Heritage Turns Farm Subsidy Reform Into a New Regressive Tax Cut For Rich Landowners

By Matthew Cameron

Most of the attention that has been devoted to the federal budget proposals that six think tanks presented at this week’s Peter G. Peterson Foundation’s Fiscal Summit has been focused on big ticket issues such as taxes, Medicare and Social Security. But all six plans also tackle the question of farm subsidies, five of them with a broadly similar approach that aims to reduce or eliminate direct subsidies and reform counter-cyclical price supports so that government payments only go to small- and medium-sized farms rather than major agriculture corporations. The Heritage Foundation, however, offers a different proposal that—surprise!—functions largely as a regressive tax cut:

The real problem—yearly income fluctuations due to crop and weather unpredictability—can be solved inexpensively with farmer savings accounts. Under the Heritage plan, growers of all crops, not just the “big five,” [wheat, cotton, corn, soybeans and rice] can save money during boom years in tax-deductible IRA-style accounts and withdraw those funds during bust years as taxable income, thus smoothing out their yearly income fluctuations.

Researchers at Cornell University (pdf) analyzed this very idea during the run-up to the enactment of the 2008 Farm Bill. Although the general idea of farmer savings accounts (FSAs) earned the group’s praise, the researchers found that the specific type of FSA proposed by Heritage is unlikely to ensure financial security for farmers or prevent overinvestment in crop production. The reason is that this form of FSA, known as farm and ranch risk management (FARRM), does not include matching contributions from the government, meaning that the only incentive for farmers to participate in the plan is the tax-deferred status of the savings. Tax-deferred savings would hardly make a difference for the low- and middle-income farmers who are meant to benefit from the program, however, because they already reside in such low income tax brackets that deferring money to be taxed in the future would not meaningfully reduce their total tax burden. In fact, according to the Cornell University report, “24% [of studied farms] would typically be found with a 0% marginal tax rate, meaning that they would owe no federal income tax, and 20% would find themselves in the 10% marginal tax bracket. This would significantly reduce their incentive for participation in the program.”