Can State Income Tax Credits on Local Investments Help Increase Access to Capital for Farmland Conservation and Other Vital Aspects of Healthy, Local Economies?

Beginning farmers and farmers of color, often champions of sustainable farming, face significant obstacles accessing capital through conventional financing methods to purchase or lease farmland. Access to capital is increasingly urgent for these farmers as farmland prices rise and the generation of farmers from the baby-boom begin to sell their farms and retire. As much as 50 percent of our nation’s farmland is predicted to change hands in the next decade and the New Land Grab is upon us as Wall Street Investors Take Aim at Farmland. Without access to capital for farmland, these farmers will be squeezed out by wealthy corporations that prioritize profits over healthy and resilient soil, food, and farm-workers.

Increasing Access to the Pool of Patient Capital

Addressing the problem of access to capital requires a multi-faceted approach. One avenue is to increase the availability of “patient capital” by harnessing the collective wealth of the community.   

Patient capital is essentially what its name implies. It’s money invested or loaned on a longer-term and/or more flexible basis than conventional financing. The lenders and investors are willing lock up their money for longer periods of time and wait, patiently, for their returns. For example, while repayment on a traditional bank loan likely starts almost immediately after funds have been dispersed, a patient capital loan has terms that allow for a longer period of time before repayment begins and/or provides some flexibility on repayment during low cash-flow months.

There is an underutilized pool of patient capital in all of our communities. Our communities are full of potential patient-capital lenders and investors. You may even be one of them. You don’t have to have hundreds of thousands of dollars to be a patient “investor.” You need only a modest amount of money to invest, and a little patience. By increasing the number of everyday people and organizations willing to make patient investments in local farming enterprises, we can become the community of patient capital investors these farmers need to acquire farmland.

Not So Easy

Unfortunately, in a system built to benefit wealthy corporations, it is not so easy to get money invested in a local sustainable farming operation, even for investors who are willing to be patient investors. Making time to vet investment opportunities can be both intimidating and challenging. And while investment advisors exist to help people make investment decisions, investment advisors generally don’t vet local investment opportunities to share with their clients. So those interested in investing their patient capital locally must vet opportunities themselves. 

Another barrier to everyday people investing patient capital in local farms is that the savings we pour into our 401(k)s and Individual Retirement Accounts (IRAs) are almost always invested in Wall Street and typically don’t provide an easy mechanism for investing those funds locally. One alternative is to set up a Self-Directed IRA (SDIRA), but the fees charged by SDIRA custodians are often cost-prohibitive unless investors have very large sums to invest. As a result, the funds may stay in Wall Street against the desires of the investor simply because the fees and the burdensome process of self-directing IRA funds strongly disincentivized moving the money.

So How do we Encourage Community-Based Lending and Investing?

One solution we are exploring at Sustainable Economies Law Center is the role a state income tax credit on local investments could play in increasing the number of lenders and investors who invest locally.   

Tax credits decrease the total tax amount owed rather than decreasing taxable income. Tax credits are an attractive approach because, unlike a tax deduction, they create a dollar for dollar decrease to your tax bill. For example, a tax credit of 20% on a $1,000 investment is a $200 tax savings. This is an oversimplified example and ultimately depends on how the credit is structured, but the tax credit in this example would lower your tax bill by $200. 

This tax credit could be viewed as a reimbursement for the costs associated with lending or investing locally. The tax credit might create enough incentive to mobilize potential local lenders and investors into action. 

What Should a Local Investment Tax Credit for Farmland Finance Look Like?

We have looked into into similar tax credits in places such as Louisiana, Nova Scotia, and New Brunswick, and while we haven’t found a perfect model, we’ve surfaced these important questions as we dive deeper into the tax credit discussion: 

• What should “local” mean for purposes of the tax credit?

• How much should the credit be?

• What characteristics does a farming enterprise need to have in order for the local investment to be credit-eligible? 

• Could the tax credit incentivize sustainable agricultural practices or responsible labor practices?

• What government entities need to be involved to facilitate and oversee implementation of the tax credit?

• How would we ensure that community members know about it and can take advantage of it?

• Are there appropriate technical assistance providers (e.g., loan funds, lawyers, financial institutions, etc.) available to help with facilitating local investment into farmland? 

These are just some of the questions we are discussing as we look into whether a state income tax credit on local investments is a feasible approach to financing farmland conservation, among other vital aspects of healthy, local economies. 

Would you like to join the conversation? We’d like to hear what you think, so please leave a comment, or email Cameron Rhudy at [email protected].