At the turn of the century in 1900, agriculture was still the main driver of both the Indiana and U.S. economies. Then, in the early 1900s, Henry Ford transformed our economy from agricultural to industrial. Though he did not invent the automobile, he vastly improved assembly line production so that the affordable auto became reality. Ford’s innovation catapulted the auto industry, and all other industries, forward.
Despite this revolutionary economic change, agriculture today remains an important part of our gross domestic product and exports. Its importance is underscored by the continuation of the Cabinet-level position of secretary of agriculture, established by President Lincoln.
Back to the early 1900s, young farmers and struggling farmers experienced difficulty in securing appropriate levels of financing, so Congress created what is now known as the Farm Credit System (FCS). The first government-sponsored entity (GSE), the purpose of FCS was to provide affordable financing for those young and struggling borrowers. Bear in mind that, during this time period, thrift institutions made loans only to finance housing, and commercial banks mostly financed commercial enterprises. Consequently there was a void in agricultural credit availability, particularly for young and struggling farmers.
Today farming has become a corporate business, with fewer and fewer family farms remaining in business. Consequently FCS has fewer places to find young and struggling farmers, so it has geared into survival mode and expanded its field of lending to residential real estate and farm-related activities (liberally interpreted, in my opinion). The reach of FCS has spread so wide that the system now competes against community banks on a number of fronts, while enjoying a huge federal tax advantage. It pays about a 1.5 percent tax rate. I suspect yours is a little higher, hovering around 40 percent! To add insult to injury, FCS is the sole GSE that competes in the retail marketplace — the others are all lenders in the secondary market. It is well past time to rein in this unfair, government-supported retail competitor. The need for FCS no longer exists.
We have a chance to at least level the playing field somewhat by having FCS pay taxes on all of its income at the same rate as other lenders. That chance is made possible by Senators Max Baucus, D-Mont., and Orrin Hatch, R-Utah, who have informed their Senate colleagues that they are clearing the slate for all exemptions and deductions. If senators want these deductions and exemptions to continue, they will need to support that position with Baucus and Hatch. So we assume that, as of now, FCS-preferred taxation level is eliminated. We also assume that FCS proponents will be fighting very hard to reinstate the exemptions.
Let’s hope that the right thing is done by eliminating this tax advantage. In the long run, however, programs like FCS, whose purpose has so significantly diminished, need to be ended.