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USDA OFFICIAL TESTIFIES ON CROP-SHARING HUNGER RELIEF ACT.

OCT. 16, 1991

USDA OFFICIAL TESTIFIES ON CROP-SHARING HUNGER RELIEF ACT.

DATED OCT. 16, 1991
DOCUMENT ATTRIBUTES
  • Authors
    Gardner, Bruce L.
  • Institutional Authors
    U.S. Department of Agriculture
  • Index Terms
    agriculture
    charitable deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-8766
  • Tax Analysts Electronic Citation
    91 TNT 214-19
STATEMENT OF BRUCE L. GARDNER ASSISTANT SECRETARY FOR ECONOMICS U.S. DEPARTMENT OF AGRICULTURE BEFORE THE U.S. SENATE COMMITTEE ON FINANCE SUBCOMMITTEE ON ENERGY AND AGRICULTURAL TAXATION

 

=============== FULL TEXT ===============

 

October 16, 1991

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to appear before you to discuss the potential impacts of the "Crop-Sharing Hunger Relief Act" on farmers and farm commodity programs.

World Food Day is certainly an appropriate occasion to focus on helping the world's hungry people. While the humanitarian goals of the legislation are in keeping with the spirit of World Food Day, we see difficulties with the Bill's proposals for achieving these goals. Because of these difficulties, the Administration must oppose this legislation. Before addressing the Bill being considered today, I'd like to outline existing efforts to redistribute surplus agricultural commodities to the hungry.

Existing Hunger Relief Efforts

The American people contribute billions of dollars each year to a wide variety of charitable causes. Internal Revenue Service data for 1989 (the most recent year for which complete data are available) indicate that individual taxpayers contributed over $90 billion to charitable organizations. Of this amount, only a relatively small portion involved direct contributions of agricultural commodities to help feed the hungry, but private voluntary organizations (PVOs) redistribute a considerable amount of surplus commodities to help the disadvantaged. In FY 1990, PVOs registered with U.S. AID received $2.3 billion in private cash and in-kind contributions.

Governmental programs are already in place with the same goals of helping the needy and hungry, reducing surpluses, and improving farm income. These programs operate both domestically and internationally. The Agricultural Trade Development and Assistance Act of 1954 (F.L. 480) is directed to international needs, with an FY 1990 budget of $1.5 billion. F.L. 480, Title II already works directly with the PVOs.

Food assistance is also provided under Section 416(b) of the Agricultural At of 1949. This section authorizes the donation of commodities owned by the Commodity Credit Corporation to needy people overseas. These donations are made through foreign governments, non- profit humanitarian agencies and international organizations.

Section 32 of the Agricultural Act of 1949 is the basis for programs directed both domestically and internationally although presently Section 32 is directed mostly to domestic needs. Food distribution, child nutrition, and the Women, Infants and Children (WIC) programs generated $7.4 billion in food program benefits in FY 1990.

PVOs, such as Worldvision, Catholic Relief Services, Lutheran World Federation, Save the Children Fund, CARE, and Plan International also provide international food assistance. PVOs receive most of their funding support from private donations and they receive food commodities from the government stocks of major food exporting countries, including the United States. The United States currently provides a wide variety of commodities through its food aid programs, including bulk, unprocessed commodities and foods easily used in relief camps with minimum service facilities. The proposed legislation would increase the role of PVOs in redistributing surplus commodities by increasing the tax advantages for contributors.

Increasing Tax Advantages

The keystone of the proposed legislation is the incentive created by increasing the allowable Federal income tax deduction for commodity donations. Under current law, an individual who makes a charitable contribution may claim an itemized deduction on his or her Federal income tax return. In the case of contributions of property, the general rule is that the amount of the deduction is the fair market value of the property at the time of the contribution. This legislation would modify that rule for contributions of "surplus commodities" to a qualifying nonprofit organization that uses the commodity for the purpose of feeding individuals in famine, disaster, or other economically depressed areas. Under the proposal, a taxpayer would be allowed to claim a charitable contribution deduction equal to the parity price or 200 percent of the taxpayer's purchase price, whichever is less. This effectively doubles the tax benefit of surplus commodity donations relative to other charitable contributions until the maximum deduction of $20,000 per year is reached. The attractiveness of the deduction is further enhanced by the exemption from the minimum tax, which applies to many high-income taxpayers.

Under current market conditions, the price of most agricultural commodities is less than 50 percent of parity (table 1). So, the effective limit on the amount of the contribution is the 200 percent of purchase price.

The larger tax benefit resulting from this proposal would provide a substantial incentive for taxpayers to make such contributions. For example, a taxpayer in the 31 percent Federal tax bracket would receive a Federal income tax savings of 62 cents for each dollar of surplus commodity contributed. In many instances, an additional savings of l0 to 20 cents in State income taxes can be expected. As a result, the after-tax cost to many taxpayers would be about one third of the contributed amount.

