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20–338—PDF 2005

S. HRG. 108–807

SAVING AMERICA’S GREAT PLACES: THE ROLE

OF TAX INCENTIVES IN PRESERVING RURAL

COMMUNITIES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

(SIOUX CITY, IA)

AUGUST 25, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Brownback, Hon. Sam, a U.S. Senator from Kansas ............................................ 5

WITNESSES

Peltier, Jean-Mari, president, National Council of Farmer Cooperatives,

Washington, DC ................................................................................................... 9

Keppy, Glen, director, CHS Board of Directors, Davenport, Iowa ....................... 11

Froelich, Peter K., Ph.D., Assistant for Special Projects, Office of the President, Dickinson State University, Dickinson, North Dakota ........................... 13

Hassebrook, Chuck, executive director, Center for Rural Affairs, Lyons, Nebraska .................................................................................................................... 15

Edberg, Kevin, executive director, Cooperative Development Services, Saint

Paul, Minnesota ................................................................................................... 17

Tiernan, Shane, Ag/Commercial Loan Development Officer, Grundy National

Bank, Grundy Center, Iowa ................................................................................ 20

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Prepared statement .......................................................................................... 37

Brownback, Hon. Sam:

Opening statement ........................................................................................... 5

Prepared statement .......................................................................................... 37

Daschle, Hon. Tom:

Prepared statement .......................................................................................... 39

Dorgan, Hon. Byron L.:

Prepared statement .......................................................................................... 40

Edberg, Kevin:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 42

Froelich, Peter K.:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 52

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 60

Hagel, Hon. Chuck:

Prepared statement .......................................................................................... 61

Hassebrook, Chuck:

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 62

Keppy, Glen:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 64

Peltier, Jean-Mari:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 65

Tiernan, Shane:

Testimony .......................................................................................................... 20

Prepared statement with attachment ............................................................. 71

Page

IV

COMMUNICATIONS

Iowa Finance Authority ........................................................................................... 83

National Association of Home Builders (NAHB) ................................................... 84

National Cooperative Business Association (NCBA) ............................................ 88

Nonprofit Coordinating Committee of New York .................................................. 92

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SAVING AMERICA’S GREAT PLACES: THE

ROLE OF TAX INCENTIVES IN PRESERVING

RURAL COMMUNITIES

WEDNESDAY, AUGUST 25, 2004

U.S. SENATE,

COMMITTEE ON FINANCE,

Sioux, City, IA.

The hearing was convened, pursuant to notice at 10 a.m. in the

Martin Ballroom, Pierce Street, Sioux City, Iowa, Hon. Charles E.

Grassley, chairman of the committee, presiding.

Also present: Senator Sam Brownback, Jean-Mari Peltier, Glen

Keppy, Peter Froelich, Chuck Hassebrook, Kevin Edberg, and

Shane Tiernan.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. I bet we can fill up the front seats if I announce

that all the big givers can sit in the front.

Well, you can sit wherever you want to. And we appreciate all

the interest there is in this most important subject of economic development in rural American and how the tax code can help that.

Before I open the meeting with the testimony and things of that

nature, I want to take a moment to thank the people right here in

Sioux City who help make this hearing happen.

First I want to thank the Downtown Partners, including Roger

Caudron, the executive director; Dee Polak, marketing and promotion manager; Tamie Newberg, the administrative assistant;

president James Johnson and vice president Tim Kromminga.

I would also like to thank the Martin Ballroom and Apartments

for providing the beautiful venue for this hearing. And I think

those of you from outside of Sioux City can say that they have done

a good job of restoration. And in this regard, I particularly want

to thank Lewis Weinberg, the owner, and the ballroom marketing

coordinator.

I also want to thank our court reporter Carolyn Plueger for coming here and doing our reporting.

And finally, I want to thank Lance Ehmcke, a local attorney who

is active in the Siouxland Chamber of Commerce and who I figured

always lived in Washington, DC because that’s where I see him

most often, for being here, but obviously representing Siouxland

Chamber of Commerce very well with his leadership.

I say all this because without the effort that is put forth here by

the local people to help us have this venue and everything conVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 20338.000 SFINANC2 PsN: SFINANC2
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nected with it, we wouldn’t have quite as good of a meeting that

we otherwise would have.

I’m very happy to be here in Sioux City to bring national focus

on the issue that I find disturbing, the continuous loss of young

people and our families from the rural Midwest.

I see many people in this room that I have known for years, and

I met many more of you this morning, and I’m pleased to see such

a collection of talented, dedicated leaders of our communities. We

have people here not only from Iowa, but Nebraska and the Dakotas and even other states as well. All of you come here with a common concern, that being how to stem this tide of rural out-migration.

As chairman of the Senate Finance Committee, we have begun

to examine through the committee the role of tax incentives to preserve rural communities. In some areas, tax laws are unfair to

rural communities or don’t do enough to build economic growth. In

other areas the tax code is outdated and needs to come into the

21st Century. Today we will discuss a series of proposals that address those issues. Specifically, the witnesses that have joined us

today will focus on a bill that I introduced called the Heartland Investment and Rural Employment Act, and that spells out to a very

fancy acronym, HIRE, H-I-R-E. My goal with this legislation is to

update tax laws and create new incentives that makes sense for

rural America.

Rural America has a lot to be proud of, of course. And while the

agricultural economy is showing strength that we have not seen in

years, I think Congress should do its part to help bolster some of

our successes with the proper incentives.

In the last 10 or 20 years, you can think about rural America has

built 12 farmer-owned cooperative ethanol plants right here in

Iowa, and several additional plants are under construction. Nationally we have 74 ethanol plants producing 2.9 billion gallons and 14

plants under construction that would bring our production to 3.4

billion gallons yet this year. To put this in perspective, the U.S.

produced 10 billion bushels of corn in 2003. And nearly 1.1 billion,

a little over 10 percent of the corn, was used to produce 2.9 billion

gallons of ethanol. The ethanol industry has created rural jobs and

economic diversity, not to mention decreased dependence on foreign

oil. It is truly a hometown success.

And last year I had an opportunity to visit with the little town

of Lakota up in north central Iowa and there found not only the

ethanol plant, but a lot of well paying jobs in the community of

probably I would guess under seven or eight hundred, at least. So

we can do a lot for rural America. And we’re in the process of doing

that. So this hearing is about what more we can do.

We have more rural success stories. Iowa ranks fourth in the nation in terms of installed wind generation capacity, generating

enough electricity to power 300,000 homes. Rural America is clearly on the forefront of reducing our Nation’s dependence on foreign

sources of energy. But we need more of these success stories, and

I believe a few changes to a complex tax code could help make

these stories come true.

We had some unfinished business. Today some of the things that

we’ll talk about will sound familiar; that’s because we have been

3

fighting for them for years. They are good ideas that enjoy strong

bipartisan support and were actually approved in 1999 as part of

a bill we called the Taxpayer Relief Act, but was vetoed at that

time by President Clinton, so obviously these things are not law.

The first of these is a proposal that I call FFARRM accounts, an

acronym that comes out Farm, Fishing and Ranch Risk Management Accounts. Some of you might know these as farmer IRAs.

These farmer savings accounts would allow farmers to contribute

up to 20 percent of their income in an account deducted in the

same year. FFARRM accounts would be a very important risk management tool to help farmers put away money and spread out the

high and low gains of income.

The other proposal is from my good friend that is sitting here beside me, a person who came up from Kansas to help us bring not

only attention to his ideas of rural economic development, but to

support the activity of our Senate Finance Committee. I thank him

for coming.

Senator Brownback has taken the lead on fixing this problem. It

is the unfair IRS decisions of self-employment tax on farmers who

participate in the Conservation Reserve Program.

And he also has ideas on bringing people back to counties that

are what we call out-migration counties where they have lost population, to help people establish homesteads and bring people back

home. And we will be talking about that to some extent later on.

And then, of course, there is our ongoing effort to address the

Dividend Allocation Rule, and end the unfair third level of tax on

cooperative dividends. This provision has been included in my

Jumpstart Our Business Strength Act, and this is known as the

JOBS bill in Congress, which will be in conference with the House

soon after we return after Labor Day, so with any luck and a lot

of hard work on the conference, we could have that bill to the

President by October.

In addition, our witnesses today will be discussing the issues of

out-migration and the potential effect of proposals of the Heartland

Investment and Rural Employment Act, the HIRE Act I talked

about.

Now, before introducing our witnesses for today’s hearing, I’m

going to express the fact that Senator Baucus, the ranking Democrat on this committee, couldn’t be with us today because he has

got business in his state of Montana and was unable to join us. So

I will include that statement in the record at this point. And I will

submit that to the shorthand reporter.

[The prepared statement of Senator Baucus appears in the appendix.]

The CHAIRMAN. We have included some of the important provisions from the New Homestead Act, which was originally sponsored—called the New Homestead Act which was originally sponsored by Senator Dorgan of North Dakota and 12 original cosponsors, including Senators Hagel, Grassley, Tom Daschle of South

Dakota, and again my friend Sam Brownback of Kansas.

Senators Dorgan, Daschle and Hagel were unable to join us

today, but their statements are on the table for your review. And

take them home with you and study what these senators have to

say about the important issue of rural economic development.

4

We have included these provisions in both the HIRE Act and the

JOBS Act that I previously referred to, and these awaits conference

with the House.

Under current law, there is no special assistance for businesses

in counties that are losing population. Here again, Senator

Brownback has joined us today to more fully explain the motivation

and tax policy behind the New Homestead Act. Even though Senator Brownback is not a member of the Senate Finance Committee,

he always shows a great deal of leadership for agriculture in rural

areas and speaks out strongly. And I have a close working relationship with him and I welcome him here and he will be speaking to

us in just a minute.

I am going to take advantage of the opportunity now, so I don’t

have to come back to the introduction, and introduce people here

at our right and left who are witnesses for today’s hearing. And we

will hear from them in the order in which I introduce them. And

they will start after Senator Brownback speaks. And then Senator

Brownback and I will have a series of questions to bring out some

things that we feel are important that maybe the witnesses didn’t

have time to testify on or things that maybe they don’t even know

we’re interested in asking about.

But our first witness is Jean-Mari Peltier. And she’s President

and CEO of the National Council of Farmer Cooperatives. Ms.

Peltier has currently joined the National Council of Farm Cooperatives as a new president and brings unique insights into the organization because prior to joining the organization, she served the

Bush Administration as consulate for agricultural policy to the administrator of U.S. EPA.

Then we have a friend of mine, Glen Keppy, who is a director

of the CHS Board of Directors, a fellow Iowan from Davenport.

Glen will be sharing some of his organization’s insight on rural economics.

Then Peter Froelich, Ph.D. Dr. Froelich is Assistant for Special

Projects, Office of the President, Dickinson State University of

North Dakota—Dickinson, North Dakota. And in addition to that,

he has previously testified before my Finance Committee in Washington, DC, when he had just completed the Great Plains Population Symposium project. And we thank him for his ongoing efforts in that area.

And then somebody that is very famous in rural America, particularly before the Congresses rural committees, including finance,

Chuck Hassebrook, who is Executive Director of the Center for

Rural Affairs, Lyons, Nebraska. He will be discussing out-migration issues.

And then lastly, Kevin Edberg, who is Executive Director of Cooperative Development Services in Saint Paul, Minnesota. Mr.

Edberg will review the community homeownership issues based on

a proposal from the President’s budget. And I understand that he

also will be discussing the need of rural seniors for affordable multifamily housing choices and the role that cooperatives play.

And our last witness is Shane Tiernan, an Ag and Commercial

Loan Development Officer with the Grundy National Bank, Grundy

Center, Iowa—Grundy County, Iowa.

5

I look across the road from my farmstead and I look at Grundy

County and a farm that’s just across the road, it will bring

$500,000 an acre more. That’s the reputation of people in Grundy

County.

They do very well.

He will be bringing an interesting analysis of machinery cooperatives and their necessity in light of rural out-migration of young

farmers. And I told him I don’t think we’ve ever received testimony

on that issue, so we will find that very interesting.

Now I have a chance to call on a friend and a coworker in this

area. Senator Brownback, will you start with your testimony.

Senator BROWNBACK. Thank you, Senator Grassley.

The CHAIRMAN. He will stay with us for the entire hearing, or

at least until noon.

OPENING STATEMENT OF HON. SAM BROWNBACK,

A U.S. SENATOR FROM KANSAS

Senator BROWNBACK. Thanks, Senator Grassley, for holding the

hearing and for convening this group of people. I’m looking forward

to the testimony and hearing what folks have to say and some

things we ought to do to address this.

My background is Secretary of Agriculture for Kansas, and a

member of Congress, then the Senate, and so I have been working

on these issues of rural development for some period of time. I am

very frustrated that we continue to see the out-migration taking

place. And what is it that we can do? I’ve got a proposal that I’m

going to talk about today that I think is one that really could make

a big difference in this.

