Level the playing field for lending institutions

BY CURT EVERSON

About six months ago, the South Dakota Bankers Association board of direc tors decided it was time to increase general awareness about a couple of ver y old provisions in the federal income tax code which may not make as much sense today as they did 80 to 100 years ago. Since 1916, lending institutions that are part of a little know n federal government sponsored enterprise, the Farm Credit System, have been totally exempt from paying federal income tax and state income taxes on any income derived from loans secured by agricultural real estate Likewise since 1934, federally chartered credit unions have been totally exempt from paying federal and state income taxes and from payment of state and local sales taxes on purchased products and services.

Supporters of continuing the status quo for these tax-favored financial companies have been quick to criticize bankers as being nothing more than greedy, profit-hungry competitors Bankers do not fear competition, but would like to be able to compete on a level playing field The primary motivation behind the SDBA’s awareness campaign is to inform the general public about changes that have taken place in the business models of the Farm Credit System and credit unions over the past 80 to 100 years Those folks can make up their own minds about whether or not Congress should take an objective look at the present-day justifications for continuing or changing these old provisions in the federal tax code

Why did the SDBA decide that now is the right time to raise these issues? In the wake of the subprime mortgage-driven financial crisis and subsequent passage of the Dodd-Frank

Act, bank regulators decided to take a closer look at the challenges and threats facing the nation’s remaining community banks. During 2012 the FDIC (Federal Deposit Insurance Commission) conducted a formal study to better understand the many forces putting pressure on the community bank model. Last year, the Conference of State Banking Supervisors collaborated with the Federal Reserve on a second study of challenges facing community banks. In addition to pressures created by increasingly complex, expensive regulations, the studies reported that community banks are also concerned by the aggressive, growthfocused business model used by some of the largest of these tax-favored financial service providers and believe it poses a real threat to their continued viability.

It is hard to imagine that Congress ever envisioned a $1 trillion dollar tax exempt industr y dominated by multibillion dollar credit unions when it granted a 100 percent tax exemption to the single, common-bond credit union charter back in 1937 By the same token it is difficult to believe that Congress could have envisioned that the Farm Credit System would grow to be the $250 billion system it is today, a system that enjoyed a combined federal and state income tax rate of only 5 percent in 2012 Congress is talking in a bipartisan way about reforming the federal tax code Don’t these old exemptions deserve a second look? PB

Curt Everson President South Dakota Bankers Association ceverson@sdba com