The bi-partisan bill encourages farmers to save income during good years to supplement income during bad years. Grassley said the bill uses the tax code to more fully equip farmers to deal with factors outside their control, such as weather and trade barriers.
Grassley said the volatile nature of commodity markets can make it difficult for family farmers to survive some business cycles. "When prices are high, farmers often pay so much of their income in taxes that they're unable to save anything. When prices drop again, farmers can face liquidity problems. Our bill lets farmers manage their income and smooth out the highs and lows of the commodity markets," Grassley said.
Specifically, the Farm and Ranch Risk Management Act of 1998 allows eligible farmers to make contributions to tax-deferred accounts known as FARRM accounts. The contributions would be tax-deductible and limited to 20 percent of a farmer's taxable income for the year. Contributions would be invested in cash or other interest-bearing obligations. The interest would be taxed during the year it is earned. Grassley said funds could stay in the account for up to five years. Upon withdrawal, the money would be taxed as regular income. If the funds were not withdrawn after five years, they would be taxed as income and subject to an additional ten percent penalty.
"Essentially, farmers are given five-year windows to manage their money in a way that is best for their own operations. A farmer could contribute to the account in good years and withdraw from the account when his or her income is low," Grassley said.
During a morning news conference to mark introduction of the bill, Grassley said the bill is a good complement to the freedom to farm program enacted in 1996. "It leaves business decisions in the hands of farmers, not bureaucrats at USDA or members of Congress. The farmer decides whether to defer his income for later years. The farmer decides when to withdraw funds to supplement his operation," Grassley said.
The 1996 farm bill took planting decisions out of the hands of the government and returned them to individual farmers. Farmers now have the ability to plant according to the demands of the market. Grassley said farmers in Iowa tell him they like this change in philosophy and say they prefer to rely on the market for income, instead of the government.
"Today's bill helps the farmer help himself. It's not a new government subsidy for agriculture. And it doesn't create a new bureaucracy purporting to help farmers. The bill simply provides farmers a fighting chance to survive down times and an opportunity to succeed when prices eventually increase," Grassley said.
Grassley said that in addition to weather fluctuations, farmers are challenged by uncertainty in international markets. In Iowa, farmers export 40 percent of all they produce. Grassley said exports fall and farm income declines when European countries impose trade barriers on beef, pork and genetically-modified feed grain, or when Asian governments devalue their currencies.
Last week, Grassley and Sen. Bob Kerrey of Nebraska launched an initiative to revitalize the free trade agenda in Congress. They said their first goal is to ensure that American farmers gain significant access to new markets during negotiations next year of the World Trade Organization (WTO). Grassley and Kerrey discussed their plans with U.S. Trade Representative Charlene Barshefsky during a meeting yesterday afternoon. "The lack of attention to international trade by the administration right now could be devastating for our farmers back home. We just can't let that happen," Grassley said.
In April, Reps. Kenny Hulshof of Missouri and Karen Thurman of Florida introduced a House bill to establish FARRM accounts. Sens. Pat Roberts of Kansas and Kerrey were original co- sponsors of the Grassley/Baucus bill introduced today.
Grassley is a member of the Senate Agriculture Committee and the tax-writing Finance Committee. He is chairman of the Senate subcommittee on international trade.