I want to say at the outset, before I go on to testimony, though,

is thank you, Chairman. As Chairman of the Finance Committee,

you have done a great deal for rural America, most recently to the

rural Medicare provisions for hospital reimbursement and Medicare reimbursement that were in the pharmaceutical drug bill last

year. Senator Grassley really got through a significant increase in

reimbursement for our rural hospitals, which is a key foundational

unit for rural living. If you don’t have good healthcare, a lot of people just aren’t willing to live there. And he really worked and got

a lot of things done. So I tell him often on the Senate floor, ‘‘If it’s

good for Iowa, it’s good for Kansas.’’ Policies that help here in Iowa

help in Kansas a great deal and I really do appreciate that.

The CHAIRMAN. That’s with the exception of the Jay Hawks

versus the Cyclones.

Senator BROWNBACK. Well, we’re in football season now, so it’s

Wildcats versus Cyclones. We will take you—when we go to basketball, we’ll go to the Jay Hawks.

But it is great to be here.

Over 140 years ago, President Abraham Lincoln signed into law

the Homestead Act, the first Homestead Act. It was a great bargain

that the President and U.S. Government made with the American

population. They said back in 1862, it is basically a one-time bargain. They said, ‘‘All right. If you will go out and settle this area

and stay on it for 5 years, we will give you 160 acres.’’ It was the

original Homestead Act. It was the promise of free land, and a

6

promise of opportunity, and it was massively successful in

populating the Great Plains.

Today, America’s Heartland is facing massive depopulation.

If I could get you to put up that chart of the overall number of

states facing out-migration, and then I’m going to show you what

is happening particularly in my state, which mirrors what is occurring in Iowa.

You see basically since the large-scale magnification of agriculture, the consolidation of agribusinesses, this massive depopulation of the center of the country, the hollowing out of America.

From Texas north, winging out, you see in the major—a number

of states losing a large scale amount of population. The Dakotas is

leading. North Dakota, you have got 89 percent of the counties suffering rural out-migration.

We define out-migration of the bill as the loss of 10 percent of

the population or more over the past 20 years. A number of counties would have experienced substantially more than that.

You can see most of the leading states in that category are right

in the center of the country. North Dakota, South Dakota, Nebraska, Iowa, Montana, and Kansas. Alaska is a little out of place

there. Wyoming. West Virginia, a little out of place. Minnesota,

Texas, Oklahoma, Illinois. These are your major states losing to

out-migration of population that’s taking place. And it has been

strong and it has been continuous.

I want to show you next, if I could, my chart of Kansas and what

is happening in our state. We have basically half of the counties

in Kansas that have been experiencing significant rural out-migration. There are no more rural parts of our state. In the western,

particularly northwest, north central parts of Kansas, we have

some communities there where they have lost a fourth of their

school-age population over the last 5 years. So not only is the outmigration happening, and it is fallen down to the school-age population, is falling precipitously in a number of these counties. And

the age of the population of the counties is growing dramatically,

which is a feature happening much in rural—this middle part of

the country that is occurring today.

We’re losing much of our small-town lifestyles. And I fear if we

don’t act now, you are going to get past the point of no return, and

we are going to get up to a point where you lose your critical mass

around which you can rebuild and it is just not going to be there.

And we really are at one of those points in time where we need to

act.

We saw a similar thing happen in the ’70’s in the urban cores

of America. We’re seeing huge out-migrations to suburbia from the

urban cores. From downtown New York City. We saw it in Washington, DC. We saw it in Los Angeles. But the country didn’t just

sit back and say, okay, well, that’s just the old; this is the new;

we’re going to let it take place. They stepped in with a series of

tax policies to encourage redevelopment in the urban cores in the

urban areas of our country. And we put in place a series of incentives that have by and large—not all together, but by and large

have worked. And people have moved back into the urban areas.

I chaired the BG Subcommittee when I first went into the Senate

and we had then and put together a plan of economic incentives

7

to try to get people to move back into Washington, DC. And by and

large, they worked, and people have moved back in. But it has been

a series of pulling incentives—not pushing, but pulling incentives

that you say if you will live in this area, we will provide this set

of incentives.

What I’m proposing—what we are proposing in this bipartisan

package that Senator Dorgan and Senator Hagel first led with, and

now a number of us have pulled us around, is a series of economic

incentives we call the New Homestead Act, to try to pull people

back to these rural areas, and saying to them if you will do this,

if you will live here for a period of 5 years, here’s a set of incentives

that are available to you. And we’re finding a broad interest and

acceptance of it because people want to live in these areas, but they

can’t in many cases now because the economic incentives and the

economic wherewithal is just not there. They need an incentive.

They need something to be able to make it a little more of an even

play between living in northwest Kansas versus in Wichita or Kansas City. They need the incentives.

So what’s in the New Homestead Act? To provide a number of

new and updated homestead opportunities for individuals to live,

work, and prosper in these high out-migration counties.

We define an out-migration county as a rural county that has experienced 10 percent or more population loss for the last 20 years.

So offer new incentives for businesses to locate, grow, and profit

in high out-migration counties; and to improve access to capital for

business development.

Specific provisions. Loan repayments: Forgive up to 50 percent of

college loans for recent graduates who move to these communities

up to a maximum of $15,000. Home tax credits: Provide a $5,000 tax credit for all home purchases in these areas.

I might say as a side bar, when we put that in place in Washington, DC, you saw a big influx of first-time home buyers to Washington, DC with this $5,000 tax credit for home purchases.

Protecting home values: Allowing losses in home values from a

principal residence to be deducted from Federal income taxes.

Individual homestead accounts: These accounts help build savings and increase access to credit for residents in high out-migration counties. Individuals could contribute a maximum of $2,500

per year, for up to 5 years, as well as receive a government match

of 25 to 100 percent.

Included in this Bill are also incentives for businesses through

Rural Investment Tax Credit. This targets investments in high outmigration counties.

States—actually this provision, Mr. Chairman, and I’m very appreciative of you, you have included in your FSC/ETI Tax Bill that

has passed the Senate, this provision that overall has passed the

Senate 92 to 5. And this provision is actually already in the FSC/

ETI Bill that is in front of the Senate—in front of the Congress

now. And the Chairman has been the one that has fought to do

this.

And I might note that in my recollection, this is the first time

we have any tax incentives that have passed either body that have

been targeted towards out-migration in rural counties. I don’t know

8

that we’ve ever targeted those before, so I’m excited if we can get

the front end of these in and establish the precedent for doing this.

In this particular provision that has passed the Senate, states

would receive $185,000 of tax credits for high out-migration counties. The states then allocate these credits to businesses that move

to or expand in a high out-migration county.

The other provision that passed the Senate is Micro-enterprise

Tax Credits. And these tax credits are for small businesses, five or

fewer employees. And states may choose to allocate up to 10 percent of their rural investment tax credit allocation to qualified

start-ups or expanded small businesses.

Small business is the key engine for economic growth for the

country, but certainly for rural areas of our Nation.

Mr. Chairman, the final piece of this is a Venture Capital Fund

that we seek to have 3 billion dollars put in a Venture Capital

Fund to invest in high out-migration counties that we hope would

be matched at state and local levels because Venture Capital

Funds are something that is pretty rare to find targeted or existing

in rural areas.

It is critical that we have a healthy and growing rural economy.

Mr. Chairman, I worked for years on the issue of rural development. And we’ve generally in the past tried to target the creation

of programs of: Let’s create a specialist here, let’s try to get this

person to encourage that, do this, but we have not—it has mostly

been push programs. Let’s try to push people to rural areas.

What’s different about this, and it is modeled after the first

Homestead Act, is it is a pull program. You say, ‘‘Okay, here’s the

incentive. If you’ve got heart enough to do it, come and do it.’’

And that’s what we said in the first Homestead Act. I’m thankful

that we didn’t interview people in Washington to determine whether or not they were good enough to qualify for the 160 acres. We

just said, ‘‘If you’ve got guts enough to do it, go do it.’’ And it was

a wildly successful program.

This one is a pull factor as well. These incentives are there. We

don’t care who you are. If you will go and live for 5 years, they’re

there.

And I think this is around what we can start to rebuild the

hollowing out of rural America, particularly in the high plains in

the center of the country. I think it is critically important we do

it. You’ve started. And I want to urge that we pass the overall provisions of this Bill forward.

Thanks for allowing me to participate.

The CHAIRMAN. Well, and I thank you. And I think all of you in

the audience can see the passion and the knowledge that Mr. Senator Brownback brings to this issue. And attention to rural America is something that is not easy to do in the Congress of the

United States. It might be easy to do in the United States Senate

because there are two senators for every state, but in the House

of Representatives, it is very, very difficult, as I am sure each of

the people testifying will testify to.

Ms. Peltier.

9

STATEMENT OF JEAN-MARI PELTIER, PRESIDENT, NATIONAL

COUNCIL OF FARMER COOPERATIVES, WASHINGTON, DC

Ms. PELTIER. Thank you, Mr. Chairman, Senator Grassley, Senator Brownback. It is my pleasure to be here to appear before you

today to—and I would like to commend you for holding this very

important meeting to talk about economic growth and opportunity

in rural America.

I was a little nervous, Senator Grassley, with my introduction

when you point out that I work for the Environmental Protection

Agency. I know that is not always a popular thing in talking with

the farm community, but I would like to point out that in my prior

life for 10 years, I represented the pear industry and a bargaining

cooperative and sold to two other processing cooperatives. So I

come to you now as the president and CEO of the National Council

of Farmer Cooperatives, which is headquartered in Washington,

DC. Farmer cooperatives, their farmer owners, employees and their

families have a significant issue in the subject of today’s hearing

because rural America is where our cooperatives call home.

NCFC is a national trade association and it represents America’s

farmer-owned businesses. Our members represent nearly 30—excuse me, nearly 50 regional and national cooperatives businesses

which market, supply, and provide credit to cooperatives, and in

turn comprises more than 3,000 local cooperatives. In turn, those

local cooperatives represent the majority of our Nation’s 2 million

farm families.

Here in Iowa, there are over 160 cooperatives, making Iowa the

7th largest home to cooperative business entities. In addition, the

National Council of Farmer Cooperatives membership includes regional and state councils, including the Iowa Institute of Cooperatives.

These farmer businesses handle, process, and market virtually

every type of commodity produced in the United States. They manufacture and sell farm supplies; and provide credit-related services—financial services on behalf of their own members.

Being farmer owned and controlled, these earnings from these

activities are returned to farmer members on a patronage basis.

This not only helps their overall income from the marketplace, but

it also promotes additional economic activity in their rural communities.

Farmer cooperatives play another important role when it comes

to our rural communities by providing over 200,000 full-time and

part-time employees with a combined payroll of over $8 million—

$8 billion. These include an estimated 22,000 jobs here in the state

of Iowa.

Clearly, maintaining and strengthening the ability of farmers

who join together in cooperative self-help efforts is critically important to their economic well-being as well as that of rural America.

Rural America faces a number of challenges as a result of a combination of factors, including changing demographics, the advent of

new technology, and globalization.

Earlier this morning, Senator Brownback pointed out over the

last 20 years, rural counties have experienced out-migration of over

10 percent. Such losses have had a ripple effect on many communities in terms of their available work force and tax base, as well

10

as having an impact, as he pointed out, on schools and the availability of various services.

Many of these counties continue to be a home to a significant

number of farmer cooperatives and their farmer owners, their employees, and their families. This has strategic importance. According to the USDA, job growth in agricultural areas is now more likely to come from rural industries related to farming rather than

farming itself. Thus, farmer cooperatives and other agribusinesses

involving agricultural inputs, processing and marketing of products, as well as the wholesale and retail trade of agricultural products, a significant presence is felt by cooperatives in rural communities.

Farmer cooperatives and their members have a strong commitment and vested interest in rural communities.

Addressing these challenges that are facing rural America, however, are going to take a strong commitment on the part of those—

not only those who call it home, but also a combination of public

policies and programs, including tax incentives and other initiatives.

And for this, we commend you, Senator Brownback—Senator—

excuse me, I am stepping on my tongue. I am a little nervous—

Senator Grassley, for your creation of a Heartland Investment and

Rural Employment Act.

Title I of this important legislation contains a number of provisions that are really important to farmer cooperatives. And I would

like to highlight those. First and foremost for the National Council

of Farmer Cooperatives, is the elimination of the triple tax on cooperative—on corporate dividends paid on capital stock. Such a provision has been top priority—is one of the top priorities of farmer cooperatives as they gain access to equity capital.

Unfortunately in this case, capital stock are subject to a tax at

60 percent higher than that that is paid by their counterparts in

corporate America. Eliminating this unfair tax penalty would better enable farmer cooperatives to raise the equity capital that they

desperately need to modernize and expand, and it would help our

farmer cooperatives to further expand their value-added business

opportunities.

Additional provisions that we’re very much interested in include

the clarification of ‘‘cooperative marketing’’ to include value-added

animal processing such as the conversion of corn into feed for

chickens that lay eggs and then are marketed by a cooperative on

behalf of its farmer owners.

Unfortunately, the IRS has held that since this involves a biological process rather than a mechanical process, it doesn’t qualify.

This provision addresses that issue.

