The Clinton administration has proposed and Congress is considering a wide-ranging set of tax and spending changes that will affect Indiana agriculture along with every other sector of the economy. The proposals generally do not provide all the details necessary for a comprehensive assessment. In this paper, we attempt to provide a general assessment of the impacts on Indiana agriculture and rural economy of parts of the overall proposal. Clearly, we have not included all the tax and spending measures, not even all those directly affecting agriculture. Rather, we have included those we felt would be the most important for Indiana’s agriculture and rural economy.

Also, we are not making any judgments on whether any of the proposals are “good” or “bad” for agriculture or for the economy as a whole. Our sole objective is to provide information that may be useful to citizens and policy makers in making decisions about these proposals. One must recognize, also, that the proposals are evolving as discussion and debate continues, so the specific impact estimates given here certainly will not hold as the various measures are modified.

The proposed fiscal package must be judged not only on how it will affect Indiana farmers directly but also on the indirect, longer-term impacts of the tax and spending proposals on producers. The package is designed to accelerate and sustain the economic recovery assumed to be underway. This economic growth could contribute to increased demand for food, improved off-farm employment opportunities for farm families, and improved economic conditions in the rural sector, all of which will benefit Indiana farmers in the longer run. It is also import-ant to remember that people will respond to taxes and that markets will adjust in such a way as to make their longer run impacts less severe than their immediate impacts.

Specific Measures

BTU Energy Tax

The proposed energy tax is on the energy content of different fuels. There are two rates: 59.9¢ (per million BTUs) for crude oil products and 25.7¢ for other energy sources. Exactly how the tax will be applied is still being debated. Our best estimate is that the total direct and indirect impact on the cost of producing corn will be about $3/acre or about 2.5¢ per bushel. In the short-run farmers will not be able to pass this on in their prices. The impact on soybeans will be about half the impact on corn, largely because of the difference in fertilizer and drying costs.

The BTU energy tax would result in price increases for all energy sources. Gasoline and diesel would be taxed at about 7.4 and 8.4 cents per gallon respectively. Natural gas would be taxed at about 2.6 cents per therm. The electricity tax could range between .09 and .27 cents per kilowatt hour consumed, depending on whether electrical energy is taxed based on the energy delivered to the consumer or energy consumed in the generation of electric power. At current gas and electricity prices and assuming the higher rate for electricity, both natural gas and electricity costs would go up a little less than 5 percent.

Barge Fuel Tax Increase

The existing barge fuel tax does not cover the cost of construction and rehabilitation of the inland water-ways. The proposal increases the barge tax from 19¢ to $1.19 per gallon over four years in order to eliminate the barge transport subsidy. The increased revenue would be sufficient to eliminate the current subsidy required for maintaining the inland waterways. This tax increase would increase the cost of transporting corn and fertilizer on the inland waterways. Estimates of the impact range from 4¢ to 10¢ per bushel of corn. These estimates assume there would be no change in the world (FOB U.S. Gulf) corn price, so the domestic U.S. price would fall by that amount. The impact would not be uniform, however, with a much greater impact on those regions that make greater use of barge transport. Also, to the extent that domestic corn price falls, deficiency payments will increase. The rise in deficiency payments should make up about two-thirds of the fall in corn price.

Increase of Flex Acres from 15 to 25 Percent

 

An increase of flex acres from 15 to 25 percent would eliminate government deficiency payments to farmers on that additional 10 percent of base acreage. Using 1992 figures, that change would eliminate payments on 436,610 acres or 48 million bushels of corn. With the 1992 deficiency payment of 73¢ per bushel, that amounts to $35 million in lost revenue for Indiana farmers. In 1992 Indiana corn production was 877.6 million bushels. Spreading the lost revenue from the deficiency payment over the entire corn crop yields an income loss of 4¢ per bushel of corn produced by Indiana farmers.

Elimination of Pay-92 Programs

These programs allow farmers to not plant their crop base and receive payments on 92 percent of the eligible acres. In 1992 there were 48,529 “pay” acres in Indiana, resulting in payments of $3.3 million. If one spreads that income loss over total corn production in the state, it amounts to 0.4¢ per bushel of corn produced. To the extent that pay-92 acres would come back into production, this increased production could depress corn price. Farmers in the commodity program would receive higher deficiency payments covering part of the loss, and those not in the program would incur larger losses.

Eligibility Limitation on Off-farm Income

This proposal eliminates eligibility for deficiency payments for anyone with off-farm income greater than$100,000. It would have a small impact on producers in Indiana. The limitation would affect mainly high income landlords. Because they would not be eligible to receive deficiency payments under share leasing, they would have an incentive to switch to cash renting their land. The farm operator then would be eligible to receive the deficiency payment. Hence, the main impact would be in the form of an incentive to change from share leasing to cash rent. The change in lease terms could, however, move more farmers to the $50,000 payment limit.

Investment Tax Credit

An investment tax credit reduces tax liability by a certain percentage of the value of capital investments made during the year. The original proposal is for a 7 percent credit in 1993 and 1994 and 5 percent thereafter. This could be important for farmers, depending upon which investments qualify. Total tax liability is reduced dollar for dollar by the amount of the credit. Consequently, net farm income increases by the amount of the credit. For example, if machinery were eligible and a farmer purchased a $100,000 piece of equipment, income taxes would be reduced by $7000 in 1993 or 1994. For the state as a whole, we estimate that, if all capital items were included, the annual benefit for Indi-ana farmers could be $45 million in 1993 and 1994 and $32 million per year thereafter.

Rural Development

The economic package includes considerable increases in funding for rural development. The package includes increases of $470 million in loans and $281 in grants to help poor rural communities comply with clean water standards. There are also funding increases for low income housing in rural areas.

REA Subsidy Elimination

Loans for rural electrification have been subsidized in the past. The package includes a proposal to eliminate this subsidy on rural electric power. This change would lead to increased costs for rural electric cooperatives, but the amount of any rate increase is impossible to estimate at this time.

Summary

 

Farm Impacts

Several of the measures would lead to increased costs or reduced prices for farmers. The energy tax would increase costs. The increase in flex acres would reduce government deficiency payments. The barge tax would likely result in lower farm gate prices. However, the loss from the lower prices would be offset in part by higher deficiency payments. If the corn price were to fall 6¢ due to the barge tax, farmers would recoup about 4¢ of that through higher deficiency payments. The impact of all the changes taken together, without adjusting for crop price changes, would be about 9¢ per bushel of corn produced (flex acre increase – 4¢, BTU tax – 2.5¢, barge tax – 2¢, and 0-92 elimination – 0.4¢). The investment tax credit would partially compensate for this loss for those farmers making capital investments. Also, to the extent production costs increase, we would expect to see some increase in market price, although not enough to completely offset the higher costs.

Consumer Impacts

The President’s economic proposals will increase funding for the Women, Infants and Children’s and Emergency Food Assistance programs. The proposals will not have much impact on consumer food costs in the next year, but there may be longer term impacts. The higher taxes and costs will increase the costs of food marketing and be passed through in part to consumers. The proposed increases in charges for federal meat and poultry inspection, higher live-stock grazing fees for federal lands, and increased charges for irrigation water could also contribute to some-what higher food prices in the future. Proposed reductions in federal subsidies for honey, peanut, and sugar producers won’t significantly affect food prices.

In most cases, the analysis presented here must be viewed as pre-liminary and incomplete. It represents a rough estimate of direction and magnitude of impacts based upon the information available to us at this time.

* Contributors: Otto Doering, Bob Jones, Marshall Martin, Kevin McNamara, George Patrick, Wallace Tyner, and Joe Uhl