WASHINGTON–With credit unions in Washington, a long-time credit union critic has published an op-ed in the Washington Post calling nonprofits like CUs a “$2.8-trillion tax shelter” and that “only good can come from taxing these ‘non-profits’.”
The opinion piece appeared at the same time America’s Credit Unions is hosting its annual Governmental Affairs Conference (GAC) in Washington, with approximately 6,000 people on hand.
Scott Hodge, tax and fiscal policy fellow at Arnold Ventures and president emeritus of the Tax Foundation, wrote in the Post that the Congressional Budget Office’s latest economic report offers a “bleak forecast” of the U.S. government’s fiscal health, and sees deficits surpassing $2 trillion for years to come.
“The menu of solutions to close this gap is just as depressing: slash benefits and services or raise taxes,” Hodge wrote. “But one option could generate substantial revenue while making the tax system fairer: ending the tax exemption for America’s massive nonprofit business sector.
“Many ‘charities’ have become big businesses,” Hodge continued. “While numerous benevolent charities do wonderful work, the industry is dominated by some of the top companies in America operating largely free from the tax obligations that burden their for-profit competitors. The commercial revenue generated by these nonprofits totaled $2.8 trillion in 2023, nearly three times the amount nonprofits receive from donations and government grants.”
A History Lesson
Hodge pointed to 1909 when Congress exempted charitable organizations from the corporate income tax, saying they intended to protect small fraternal societies providing insurance to widows and tending to the poor, but opened the door to many other institutions and businesses.
“During the 1909 Senate floor debate, Sen. Coe Crawford (R-SD) warned about the slippery slope of exempting businesslike entities from the tax,” Hodge wrote. “His question then still resonates today: ‘Is it a corporation for profit and has it a net income to which this proposed law shall apply?’ If so, why should it be exempted?”
After citing nonprofit hospitals, AARP, the PGA Tour and other sports leagues, the Academy of Motion Picture Arts and Sciences, and other organizations, Hodge turned to financial nonprofits.
‘Outgrown Roots’
“With more than $2.3 trillion in assets, the tax-exempt credit union industry has long outgrown its Depression-era roots,” Hodge wrote. “Originally exempted to serve working-class people of “small means” who lacked access to banking, credit unions are now indistinguishable from commercial banks. They offer mortgages, auto loans, credit cards and investment services — and they’re using tax-free cash to buy banks. In the past decade, credit unions have purchased nearly 100 commercial banks, converting taxpaying businesses into tax-exempt ones. Imagine your local YMCA buying Gold’s Gym.”
Hodge said the solution to reining in the tax-exempt business sector isn’t to eliminate support for genuine charitable work but said the country must distinguish between true charities and commercial enterprises “wearing nonprofit clothing.”
‘Several Paths’
“Reform could take several paths. The simplest: exempt only charitable donations and government grants from taxation, while taxing all commercial revenue — TV deals, insurance payments, ticket sales, royalties and sponsorship income — at standard corporate rates,” Hodge posited. “The infrastructure exists; nonprofits must already categorize these revenue streams on their tax returns.
“Alternatively, adopt a ‘commerciality test’ that taxes any activity where an organization competes in a market, charges market-rate prices and accumulates profits — regardless of how those profits are later used. If it walks and quacks like a business, tax it like one.”