Further—and this gets in an area of tax law with which I’m not

terribly familiar, but Extension of Declaratory Judgment Procedures to Section 521 cooperatives on the same basis as similar

types of entities would allow a cooperative whose application for

Section 521 status is rejected to be able to seek judicial review of

the denial first without creating a tax controversy.

Finally, and very importantly, we support the establishment of

a general business credit that would allow cooperatives to pass

through certain tax credits to their farmer members. This ability

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to pass through these credits will give farmers and their cooperatives the opportunity to take advantage of other embedded tax incentives available to other businesses. I am going to talk about that

further when we talk about some of the energy provisions and

other environmental incentives that you have been a proponent of,

Senator Grassley.

Many of these provisions are also included in several other bills

that you mentioned that are critically important to the National

Council of Farmers Cooperatives with the recent action taken in

the session and the remainder of this session, including the JOBS

bill, the FSI/ETI bill, as well as in the energy bill.

Finally, your HIRE Act include the provision that would create

a special commission to help identify and recommend additional

tax changes to encourage and promote cooperatives self-help efforts

by farmers. We would welcome the opportunity to work closely with

you on development of this commission and work with the commission.

Finally, I would like to just mention two additional issues that

are important in addition to passage of FSC/ETI, in addition to

passage of energy legislation, we would like to just highlight the

importance of maintenance of the basic farm support programs.

In addition to that, we would like to consider the creation of a

cooperative conservation initiative, which would allow farmerowned cooperatives to seek to get better access to that expanded

pool of funds that are available under the conservation title of the

farm bill to allow farm cooperatives to help in the distribution of

those benefits and help rural America meet new environmental incentives.

Thank you very much, Senator Grassley. And I will be glad to

take any questions that you may have.

The CHAIRMAN. Thank you, Ms. Peltier.

Now, Mr. Keppy.

STATEMENT OF GLEN KEPPY, FARMER AND DIRECTOR,

CHS BOARD OF DIRECTORS, DAVENPORT, IOWA

Mr. KEPPY. Good morning, Senator Grassley and Senator

Brownback. My name is Glen Keppy. I am a farmer from Davenport, Iowa. And I serve on the CHS Board of Directors.

CHS is a regional agricultural cooperative with over 1,100 local

cooperatives representing nearly 350,000 producers centered in 28

states, which include Iowa, Montana, and Kansas. In fact, CHS

continues to be the second largest employer in the state of Montana. Our company is a result of a merger of the cooperatives

CENEX and Harvest States; thus the name CHS.

CHS appreciates being able to speak to several issues concerning

the focus of this hearing today upon rural America. For 15 years,

CHS directors and management have been coming to Washington,

DC, urging help for rural America, especially for agriculture. We

appreciate your efforts.

CHS has worked hard in supporting many of these items in bills

produced by this Senate Finance Committee and applaud the committee, especially its leadership, in finding every means it can to

advance hope to rural America.

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I will highlight a few tax bills produced in 2004. In the highway

bill, you have offered tax help for ethanol and biodiesel. This will

help many farmers by providing another outlet for their crops. It

will also help the environment by providing cleaner fuels for motor

vehicles.

In the energy bill, you have offered several items to include tax

credits for small petroleum refineries that dominate rural America

as they try to meet the costly EPA diesel desulfurization requirements by the year 2006. These tax credits are critical to the last

three remaining farmer-owned refineries in America, one of which

is in Montana, Kansas, and Indiana.

In the corporate tax bill, you have offered help to ag exporters

of American grain and granted farmers the right to economic tax

assistance by classifying their cooperatives as manufacturers. Both

of these measures will help, as the U.S. transitions away from export supports found illegal by the World Trade Organization and

under which the United States is now being penalized, with tariffs

increasing each month to over $4 billion.

And this month, you introduced a bill for Heartland Investment

and Rural Employment, called HIRE, that continues your efforts to

help rural America. This is the topic for today.

Having supported many of the sections of HIRE legislation in

previous bills, CHS knows firsthand that they are good provisions.

The first part of the HIRE bill, Title I, has items we know will help

cooperatives and producers. For example, you have been trying to

eliminate the unfair third tax on co-ops that issue stock. Your proposed provision that allow co-ops to issue stock without reducing

patronage dividends, which is known as the Dividend Allocation

Rule, would certainly help cooperatives like CHS.

CHS looks at how elimination of the Dividend Allocation Rule

would specifically help us in our CHS preferred stock offering nearly 2 years ago. We determined that elimination of the Dividend Allocation Rule would help us keep more patronage for our memberowners.

More importantly if the Dividend Allocation Rule is no longer in

place, we believe more cooperatives would issue stock, thereby providing cash-strapped farmers and ranchers more liquidity and financial strength. There is a lot of co-op interest in this issue. In

fact, our CFO and CEO have been giving briefings to other co-ops

on the stock offering mechanism and the Dividend Allocation Rule’s

impact.

The second part of this HIRE legislation we would like—that I

would like to comment on is Title III. Title III has another good

group of provisions. We want to thank Senator Brownback for his

work on these issues and on the New Homestead Act, along with

Senators Dorgan of North Dakota and Senator Hagel of Nebraska.

We see the two provisions called ‘‘Rural Investment Tax Credits’’

and ‘‘Qualified Rural Small Business Investment Credits’’ as very

useful for rural America.

Rural gas station with convenience stores and stores for crop inputs like fertilizers and crop protection items might be good candidates for these rural credits. Why? Let’s take gas stations as an

example.

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The trend in the number of retail stores selling motor fuel in the

United States has been steadily downward. Since 1994, there has

been a loss of 35,532 stores, for a decline of 17.5 nationwide.

Since 1994, retail stores selling motor fuel in ten of CHS’s core

states, which include Iowa and Kansas, have declined by nearly

3,500 stores or 12.6 decline.

The three hardest hit states for CHS are Wyoming with a decline

of 42; Kansas 21; and Montana declining by 20.9. We see that this

is a serious factor in contributing to the shrinkage of rural communities.

CHS has been working hard on reversing this. It is our business

program that gives co-ops the business tools to build local gas stations and convenience stores, but some are reluctant to make the

financial commitment. This tax credit could help.

We are a mobile society, and as gas stations close in a given

area, people move.

Our tax people have looked at the Rural Investment Tax Credit

and would suggest several changes to the committee. First, reduce

the number of players in the oversight of the program; and, second,

set up a simple administrative process; and, third, insure the program has restraints and constraints so it does not become slanted

or a who-you-know process.

Our tax people will be very happy to work with your staff on

these suggestions. But all-in-all, this is a great provision.

In summary, we would commend the efforts of this committee

and its leaders in pushing for tax relief for agriculture and rural

America. The committee continues to do its job well. The problem

is Congress.

First, Congress cannot seem to find the means to pass the energy

bill or the corporate tax bill; both, which I have mentioned earlier,

have some great tax help for agriculture and rural America. We

need just two senators to change their filibustering vote on the energy bill, H.R. 6, and that, with its helpful ag and rural tax provisions, would become law.

Second, Congress needs to pass the corporate tax bill. It would

be an embarrassment if the corporate tax bill with the tax provisions did not pass Congress this year; otherwise the WTO continues to levy more and more tariffs on our goods.

And lastly, this legislation called ‘‘HIRE’’ is another good bill that

warrants passage. Once improved, CHS would actively urge members of Congress to give the HIRE bill their full support.

Thank you for this opportunity and thank you for your continued

efforts to help rural America. I’m looking forward to answering

questions later.

The CHAIRMAN. Thank you, Glen.

And now we go to Dr. Froelich.

STATEMENT OF PETER K. FROELICH, Ph.D., ASSISTANT FOR

SPECIAL PROJECTS, OFFICE OF THE PRESIDENT, DICKINSON STATE UNIVERSITY, DICKINSON, NORTH DAKOTA

Dr. FROELICH. Mr. Chairman, Senator Brownback, I would like

to thank you for the honor of speaking here today. My name is

Peter Froelich and I am from Southwestern North Dakota. I am an

assistant to the President at Dickinson State University. And I was

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coordinator of the Great Plains Population Symposium Project,

which was sponsored by Congress to study the demographic trends

in the Great Plains.

Out-migration is creating a crisis in many parts of rural America, especially in the Great Plains. The challenges facing Great

Plains communities include extensive out-migration of young

adults away from rural places, the aging of the population, the erosion of local agricultural economies, the concentration of a few people into a few of the region’s urban areas.

During the ‘90’s, 38 percent of Great Plains counties lost population. In the year 2000, over half of the 1,000 non-counties of the

Great Plains had smaller populations than they did in the year

1950. In total, Great Plains counties have lost over a half million

people during the last 50 years. That’s the net with natural increase included.

The dynamics underlying these changes are complex. Out-migration is highest among young adults. The loss of young adults computes to fewer births. The loss of young residents and fewer births

exacerbates the aging of the population. Aging and lower birth

rates combine to lead to natural population decrease which robs

communities of their biological vitality and their ability to come

back from out-migration shocks.

The widespread decline of rural communities is also masked with

a large extent within the region as a whole, because if you look at

state or regional statistics by these standards, a relatively rapid

growth in about 14 percent of the Great Plains counties which are

metropolitan. During the last half century, those metropolitan

counties actually grew by about 182 percent.

The decline of rural communities is often attributed to the consolidation of agriculture that has been driven by the advance of agricultural technology and the need for economies of scale.

In North Dakota, the number of farms has fallen from about

86,000 in 1940 to fewer than 30,000 today.

The change in the number of young people under the age of 18

who live on farms in North Dakota is even more alarming. From

1970 until 1997, the number of farm youth fell by 82 percent; from

63,557 to 11,662.

The changes in agriculture are undeniable. The decline of rural

communities should probably be attributable to a broader failure to

develop economic alternatives, in addition to production of agriculture, rather than to changes in agriculture alone.

Agriculture will always be important for rural America. By itself,

it simply does not provide an adequate base for a thriving rural society.

Revitalizing rural communities will not be an easy undertaking,

but the provisions for tax credits that are included in the New

Homestead Act, and also in the JOBS Act and the HIRE Act, are

a solid step in the right direction.

The rural investment tax credits and the micro-enterprise tax

credits that are included in all three bills will be powerful incentives for entrepreneurs who are needed to rebuild, diversify, and

expand rural economies.

The provisions for these tax credits in all three bills are very

similar, but given the current resource constraints, probably the

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HIRE Act is the one that I would prefer because it includes a higher limit for the micro-enterprise tax credits. I think in the JOBS

Act, it is 9 percent, and in the HIRE Act, it was 20 percent, the

amount—the total growth investment credits that could be allocated to micro-enterprise. I think that’s important because that

higher limit for the micro-enterprise tax credits would give states

more flexibility in promoting or supporting a bigger diversity of entrepreneurs in rural places.

Ultimately it is my hope that all of the provisions of S. 602, the

New Homestead Act, will be enacted.

The forgiveness of college loans, individual homestead accounts,

support for homeownership, and access to venture capital will be

investments in the creative capacity of rural Americans and will

give young people direct incentives to build their lives in rural

America.

And with that, I would like to thank you again for holding this

hearing, and for your efforts in rural America, and for giving me

the opportunity to speak here.

The CHAIRMAN. I want to note that Dr. Froelich has a much

longer statement that I assume you want printed in the record,

don’t you?

Dr. FROELICH. Yes.

The CHAIRMAN. And, Amy, if you could add the longer statement

than what you gave, we will print that into the record so that everybody will have access to all the information that we do.

[The complete prepared statement of Dr. Froelich appears in the

appendix.]

Chuck.

STATEMENT OF MR. CHUCK HASSEBROOK, EXECUTIVE DIRECTOR OF THE CENTER FOR RURAL AFFAIRS, LYONS, NEBRASKA

Mr. HASSEBROOK. Thanks, Senator Grassley. Thanks for having

me. And thanks for taking the leadership that you have taken on

so many issues that are important to family farming in rural communities; and Senator Brownback on the leadership of the New

Homestead Act.

We strongly support the New Homestead Act. It makes a statement. I think it makes a statement that rural communities matter.

And in my judgment, communities really do matter. Communities

matter in part because strong communities I think bring out the

best in people. We believe that strong communities restrain our

selfish impulses and I think it elevates our instinct to help others.

And it’s time for public policy to begin to recognize that.

We are especially supportive of the New Homestead Act provisions aimed at stimulating small business development. Rural

Small Business Investment Credit provides a 30 percent credit to

establish or grow owner operated small businesses with five or

fewer employees.

Senator Grassley, we appreciate your leadership in getting that

JOBS tax code. We urge you to work for its adoption in the Congress. However, I would like to ask you to make one refinement as

it goes to the Conference Committee.

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The Senate JOBS provision would provide Rural Investment Tax Credits of $185,000 per eligible county, but no more than 10 percent of that amount could be allocated to the Rural Small Business

Credit. The other 90 percent would have to go for buildings.

And we urge you to remove that 10 percent cap on small business credits and simply allow communities the flexibility to determine how best to use their credits and decide what development

path makes the most sense for them.

Based on our research, I have to say that for many communities,

particularly those that have generally not been able to lure the

large employers from outside and create jobs, small business development and small ownership really is the most promising strategy.