Implementation Issues

Implementing this legislation involves the mechanics of what commodities would be covered, how the parity pricing provision would be applied, how individual donors would interact with eligible PVOs, how the PVOs would handle and finance their supporting role, and how compliance with the bill's provisions would be monitored and enforced. The responsibilities of the Department of Agriculture involve determining eligible commodities and pricing these commodities tax for deductibility purposes. My remarks address only the determination of eligible commodities and their pricing.

Eligible commodities are defined as a list of "surplus" commodities. The list of surplus commodities could be based on several alternative criteria:

o commodities that the CCC owns in its inventories,

o commodities that have acreage or supply controls,

o commodities with prices below their trend or average price, e.g., below a 5-year moving average of the commodity's past market prices.

The essential concept of a surplus commodity is one whose supply exceeds market demand at some price thought to represent normal or desirable circumstances. Identifying a surplus then focuses on either low prices or governmental intervention to support the price by means of commodity acquisition, supply control, or producer payments. These different ways of identifying surplus commodities conflict with one another to some extent. For example, wheat has an acreage reduction program, but partly because the program has reduced supplies there are not presently surplus U.S. stocks. Indeed, the U.S. wheat market is currently "tight" in the sense that projected carryover stocks for next May are the lowest since the mid-l970s.

The approach that appears to fit best with the proposed Bill's intentions is to define surplus food commodities broadly as those which currently have government-owned stocks, acreage reduction, or deficiency payment programs, but not commodities for which no commodity programs exist. Beyond the problem of determining when a non-program commodity becomes a surplus commodity, there will always be a net budgetary outlay involved with applying this bill to a non- program commodity.

The use of parity prices to determine the deductible value of a commodity introduces complications. The parity price changes each month as the prices of farm inputs change. Thus, a rise in the farm wage rate would change the parity price of every commodity, and hence the amount that could be deducted. Yet the surplus situation, and the market value of the commodity, might be completely unchanged. Thus the use of parity prices does not contribute to, and may even detract from, the Bill's focus on surplus commodities.

An important practical effect of the parity pricing provision is to prevent some commodities from being donated. Those commodities with prices greater than 50 percent of parity would receive a deduction of less than 200 percent of the market price. For example, using the July 1991 data, potatoes have a market price of $8.14 per hundredweight and a parity price of $11.00. If I donate $1,000 worth of potatoes I receive a tax deduction of $1,351. But if I donate $1,000 worth of corn I receive a $2,000 deduction (because the market price is less than 50 percent of the parity price). I would be foolish to donate potatoes, and the same is true for meats, apples and many other fruits and vegetables.

Consequences of Proposed Changes

The key consequences of this legislation are the effects on hunger relief, other charitable giving, U.S. tax revenue, farm program outlays, farm commodity prices, and farm income. Policies already exist in all of these areas. The question arises as to how the proposed program would work in conjunction with them. A general problem is that while the proposed Bill promises benefits on many accounts, it could reduce the effectiveness of already existing programs and activities.

HUNGER RELIEF EFFORTS. The proposal may cause a change in the commodity mix offered by international relief organizations from demand driven requests toward supply driven shipments. Relief organizations may be offered large quantities of commodities that they don't need, or cannot easily handle. It may be more difficult to fit the offered commodities into ongoing efforts to ensure that food aid does not hinder the development of food production capabilities in receiving countries. Moreover, if relief organizations were unable to accept commodities that were offered there would be a problem that some taxpayers would be able to take advantage of a tax benefit while others could be denied the opportunity.

NONFOOD CHARITABLE CONTRIBUTIONS. This legislation implicitly contains a judgment that food aid is socially twice as valuable as other charitable donations, perhaps more than twice since these deductions can reduce even the minimum tax. While the legislation is not limited to international relief efforts, such organizations are likely to be the primary beneficiaries. To the extent that the tax benefit difference encourages taxpayers to shift contributions to eligible PVOs, support for other domestic organizations will decline. The committee should consider the potential adverse impact of such a shift on domestic charitable organizations which are already struggling as a result of reduced support.

FEDERAL TAX RECEIPTS. How much the legislation would reduce Federal tax receipts depends upon a number of factors including the level and nature of the response in charitable giving, and the marginal tax bracket of the donor.

An issue most difficult to assess is the net additional charitable giving generated. We would expect that most donations to food relief organizations under current tax rules would be switched to the double-deduction form. For example, if half the $2.3 billion that PVOs received in FY 1990 were converted to donations under this Bill's provisions, a budgetary cost equal to the average donor's tax rate times $1.15 billion would be incurred even with no increase in donations to the PVOs.

New donations would contribute net increases in giving, but only to the extent that this new giving to PVOs is NOT transferred from charities that do not distribute food. Donations that are transferred from, say, the American Heart Association or other nonfood charities would again simply double the U.S. Treasury cost of existing donations.

