Can Farmer Savings Accounts Help Save Farming? - Farm Bill 02 Choices - Statistical Data Included

Choices: The Magazine of Food, Farm and Resource Issues, Fall, 2001 by Mark A. Edelman, James Monke, Ron Durst

Despite a largely merited reputation for thrift, farmers in the United States do not generally save for bad times. In contrast, Canada encourages farmer saving by matching their deposits and providing interest rate bonuses. In Australia, a relatively new program allows farmers to defer taxes on savings deposits in good years so the savings can be withdrawn at lower tax rates during poor years. Although Congress has debated farmer savings concepts off and on since 1996, the United States has not yet implemented a specific farmer savings account program. However, a savings program may emerge, either in the 2002 Farm Bill debate or as part of a broader tax package. We describe four possible savings account concepts to show the potential role that farmer savings incentives might play in future U.S. farm policy.

Option 1: Net Income Savings Accounts (NISA)

Canada implemented a Net Income Savings Account program in 1991. Under the program, a farmer who makes a deposit into a NISA account receives a government matching deposit up to three percent of Eligible Net Sales (ENS) -- defined as gross sales of qualifying commodities less purchases of seed, plants, and livestock. The Canadian government then pays a three percent interest rate bonus over local bank rates on all NISA deposits.

The maximum ENS eligible for matching is limited to C$250,000 per year per farming entity, so the maximum match is C$7,500 per year. Farmers can deposit up to 20 percent of ENS per year without a government matching deposit. Each entity is subject to a maximum NISA balance of 1.5 times the 5-year average ENS. Unused deposit allocations can be carried forward for up to five years.

NISA withdrawals can be made under either an "Income Stabilization" trigger when the farmers current year gross margin falls below the average gross margin for the five previous years. (Gross margin is roughly analogous to the IRS's Schedule F Gross Farm Income.) Alternatively, withdrawals can be made under a "Minimum Income" trigger when the farmer's current net income from all sources falls below a threshold level -- C$20,000 per individual or C$35,000 per family.

NISA is a voluntary program, used by slightly more than half of all Canadian farmers. Farmers may leave and rejoin under specific rules, and are required to opt out if they quit farming or retire. NISA does not replace other Canadian farm income programs. Subsidized crop insurance and government funded NISA incentives are farm program mainstays north of the border. While Canada maintains an ongoing supplemental disaster assistance program, it does not provide farm supports analogous to Agricultural Marker Transition Act (AMTA) payments and Commodity Loan Programs.

Option 2: Farm and Ranch Risk Management (FARRM) Accounts

U.S. proposals for Farm and Ranch Risk Management (FARRM) accounts originally appeared during the 1996 Farm Bill debate. Under FARRM, there are no matching deposits, interest rate bonuses, or income triggers for withdrawals. Instead, deferred taxes encourage farmer savings account deposits. Farmers would make FARRM account deposits as an additional deduction from pre-tax income. Deposits would be held in interest-bearing accounts at approved financial institutions. Interest earnings would be distributed to the farmer and taxable in the year earned. Withdrawals from FARRM accounts would be made at the farmer's discretion and taxable in the year withdrawn.

Under the most recent proposal, farmers could deposit up to 20 percent of eligible net farm income annually. While there are no limits on account balances, FARRM deposits could only stay in the account for up to five years, with deposits not withdrawn in 5 years incurring a 10 percent penalty. Withdrawal of FARRM funds would be required if the account holder did not farm for two consecutive years.

Option 3: Individual Risk Management Accounts (IRMAs)

Individual Risk Management Accounts (IRMAs) are voluntary and contain a combination of deferred tax and government matching deposit incentives. Similar to FARRM accounts, IRMA deposits are deductible from pre-tax income. Deposits and interest are taxable only upon withdrawal. A farmer would voluntarily deposit a minimum of two percent of Schedule F gross farm income each year into an IRMA account. The federal government would then make a two percent matching IRMA deposit.

IRMA is viewed as a tool for self-insurance. Therefore, IRMA farmers can expect to receive government subsidies roughly equivalent to those who benefit from subsidized crop insurance. However, IRMA participants are expected to deposit contributions similar to those made by farmers who purchase crop insurance premiums. Farmers receive catastrophic crop insurance (CAT) coverage under IRMA, but any additional crop insurance purchased by an IRMA participant may not be subsidized.

Similar to NISA, farmers can maintain maximum IRMA balances of no more than 150 percent of the their 3-year average Schedule F Gross Farm Income. Farmers may withdraw only during years when their Schedule F Gross Farm Income falls below 80 percent of the average for the previous three years, and the withdrawal can only be used to bring the income up to the 80 percent level.