Washington state lawmakers have repealed a tax exemption for credit unions, disrupting a fast-growing market for mergers and acquisitions, effective Jan. 1, 2026. State-chartered credit unions that acquire banks in Washington are now required to pay a 1.2% business and occupation tax on gross income tied to these transactions.

The policy is impacting a booming market for M&A deals that has taken hold of the financial sector in recent years, with Washington emerging as the epicenter of this nationwide trend. As previously reported by the Journal, in 2024, about 32% of bank acquisitions by credit unions occurred in Washington, as of October 25 that year.

Lawmakers have framed the policy as part of a broader effort to “create greater tax preference transparency and accountability,” but it also comes during a moment of financial uncertainty for the state of Washington, which faces a multibillion-dollar budget deficit. 

Additionally, as credit unions shift strategies to mitigate the impact of the revised policy, some financial experts suggest the state will see a scaling back of acquisitions here, find credit unions are shifting their focus to other states, or that credit unions will consider becoming an entirely different kind of financial institution.

Dan Hansen, communications strategist at STCU, says the new policy will have unintended consequences for Washington’s smaller rural communities. He explains that in the early 2020s, STCU struck deals with Umpqua Bank and Banner Bank to acquire new locations in rural communities including in Chewelah, Colville, Kettle Falls, Ritzville, Othello, and Medical Lake.

“We were happy to step in and serve those former bank customers and their communities, so they wouldn’t lose in-person access to local financial services,” Hansen says.

However, there are concerns that the tax will contribute to a growing number of “banking deserts” in the state, which are areas without adequate banking services. 

Despite the demand for financial services in these communities, the tax policy is changing the economics of M&A deals, prompting STCU to shift their strategy.

“The financial impact of the B&O tax,” Hansen says, “definitely curbs our appetite to pursue acquisitions in Washington.”

There are exemptions from the B&O tax that exist for Washington credit unions that submitted an application for regulatory approval before Jan. 1, 2026; credit unions that are organized under the laws of any other state; and for federally-chartered credit unions, according to the Department of Revenue.

Large banks, such as Wells Fargo, Bank of America, and JPMorgan Chase have been winding down operations in rural areas, leaving room for credit unions to fill the void in these communities. At the height of the M&A surge, Ezra Eckart, former CEO of STCU, explained that credit unions were moving into small rural areas that banks were withdrawing from, as previously reported in the Journal.

The Federal Reserve reported that over 40% of rural areas experienced bank closures between 2012 and 2017. The pandemic also accelerated a long-term trend of banks leaving rural markets, spurring rural customers to rely more on alternative financial institutions, such as credit unions and community banks. But these financial institutions do not abide by the same rules and regulations.

As nonprofit financial institutions, credit unions have historically benefited from exemptions that lower their operating costs, allowing them to pay higher prices for acquired banks. It has been an important growth strategy for credit unions in Washington state and across the country, helping institutions expand into new regions, increase deposits, and scale more rapidly. 

In contrast, community banks have faced higher tax burdens and regulatory constraints compared to credit unions, making it difficult to compete with them.

Greg Deckard, CEO and board chairman of Spokane Valley-based State Bank, previously explained that banks have been exhausted with regulatory burdens which are costly to comply with.

Ahead of the repealed tax exemption, Rebeca Romero Rainey, president and CEO of Independent Community Bankers of America, noted in a 2024 statement that acquisitions of tax-paying community banks by tax-exempt credit unions were setting record highs at precisely the moment that policymakers and the American public were increasingly scrutinizing the deals.

Viewing the tax and regulatory framework as an unfair advantage, advocacy groups, such as the Community Bankers of Washington, repeatedly pushed lawmakers to create a more balanced regulatory environment.

“If credit unions are going to acquire banks,” the group said, “they should be treated like banks.”

For advisers including Jeff Cardone, a partner at Washington, D.C.-based law firm Luse Gorman PC, which advises on these deals, the B&O tax is not benefiting the state because it's not generating any meaningful tax revenue.

However, Cardone, who works with credit unions in Eastern Washington, says the tax completely changes the economics of M&A deals. To mitigate the impact, he says he expects state-chartered credit unions to explore new ways to restructure transactions.

“We expect credit unions to get more creative,” says Cardone, by, “converting to federal-chartered or contiguous state-chartered credit unions to circumvent the tax.” 

He adds that some credit unions also are exploring whether to convert to mutual banks.  

Large or small, credit unions throughout the state are facing a new regulatory environment that is reshaping the banking industry.