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Kansas City Fed: FCS Tax Advantages Distort Competition

Posted on 7/28/2016

A recent article published by researchers at the Federal Reserve Bank of Kansas City demonstrated how the Farm Credit System's tax advantages have distorted competition in the marketplace between commercial banks and FCS lenders. Bert Ely pointed to the article in yesterday's edition of ABA's Farm Credit Watch e-bulletin. While both classes of lenders currently hold roughly a 40 percent market share, the article's comparison of real estate and production loans showed the competitive edge FCS enjoys as a result of its tax-advantaged status.

When it came to real estate loans -- from which all FCS profits are tax-exempt -- FCS lenders had 10 percent greater market share than commercial banks. That trend was reversed, however, for production loans, where FCS profits are only exempt from state income taxes. Commercial lenders held roughly 61 percent of those loans, compared to 39 percent held by their FCS competitors.

These data "illustrate the distorting effect of the differential tax treatment of banks and the FCS," Ely wrote. "They provide powerful evidence as to why the taxation of banks and the FCS should be comparable."

Read Farm Credit Watch

Read the Kansas City Fed article

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