Tilting the Playing Field: Tax Preferences for Cooperatives and Government-Owned Enterprises

When policymakers and pundits talk about “tax fairness,” they’re likely not talking about the huge and overlooked market distortions that I review in my new policy brief: cooperatives and government-owned enterprises, entire sectors of the U.S. economy that operate outside the corporate tax system altogether.

Cooperatives, state and local government enterprises, and federally owned corporations together generate over $1.4 trillion in commercial revenue each year. Yet much of that activity escapes entity-level taxation entirely. The result is a sprawling untaxed sector that competes directly with private firms on an uneven playing field, as the table below illustrates.

The Hidden Giants of the “Untaxed Economy”

Credit unions now hold $2.4 trillion in assets, serving 144 million members, while paying no corporate income tax. They compete directly with commercial banks that do pay corporate income taxes, and credit unions often buy out commercial banks. In 2024 alone, there were 22 announced deals of credit unions acquiring a bank.

The story doesn’t end there. Agricultural and utility cooperatives such as Land O’Lakes or electric cooperatives operate under special provisions of the tax code that let them deduct “patronage dividends” to members, effectively avoiding double taxation. For some rural utility co-ops, their entire net income escapes taxation so long as most of it comes from member business.

Meanwhile, state and local governments run commercial enterprises of their own: utilities, hospitals, liquor stores and even hotels. At the federal level, corporations like the U.S. Postal Service, Amtrak and the Tennessee Valley Authority bring in billions from commercial activities that look indistinguishable from those of private competitors, but the federal corporations enjoy legal privileges and exemptions private firms can only dream of.

How Big Is the Untaxed Sector?

The numbers are staggering:

· Cooperatives collectively generate about $503 billion in annual revenue.

· State and local government enterprises bring in another $797 billion, mostly from utilities, hospitals and public colleges.

· Federal enterprises—chiefly the U.S. Postal Service, Tennessee Valley Authority, Bonneville and Western Power Administrations and Amtrak—add roughly $100 billion more.

All told, that’s $1.4 trillion in economic activity operating outside the corporate income tax system, as shown in the table below. To put it bluntly, a large chunk of the U.S. economy competes with taxpaying businesses while being shielded by statute from the taxes those businesses face.

The Problem Isn’t Just Lost Revenue

One might argue this is simply a matter of forgone federal revenue. But the deeper issue is distortion. By exempting certain organizational forms from tax, the government tilts the playing field, rewarding some business structures while penalizing others. The result is an economy shaped not by efficiency or consumer demand, but by legal privilege.

From the perspective of a neutral tax base—like the one proposed by Hall and Rabushka’s flat tax—this system is anything but neutral.

· C-corporations face double taxation.

· Subchapter T cooperatives enjoy pass-through treatment.

· Credit unions and government-run enterprises often face no entity-level tax at all.

Why Structure Matters More Than Rates

Even if we decided to tax public enterprises, the problem wouldn’t disappear. These entities lack shareholders, market discipline and profit incentives. Without those pressures, they tend to allocate resources for political or bureaucratic reasons rather than economic ones. Taxing them wouldn’t fix that; only governance reform can.

Similarly, not all cooperative advantages can be justified on social grounds. Credit unions no longer serve just “underserved communities.” Many now resemble small- to mid-sized banks, offering mortgages, auto loans and business accounts while enjoying a tax exemption their competitors cannot access.

Returning to the Neutrality Principle

The goal isn’t to punish cooperatives or public enterprises. It’s to restore neutrality—to ensure that similar economic activities face similar tax treatment regardless of ownership form.

Under a flat, neutral system:

· Cooperatives and government enterprises competing in commercial markets would be taxed like private firms.

· C-corporations would be taxed once, not twice.

· And policymakers would stop picking winners and losers through the tax code.

The tax code should not be a tool for social engineering, political favoritism or bureaucratic convenience. It should create a level field where efficiency and innovation, not legal privilege, determine success. Restoring that neutrality would not only make the system fairer—it would make the economy stronger, more accountable and more genuinely competitive.

In the long run, a tax code that favors no one best serves everyone.