Credit unions were charted as tax-exempt financial cooperatives by the U.S. Congress during the depths of the Great Depression 85 years ago. For-profit banks were failing right and left and those that survived weren’t lending. Cooperatively based credit unions provided credit to member-owners that wasn’t available elsewhere.

In the depths of the Great Recession 10 years ago, once again hundreds of banks failed and those that survived weren’t lending. Cooperatively based credit unions made plenty of loans throughout this time period, and served as a source of funds for millions of members throughout the century. Day Air experienced some of its greatest growth at that time while so many banks were receiving  TARP funds from the government.

The banker’s trade associations are again beating their drum about the Credit Union tax exemption, advocating to legislators that it provides an unfair advantage. Let’s look exactly why the tax exemption exists. We’d also like to invite the Directors of any bank to give up their stock options and convert to a credit union.

For-profit companies are in business to generate a return to stockholders. Those net earnings are taxed. Cooperatives such as credit unions do not generate income for their owners. Quite simply, there is nothing to tax.

If a financial cooperative generates revenue in excess of expenditures (net earnings retained for future use), but no individual member gets to spend it, is it profit? The U.S. tax code is structured in such a way that income taxes are levied on economic value that injures to the eventual benefit of an individual. Ultimately this is the logic behind every provision of the tax code.

The excess revenue of a for-profit company (e.g. a bank) is taxed because it accrues to the benefit of stockholders. Those profits provide economic value to stockholders and are realized in the form of stock dividends or appreciation of the stock price. The excess revenue of the cooperative (e.g. a credit union) does not accrue to the benefit of member-owners. Members do not receive stock dividends and the value of a membership share can never increase.

The value of credit union membership is realized through use of a credit union’s products and services, which are generally superior to that offered by banks. But the excess revenue posted by a credit union in its financial statements does not represent economic value to member-owners, and is therefore not considered taxable profit.

As a financial cooperative, members own their credit union. The best way to extract value is to utilize the many convenient products and services offered. Please let us know how we best meet your financial needs.