Non-profits aren’t always what they seem. While they enjoy tax-exempt status, many operate just like businesses—without the same level of transparency or tax burden. Credit unions, for example, are rapidly expanding by acquiring private banks, leveraging government-created advantages to outcompete their for-profit counterparts. This distortion raises serious questions about fairness, competition, and market efficiency.
In his latest piece, economist and Market Institute President Charles Sauer examines how these policies tilt the playing field—and why Congress should take a closer look as it considers tax reform.
Read an excerpt below.
“A business is always a business, and a mom and pop shop is as concerned with their bottom line as is a multi-national corporation. Almost everyone understands that idea. What isn’t as well understood, though, is that the businesses defined as “non-profits” by the government have the same incentives as for-profit and multi-national corporations to care about their bottom lines. The reason is simple: non-profits are still businesses. The question, then, is whether these carveouts make sense. For instance, credit unions, 501(c)(1) non-profit organizations, are currently buying up private banks and increasing their market share of the banking industry, which is an expansion beyond their statutory remit.
We see this in several industries where the government creates multiple sets of rules that benefit one group over another. For instance, the government pays hospitals more than independent doctors. This has created a race in the industry for hospitals to buy up as many independent physicians as possible, forcing consolidation of healthcare markets – with the biggest beneficiary being the hospitals that operate as non-profits. Additionally, in California, government owned emergency transporters are paid more than private emergency vehicles, moving more and more emergency services to the government, including the occasional subcontract to the private companies that previously provided those services.
Credit unions are a different beast, though.
Although credit unions are nonprofits, they don’t even file a 990. Other non-profits like churches, think tanks, political organizations, and membership organizations all file 990s. This provides some transparency regarding the organizations’ funding, their salaries, and the value that these organizations provide to their communities. Sometimes there might be disagreement over whether one organization is providing a benefit to its community or not, but at least these forms provide a foundation to make those arguments in either direction. Non-profit businesses represent a tax expenditure and their existence is a choice, but it is a choice that should be justified with good reasons and not just accepted.
This is important because credit unions are now buying more and more private banks, acting like the businesses that they are. Market activities like this wouldn’t be a big deal if businesses were competing on a level playing field. But when non-profits compete against for-profits, the difference in the amount of taxes paid and organizational transparency tip the scale towards credit unions. The biggest issue and the primary advantage that credit unions provide is that they are tax exempt. This distorts the banking sector in ways that could affect the whole market, and does so in a way that wasn’t intended.
When the market favors one business model over another merely because of a tax advantage, poor market decisions can easily be made. There is a chance that credit unions are better, though it is unlikely, but given the market advantage we will never know.”
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