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Interplay of Tax Code, Farm Laws Yields Odd Harvest

January 05, 1986|BRUCE KEPPEL | Times Staff Writer

The ecologically fragile Sand Hills of Nebraska--grassy dunes that sprawl across much of that state's midsection--offer only marginal growing land for crops. Yet, despite federal programs to conserve soil and reduce erosion, bulldozers have pierced the fragile top soil, toppling the cliffs and filling the ridges.

Now, ironically, corn grows on some of this land, contributing to the nation's costly surplus.

That bizarre juxtaposition results from the interplay of a variety of federal laws: Programs that seek to curb production, for example, bump up against tax shelters and investment tax credits that encourage more production. The tax code entices into agriculture non-farm investors "looking not for profits but for deductions," says Chuck Hassebrook, a tax analyst for the Center for Rural Affairs in Waltham, Neb.

For example, farm policy seeks to reduce the size of herds in an effort to dry up the nation's sea of surplus milk, while the tax code adds to the surplus by providing investment tax credits for buying more cows--then enables investors to write off the animals over five years. Finally, when the cows are sold, the income qualifies as a capital gain, 60% of which escapes taxation.

"There's no conscious effort to coordinate tax policy with farm policy," says Hoy F. Carman, an agricultural economist at the University of California at Davis, who has studied the effects of the tax code on agriculture since the Tax Reform Act of 1968. His conclusion: "It's a nightmare."

While the effects of this phenomenon can thus be found across the United States, nowhere are they more stunningly strange than in the Sand Hills of Nebraska.

There, the subterranean water underlying the porous dunes is tapped to irrigate the superfluous cornfields, qualifying for a federal "depletion" allowance. Up above, the rotating irrigation booms and water pumps that make farming possible provide investment tax credits for equipment that also can be written off over just five years.

And--final irony--conservation credits are available for bringing the unique dunes under unneeded cultivation. "The tax code treated the earth-moving like a conservation expense, but it was more like an earth-raping expense," Hassebrook claims.

Possibilities of tax savings--in effect, letting Uncle Sam spring for a part of one's investment--are hardly inventions of the 1980s. What is new is a growing awareness, within government and without, that the interplay of farm programs and the tax code is not only costly but has unintended counterproductive consequences such as loss of federal tax revenues, overproduction of many crops, disruption of markets and dislocation of real farmers.

Congress, the Agriculture Department, the Treasury and the White House itself all have examined the situation recently. The White House concluded that the government is the loser: Claimed tax losses attributed to farming more than offset claimed farm income. As James C. Miller of the National Grange farm organization sums it up: "For every dollar collected in farm profits, two other dollars of income are sheltered."

One congressional estimate projected the government's tax loss over the next two years at $2.6 billion.

An Agriculture Department study showed how such losses can result. The USDA told of an audit by the Internal Revenue Service of 12,000 tax returns, each of which reported farm losses exceeding $50,000. Since non-farm income on these tax returns averaged $122,000 and farm losses averaged $104,000, these taxpayers had managed to reduce their adjusted gross income to just $16,000.

Sen James Abdnor (R-S.D.), who unsuccessfully sought to impose a $21,000 limit on how much off-farm income could be sheltered, calls this "farming by the tax code."

"Current tax law encourages production on marginal lands, since investors are able to incur greater farming losses on these lands, thus aggravating our surplus production problems and adding to our soil conservation problems," Abdnor explains.

Not only can such investment decisions increase erosion in such areas as the Sand Hills of Nebraska while increasing costly crop surpluses, they also can help undermine the financial foundation of those who earn their living from farming, adds Abdnor, who is vice chairman of the Joint Economic Committee.

"If farm investment by non-farmers occurs due to sheltering, and the resulting extra production occurs during a time of surpluses, prices can fall, jeopardizing farms that are in a cash-flow pinch," the committee found in an investigation.

As a matter of fact, a Treasury study concluded that tax revenue lost through "farming by the tax code" totaled only 3% of the total revenue lost through tax shelters. The greater effects, it said, show up on the structure, output and economic well-being of bona fide farmers, particularly those in the middle-sized range.

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