In the most rural counties of our region, in Iowa, Kansas, and

in southern Nebraska and the Dakotas, as a group, nonfarm selfemployment, people creating their own job by starting a small business, accounts for nearly 60 percent of total job growth and 80 percent of the net job growth in these rural agricultural counties. And

there are advantages to that kind of development. It keeps profits

in the community. It creates opportunities for people that own assets, build assets, and to become part of the middle class by starting a successful business and it puts the future of the community

in the hands of community members. And I think that is particularly important in this day and age.

The Senate was wise to include the Rural Investment Tax Credit

in its JOBS bill, but could be improved by removing the 10 percent

cap on its use for small business development, and allowing rural

development investments to go to where the return is greatest.

I would also like to comment on the Heartland Investment and

Rural Employment Act, the HIRE Act.

HIRE proposes removing First Time Farmer Bonds from the

state-by-state volume caps on private activity bonds. We support

that provision. It is going to make more affordable credit available

to beginning farmers. And that’s important to our communities.

And we would suggest one additional provision with respect to

First Time Farmer Bonds.

Current law prohibits Federal guarantees of beginning farm

loans based on First Time Farmer Bonds, and we propose changing

that, allowing USDA to use its existing loan guarantee program to

guarantee loans made to beginning farmers through state programs that are based on these First Time Farmer Bonds.

USDA has had trouble meeting its targets for guaranteeing loans

to beginning farmers, of providing 25 percent of their loan guarantees towards beginning farmers. They have had trouble getting

that. And this change would help overcome that problem and it

would open a great deal more affordable credit to beginning farmers. I think most exciting is that the incentive that this could create, an incentive to retiring farmers to sell land on contract to beginning farmers.

USDA is experimenting with a new pilot program under the

terms of the last farm bill that would allow it to guarantee or to

use its guarantee program on land contracts. In other words, a retiring farmer would sell land on contract to a beginning farmer.

USDA now can, on a pilot basis, guarantee that that contract sale

would be repaid.

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And if you would—if you would add that, together with the provision that would allow those guarantees to be applied to these First

Time Farmer Bonds, you could actually create a situation where if

a retiring farmer would sell land on contract to a beginner, that retiring farmer could be assured of getting repaid and also get a tax

exemption on all the interest paid on that land contract. In other

words, all interest on that land contract would be tax-free. And

that would create a powerful incentive to sell to beginning farmers.

Finally, I want to balance my comments with a caution regarding

the extension of favorable tax treatment to production agriculture.

Prior to the Tax Reform Act of 1986, agriculture was a significantly

tax-favored industry. The experience was not good. Tax shelters induced overinvestment, and that led to tax shelters and using overproduction, and that led to lower prices for farm commodities.

And I think the most troubling thing about that was that tax

shelters changed the rules of competition in agriculture to favor

large farms and investors with high-bracket incomes and capital to

invest over medium-sized owner-operated farms and ranches.

Farmers and ranchers recognized the problem in the 1980’s and

they asked Congress to help. Senator Grassley, I think you more

than anyone else played the lead role back in the 1980’s in fixing

the problem.

It’s a lesson worth remembering, though. And I just want to say

that we need to exercise caution so as to avoid repeating the mistake. For example, tax incentives in the New Homestead Act for

buildings and venture capital should either exclude production agriculture or be carefully targeted to small- and medium-size owneroperated farms.

And, likewise, that the tax exemption in HIRE for livestock production cooperatives should be carefully scrutinized to ensure that

it does not subsidize large industrial livestock operations and give

them an unfair advantage over family livestock farms that have to

pay taxes.

Thanks for the opportunity to testify and 1 submit written testimony. I would add that there is an error in my written testimony

when I say that the Rural Investment Tax Credit is 165,000 per

eligible county. In fact, it is 185,000. So anybody who picks up a

written copy, I’ll alert you to that error.

Thank you.

The CHAIRMAN. And I note that you asked us to take a look at

that provision in the bill with a 10 percent cap on it and we’ll do

that.

Mr. HASSEBROOK. Thank you.

The CHAIRMAN. Now you, Mr. Edberg.

STATEMENT OF MR. KEVIN EDBERG, EXECUTIVE DIRECTOR,

COOPERATIVE DEVELOPMENT SERVICES ON BEHALF OF

THE NATIONAL COOPERATIVE BUSINESS ASSOCIATION,

SAINT PAUL, MINNESOTA

Mr. EDBERG. Thank you, Mr. Chairman.

Chairman and Senator Brownback, I am pleased to be here today

representing the National Cooperative Business Association, the

only national membership association that represents co-ops across

all economic sectors.

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I am the executive director of a nonprofit organization called Cooperative Development Services. I am also, in my spare time, the

managing partner of a farming operation in Minnesota.

CDS is a longtime NCBA member. We help farmers and others

in Iowa, Minnesota, and Wisconsin form cooperatives that create

jobs, increase income, and expand economic opportunity. We have

several new generation agricultural projects here we are working

on in Iowa.

Cooperatives have long been an underused resource and tool for

rural development; and for that reason, NCBA applauds the many

provisions of the Heartland Investment and Rural Employment Act

that encourage cooperative development through a combination of

tax code modernization and new tax incentives.

The bill represents a major improvement in Federal tax policy.

NCBA strongly supports the provisions that provide greater tax equity profits. Eliminating the adverse impact of the committed allocation rule will help cooperatives raise capital by issuing nonvoting

stock. Repeal of this rule is long overdue and we appreciate, Senator, your support to enact this provision.

NCBA also supports the provision that allow cooperatives to pass

through tax credits to their members, and those that clarify Section

521 of the tax code, giving co-ops the ability to modernize and expand their services to members.

We welcome your interest in creating a commission to evaluate

Subchapter T of the tax code, including capital and other barriers

the co-ops face, but we recognize that driving this provision are

state-level statutes that provide ag co-ops with greater flexibility in

accessing outside capital, particular need for value-added co-ops

that require capital for processing facilities.

Though many support this new approach, these hybrid statutes

fundamentally alter the definition of cooperatives by redefining

who their members are, and this process could potentially delude

member control.

Any changes in Subchapter T, relating to these and other issues,

affect every cooperative that file under its provisions, not just ag

co-ops. And as a result, we ask that any Subchapter T commission

include experts from a range of industries in which co-ops operate.

Turning to another section of the Bill, we thank you, Mr. Chairman, for proposing a new Community Homeownership Credit program that will for the first time provide parity for developers of affordable homes.

Homeownership is a primary way that average citizens build assets and wealth and they are the key to sustain both rural and economic development and yet there has been no Federal program to

promote the development of affordable homes. Tax credits have

been available only for the development of rental housing.

Housing co-ops offer great promise to rural America, particularly

for elderly populations. Like any form of homeownership in rural

communities where incomes tend to be lower than the national average, affordability is an issue. What developers must charge to

cover construction costs and earn a return exceeds what many

rural families can afford to pay. The tax credit closes that gap and

puts homeownership in reach of more rural residents.

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Housing costs tend to be more difficult to develop than conventional single-family homes, though they are no more expensive to

construct than other forms of multi-family housing. Educating community leaders, lenders, and potential buyers about cooperatives

takes time, energy, and money and these act as a disincentive to

the development of co-ops. The tax credit mitigates these factors.

I would like to speak for a moment about rural seniors. Rural

seniors are often faced with two choices. As they age, the quality

of the home that they are in becomes less appropriate for them,

they have two choices. One is to leave the community and the—because they—there is an absence of appropriate housing for them,

or to move into a local, more expensive, nursing home.

Rural senior housing co-ops offer unique solutions to the problems of the elderly. They allow seniors to revolve their equity from

the sale of their single-family home to access appropriate affordable

housing, and they encourage seniors to remain in their communities in an environment that encourages them to remain independent, active, and involved. This solution retains their lifelong

accumulation of wealth and purchasing power in their own community to the benefit of Main Street businesses and to the local economy.

NCBA recommends completing organizational costs in the eligible basis for the community homeownership credit for other types

of housing—excuse me, for cooperatives because these costs are

higher for housing co-ops than other types of housing.

We also suggest evaluating other tax credits that may increase

investment in rural co-ops, such as farmer investments, valueadded ventures, or small business investment in purchasing co-ops.

Finally, on an unrelated topic, we urge that this legislation be accompanied by strong Federal appropriations for the technical infrastructure of the co-op development. Centers, like CDS and the Iowa

State Value-Added Center, rely largely on Federal funding to help

support business, to help us to work with rural businesses in conducting credible feasibility analyses and the development of solid

business plans. And without these two components, neither

changes in tax law or co-op structure will help attract new capital

to rural ventures.

Unfortunately, the Federal support for these centers have remained largely flat in recent years. And this year, the House has

proposed cuts in the program known as the Rural Co-op Development Grant program. We urge more funding from Congress so that

these centers can continue to help form new cooperatives that will

in turn help rural America.

Mr. Chairman, on behalf of NCBA, we thank you for this opportunity to testify and for the long-standing support of cooperatives.

The CHAIRMAN. And I thank you for summarizing a very long

and comprehensive statement that you’ve submitted for the record

as well.

Now, Mr. Tiernan.

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STATEMENT OF SHANE TIERNAN, AG/COMMERCIAL LOAN DEVELOPMENT OFFICER, GRUNDY NATIONAL BANK, GRUNDY

CENTER, IOWA

Mr. TIERNAN. Mr. Chairman and Senator Brownback, I am honored to have this opportunity to address your committee to discuss

our concern regarding the out-migration of our rural areas.

Grundy National Bank is a two bank holding company located in

north central Iowa. We are owned by just over 300 shareholders,

the majority of whom are local residents, business men and women

and farmers surrounding the Grundy Center area.

We recently facilitated a discussion among the local producers,

farm implement dealers, ag experts, legislator and legislative representatives. The purpose of this discussion was to explore the feasibility of establishing a machinery cooperative. There are several

reasons we felt we needed to have this discussion.

Farm production costs continue to increase. While many producers are attempting to chase more revenue, more needs to be

done to help farmers reduce costs.

The loss of farm producers in the past 20 years is staggering in

our region and statewide. If we do not, (A), lower the cost of entry

into the industry and, (B), lower the cost of staying in the industry,

we will continue to see the out-migration of our young men and

women away from production agriculture.

There are many small- to mid-size farm operations that cannot

afford to update their machinery and equipment. Consequently,

they are forced to work with older, inefficient equipment which is

constantly in the state of repair; leaving industry because they can

no longer afford to pay for their equipment; or seek off-farm employment to subsidize the farm operation.

If we do not find an economical means to reduce producer cost,

we will see—we will also see the increases in contract farming arrangements with large corporations. We will also continue to see

the average farm size grow in which a handful of very large producers control large lots of land.

These trends will continue to accelerate the erosion of our rural

community fabric which in turn will result in the continued reduction of school districts, rural businesses and communities who are

not fortunate enough to be located on the edges of metropolitan

areas.

A closer look at our decline of farm operators is revealed in the

graphs presented here today.

Since 1982, in a six-county region in north central Iowa, we have

lost 2,256 operators. This amounts to an average loss of 113 producers per year.

Across the state of Iowa, the numbers are no better. During this

same time period, Iowa lost 24,830 producers, an average of 1,242

per year.

Where are the largest losses? From 1982 to 2002, our six-county

area lost 75 percent of farm producers age 25 to 34 years old.

Statewide the loss was slightly higher.

As of the 2002 Census of Agriculture, the state of Iowa had an

average of only 62 farm producers per county in this age bracket.

On the other hand, producers over age 65 have grown substantially. Statewide this age group has grown 56 percent from 1982 to

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2002. Many of these producers will remain active longer because

they can’t afford to quit due to the tax consequences of having a

sale or there is no one they can turn their farming operation over

to.

Our questions of the roles of a community bank are: In another

10 or 15 years, who will be our customer? Who will be farming the

land? And how do we help create an environment where young

men and women see a profitable future in production agriculture?

We must solve two major issues: How do producers participate

in the value chain without being taken advantage of? How can we

help producers find ways to drive down their fixed costs so they become more viable a competitor and a world leader on industry.

Many producer groups are seeing some success in participating

in the value chain. The growth of producer-owned or partially

owned ethanol plants and farmer-owned cooperatives are good examples. However, creating and sustaining farmer-owned production

and machinery cooperatives creates new challenges.

Canada has been successfully using machinery cooperatives since

1991. The data available suggests that producers have been able to

reduce their machinery cost by 35 percent. However, because of

farm program payment and some tax rules in the United States,

initiating machinery cooperatives may be more difficult.

We believe a machinery cooperative may be a viable option to encourage. One fact remains clear. If we do not find ways to keep

young producers and smaller to medium size family farm operations viable, we will continue to see the out-migration of these

families to areas where they can sustain an affordable living. The

ripple effect of this trend has major economic implications not only

for rural Iowa and rural community banks, but rural areas across

this country.

I believe the time has come to stop talking about this problem

and provide real and tangible programs and processes to address

the population losses being endured by rural and primarily agricultural America.

This machinery cooperative concept is only one small piece of the

puzzle. There are many and complex issues, but if we are truly

committed as a country to preserving our rural regions, then we

must commit the resources necessary to make it happen.

