In 2002, The Century Foundation convened the Working Group on Tax Expenditures to examine and propose reforms to the tax code. The resulting report, Bad Breaks All Around, identifies twelve tax breaks with little or no economic justification. These “dirty dozen” are no less ripe for the chopping block a decade later, as Congress finally takes up the task of simplifying the tax code. Follow along at Blog of the Century and on the “Dirty Dozen” expenditures homepage as we reintroduce each of the “dirty dozen” and explain why it's long past time to eliminate these costly tax breaks.

Credit unions in the United States have been exempt from the federal income tax since 1937, following an amendment to the Federal Credit Union Act of 1934, in recognition of their not-for-profit, cooperative status. Although credit unions still pay property, sales and employment tax, some groups (particularly for-profit banks) have challenged this tax-exempt status. The Century Foundation's 2002 Working Group on Tax Expenditures recommended revoking this status a decade ago in order to raise around $1 billion a year in currently foregone revenue.

However, as a general institutional policy, The Century Foundation does support the continued tax exemption for credit unions, which are chartered under a “common bond” that gives each member a share of ownership in proportion to their deposits. These cooperative bonds, along with their not-for-profit corporate structure, lend credence to the idea that credit unions fill an important social role in their communities by providing financial services to otherwise disadvantaged populations. All profits are reinvested or paid back to credit union members, and taxed as dividends.

If credit unions expand beyond the scope of their federal charter, it may be appropriate for regulators to reconsider their tax advantages on a case-by-case basis. But so long as these not-for-profit, financial cooperatives hold to the spirit of their mission to assist under-served communities, their privileged tax status seems justified.


Learn more about the “Dirty Dozen” tax breaks here.