Pub. 2 2014 Issue 1

www.uba.org 26 T he Farm Credit System (FCS), through its trade association, the Farm Credit Council (Council), quickly attempted to rebut ABA President Frank Keating’s July 19 letter to Sens. Max Baucus and Orrin Hatch advocating that FCS institutions be taxed as if they were banks. [You will find the ABA letter at www.aba.com/Tools/BankType/Ag/Documents/SFINLetter- reFCSRepeal071913.pdf and the Council’s July 26 response at www.aba.com/Tools/BankType/Ag/Documents/Farm_Cred- it_Finance_Committee_letter_26July20131.pdf.] Keating’s letter noted that if the FCS “were a bank, it would be the ninth largest one,” yet in 2012 the FCS paid an effective tax rate of just 5.12 percent, compared with a 29 percent average tax rate for the banking industry. This tax rate differential—the FCS’ tax subsi- dy—“will cost taxpayers at least $6.44 billion over the next five years.” Keating also mentioned a point made many times in Farm Credit Watch (FCW): “The credit FCS provides to farmers and ranchers often goes to farmers who least need subsidized credit.” Only a very modest portion of the FCS’ subsidized credit “goes to those who need it the most,” and that is America’s young, beginning, and small (YBS) farmers. Not only does the FCS double- and triple-count its lending to YBS farmers, but as observed in the July 2013 edition of FCW, the FCS’ lending to YBS borrowers, in terms of credit outstanding, actually declined from 2009 to 2012 relative to total FCS credit outstanding. The Council’s response was predictable. While incorrectly imply- ing that banks “engaged in the subprime fiasco that recently cost the economy so dearly,” the Council conveniently overlooked the prime role the FCS played in inflating the farmland bubble of the late 1970s and early 1980s whose bursting forced Congress to bail out the FCS in 1987. The best the Council could do in defend- ing its favored tax status, including zero taxation on its profits from real estate lending, was to try to draw an analogy with the Subchapter S status of many banks, claiming that they “pay an effective tax rate of 1.4 percent.” What the Council conveniently overlooked, of course, is that bank stockholders pay income taxes on 100 percent of the profits Subchapter S banks earn, including profits retained by these banks to increase their capital. Also ignored by the Council is the fact that banks not taxed under Sub- chapter S pay stockholder dividends out of after-tax profits while the patronage dividends the FCS pays to its owner-borrowers reduce the amount of FCS earnings subject to federal taxation. The Council closed its letter by asserting that “now would be the wrong time to create uncertainty for agriculture’s most reliable, competitive, and lead source of capital, the [FCS].” Of course, as older farmers fully appreciate, the FCS was hardly a depend- able lender during the 1980s as the FCS struggled to overcome its self-inflicted lending woes. In fact, now is an excellent time to level the playing field in agricultural credit since American farm- ers are in good shape financially. Further, while the FCS’ focus on providing subsidized credit to America’s wealthiest farmers, ranchers, and agribusiness has never been justifiable, it is even less so in this time of massive federal budget deficits. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE FCS Trots Out Old Arguments to Justify Favorable Tax Treatment By Bert Ely