Regional collaboration among communities, counties, farm and

nonfarm groups focused on creating and sustaining viable familyowned production agriculture which also includes the growth and

development of rural based job opportunities will bring a valueadded needed to convince our young men and women and families

that there are viable opportunities for them in rural areas.

I encourage being creative in developing the tools necessary to

accomplish this. We do need to take a hard look at existing tax

codes and FSA regulations and be willing to make to special exceptions for innovative and viable processes and programs that contribute to the economic growth of rural community and agricultural

enterprises.

Thank you again.

The CHAIRMAN. And I would like to suggest to you that some of

the charts you have given us will be charts that we can use with

our issue of the death tax in final decisions on that because your

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statistics show this great out-migration. And I think they showed

22 percent of our farmers over 65 years of age. So in a very short

period of time, we’re going to lose a lot of our farmers. And that’s

very much related to the ability, as both you and Chuck

Hassebrook suggested, of ways of helping young farmers get started. So we might follow up with you on that point.

Now we are going to—I think what I will do here, is normally

we would take 5 minutes for me and 5 minutes for you, but I think

we will just alternate back and forth. So I’ll ask the first question

and then you can ask a question.

Here—before I do that, though, this may not happen, but sometimes when other members of the committee can’t come, you might

get questions in writing. And so if you get those questions in writing, we would appreciate very much your immediate response. For

those of you that haven’t been involved with that, my staff can help

you in that process. I don’t think there will be, but there could be.

I suppose even from us if we don’t get enough questions asked.

I’m going to start with Glen Keppy.

As you mentioned in your testimony, many of the things we have

discussed today are included in this bill that I referred to as the

JOBS bill. It passed the Senate 92 to 5.

I hope the final version of the bill includes manufacturing reductions for cooperative relief from dividend allocation clarification of

value-added process and all of the energy tax provisions. And some

of even Senator Brownback’s New Homestead Act is included.

If the President—here’s my question: If the President were to

sign all of that into law, how do you think that it would spur economic growth in rural America?

Mr. KEPPY. Well, my simple answer would be it would be tremendous. But I want—I want to start out by—you addressed early

on in your comments that the young people are leaving the state.

And that indeed is true. I want to say that maybe I’m bucking the

trend. have twin boys that 6 years ago came home from college and

are in the farming operation. They said they like the lifestyle of all

four grandparents, my wife and I, and they wanted to be a part of

that. So I’m proud of that.

But I do know, and I have the succinct problem with the last

speaker, I don’t know who is going to farm all the farm—all the

land in the future. And so I think the issues that you have been

addressing and that you addressed today are vitally important.

The other thing, as I got on the airplane to leave here—I guess

before I got in the airplane, while I was waiting, there was a news

article about an Illinois high school that had to cancel its football

season because of lack of players. There is another case in point.

So many people from that rural area have left and they can’t even

put a football team together. Now they can consolidate, and that

is an answer, but I guess my question is: How long can we continue

to consolidate?

So we need—we need to bite the bullet and find some solutions

so that we can enhance the opportunities for those of us that want

to stay in rural America that we can.

The energy tax. I think the tax credits that go to smaller refineries is extremely important. We as a co-op are—own one, are part

owners of another refinery. There is continued upgrading that we

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need to do. We are just spending 90 million now to upgrade on the

sulfur requirements.

And we have—if agriculture is going to be assured diesel fuel

during their production season, there has to be a co-op system because the big boys, quote, may not take care of agriculture when

we need it during corn harvesting or planting. In fact, 40 percent

of all of the agriculture diesel fuel comes from the co-op system

today. So it is significant. And if we would ever lose that, it would

be tremendous to—a tremendous drain.

One other thing I want to mention. There are so many different

structures within agriculture. And I think the rural America and

the co-op system needs to be there so that we can provide the services that they need, whether it is a small family farm or ultra large

unit. And if there isn’t a co-op system there today to provide the

services, there will be one born. And I think that’s where rural development can really help make sure that value-added and the opportunity for profit is out there for agriculture.

Dividend allocation. And I appreciate the efforts of so many people in Washington, DC, and especially you, Mr. Chairman, and

your staff. That is an unfair triple tax that we need to get rid of.

And I think that if the legislation you are proposing is signed by

the President, it would be a tremendous boost to the agriculture

and cooperative system.

There is not enough farmer money to go into some of these valueadded projects and we need to find other ways of capitalizing the

co-op system and the value-added cooperatives that are being born.

And I think if we could do away with this unfair triple tax, it

would be important.

HIRE. There are so many excellent points in that and positive

points. The bottom line is if we have a healthy agriculture, we have

jobs and taxes created. And jobs and taxes is what is good for rural

America. In fact, it is good for all of America. And so I support the

efforts and I am going to continue to work hard to try to get it

passed. I just hope your statement that the President signs it

comes true someday. It is my—my challenge to Congress, as I stated, is to get it passed.

Thank you.

The CHAIRMAN. Senator Brownback.

Senator BROWNBACK. Thank you. Excellent panel and a good discussion of the topics. I wanted to say one thing real quick, if I

could, on the energy bill agreement, Mr. Keppy, we passed this

thing in the Senate, two—on the third time we have passed it,

we—it is being held up—it is hurting the country. It is hurting agriculture. We’ve really got to get this energy bill through. And it

has been a great frustration to me that we haven’t been able to get

it on through and across the line.

And if you look at prices of energy, what they are doing with

the—what is happening globally, we are really heading for problems. And it has been filibustered. We have 58 votes. We need two

more. It’s not that we don’t have the majority; we do. But to get

it on across the line has been a great frustration for me that a

number of people, for whatever reasons, are holding that up.

I want to address my question to you, if I could, Mr. Hassebrook.

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I’ve worked in the area of rural development, rural issues for 20,

30 years now and have seen this constant number and this decline

taking place for a lot of years, and I have seen efforts for a lot of

years.

Okay. Let’s try to get more young farmers and let’s try to get

people back to the rural areas and create new farmer programs in

our state and things we try to do nationally. And it just seems like

we have not been able to stop it, in spite of a lot of people’s efforts,

a lot of people’s thinking. You’ve been thinking and writing about

it for years. Why have we not been successful today or what do we

need to change in the design of the programs to really have an

input here?

Mr. HASSEBROOK. That’s a very good question. I think to some

extent—when we talk about agriculture for a minute because we

talked about young farmers, to some extent our larger policy framework has overwhelmed everything that we have done to try to help

the young farmers.

I’ve often said and I truly believe that the single most important

thing Congress could do to help create a future for family farms

and beginning farmers is stop subsidizing the largest farms and

driving out of business and put up real capital and payments. And

Senator Grassley has been the leader on that and he supported

that. But the most money we spent in agriculture is distributed on

the basis of the bigger you get, the more money you get. The net

affect is going to be to get at least as much to help the largest,

most aggressively expanding farms drive their neighbors out of

business, smaller farms, and particularly beginning farmers. If

somebody large has got a lot of capital and can get—you know,

every time they had a farm, they get more money from the farm

program. It is just very hard for a young farmer with limited capital to go in and compete with them for cash rents or to buy land.

So that has overwhelmed so much of what we have done because

that has been a predominant policy.

The other thing is I think that from the standpoint of rural development—and I’m particularly speaking from the perspective of

the smaller counties, the counties that have been losing population,

that so much of what we’ve done in rural development has focused

on the idea of luring a big employer to town. And that has worked

in some places, the places with 20,000 population, places like that.

But it hasn’t worked in the communities that have towns of 5,000

and below, by and large, especially the smaller ones.

What’s worked there is small business development. But yet I—

when I look at public policy, I think there is a kind of a bias

against that kind of development. I am speaking about my own

state of Nebraska. In Nebraska, we spent over a billion and a half

dollars over the last 15 years to provide incentives for companies

to come in and create jobs. And we haven’t spent 1 percent of that

amount on small business development, even though that counts

for most of the job growth in most rural places.

And I think that provisions like the New Homestead Act provision, that the rural small business investment credit are starting

to fix that. Everybody is starting to fix that. But—so I think getting that focus back on—for lack of a better term I’ll call small entrepreneurship, farmers coming together to form new cooperatives,

25

or people starting a small nonfarm business, or getting an agriculture policy that focuses on having people—more people make a

living out there, rather than concentrating so much of their resources in fixing it. All those things can work; but that’s not the

way—that’s not been the predominant approach in the past and I

think that’s why it never worked.

Senator BROWNBACK. Me, too.

The CHAIRMAN. I want to go to Jean-Mari.

You outlined in your testimony that farmer cooperatives play an

important role in carrying out environmental conservation programs. I would like to have you share those thoughts in more detail and whether any existing programs would need to be modified.

And my question comes from the standpoint that we don’t discuss a whole lot, but there are a lot of government action that is

waiting to be taken that is going to be very detrimental to agriculture, and whether or not agriculture is going to have the resources to meet those requirements, assuming those requirements

are legitimate. I don’t assume that, but we’ve got to deal with them

anyway.

Ms. PELTIER. Well, Senator Grassley, in my role as counselor to

the Administrator of the EPA, I thought firsthand that there was

an ever broadening scope of environmental statutes that were

being applied in ways that had never earlier been contemplated.

Application of laws to the super fund, all of a sudden being applied to animal agriculture operations; new concerns about air

emissions from animal feeding operations; application of—the convergence of the Endangered Species Act and use of agriculture

chemicals, all of these together are putting a broader array of challenges to farmers to comply with those kinds of regulations.

And during the last discussion of the farm bill, Congress expanded by 80 percent the amount of funds that were available to

producers to deal with conservation issues. But—but USDA, especially through the National Resource Conservation Service, and

folks who have had historic expertise in application of water statutes aren’t necessarily there and prepared to help farmers comply

with new air rules or new pesticide rules. And therein lies a real

potential role for farmer-owned cooperatives. An organization like

CHS that is a part of ag reliance has the expertise there to help

farmers put together reduced risk, cost-management strategies,

and actually see those implemented at the field level.

Our organizations like CF Industries, that are salespeople of fertilizers, have the ability to help producers put together reasonable

nutrient management plans and see those implemented out in the

field.

And so I think that we could provide a really important role in

serving in the role of technical service providers that were envisioned under those statutes, and also to play the role that we have

in some of the FSA programs, unlike ones we have for cotton and

for rice where the cooperatives are the conduit for which those benefits flow. We could do the same thing with conservation programs.

And the cooperatives could help the staff in actually documenting

what the environment benefits are.

Importantly, Senator Grassley, I think some of the proposals that

you have championed, whether it is the Section 29 Credit, the SecVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 20338.000 SFINANC2 PsN: SFINANC2
26

tion 45 credit, which would provide an additional 1.8 cent per kilowatt hour for generation of electricity for nontraditional sources,

that’s an area where we really could try to build some programs.

I know in Iowa, there have been concerns about air emissions

from animal feeding operations, hydrogen sulfide, ammonia. There

is also concerns under implementation of a confined animal feeding

rule to reduce runoff of nutrients into the water supply. One of the

potential solutions is running those nutrients through an anaerobic

digester.

I might just underscore first, as I am sure that Glen Keppy

would agree with me on this, one of the best uses of animal nutrients is to continue to use those in the best way possible. And that

certainly is something that we would continue to promote. But

there are areas where there just frankly is more manure. And in

those cases, looking at advance forms of manure treatment, whether it is running anaerobic digesters, it’s hard to put in place because it’s hard to make them pencil. It is hard to find an ability

to wheel that power back to the grid, but something like the

eight—1.8 cent per kilowatt hour tax incentive that you provided

could help make that pencil.

Further, the flow-through provisions that you put in place could

help co-ops help farmers put those systems in place and allow them

to flow that benefit back in the form of patronage. So we are really

hopeful to see all of those provisions finally put into law.

We would need to see potentially some modification in the conservation programs to clarify that programs that are there to help

the farmer, that cooperatives can also—as being owned by farmer

members, that they would also be eligible for consideration as an

individual under those conservation programs.

The CHAIRMAN. Senator Brownback.

Senator BROWNBACK. Thank you. I think for Mr. Edberg, if I

could.

We had a push, over the years, on some of these new uses, finding different markets for agriculture commodities. We have had

some nice successes in some of those areas. Ethanol is a noteworthy one. Biodiesel is coming on nicely. Inks out of soybean oil,

things along that line. But there was—I remember we had an Expo

of this a number of years back just showing some of these things.

And there were some really clever ones I thought that were out

there that I haven’t seen come on forward, like particleboard made

out of wheat or straw.

A guy had—I remember had a clay pigeon for shooting that used

a target made out of starch.

And another person had edible plates and silverware. I thought

that was an interesting concept. I guess you’d have to add that in

your caloric intake where you’d eat your plate then afterwards as

well.

What has happened to that series? Are those coming on the marketplace now? Have they been stepped back? What’s happening?

Mr. EDBERG. There’s two or three components of that. Some of

those are being developed. For example, a joint venture between

Cargill and DuPont is—or excuse me, Dow is currently creating

that starch plastic eating utensils, disposable packages, and so

forth. That’s been rolling out in the last couple of years. It is not

27

being done through a farmer-owned cooperative, but it is being

commercialized in the industry.

