Pub. 8 2013-2014 Issue 3

www.nebankers.org 22 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 FCS Trots Out Old Arguments to Justify Favorable Tax Treatment T he Farm Credit System (FCS), through its trade association, the FarmCredit Council (Coun- cil), 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. [Youwill find the ABA letter at www.aba.com/ Tools/BankType/Ag/Documents/ SFINLetterreFCSRepeal071913.pdf and the Council’s July 26 response at www.aba.com/Tools/BankType/Ag/ Documents/Farm_Credit_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, comparedwith a 29 percent average tax rate for the banking industry. This tax rate differential—the FCS’ tax subsidy— “will cost taxpayers at least $6.44 bil- lion over the next five years.” Keating also mentioned a point made many times in Farm Credit Watch (FCW): “The credit FCS pro- vides 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 themost,” 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 pre- dictable. While incorrectly implying 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 defending 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 per- cent.” What the Council conveniently overlooked, of course, is that bank stockholders pay income taxes on 100 percent of the profits Subchap- ter 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 Subchapter 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 as- serting that “now would be the wrong time to create uncertainty for agricul- ture’s most reliable, competitive, and lead source of capital, the [FCS].” Of course, as older farmers fully appreci- ate, the FCS was hardly a dependable lender during the 1980s as the FCS struggled to overcome its self-inflicted lending woes. In fact, now is an excel- lent time to level the playing field in agricultural credit since American farmers are in good shape financially. Further, while the FCS’ focus on pro- viding 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. CFTC Exempts FCS From Swaps Rules On Aug. 13, the Commodities Futures Trading Commission (CFTC) issued a final rule exempting from the swaps-clearing requirements man- dated by the Dodd-Frank Act “swaps entered into by qualified cooperatives” regardless of the cooperative’s size, provided “that the cooperative’s mem- bers are either non-financial entities or other cooperatives whose members are non-financial entities.” This ex- emption effectively applies to all FCS institutions and to all credit unions no matter how large; Dodd-Frank exempted only banks and thrifts with less than $10 billion of assets from the swaps-clearing requirement. There is no justification for exempting large FCS institutions from Dodd-Frank’s swaps-clearing requirements. This is one more instance where Congress and the regulators have tilted the com- petitive playing field against taxpaying entities.