Pub. 6 2011-2012 Issue 5

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2012 Bert Ely Two CoBank Divisions Pay Most of FCS Tax Bill T HE FARM CREDIT SYSTEM ENJOYS an extremely low effective tax rate. In a previous Farm Credit Watch, I reported that the overall Farm Credit System (FCS) tax rate dropped from 7.2 percent for the fourth quarter of 2010 to 5.7 percent for the third quarter of 2011. What I did not report was that the FCS’ tax bill dropped $6 million from the fourth quarter of 2010 to the third quarter of 2011 even though FCS’ pre-tax profits rose $140 million between the two quarters. In effect, the FCS had a negative tax rate of 4.3 percent on that increase in profits. The primary reason the FCS tax rate is so low is due to the fact that profits on FCS real estate lending are exempt from all income taxes. To further minimize its tax liability in recent years, all but three FCS associa- tions have structured themselves as an Agricultural Credit Association (ACA) with two wholly owned subsidiaries: a Federal Land Credit Association (FLCA) and a Production Credit Asso- ciation (PCA). The FLCA, which does the ACA’s real estate lending, is exempt from all federal, state, and local taxes while the PCA, which does the ACA’s non-real estate lending, is subject to federal income taxes but inmany states is exempt from state and local taxes. Patronage dividends paid by the PCA are tax-deductible, further reducing the ACA’s overall tax liability. The five farm credit banks are exempt from corporate income taxes with one important exception: Co- Bank has to pay income taxes on the profits it earns on its agribusiness lending (largely to agricultural co- operatives) and its lending to util- ity cooperatives. For the first nine months of 2011, these two CoBank lending divisions produced 20.4 per- cent of FCS’ total pre-tax income yet accounted for 73.9 percent of the FCS’ income-tax liability. Viewed from an- other perspective, those two CoBank divisions paid an effective tax rate of 22.4 percent on their pre-tax earnings versus a 2.03 percent tax rate for the rest of the FCS. The third-quarter 2011 numbers did not differ greatly. The two CoBank divisions produced 18.3 percent of FCS’ total pre-tax earnings yet accounted for 69.3 percent of FCS’ total income-tax liability; the CoBank divisions had an effective tax rate of 21.6 percent versus 2.14 percent for the rest of the FCS. The gap between these tax rates and the basic federal corporate tax rate of 35 percent gives one a good sense of the magnitude of the tax advantage the FCS has over its taxpaying competitors. Tax Rates Vary Among the ACAs There were significant differences among the 81 ACAs in their effective tax rate during the first nine months of 2011. Fifteen ACAs, with total pre-tax income of $296million, had effective tax rates above 5 percent, ranging from a high of 10.43 percent to 5.19 percent, for an average rate of 7.97 percent. Seven ACAs with total pre-tax income of $521 million had tax rates ranging from 4.91 percent to 2.85 percent, for an average rate of 4.29 percent. The largest group of ACAs (34) with $1.071 billion of pre- tax income had tax rates ranging from 1.97 percent down to .01 percent, for an average rate of .76 percent. Another 19 ACAs with $133 million of pre-tax income reported no income tax liability. Bringing up the rear were six ACAs with pre-tax income of $1.3million andnega- tive tax expense due to negative income or apparent tax refunds. The effective tax rate for the five most profitable ACAs during the first nine months of 2011 varied sig- nificantly. The second-largest but most profitable ACA, FCS of America (FCSA), headquartered in Omaha, Neb., had a tax rate of 1.22 percent on $335 million of pre-tax earnings. The largest ACA, but second in the profit- ability derby, was Louisville, Ky.-based Mid-America ACA (MidAm), with a tax rate of 4.91 percent on pre-tax earnings of $201 million. FCSA’s lower tax rate is puzzling since 59.4 percent of its loans were secured by real estate as of Sept. 30, 2011, while 74.3 percent of MidAm’s loans were secured by real estate. Perhaps FCSA is more creative in how it calculates its tax liability. The third-largest earner, Northwest FCS of Spokane, Wash., had $122 mil- lion of pre-tax income, a 3.99 percent tax rate. The fourth-largest, Farm Credit West of Roseville, Calif., had a rock-bottom tax rate of .09 percent on $111 million of pre-tax earnings. Capital Farm Credit of Bryan, Texas, the fifth largest with $96 million of pre-tax income had a tax liability of just