Senator BROWNBACK. And are those on the market now?

Mr. EDBERG. Coming on. And they are choosing their—the statements on the marketplace to enter are being chosen very carefully.

It has wide possible application, to bringing the technology in certain areas that would—packaging first, and then some other places

to establish a foothold, to create the manufacturing distribution infrastructure. And so some of these other applications will be coming out following that.

The example of particleboard, straw and particleboard has been

attempted in some places. We do—one of the states where we do

some work is Minnesota. And the challenge there has been the agricultural community has been viewed by the timber industry as

competitors. The particleboard for straw being a competitor to the

wood-based product. A much smarter—and for that reason, the

marketing plans for how you penetrate and take on an entrenched

existing industry, the timber industry, has made it very difficult for

ag producers to be competitive in that.

However, a much smarter approach would be for ag producers

and wood producers, particularly in the upper Midwest where they

are facing fiber shortages, to view themselves as being partners or

potential joint venturers so that the group of producers would in

fact turn their straw into either pure particleboard into straw or

mixed fiber materials with partial wood fiber and straw fiber, and

being marketed through or in conjunction with the existing distribution models is a much better business model.

So in that situation, the cooperative approach hasn’t found the

right way of entering the marketplace in a successful way because

they haven’t found the right partners to do that.

To take a step back. The biggest issue facing the success on a

farmer value-added venture, these new types of ventures, is strong

support in the predevelopment phase. It is the support to help the

local chamber, the folks who are sitting around the dice cafe—sitting around the table of the cafe before they shake dice, they say,

you know, we don’t like the price of X. Pick your favorite commodity. And they have an idea for something that they could do locally. But the amount of predevelopment knowledge that will assist

those folks in moving through the feasibility analysis of the business planning stage, that process is long and drawn out and it

kills. It kills the idea before it has an opportunity to move to the

equity phase, which also will kill. Now gathering equity is a substantially long process.

So we need both. We need predevelopment and then components

of a HIRE Act that would be—provide credits and gather the equity. It is a one-two combination. And we can’t do one without the

other.

I would also put in one other plug.

Senator Grassley, you have been a champion on the value-added

booster grant program. Those dollars, which have been reduced in

the past budget, have been successful in helping in that phase of

doing the predevelopment hours and for getting the working capital

for projects to move forward. We’ve seen a reduction in the investment in those areas. And that’s been a challenge in recent years.

28

So what we need to do, in my opinion, is make sure that we are

strengthening the support base of those value-added ventures

through predevelopment support, and then continuation of a working capital and tax policy provisions of things like the HIRE Act.

Senator BROWNBACK. Thank you.

The CHAIRMAN. Mr. Froelich, you have, in your long statement,

put a lot of emphasis upon the need for entrepreneurship for economic development in rural areas.

First of all, is that statement similar to what Chuck Hassebrook

was saying about more emphasis upon small business or does it go

beyond that? And what are some ways which we can help attempt

to foster entrepreneurship?

Mr. FROELICH. I think I agree with Mr. Hassebrook about the

importance of entrepreneurship. I think that in the past, rural development has tended to focus too much on recruitment of outside

businesses and then got into competitions with their neighboring

communities to try to attract companies that had got into bidding

wars and stuff, which really hasn’t benefited them very much. As

he said, many of the smaller communities simply are not successful

in that game anyway.

I think it makes a lot more sense, and I think it actually hearkens back to an earlier tradition back in the time of the Homestead

Act. I mean homesteading was about being an entrepreneur. Maybe

the difference between that earlier period and now is that when

those entrepreneurs came out into rural areas and homesteaded,

they may not have known how to do everything they needed to

know how to do, but they knew what they were going to try to do.

And now we have a lot of potential entrepreneurs who would perhaps love to stay in rural America, but it is, like, well, I would

have to invent some new industry. I have to—I have to have a new

idea. I can’t take something that is kind of readymade. I can’t say,

well, I am going to be a farmer, I’m going to learn how to farm and

go out and create a farm business. They have to say, well, what

could I do in this place?

And I think that that is a tremendous challenge for a lot of rural

communities because you have young people there and they don’t

know what it is that they can do that will be successful in that

place, and then they feel compelled to go to school to get an educational and leave. And I think that that’s the pattern that has developed over the last 50 years, at least.

But, nonetheless, I think that entrepreneurship is the development strategy that is most likely to work in those smaller communities. I mean it is homegrown. I think most of the things that

Mr.—well, I should rephrase—that all of the things Mr.

Hassebrook said are true.

I think the tax credits and the particular micro-enterprise tax

credit is going to be very important for encouraging entrepreneurs.

Before I came here, I was at a place where there were some potential—there were guys that had been starting things for the last

couple of years that are inventors and they are outsourcing all

their manufacturing. And I described these provisions to them just

to see what their reaction would be. And I could just see the lights

were coming on and they said, ‘‘Boy, let me know if this—if this

stuff passes because this changes everything. This changes everyVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 20338.000 SFINANC2 PsN: SFINANC2
29

thing about what we might do. We might actually build warehouses and create some jobs or even try to bring manufacturing capacity into this area if we can get these tax credits.’’

So I think this would be a major step forward.

But I think even with the financial aspect of it, we still have to

address the sort of question that comes before us. If people aren’t

inventors and they want to be entrepreneurs, what is it they can

do? And for that, I think that we need to really—well, for one

thing, we need to start enlisting our schools, the K–12 school system, with some entrepreneur training. I’m not sure exactly how

that is a tax issue, but I do think that—and I have recently spoken

with a number of superintendents in our area, and they are a little

nervous about doing entrepreneurship training, partly because they

are worried about meeting the requirements of No Child Left Behind and they think we can’t do anything else.

So I think that we need to somehow find a way to get some entrepreneurship training into the K–12 schools.

And then I also think we need to tap on the universities and give

them incentives to perhaps fund different kinds of research that

are aimed at small businesses that can be successful in rural

places, and give researchers at the university the charge of saying

it is up to you, if you want this funding, to come up with commercially viable alternatives that a family out in the small town can

start a business around. And I think that’s possible. But we have

tended to support our universities to do different kinds of research

that are aimed at larger industries or for production of agriculture

on a grander scale.

So I think that, you know, a number of things like that, that—

the last thing, I guess, that I will mention here is that I think in

the farm bill, and even though I am not an expert on the last farm

bill, there was a provision for some rural business investment companies. And my understanding is that those were not funded, even

though they are in the—in the act.

I think it would be a good idea, even though this is—again, it

comes later as sort of the venture recreation stage, if we funded

those provisions that are in the farm bill now, the rural investment

companies that were created.

The CHAIRMAN. Senator Brownback.

Senator BROWNBACK. I wanted to know if I could go to one font

that we had on the New Homestead Act that was pulled out. And

it had some controversy with it. But in looking at my own state,

Kansas, I wondered about this as a provision for us to grow the

population of rural areas. And that’s the issue of immigration. Always a touchy issue, always a difficult issue for the country. But

when I look at my counties—I was going to show——

Brian, would you mind putting that canvas back up.

When I look at my Kansas in the rural parts of my state that

have grown, they have generally been ones in the southwest portion of the state, rural areas, the population of Kansas, primarily

in the eastern part of the state. We have got a population growth

in the southwest has primarily been—beef packing has been the

center of the business creation, but then a lot of other businesses

around that, the cattle industry around that. Most of the people,

though, this has been an immigrant population that has come in.

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It has been Asian; it has been Latino that has come into this area.

And they have been great, they have been hard workers, they have

done well, they have established roots and they have established

community in this area.

One of the things we talked about in the New Homestead Act

was a particular immigration provision in the bill saying you create

a series of visas for out-migrating counties and say to the county

commissioners in the county, if you want to access these, great,

God bless you; if you don’t, that’s fine, too, you don’t have to, but

as a way of creating a group of people coming into the area and

working.

What do you think about an immigration strategy and that as a

proponent on a rural redevelopment in the Great Plains?

Mr. FROELICH. Well, I think that in having the immigrants come

into some of the out-migration counties would be a good thing if

you can stay there. But, you know, regardless of where they come

from, they need to have something that they can do when they get

there. And they need to have a vision of what they are going to do

when they get there.

So I mean if—if they come into, you know, a rural county, and

they have some notion of what their life is going to be and what

they can build there, and they have some tools to build that, then

I think it can be very positive. I think you can get there.

But I think, on the other hand, that if they go into a lot of those

places and they look around and they say, well, what is it that I

could do here, that essentially they will be moving to the larger

counties.

I mean I—I remember 2 years ago, the council general, I think

is the title, from Armenia came and visited our university, and I

gave him a tour, and we had a conversation about trying to bring

some Armenian students to Dickinson to study there. He started

asking me about discotheques and nightlife and restaurants and a

whole host of things which I didn’t realize that Armenian—the students there are quite urban and sophisticated, he said. And he told

me that he thought that we could possibly do it if we brought very

serious students who weren’t interested in anything but their

books, but he said that pretty much everybody else that he could

think of that we could bring over to Dickinson would be there 2

weeks and then they would move to Los Angeles. And I think that’s

a problem.

I think regardless of where the people come, we have to develop

a climate in those small communities that people feel happy with,

where they can get the things that they want, where they can buy

the things that they want, and where there are markets that they

can see a way to tap into for their own prosperity.

I mean—so I think it is a complex challenge. I think if we can

address some of those other issues kind of at the same time that

we would bring in immigrants, then I think it might be a real success. Otherwise I think it would be a problem.

The CHAIRMAN. Mr. Edberg, you discussed senior housing co-ops.

And evidently—I don’t know that there’s very many of them. And

why haven’t they developed? Or what does it take to develop it?

Mr. EDBERG. There are two or three aspects of that. The framework that you want to think about that in, it’s a complement to the

31

strategy of attracting new people or allowing people to stay in rural

places. You want to keep the existing cash flow and asset base that

is there. You want to prevent leakage of the asset base by keeping

the rural seniors in their place. Because when they leave, if they

have to leave and go to a larger town, they are going to pull money

out of the local bank, they are going to no longer frequent the local

pharmacy, the local grocery store, the local doctor, you are going

to put constraints on an existing strained system and exacerbate

the problems of departure.

Rural—senior co-op housing is actually very popular in the upper

Midwest. We have about 74 of them in Minnesota. Not all rural,

many of those are urban, but we have about two dozen rural senior

co-ops in Minnesota. There are about eight or nine of them here in

Iowa. There are relatively few in other places.

One of the impediments of that has been on educating lenders

on lending to cooperatives. It seems like there is only—in the upper

Midwest, in Minnesota, to an extent in Iowa, that HUD, using Section 202 financing, has been able to figure out how to make that

program work for financing these cooperatives. The rules are there,

the structure is there, but there are very few other HUD offices in

the country making any loans using the 202 allocations.

And I believe it was a Senate Special Committee on Aging a year

ago that identified that as a problem for underutilization of the resources that are provided to it. So some education on here’s how

you make these resources available in conjunction with other financing opportunities becoming one part of that.

I would note that the Iowa Institute of Co-ops has talked to my

organization. And this fall we are going to be doing an assessment

on what would be the pathway to success for development of more

rural co-ops in county seat sized community, communities about

five to ten thousand individuals. And part of that is going to be

finding the developers that are interested in doing that.

There are resources close by in Minnesota where people can see

how this process is working so they can see how they would do it

in these smaller communities.

A challenge—so one part is the developer. One part is the financing. One part is the education of the process, you know, here’s how

you do it and getting more familiar with that.

We find that rural co-ops are successful when they are started

within about 60 miles of an existing one. People get familiar with

the idea and then they want one in their community.

The last thing I had mentioned is that in smaller towns, these

things are size-sensitive. In other words, where you have a smaller

community, you have to be very cognizant of how many units you

can put on the market. If you build too much, you can’t sell them,

and then that’s a financial drain. But if you get that market assessment right, that’s exactly where some of the provisions of the

HIRE Act would fit in in helping make those projects go, by providing the tax credits for those developers.

The CHAIRMAN. Senator Brownback.

Senator BROWNBACK. Mr. Tiernan, I was looking at your charts

that you had for your counties, and that mirrors a lot of my experience in what I have seen on the rural county that I am from in

Kansas. And we see that throughout the Midwest.

32

You put forward a proposal on a machinery cooperative. And

that’s an interesting one to do. But you also must be figuring that

as a banker of a financial institution, who is going to farm here in

the future? What—without policy shifts—without major policy

shifts, who do you project is going to be farming in the future?

What’s it going to look like?

Mr. TIERNAN. Well, I think that we are already starting to see

the increase in contract farming arrangements with large grain

processors where they are offering the producer a flat per acre fee

to provide labor, machinery, and land to that organization in order

to supply them with grain. They need to have a supply—a steady

supply of grain. So without—as farm sizes grow larger, the large

producers don’t have a need for those contract arrangements. The

smaller producers do. I mean granted there is risk, but they become a little more than contract laborers for a large corporation

and are at the mercy of that corporation once they are hooked into

those contracts to really have to perform under those standards, I

think, and also don’t have a benefit of additional profit opportunities when they become available.