Farm Income and Farm Program Outlays

The issues here are best introduced with an example. Suppose this legislation results in donations of $28 million, consisting solely of 10 million bushels of wheat to be used for foreign distribution. The foregone federal tax revenues, assuming the contributors pay a marginal federal tax rate of 31 percent, would be $17.4 million ($28 million x 2 x .31). If the contributors' state tax rate averages 5 percent, state tax revenues would decline by $2.8 million ($28 million x 2 x .05). Total governmental tax receipts would fall by $20.2 million.

Because wheat is a farm program crop, there is a potentially offsetting reduction in federal expenditures on farm programs. An increase in wheat demand of 10 million bushels is expected to raise U.S. wheat prices by $0.015 per bushel. This price increase would lower wheat deficiency payments by $29 million. It would appear that there is a net government deficit reduction of $8.8 million ($29 million -- $20.2 million)

Unfortunately, this calculation represents the most favorable case, not the most likely. There are several factors which would turn this potential deficit reduction into an increase. First, the in-kind donations will not all be made in a farm program crop. Second, donations of other program crops would result in smaller farm program savings than for wheat. These two factors would greatly reduce the farm program savings estimate.

A third and more fundamental problem is that there are no requirements in the legislation to prevent eligible organizations from receiving newly donated wheat and then reduce the purchases of wheat and wheat products that they otherwise would have made. If this occurs, the net increase in wheat donated overseas would be less than the 10 million bushels indicated and the U.S. price increase would be smaller.

Fourth, if there is a net increase in foreign aid, there is nothing in this legislation to prevent a country that receives donated wheat from reducing the purchases of wheat and wheat products it otherwise would have made. Again, this would dilute the net increase in the price and the demand for U.S. wheat.

And fifth, to the extent that any net increase in demand for U.S. wheat does occur, the federal government could reduce the size of the wheat acreage reduction program and return more wheat land to production. The increased production would prevent any price increase or any reduction in wheat program outlays. So, what at first blush appears to be a hopeful way to reduce government budget deficits, in fact more likely increases them.

In summary, while the goals of the Crop-Sharing Hunger Relief Act are most worthy, we have serious reservations about the cost and consequences of the proposal. This concludes my testimony, Mr. Chairman. I will be happy to respond to questions.

                              TABLE 1.

 

  UNITED STATES PARITY PRICES FOR FARM PRODUCTS AND AVERAGE PRICES

 

  RECEIVED AS PERCENT OF PARITY PRICES BASED ON DATA FOR JULY 1991

 

___________________________________________________________________

 

 

                                                            Current

 

                                                            Market

 

                                                            to

 

                                                            Parity

 

                                                            Price

 

Commodity and Unit             Parity Prices                Index

 

___________________________________________________________________

 

 

                                     Dollar                 Percent

 

                                     ______                 _______

 

 

Basic Commodities

 

 

  All Wheat, Bu                       8.07                      31

 

  Rice, Cwt                          22.20                      31

 

  Corn                                5.65                      39

 

  Peanuts, Lb                         .557                      --

 

 

Designated Nonbasic

 

 

  All Milk, Sold to

 

    Plants, Per Cwt                  26.60                      46

 

 

Other Nonbasic

 

 

  Barley, Bu                          4.99                      35

 

  Dry Edible Beans, Cwt              44.00                      43

 

  Oats, Bu                            3.35                      33

 

  Potatoes, Cwt                      11.00                      74

 

  Rye, Bu                             4.33                      --

 

  Sorghum Grain, Cwt                  9.53                      40

 

  Soybeans, Bu                       12.40                      42

 

  Sweetpotatoes, Cwt                 26.60                      --

 

  Apples, Fresh, Lb                   .317                      78

 

  Citrus (equiv on-tree), box

 

    Grapefruit                        7.52                      64

 

    Lemons                            9.18                     231

 

    Limes (FL)                       18.30                       5

 

    Oranges                          11.10                     175

 

    Tangerines                       17.40                      --

 

    Temples (FL)                      8.91                      --

 

  Beef Cattle, Cwt                  128.00                      60

 

  Calves, Cwt                       147.00                      70

 

  Hogs, Cwt                          96.10                      56

 

  Lambs, Cwt                        128.00                      43

 

  Sheep, Cwt                         47.70                      51

 

  Eggs, Doz                           1.25                      57

 

  Turkeys, Live, Lb                   .808                      50

 

___________________________________________________________________

 

 

     -- Indicates that data is not available.

 

 

Source: Agricultural Statistics Board, NASS USDA
DOCUMENT ATTRIBUTES
  • Authors
    Gardner, Bruce L.
  • Institutional Authors
    U.S. Department of Agriculture
  • Index Terms
    agriculture
    charitable deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-8766
  • Tax Analysts Electronic Citation
    91 TNT 214-19
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