In 1990, the Filene Research Institute explored the public policy implications of imposing a tax on the net income of credit unions. The authors of the study hypothesized that a tax on credit unions would lead to:
- Declines in net income, capital levels, the number of credit unions, and the level of member involvement.
- Increases in failures, mergers, services, risk- taking, and share/ deposit rates.
Since U.S. credit unions are not subject to a tax on their net income, researchers used the Canadian credit union system as a unit of analysis to test these hypotheses. Fast- forwarding to the present day, U.S. credit unions continue to be exempt from tax on their net income, so testing the impact of taxation here is still a bit problematic. Therefore, this study examines the experience of Australian credit unions, which were subject to a tax on their net incomes beginning in 1994–1995.
What is the research about?
Like their Canadian counterparts in the earlier study, Australian credit unions present a suitable laboratory to test the above hypotheses, but it is an imperfect laboratory. First, the banking systems in Australia and the United States are extremely divergent. For example, four “national operating banks” capture 80%–90% of the consumer finance market share in Australia, while in the United States market share is much more diffuse. Also, the data necessary to test all the hypotheses were frequently not available. For instance, the research team was unable to procure institutional pricing data to test the share/deposit rate hypothesis. Finally, Australian credit unions (and all financial intermediaries) lack deposit insurance, while U.S. financial institutions are stalwart followers of a fairly strict deposit insurance regime.
Despite the limitations of studying the Australian credit union system’s experience with taxation, the research team did manage to identify a number of insights that inform policymakers and credit unions alike about the potential future impact of credit union taxation in the United States.
What are the credit union implications?
Taxation is the number one public policy issue for U.S. credit unions. Exploring another country’s experience with credit union taxation provides practitioners and policymakers a slightly imperfect yet realistic what-if scenario for U.S. credit unions. While this report may not have many practical implications for credit union executives or directors, policymakers can certainly glean a great deal from the impact of taxation on Australian credit unions.