Senator BROWNBACK. So do you—if I could, Mr. Tiernan, you

view that, then, the agriculture production, agriculture grain production as going and following the same track as much as the livestock agriculture is a contract arrangement?

Mr. TIERNAN. Right. It’s a real issue that we have seen it in the

livestock industry. And it is only a matter of time before it expands

into cash grain production because the people—the producers just

aren’t there.

And, you know, we have one producer operation in our region

that farms 30,000 acres. One producer farming 30,000 acres is not

beneficial to our rural communities and counties in the state of

Iowa. It benefits him. And certainly it creates jobs, but some of

those jobs are being created to farmers who could no longer afford

to farm their own farm and so have advocated their farm operation

to this type of operator and then they have worked for a wage because that’s an income that they can live on and it keeps them out

in the rural area.

So those types of trends are certainly going to continue if we

don’t find a way to lower the cost of entry and then also lower the

cost of staying in the industry.

And the machinery cooperatives are only one tool. One of the biggest barriers for a young producer to enter the industry is the cost

of the equipment. Obviously there is access to land, is an issue as

well. But if they can be a part of this cooperative, and not have at

large the initial cost, and then also share the knowledge of farmers

who had been in the industry, because a lot of these young men

and women are college-educated men and women, they have a lot

of skills that they can bring to the table, but they are not having

that opportunity because of the cost of entry.

The CHAIRMAN. The farmer you referred to tried to convince me

how wrong I was that I wanted to put a limit on the amount of

money that one farmer could get out of the farm program and how

detrimental that was to agriculture, to these family farms that he

was associated with.

Mr. TIERNAN. Right. So you know who I am talking about.

33

The CHAIRMAN. By the way, I believe that no one farmer should

get a certain amount of money. And today, 10 percent of the farmers are getting two-thirds of the benefit from the farm program.

And they were meant to help the small- and medium-sized farmers

and not somebody with 30,000 acres, as I sense.

I have got one more question and then we’re going to quit, unless

you’ve got another question.

Senator BROWNBACK. It sounds good to me.

The CHAIRMAN. Okay. Mr. Tiernan, something you said in your

statement, and it deals also with something that Mr. Hassebrook

testified on, but you went beyond with a new venue for helping

young farmers.

Do you see any transport joint venture between young beginning

farmers who may be in the need of equipment and older farmers

who have equipment and maybe looking to retire? Although I think

Chuck’s statement was about the land and not the equipment.

What are your suggestions for helping encourage young farmers

to remain in rural agriculture and enter the business of agriculture

to the extent of which your co-op fits into that? If it was meant—

it obviously would be meant for any farmer, but it could also apply

to young farmers.

Mr. TIERNAN. Yeah. In Canada, that is one of the main reasons

why they started initiating machinery cooperatives was so that

young producers could enter the industry at a much lower cost.

I would like to say, you know, that I’m really—personally really

excited about the provisions of the HIRE Act and the New Homestead provisions because they do offer some real significant incentives that are directly tied to the rural communities, but I have not

seen any kinds of joint ventures between a young farmer and an

older producer other than some lease purchase arrangements between a father and a son or a granddaughter or a grandson, which

does lower the cost of entry into the industry initially, but the difficulty comes when that young producer goes to replace that equipment.

Oftentimes with the—you know, in the lease purchase agreement

is a little bit older equipment that has some maintenance costs,

and it might be two or 3 years down the road, but when the son

goes to replace that equipment, he is not financially in a position

to be able to do that more times than not. So machinery cooperatives I think offers some benefits.

One thing that I would like to suggest is that machinery cooperatives, if this can move forward, does not meet the definition of a

value-added agriculture enterprise. Most of the time we are talking

about adding value on the revenue side, but if this adds value,

which it appears they do, by lowering the cost, shouldn’t it meet

that definition? Even though it is on the cost end instead of a revenue end, it does clearly seem to add value, so we would like to

make that suggestion.

The machinery cooperative also promotes collaboration among

producers to pool their skills and pool their resources together to

be more efficient, more effective.

As far as additional ideas for rural communities, probably I don’t

have enough time to suggest several ideas that we have, but cerVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 20338.000 SFINANC2 PsN: SFINANC2
34

tainly provisions of the HIRE Act and the New Homestead tax

credits, those are all incentives that we need.

Reasonable collaboration has got to come in here at some point.

We need—however these incentives are tied, we need to tie them

so that counties and individuals, public private partnerships, are

really encouraged, because we’re—with everything else, we are always much stronger working together versus working alone. So

somehow these incentives need to be tied to that.

We heard some really good ideas earlier this spring at the Capitalizing on Rural America symposium sponsored by the Home

Loan Bank. The challenge there is again for rural communities like

Grundy County, the cost of bringing that technical expertise to our

county to help move some of these ideas forward is quite high. To

bring one individual in for 1 day, the cost was $15,000. And

Grundy County just doesn’t have those resources to bring that kind

of technical assistance to bear because it needs to be there not for

just 1 day. It needs to be there to guide them through the process

start to finish. And so whatever incentives need are out there, it

somehow needs to be tied to regional collaborations of counties,

farm groups, nonfarm groups, and promote public private partnerships.

The CHAIRMAN. Well, if there is one last item that maybe was

left hanging and anybody wants to do that right now, this would

be—for a short statement, would be the opportunity. But if you

don’t, then we will just close.

Do you have anything that you want to say in closing?

Senator BROWNBACK. No. Thanks.

The CHAIRMAN. I thank all the audience who was here. And

thank you for the hospitality of Sioux City, and most importantly

for our witnesses that had to travel as well as work putting their

statement together. Thank you all very much.

Now this doesn’t end this process. You have a hearing. We have

got—a lot of this legislation is pending in conference between the

House and the Senate now. Hopefully get those agreements worked

out, get a Bill to the President before adjournment in early October

and not have to start over again when a new Congress reconvenes

in January.

And what we haven’t done in the legislation that is pending will

be something that we will work on when we get back in January

in the new Congress.

And I think we’re well down the road to some of the things we

want to accomplish, but more needs to be done. And in that process, folks who are witnessing today, and other people here, people

that aren’t here, are proud of that process. And I always like to remind my constituents that Senator Brownback and I are one half

of the process of representing the government. Our constituents,

you, or in Kansas, are the other one half of the process of representing the government. And you can’t really have representative

government if we don’t have dialogue.

Now we kind of had dialogue just among six or eight of us today,

but that dialogue can include hundreds, either by coming to our

town meetings or by the letters that you write to us. Whatever it

is, you need to participate because in America, you have got a

chance to help rule and be ruled. You have the opportunity to help

35

government and be governed in Iowa. And you all want to help govern, and I think you all do or you wouldn’t be here. But for those

who aren’t here, you might encourage them to get involved in the

process.

Thank you very much. The meeting is adjourned.

[Whereupon, at 12 p.m., the hearing was concluded.]

(37)

A P P E N D I X

ADDITONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. MAX BAUCUS

Mr. Chairman, thank you for holding this important hearing. Rural America is

the backbone of our nation. Montana and other rural states have contributed significantly to America’s progress. Our family farms and ranches produce the food on our

tables. Transportation centers in the Midwest direct delivery of agricultural products and natural resources from the breadbasket states to our coasts.

Unfortunately, new conditions, including changes in agriculture markets and

drought, have left many rural areas without sufficient opportunities for their children. This dearth of opportunities has led to a population decline in many counties.

We will hear testimony today about this problem, often called ‘‘rural out-migration.’’

It is a serious problem, and I truly appreciate the attention the Chairman is focusing on this matter.

I also want to thank Senator Dorgan and the other sponsors of the New Homestead Act. Senator Grassley and I have been working together for several years now

on legislation, like the Tax Empowerment and Relief for Farmers and Fishermen

Act, to update the tax code for small businesses and to establish incentives for rural

economic development. The work that Senator Dorgan, Senator Hagel and others

have done in the New Homestead Act has truly focused our attention on the problem of rural out-migration. The most recent result of this new focus is our ‘‘Heartland Investment and Rural Employment’’ (HIRE) Act that we introduced in July.

The HIRE Act includes rural investment tax credits that we modeled on provisions in the New Homestead Act. These provisions are also in the Senate-passed

‘‘Jumpstart Our Business Strength’’ (JOBS) Act, S. 1637. The credits are designed

to encourage investment in counties that have suffered significant out-migration.

These investment tax credits allocate $185,000 for each qualifying county for investments in new and existing buildings, as well as investment in new business equipment. Spurring economic activity is critical to preserving rural communities.

These provisions are only a start. Rural states are facing many challenges. Tax

incentives are just one means among many to address these challenges. I am proud

that we have begun this process. This hearing and our continuing focus on the

needs of rural America are also steps along the way. And my goal is for that path

to lead us to a national policy dedicated to the preservation and prosperity of America’s wonderful rural communities.

PREPARED STATEMENT OF HON. SAM BROWNBACK

Over 140 years ago, President Abraham Lincoln signed into law the Homestead

Act, landmark legislation that helped populate rural areas in the Great Plains. Back

in 1862, the federal government struck a. one-time bargain with people who took

a chance and settled out West. In exchange for a 5-year commitment to stay and

develop the land, the original Homestead Act offered these settlers 160 acres of free

land and the promise of opportunity.

Today, America’s Heartland is facing massive depopulation. Many rural communities are struggling to survive. This shouldn’t be the case. Our rural communities

are some of the strongest in the nation. But people who are from these areas know

it is virtually impossible to start, maintain or grow a business in an environment

where the overall economy is shrinking, where current and potential customers are

leaving, and public and private investments are falling.

38

Many of us here in this room are products of a rural American upbringing, myself

included. Some of the greatest moments in my life have been spent in rural Kansas

with my family and friends. Most of you have your own memories of growing up

in small towns around America that you may like sharing with your children and

grandchildren, whether it be by actually living in rural America or by telling stories

of life in your hometown, where you had 10 people in your graduating class. Unfortunately, the growing trend that we recognize is the depopulating of rural America

and these ‘‘small town’’ lifestyles that we have so much respect for. With this respect in mind we must work harder to restore rural America and repopulate small

communities that are suffering from a high rate of out-migration.

A high out-migration county is defined as any non-metro county that has suffered

net out-migration of at least 10% over the past 20 years. The Midwest is plagued

by this trend. Over 50% of the counties in the Midwest region suffer from high out

migration. When compared to the national average of 21%, it’s easy to see that the

Nation’s Heartland needs help. Some states have it much worse. In North Dakota,

almost 90% of the counties have experienced out-migration. Here in Iowa, 55 of the

99 counties (or 53%) are determined to be out-migration counties. Nearly fifty percent of,the counties in my state of Kansas have been the victims of this out-migration.

We have faced this type of problem before in America. In the 1970s, metropolitan

urban cores across America were suffering from out-migration similar to what we

are seeing today in rural America. Tax incentives were put in place to enhance economic development and it revitalized our nation’s urban cores. It worked back in

the 1970s for the urban core and it can work today for rural America. We are simply

looking to do for rural America what we did for urban cores back in the 1970s.

There is a role that we can all play in the restoration of rural America at the

Federal level that has been proven successful in the past. That is why 1 am honored

to cosponsor the New Homestead Act, which will help to alleviate the problem we

face in rural America.

The main objectives of the New Homestead Act are:

(1) to provide new and updated homestead opportunities for individuals to live,

work, and prosper in high out-migration counties;

(2) to offer new incentives for businesses to locate, grow, and profit in high outmigration counties and

(3) to improve access to capital for business development in high out-migration

counties.

As with the original Homestead Act, this bill seeks to reward those individuals

willing to take a risk and locate in a high out-migration county. It says to these

new homesteaders, ‘‘If you’re willing to make a 5-year commitment to live and work

in a rural community that’s shrinking in population, we’ll give you every opportunity to get a college degree, buy a home, and build a nest egg for the future.’’ It

does this through:

• Loan Repayment: forgive up to 50 percent of college loans for recent graduates who move to these communities (up to a maximum of $15,000);

• Home Tax Credit: provides a $5,000 tax credit for all home purchases in these

areas (or 10% of the purchase price, whichever is lower);

• Protecting Home Values: allows losses in home value (from a principal residence) to be deducted from federal income taxes; and

• Individual Homestead Accounts: these accounts help build savings and increase access to credit for residents in high out-migration counties. Individuals

could contribute a maximum of $2,500 per year, for up to 5 years, as well as

receive a government match of 25–100%, depending on their income. Savings

could grow tax free and, after 5 years, be tapped into for small business and

education expenses, first-time home purchases, and extraordinary medical expenses. And all funds would be available upon retirement.

Included in the bill are also Incentives for Businesses through rural investment

tax credits. My colleagues in the Senate had the foresight and good judgment to attach these two provisions in the FSC/ETI Bill that passed the Senate on May 11

with a vote of 92–5. These two provisions are:

• A Rural Investment Tax Credit (RITC): This targets investments in high

out-migration counties. Under this provision:

• States receive $185,000 of these credits per high out-migration county. The

state then allocates these credits to businesses that move to or expand in a high

out-migration county. Businesses then use these credits to offset the cost of

newly constructed or existing buildings. Over a ten year period, businesses can

use these credits to reduce their taxes by as much as 80% of their total investment.

