Lending Feud

October 2, 2013 08:37 AM
Lending Feud

Commercial banks launch attack on FCS tax rates

Commercial banks fired an opening salvo with Congress this summer against their chief ag loan competitor, the Farm Credit System (FCS). As lawmakers begin to reform the federal tax code, bankers asked Congress to repeal FCS’ tax subsidy.

This is not a new fight. It’s largely a philosophical one about the appropriate level of government support to an industry and market share. But this time around, bankers believe they are more likely to be successful.

mary fritz

"Now would be the wrong time to create uncertainty for the Farm Credit System." —Mary Fritz, FCS board chair

"We have an opportunity that didn’t exist in the past," says John Blanchfield, director for the center of agriculture and rural banking at the American Bankers Association (ABA). "Much of Congress and the public believe we are at the edge of a debt abyss; without tax reform, we will go over the edge."

FCS officials strongly dispute banker contentions on all fronts.

"We do not believe they will be successful," says Kenneth Auer, Farm Credit Council CEO. "Getting a farm bill passed is an easy chore compared to tax reform."

In the event commercial bankers convince Congress to increase taxes paid by the FCS, he says interest rates would likely go up and patronage dividends would be reduced, reflecting higher costs to the system.

The crux of ABA’s argument: "FCS profits were $4.34 billion in 2012, yet it only paid a total of $222 million in combined federal, state and local taxes—an effective rate of only 5.12%," wrote Frank Keating, ABA CEO, in a letter to the Senate Finance Committee. "Had it paid a rate of 29%—what banks pay—FCS would have paid $1.285 billion in taxes. This means FCS’s tax subsidy will cost taxpayers at least $6.44 billion during the next five years."

However, FCS’ data shows that combined net income for 2012 was $4.12 billion.

In Keating’s view, the FCS has an unfair advantage and can well afford to pay the same tax rate as banks.

The FCS countered in its own letter to the Senate Finance Committee. "The uncertainty that surrounds current agricultural policy, the substantial and increasing variability in weather patterns and the expectation that commodity prices are likely to become even more volatile are all combining to create greater risk for farmers of all sizes. Now would be the wrong time to create uncertainty for the FCS," said Mary Fritz, a producer from Chester, Mont., and FCS board chair.
"Their proposal does not meet any of the criteria you have set out for tax reform."

Both Eat Cake. Furthermore, FCS maintains ABA’s allegations about tax subsidies versus commercial banks are misleading. More than half of all ag banks are organized as Subchapter S corporations; 92% of them make some ag loans. "An analysis of actual call report data shows that Sub S commercial banks pay an effective tax rate of 1.4%," says Fritz. "This tax rate is considerably less than that paid by the FCS." Because FCS is a cooperative system, she suggests that it would be more accurate to compare FCS tax rates to Sub S banks.

However, ABA argues that FCS no longer needs its tax subsidy. "FCS, the first government-sponsored enterprise, was created when farmers had limited options available to finance their farms," Keating says. "That is no longer true today."

In FCS’ view, commercial banks are themselves subsidized and are not the bastions of free enterprise they make themselves out to be. "They enjoy the benefit of direct access to funding from not one but five government-sponsored enterprises," Fritz said. Auer adds that if commercial banks were at such a comparative disadvantage, they would not be increasing loan volume or be the most profitable of all lending sectors.

With charges and countercharges, this debate is not going to disappear anytime soon.

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