Welfare Reform Hits Dairy Farmers Hard

WASHINGTON — Thousands of small-time dairy farmers who depend on federal help to make ends meet were inadvertently cut off in last year’s welfare overhaul.

For years, the farmers have been eligible for a tax credit designed to supplement incomes of the working poor. To many struggling families, the credit has meant an extra $1,000 to $3,000 a year.

But the Internal Revenue Service is interpreting a provision in the new welfare law to disqualify dairy producers from the tax credit.

In tightening eligibility for the credit, Congress didn’t account for what would happen to dairy farmers because of the way the government treats money they make from selling off old, unproductive cows.

Lawmakers say they never intended to cut dairy farmers off the tax credit, and they are demanding the IRS change its interpretation of the welfare law. The IRS has so far refused to back down.

Some 57,000 farmers--more than one of every three dairy producers in the country--are affected, according to a letter to the IRS signed by 31 House members. Together those farmers stand to lose $76 million a year.

“Small dairy farmers have already been under much stress and strain given recent low milk prices and high feed costs,” the lawmakers wrote March 7. “This refund, which Congress intended for them, can mean the difference between survival and foreclosure.”

Fifteen senators signed a similar letter to the IRS.

Dairy farmers, who work notoriously long hours while making as little as $10,000 to $20,000 a year, still meet the income limits for the credit. The problem has to do with a cap on investment earnings.

Before this year, the money farmers make from culling their herds each year counted toward the tax credit’s income cap but not the $2,200 limit on investment earnings. Now, because of the new welfare law, the cattle sales also count toward the investment cap.

Under the new eligibility standards, capital gains are considered investment income. The IRS has long considered sales of dairy cattle as a capital gain.

“The law is rather clear,” IRS spokesman Don Roberts said.

In Stearns County, Minn., a farmer who has four children was disqualified from a tax credit of $2,830, according to his tax preparer. The family’s adjusted gross income in 1996 was $13,399, including $6,100 earned from cattle sales.

The family also lost out on a state tax credit of $452 because the Minnesota credit is linked to the federal eligibility standards.

In neighboring Todd County, a family with $13,562 in adjusted gross income lost out on federal and state credits totaling $2,500.

The tax credit “is what puts bread on the table or is used to plant crops for the coming year,” said Phil Harris, an agricultural tax specialist at the University of Wisconsin. “It’s dollars that are really important to them.”

Dairy farmers typically sell 30% of their herds each year. A farmer with 50 to 60 head of cattle may sell 15 to 20 a year. At $400 to $500 a head, that income easily exceeds the cap on investment savings.

Some farmers are claiming the tax credit anyway, but they are risking a fight with the IRS, accountants say.

With the IRS refusing to back down, farm-state lawmakers are talking about pushing legislation to restore the tax credit. They already are plotting how to overturn an IRS ruling last year that stopped farmers from using commodity contracts to even out their income and taxes from year to year.

Under pressure from Congress, the IRS agreed to delay enforcing that decision so lawmakers could rewrite a 1986 law on which the ruling was based.

Sen. Rod Grams (R-Minn.) predicted that there will be broad support to restore the tax credit for dairy farmers.

“All this does is hurt small dairy farmers,” he said. “I don’t think you should try to wring more taxes out of people who are making that kind of money.”