Editor’s Note: This story has been updated since it was originally reported.

OLYMPIA, Wash.–With the state facing a budget shortfall, and bankers eager to close a “loophole” for credit unions, legislation that would place a tax on credit union acquisitions of banks now awaits the governor’s signature, after passing both the House and the Senate in the state.

The legislation would remove the business and occupation (B&O) tax exemption that state-chartered credit unions currently have in place when acquiring community banks. The tax would be 1.2% of the credit union’s gross income, with supporters of the legislation saying it closes a “tax loophole by making credit unions that acquire banks subject to the same B&O tax as banks.”

For credit unions, the success of the state’s bankers in getting the bill passed is unusual in that the legislature is controlled by Democrats, and the governor is a Democrat, a party that has traditionally been most supportive of credit unions.

The Community Bankers of Washington is expressing strong support for the legislation, noting that in 2024 25% of all credit union acquisitions of community banks in the country happened in Washington State, “driven, in part, by credit unions’ nonprofit and tax-exempt status.”

‘Tax-Free Assets’

Stating that Washington credit unions’ income has roughly doubled since 2017,  while business lending income has increased 280% over that same period, the CBW said in a statement, “This tax break for nearly $90 billion in credit union tax-free assets in our state will only grow as acquisitions of community banks continue to ramp up.

“This troubling trend is accelerating while our state faces a $12 billion budget shortfall, further undermining our economy and the vital state programs and services that run our communities,” the CBW added.

The GoWest CU Association Responds

In response to the WBA statement, the GoWest Credit Union Association said, “It’s surprising to see representatives of Washington banks celebrate a session that saw historic tax increases for banks of all sizes. Bills passed this session aimed at closing a massive budget deficit will see small local community banks experience a 20% tax increase, mid-size and regional banks’ taxes increase by 48%, while Wall Street banks will become the highest taxed entities in the entire state paying nearly double the business tax rate.  

“On top of the new tax bills, the Legislature repealed a $200 million tax exemption for community and regional banks in a bill the Washington Bankers Association supported.

“While bankers cite the rare occurrences when a Washington bank chose to sell to a credit union, more than 80% of Washington bank assets have already been sold to other banks in the last decade and have gone out-of-state, greatly outpacing the national average and reducing local access to banking services,” the GoWest CU Association continued. “In attempting to address unprecedented state fiscal challenges, legislators ultimately created a de facto ban on credit unions buying banks, since no transactions will occur as a result, and no tax will be levied on a credit union. Banking representatives in response have expressed concerns that this policy, coupled with major cost increases to small community banks, will further reduce their value since they will have fewer if any options when choosing to or if forced to sell in the future.

“While taxes were greatly increased for other financial institutions, GoWest is proud of the continued recognition by the Legislature of the tremendous value that credit unions provide 5.5 million members in the state,” the association stated. “In reality, taxing bank sales to credit unions means no sales, which was an unfortunate decision that will impact access to financial services for some individuals and communities in the future currently served by community banks. That said, Washington’s credit unions have risen to the challenge of filling gaps left by banks in the past and are prepared to continue that well into the future.”

What Bankers Are Also Saying

According to the CBW:

• Acquisitions by credit unions reduce competition and limit consumer access to certain financial services
• Community banks provide about 60% of small business loans and 80% of agricultural loans. “Displacing these local credit providers can reduce borrowers’ access to needed capital.”
• “When credit unions take over community banks, it reduces consumer choice of local financial services providers who understand the communities in which they operate and use this local knowledge in their loan decisions.”
• “Credit unions do a poor job of serving economically disadvantaged areas.”
• “Community banks are governed by the Community Reinvestment Act (CRA), a law that ensures the needs of the communities in which they do business, including low- and moderate- income (LMI) neighborhoods, are met.”
• “Bank acquisitions by credit unions are being fueled by a tax subsidy that was never intended for this purpose.”

“If credit unions are going to acquire banks, they should be treated like banks. Their tax exemption costs American taxpayers between $3 and $4 billion per year, while community banks generate $15 billion in tax revenue each year,” the CBW said, citing Tax Foundation research for those numbers.