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Should Credit Unions Pay Taxes?

Posted
9/12/2013 5:25:00 PM
By: Motley Fool
Referenced Stocks:

Credit unions got a big reputational boost during the financial crisis, as banking customers protested what in their eyes were reckless lending practices that led to massive bailouts of traditional banks. Especially in the aftermath of the crisis, as banks made numerous attempts to raise fees to recoup losses numerous attempts to raise fees to recoup losses, many bank customers fled to credit unions for relief.

Yet now, banks are trying to fight back. In Congress, bank lobbyists are waging a battle against credit-union supporters credit-union supporters over whether credit unions should continue to benefit from a tax exemption they've had ever since the Great Depression.

The tax argument
Put simply, banks think it's unfair that they have to pay taxes while credit unions don't. Banks are treated just like any other profit-making enterprise profit-making enterprise, and get taxed accordingly. In the case of the biggest banks, those tax bills can be truly massive. JPMorgan Chase has allowed for income-tax provisions of $8.9 billion on its balance sheet over the past 12 month. Wells Fargo 's tax provisions have been even greater, at $9.7 billion.

By contrast, credit unions pay no federal tax. With their structure as member-owned cooperatives member-owned cooperatives, credit unions plow their profits back into their banking products, offering higher interest rates on their deposit accounts, and lower rates on loans.

A patchwork of tax rules
Both banks and credit unions have strong arguments for their respective positions. But the sad truth is that similar disparities exist throughout the tax code. Consider the following:

In that light, the tax-exempt status of credit unions doesn't seem all that peculiar. Arguably, what's unusual about banking is that more institutions haven't moved to take advantage of the exemption. Credit unions still make up only a small fraction of the banking-services industry, with traditional banks having about 15 times the financial assets that credit unions hold.

Don't fret about credit unions
For-profit banks might not like what they see as a competitive disadvantage against credit unions. But, given the benefits that larger banking institutions gain from their relative size, keeping tax-exempt status for credit unions doesn't seem like an unfair way of keeping the playing field relatively level.

Investors in for-profit banking institutions also shouldn't worry about credit unions as a big threat. The fact is that banks are still highly profitable, yet their stock prices don't fully reflect their future potential. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report, " Finding the Next Bank Stock Home RunFinding the Next Bank Stock Home Run," will show you how and where to find these deals. It's completely free -- click here to get started.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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