Statement of

Senator Byron Dorgan

Before the Senate Agriculture Committee

on the Impact of Current Tax Laws on Farmers

February 25, 1997

Mr. Chairman, I commend you and the other members of the Senate Agriculture Committee for holding hearings to examine the impact of current tax laws on the agricultural community. I understand that your Committee will focus primarily on two areas -- estate and capital gains taxes.

I appreciate the opportunity to talk with you about several proposals that I have been working on -- with Senator Grassley and others, which are of great importance to our nation's family farmers.

Tax Relief for Farmers Using Deferred Payment Commodity Contracts and for the Health Insurance Costs of Farmers.

Before I focus on estate and capital gains tax relief for those in the agricultural community, I want to briefly address two items that I raised the last time I came before your Committee.

Since I last testified before you, Congress has taken great strides in addressing one of urgent tax matters facing our family farmers and ranchers. In the Health Insurance Portability and Accountability Act of 1996, which was passed by Congress last summer, we included a proposal to increase the amount that farmers and other sole proprietors may deduct for their health insurance costs to 80 percent by the year 2006, which is up from its then-current level of 30 percent.

This provision is absolutely critical to the health care concerns of farmers, ranchers and small business owners who conduct their businesses as sole proprietors.

But we cannot stop at this point. It is indefensible that our tax laws tell some of our biggest corporations that they can deduct 100 percent of their health costs, while others, mostly smaller businesses, are told they can deduct only a smaller share of their health care costs.

The health of a farm family or small business owner is no less important than the health of the president of a large corporation, and the Internal Revenue Code should reflect this simple fact.

That's why I will be reintroducing legislation this year to restore complete tax fairness in the Tax Code for sole proprietors who acquire health insurance coverage for themselves and their families. My bill will expand the current deduction to 100 percent by the end of this decade.

Mr. Chairman, I would also like to thank you and others who are supporting Senator Grassley's and my effort (S. 181) to provide alternative minimum tax (AMT) relief for thousands of family farmers who use deferred payment commodity transactions.

The Internal Revenue Service (IRS) has, in our opinion, mistakenly taken a position that threatens to hit many farmers with huge tax bills for using deferred payment commodity contracts, which have been routinely used in their businesses for decades. In my judgment, the IRS's position is dead-wrong and is going to impose an unintended and unacceptable financial hardship on the farming industry.

For years, family farmers have used deferred payment contracts to sell their commodities in order to better manage their business income. For example, a typical grain contract between a farmer and grain elevator calls upon a farmer to sell and deliver grain to a grain elevator (often because the farmer does not have adequate storage) for a fixed amount. In many cases, one or more payments paid by the elevator to the farmer under the contract occur after the close of the farmer's taxable year.

For regular tax purposes, farmers are allowed to defer income from the deferred payments under the grain contracts in computing their regular tax liability. But because the IRS apparently now views all deferred payment grain contracts as installment sales, it now requires them to add back this income in computing the AMT in the tax year preceding the year of payment. As a result, thousands of family farmers may face hefty tax bills because they are being whip-sawed by a new IRS policy which effectively repeals their ability to use such contracts, and to benefit from the cash basis method of accounting.

We do not believe that Congress intended this kind of tax treatment for farmers using deferred payment commodity contracts for legitimate business purposes. Moreover, Treasury Department officials, who agree that this misguided IRS position was likely not the intent of Congress, support the goals of this efforts as "reasonable tax policy, and ... welcome the opportunity to work with Congress to address this matter through corrective legislation."

The IRS has taken some steps to curtail its misguided tax practice for 1996, but we need to act swiftly to pass our bill -which is strongly supported by the agricultural community -- as part of any revenue measure considered by the Senate this year. This measure must be consider quickly in 1997 to resolve any lingering doubts that farmers may have about the correct tax 3 treatment for deferred payment commodity contracts.

Family Farm Estate Tax Relief

I join my colleagues today who express real concern about the impact that our tax laws have on the survival of our family farms. A number of bills have been introduced in Congress to eliminate the estate tax burden imposed on families who are trying to pass along the farm, ranch or other family-run business to their kids or grandkids. Some of these bills would repeal estate tax entirely, while other bills would target their relief proposals.

I have a bill which will eliminate estate taxes altogether for the inter-generational transfer of family farms and other family-run businesses valued up to $2 million.

My new legislation targets $1,000,000 of estate tax relief to help preserve one of our nation's most important economic assets -- its family-run small businesses. But it also increases the existing $600,000 Unified Estate and Gift Tax Credit to $1,000,000, which is available to everyone.

However, I'm now working with a number of my colleagues -including Senators Lott, Grassley and Baucus -- to develop a bipartisan bill which we hope will garner sufficient support to help make the long-overdue changes in the estate tax area a reality.

The main thrust of the legislation we're developing will also be the preservation of family farmers and other family-run businesses. These businesses are the major creators of new wealth and jobs in this country. However, they face a number of obstacles to succeeding, ranging from price gouging by tough international competitors to excessive U.S. regulations. That is why it is not surprising to find, for example, that we have lost some 377,000 family farms since 1980, a decline of some 23,500 family farms every year.

Since 1980, we have lost some 9,000 of our family farms in North Dakota. At the same time, we see that only a small fraction of other family-run businesses survive beyond the second generation.

When families have to sell their farms or board up their Main Street businesses, those families lose their very livelihood. Moreover, our communities lose the jobs and services those family businesses provide.

I have been approached on many occasions at town meetings by North Dakotans who say it is virtually impossible for them to pass along their farm or business -- which has been the family's major asset for decades -- to their children because of the exorbitant estate taxes they would pay. They think it is unfair, and I agree.

Unfortunately, our estate tax laws force many family members who inherit a modestly-sized farm. ranch or other family business to sell it, or a large part of it, out of the family in order to pay off estate taxes. This is especially onerous when the inheriting family members have already been participating in the business for years and depend upon it to earn a living.

I think that we must take immediate steps to breathe new economic life and opportunities into our family businesses and the communities in which they operate. It seems to me that a good first step is correcting our estate tax laws so they do not unfairly penalize those working families.

Targeted Capital Gains Tax Relief

Finally, I support targeting capital gains tax relief to farmers and others who sell an asset which they have owned for a long period of time.

I have authored in the past (and will re-introduce this year) a proposal to provide farmers and others with a 100-percent exemption from taxes for up to $250,000 in lifetime capital gains from the sale of assets they have held for many years. I think it makes sense for those who sell a family home or farm or stock to sell the asset without incurring a huge tax liability. it simply is not right to tax them on the inflationary gains in these cases.

Mr. Chairman, again I want to thank you for examining the impact of our tax laws on the agriculture community. Clearly Congress needs to take steps to address the problems existing in our tax system that threaten the future of this nation's family farms. I look forward to working with you and the members of the committee on this matter.