According to industry veteran John McKechnie, who was working onCapitol Hill back in 1986, the last time credit union tax exemptionwas on the Congressional chopping block, a “volatile” environmenton Capitol Hill means credit unions should be vigilant when itcomes to protecting their tax-exempt status in 2013.

Tax expenditures are receiving a lot of scrutiny as Congresslooks for ways to increase revenues and cut the deficit, hesaid.

Credit unions were shocked Nov. 14 when it was revealed thatH.R. 6474 included the elimination of the credit union taxexemption among seven immediate tax reforms recommended by theNational Commission on Fiscal Responsibility and Reform, also knownas the Simpson-Bowles commission.

However, the author of the bill, U.S. Rep. Dennis Ross (R-Fla.),quickly removed the provision, saying it was a mistake.

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“We regret that the credit union exemption was unintentionally included in the 'phase-out' section of H.R.6474. It was intended it to be included in the 'maintained' sectionof the bill,” said Ross spokesman Anthony Foti.

The Simpson-Bowles commission was a bipartisan panel created byPresident Obama in 2010 to study and propose ways to improve thenation's fiscal health. Although it didn't name credit unionsspecifically, the commission did recommend eliminating all $1.1trillion in tax expenditures.

Simpson-Bowles will serve as a starting point on Capitol Hill,McKechnie said, because it has credibility. But, because it lacksdetails, Congress will fill in the blanks with expenditures thatcould include credit unions.

The banking lobby has been pushing for credit union taxation foryears and is expected to jump on the opportunity to include creditunions in tax reforms.

Although credit unions are not-for-profit cooperatives, othercountries have taxed credit union profits, some for years. Canadiancredit unions have been taxed since the 1970s; Australian creditunions also pay taxes. Costa Rica's credit unions fought anunsuccessful battle over taxation in 2008, and now pay taxes oninterest income.

Although the tax expense would be tough for credit unions toabsorb, particularly small credit unions that haul in profitssmaller than likely tax rates, it wouldn't come without somebenefits. If credit unions were taxed, they would likely loserestrictions to member business lending and be permitted to put supplementalcapital on their books.

Congress may also consider taxing only large credit unions thatcompete with banks, leaving small credit unions tax-exempt.