States have their own chartering  requirements. Rationale for the Historical Tax Exemption of Credit Unions

The tax-exempt status of credit unions originally was predicated on the  similarity of credit unions and mutual financial institutions; however,  while Congress did not always cite its reasons for continuing this  exemption, recent legislation mentions the cooperative structure and  service to persons of modest means as reasons for reaffirming their  exempt status. While  the act’s legislative history contains extensive discussion of the reasons  why the tax-exempt status of the other mutual institutions was revoked, it  is silent regarding why the tax exempt status of credit unions was not also  revoked. In response, opponents of the taxation of credit unions have  argued that credit unions remain distinct organizationally and  operationally from other financial institutions, providing their membership  with services they would not receive from other institutions. In 1984, the Department of the Treasury (Treasury) report to the President  included a proposal to repeal the tax exemption of credit unions, which  also argued that the exemption gave credit unions a competitive advantage  over other financial institutions and its repeal would “eliminate the  incentive for credit unions to retain, rather than distribute, current  earnings.” In 1985, the Reagan administration proposed taxing credit  unions with more than $5 million in gross assets, but would have  maintained the exemption on credit unions with less than $5 million of  gross assets, since it was reasoned that taxing small credit unions would  significantly increase the administrative burden for a relatively small  revenue increase. They question both the  extent to which credit unions serve people of modest means and pass on  their tax subsidy to members. Estimates of the Potential Tax Revenues from Taxing Corporations Vary Widely Based on the Source and Underlying Assumptions

Governmental entities have attempted to estimate the potential revenue to  the federal government from repealing the tax exemption that ranged from  $1.2 billion to $1.6 billion on an annualized basis. Historical Distinctions between Credit Unions and Other Depository Institutions Have Continued to Blur

Since 1992, credit unions have become less distinct from other depository  institutions of similar size, particularly in terms of the products and  services offered by larger credit unions. Although credit unions are on average much smaller than banks, larger  credit unions and banks of comparable size tend to offer the same  products and services (see fig. 3). Limited Comprehensive Data Are Available to Evaluate Income of Credit Union Members

While it has been generally accepted that credit unions historically have  emphasized service to people with modest means; currently, there are no  comprehensive data on the income characteristics of credit union  members, particularly those who actually receive loans and other services. Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly Lower Proportion of Low- and Moderate-Income Households Than Do Banks

Our prior work, which included an analysis of data from the Federal  Reserve Board’s 2001 SCF, suggested that credit unions overall served a  lower percentage of households of modest means (low- and moderate- income households combined) than banks. Credit Unions Lack Transparency on Executive Compensation and Larger Credit Unions Do Not Have to Report on Effectiveness of Internal Controls

Most credit unions are not subject to IRS and other federal reporting  requirements that would disclose information such as executive  compensation and assessments of internal controls for financial  reporting—information that can enhance public confidence in tax-exempt  entities. But, unlike banks and thrifts, these credit unions are  not required to report on the effectiveness of their internal controls for  financial reporting.
Why GAO Did This Study

Unlike other depository institutions, credit unions are exempt from federal corporate income taxes. Recent legislative and regulatory changes to credit union membership restrictions and allowable products and services have blurred some of the historical distinctions between credit unions and other depository institutions. As a result, some observers have raised questions about whether tax exemption provides credit unions with an advantage over other depository institutions and whether the original basis for tax exemption is still valid. As part of its continuing oversight of the tax-exempt sector, the House Committee on Ways and Means asked GAO to address (1) the historical basis for the tax-exempt status of credit unions; (2) the arguments for and against taxation, including estimates of potential revenue from eliminating the exemption; (3) the extent to which credit unions offer services distinct from those offered by banks of comparable size, and serve low-and moderate-income individuals; and (4) the extent to which credit unions are required to report information on executive compensation and assessments of their internal controls.

What GAO Found

Congress originally granted tax-exempt status to credit unions in 1937 because of their similarity to other mutually owned financial institutions that were tax-exempt at that time. While the other institutions lost their exemption in the Revenue Act of 1951, credit unions specifically remained exempted. The act's legislative history is silent regarding why the tax-exempt status of credit unions was not revoked. More recently, the Credit Union Membership Access Act of 1998 indicates that credit unions continue to be exempt because of their cooperative, not-for-profit structure, which is distinct from other depository institutions, and because credit unions historically have emphasized serving people of modest means. Arguments for taxing credit unions center on creating a "level playing field" since credit unions now compete more directly with banks. Proponents also point to associated potential revenues, with federal estimates ranging from $1.2 billion to $1.6 billion per year. Opponents of taxation argue that credit unions remain distinct--organizationally and operationally--from other financial institutions and taxation would impair their capital levels. Prior GAO work has found that relatively large credit unions offer many of the same services that same-sized banks offer, while smaller credit unions tend to provide more basic financial services. Limited comprehensive data exist on the income of credit union members. GAO's assessment of Federal Reserve data suggested that credit unions served a slightly lower proportion of low- and moderate-income households than banks, but the lack of comprehensive data prevents definitive conclusions. Most credit unions are not subject to reporting requirements that provide information on executive compensation or internal controls. Specifically, federal credit unions are not required to file the Internal Revenue Service form that most other tax-exempt entities must file and some states allow credit unions to file on a group basis. Further, credit unions are not subject to internal control reporting requirements applicable to banks and thrifts, an item we identified for Congressional action in 2003.