both offer the same products and services while receiving oversight by governmental entities.

So, what is the big deal? Having two financial entities for the public to choose from is just offering their communities more options, right?  Sure, you can see it that way. But because credit unions are not-for-profit, it means they are taxed significantly differently, meaning they do not pay income tax. The Iowa State government has been in a rather large and heated debate as to whether this should remain the case for all credit unions.

Credit unions were originally introduced to the world more than 80 years ago as a way to help lower income families gather financing for their needs.  For this reason, credit unions were given a tax exemption at the time. Since then, credit unions have significantly changed and transformed into something vastly different then the original mission detailed. Now, the large credit unions that populate states are nearly indistinguishable from large commercial banks.

Iowa bankers have lobbied for years to see changes on this taxation situation. If the two entities offer and produce the same products and results, why should they be taxed differently? Local credit unions have used this opportunity to point out what they deem to by hypocrisy on the part of banks, as banks do take advantage of tax credits.

But what matters here, what is at the heart of the issue, is that credit unions are not paying income tax. They are becoming some of the larger employers and businesses in the area. Yet, unlike other local businesses, they avoid a tax that directly benefits our communities.

To be clear, Iowa bankers want to keep the tax exemption for small credit unions, as they have not strayed beyond their original intention.  In my area of Iowa City, banks expect the marginal tax rate to be about 21% this year. Large credit unions in this area will pay nothing.

Arguably, both banks and credit unions give so much back to their communities.  But one of these institutions avoids the most direct way to give back; income tax. While the decision has not yet been voted upon, this will certainly shine a light on an issue that has for too long been in the dark.

About Megan Lehman 21 Articles
Megan Lehman is a graduate of the University of Iowa, where she studied Communications and Spanish. After an internship in the Senate in Washington D.C., Megan decided to pursue two of her passions: writing and politics. She currently works and lives in the Iowa City area, where she is a member of the young professionals leadership council and hopes to run for office.