The other provision that passed the Senate is the:

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• Micro-enterprise Tax Credits

These tax credits are for small businesses (5 or fewer employees). States may

choose to allocate up to 10% of their rural investment tax credit allocation to qualifying start-up or expanding small businesses. These businesses would then use

these credits to offset the cost of new funding needed for business expansion, which

could reduce their taxes by 30% of their qualifying new investment.

The most effective and desirable economic development strategy for most agricultural communities is small entrepreneurship—development based on locally owned,

owner operated small businesses. This has been proven to work in the agricultural

areas that have not been successful in attracting large employers from outside

areas. In the agricultural counties of the Midwest, over 70% of the net job growth

stems from non-farm self-employment. These are people who create their own job

by starting a business. Rural Americans have a passion for entrepreneurship. Farm

and ranch counties in the nation’s Heartland have several times the rate of selfemployment as metropolitan counties. Given the chance, they are highly innovative.

The New Homestead Act gives rural Americans that chance. Together these two provisions are projected to cost $641 million over ten years.

However, this should not be looked at as an expenditure. This is an investment in

the rural communities that we all cherish and hold close to our heart. The return

on this investment is a restored rural America with expanded economic opportunities and a higher quality of life. I applaud the Senate for passing the Rural Investment Tax Credit provisions, however simply building more buildings is not our highest priority. There are too many empty building already. We need to put our investment in small business development and people.

The final piece of the puzzle lies in a Venture Capital Fund. Unfortunately, venture capital and other start-up funding is quite limited in rural areas with high levels of out-migration. This section would help such business ventures attract the equity funding they need by creating a $3 billion venture capital fund that invests in

high out-migration counties. This fund would be funded at $200 million per year,

for 10 years, and require a yearly match of $50 million from states and of $50 million for private investors.

A healthy and growing rural economy is critical to our nation’s success. The New

Homestead Act will help re-establish rural America on firm economic footing. All of

America needs the Heartland’s economy to be successful, therefore America needs

this Act. I am fighting for this because this is of great concern to me and I believe

it is time for us to take a look back at our roots. Please join me in the fight to restore rural America. All too often, small communities are overlooked for the hard

work, strong values, and great people they produce. It is time to show our appreciation for rural America and refocus on their restoration and development. Thank you

for giving me the opportunity to speak this morning.

PREPARED STATEMENT OF HON. TOM DASCHLE

Mr. Chairman, I would like to begin by offering sincere thanks to you, to the

Ranking Member, Senator Baucus, and the other members of the committee for organizing and participating in this field hearing. Events like these enable us to gather firsthand knowledge about the problems facing our rural and tribal communities.

I regret that I am not able to be with you today, but I appreciate this opportunity

to share my views on the important issues of rural out-migration and economic development.

What do we mean when we say that rural out-migration is a problem? Is it not,

as some might argue, the natural course of things for our rural areas to empty out?

Granted, it is hard to find supporters of the impacts this trend imposes on our rural

communities—stagnant or declining incomes, high incidences of social disorders, and

separation from areas that we once called home. But are these not an inevitable

consequence of the market forces that determine where our country’s economic opportunities flourish or wither?

I believe the hollowing out of our rural areas is not inevitable and that it is within

our power to shape the character of our states and our Indian reservations through

the choices we make as a society and as individual consumers. Choice is, after all,

a central component of the market mechanism that we rely upon to allocate our economic resources efficiently, and that some view as the driving force behind the decline of our rural and tribal economies.

In this case, though, the market is under-producing a good that many desire but

too few can find: economic opportunity in rural and native America. In other words,

many, if not most, of the people leaving rural areas and reservations for our cities

would rather not make that journey. So many of the people I talk to in small towns

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across South Dakota are upset that they are unable to make a decent living without

taking on more than one job. They hate to see their main streets boarded up. They

would prefer to see their children grow up with the all the benefits of a tightly knit

small-town community of relatives, friends, and neighbors.

How, then, can we increase the supply of good-paying jobs in rural states? The

legislation sponsored by Senator Dorgan represents a step in the right direction. It

recognizes that government alone cannot provide a sustainable stream of income for

rural workers, and few would be inclined to accept such a handout even if it were

available. What government can do, however, is provide incentives that attract private investors, who know how to run a profitable business. These incentives, along

with the bill’s inducements for individuals, could go a long way toward reversing

the economic decline of counties that have experienced high out-migration.

Numerous other pending bills could also contribute to this effort. Individuals all

over South Dakota have told me how important it is that we pass a good transportation bill as soon as possible. In the short term, this bill would give a boost to our

economy as various construction projects get underway. In the longer term, those

projects will provide us with the high-quality infrastructure that is the backbone of

economic development.

We can also do a better job of spurring new demand for the goods produced by

family farms. Mandatory country-of-origin-labeling will allow consumers to make informed decisions about the food they buy. We also need to pass an energy bill with

strong incentives for the use of renewable fuels produced at home, and we need to

pass the JOBS bill to end WTO sanctions on our exports and restore important incentives such as the wind production tax credit. Measures that enhance the value

of our agricultural outputs can transform our rural economies by improving the

standard of living of family farmers and the communities to which they belong. And

while I agree that it is important for us to provide incentives targeted specifically

to those counties with high out-migration, programs that would have a wider impact

are also essential.

In fact, as we consider comprehensive rural development strategies, it is important that we remember not all of our struggling counties are experiencing population decline. In my state, for example, populations are rising in all but one of the

counties where our Indian reservations are located. Sadly, four of those counties are

among the five poorest in America, with poverty rates around 50 percent.

This situation calls for a comprehensive rural development strategy that consists

of a mix of policy incentives—some targeted at locations with high out-migration,

others that will benefit the region as a whole, and still others targeted at locations

facing the dual challenge of population growth and high poverty. This third category

may well pose the greatest challenge of the three, since the poverty in those places

has been entrenched for so long.

But even there, we know what is needed. We can face these economic challenges

by providing adequate health care, so students and workers can be productive; by

providing high-quality education, so children and adults alike have an opportunity

to acquire the skills necessary to raise their own living standards; and by providing

favorable conditions for businesses, so that a robust and self-sustaining economy can

finally take hold throughout rural America.

Few of our responsibilities are as important as creating conditions in which our

citizens can prosper. To date, we have not succeeded in stimulating the market to

provide enough good-paying jobs in rural America. But we have no shortage of

promising solutions that can revitalize our rural economies. I am confident that,

with continued leadership by the members of this committee and others who are

deeply concerned about rural economic development, we can implement these solutions and create a rural America that produces the goods of prosperity in much

greater abundance.

Thank you.

PREPARED STATEMENT OF HON. BYRON L. DORGAN

Mr. Chairman, thank you for holding this important field hearing today in Sioux

City, Iowa to examine tax policies that will help rural communities in your state,

in North Dakota and across the country to grow and prosper.

As you know, I have worked several years with Senators Hagel, Brownback, Johnson and many of our colleagues on legislation we call the New Homestead Act, S.

602. This bill seeks to address one of the most serious threats to the future of America’s Heartland—the loss of its people.

As a Senator from a rural state, Mr. Chairman, you know firsthand about the

problems associated with the out-migration of people from our rural communities.

41

Over the past two decades, a majority of the counties in Iowa have lost 10 percent

or more of their population. The same is true for North Dakota, Nebraska and other

rural states.

Hundreds of thousands of people have left small towns in rural areas throughout

the Great Plains in search of opportunities elsewhere. It is a constant struggle for

those who remain just to keep their communities alive. This shouldn’t be. Our rural

communities are among some of the strongest in the nation. Most of them have good

schools, low crime rates, and a level of civic involvement that would make any public official proud. But people who are from these areas know that you simply can’t

grow or run a business in an environment where the overall economy is shrinking,

current and potential customers are leaving, and public and private investment is

falling.

The support that you and Senator Baucus have provided for the New Homestead

Act has helped call national attention to the rural out-migration crisis. Many of our

rural areas have been fighting for their very survival for years, yet most Americans

didn’t even know about this struggle. Today, general awareness about the decimation of rural America is quickly growing.

Inspired by the Homestead Act of 1862, the New Homestead Act proposes new

incentives for people and businesses to locate or stay in rural areas that are suffering from out-migration. We can’t give land anymore. But our legislation provides

new opportunities through the use of tax and other financial rewards to fight

against rural out-migration. S. 602 has garnered 17 bipartisan cosponsors in the

U.S. Senate. It also has been endorsed by many important organizations, including

the National Association of Counties, the National Telecommunications Cooperative

Association, National Council of Farmer Cooperatives and the National Rural Electric Cooperative Association, the National Association of Realtors, the National

Fanners Union, the American Bankers Association, the Independent Community

Bankers of America, the Credit Union National Association, the Center for Rural

Affairs and many others.

Specifically, the New Homestead Act would give people who commit to live and

work in high out-migration areas for 5 years added incentives to buy a home, pay

for college, build a nest egg, and start a business . . . or just plain get ahead in

life. These incentives include repaying a portion of college loans, offering a tax credit

for the purchase of a new home, protecting home values by allowing losses in home

value to be deducted from federal income taxes, and establishing Individual Homestead Accounts that will help people build savings and have access to credit.

S. 602 also would establish a new venture capital fund with state and local governments as partners to ensure that entrepreneurs and companies in these areas

get the capital they need to start and grow their businesses.

With your help, Mr. Chairman, during its debate on the JOBS Act, S. 1637, the

Senate agreed to a Managers Amendment that included two other key measures

from the New Homestead Act. Virtually identical provisions were also included in

the Heartland Investment and Rural Employment Act that you introduced just prior

to the August recess.

First, Section 633 of S. 1637 provides for rural investment tax credits. These tax

credits would encourage businesses that move to or expand in a high out-migration

rural county by offsetting the cost of newly constructed or existing buildings. Let’s

say, for example, that investors plan to build a new structure for a light manufacturing facility, and their structure would cost $100,000. With a rural investment tax

credit from state officials, these investors could claim a tax credit of approximately

$8,000 annually over a ten-year period. In present value terms, this credit effectively makes locating the facility in a high out-migration rural county less expensive

than alternative locations.

Second, Section 634 of S. 1637 provides for small business investment tax credits.

Under this provision, a state may choose to apply a portion of its rural investment

tax credit allocation for qualifying start-up or expanding small businesses with five

or fewer employees. In this case, the credits would help offset the cost of new funding needed for business expansion, including capital costs, plant and equipment, inventory expenses and wages. A taxpayer may claim up to $5,000 per year ($25,000

maximum for all years) in qualified rural small business investment credits.

Together, the rural investment tax credit and small business investment credit

would make available an estimated $641 million in credits for business investment

in high out-migration rural counties over the next decade. I look forward to working

with you, Senator Baucus and others to ensure that these provisions are included

in the final version of the JOBS Act or any other tax legislation sent to the President for his signature this fall.

It will take plenty of hard work to get these and the other provisions in the New

Homestead Act enacted into law. But with your help, Mr. Chairman, we will find

42

a way to reverse the trend of population loss in North Dakota, Nebraska, Iowa, Kansas and the rest of America’s Heartland.

PREPARED STATEMENT OF KEVIN EDBERG

Mr. Chairman, thank you for this opportunity to testify on tax related policies to

spur investment in rural communities, and in particular, how cooperatives can enhance economic opportunity in America’s small towns.

I am Kevin Edberg. I am the executive director of Cooperative Development Services (CDS). And I am here today representing the National Cooperative Business

Association.

CDS offers technical assistance to farmers and communities seeking to form their

own member-owned cooperatives. We work in Iowa, Minnesota, and Wisconsin. Our

portfolio includes new generation agricultural cooperatives, including renewable

fuels co-ops, landowner forestry cooperatives, housing cooperatives, food cooperatives

and many others. Our current projects in Iowa include providing technical assistance to Wholesome Harvest near Ames, a startup co-op for organic livestock producers, and Upper Mississippi Meats in Decorah, a natural meats co-op that is still

in the planning stages. Both of these cooperatives seek to capitalize on the rapid

growth in the organic and natural foods market. We are also working with Prairie’s

Edge, a farmer and landowner forestry co-op near Decorah. It provides farmers with

management, harvesting and marketing services that turn previously under managed woodlots into long-term, ongoing sources of revenue.

CDS was the nation’s first cooperative development center, formed nearly 20

years ago. We now work with a network of some 20 similar centers—known as Cooperation Works—that provide technical cooperative development assistance across

the country. This network includes the Iowa State Value-Added Agricultural Development Center. The centers conduct feasibility analyses, develop business plans,

and provide organizational assistance, such as help with developing bylaws and

other governing documents for cooperatives. The centers function as the only

sources of expertise in cooperative development. I have attached a list of cooperative

development centers as an appendix to my statement.

The National Cooperative Business Association, of which CDS has been a longtime member, has been a national partner with these centers, working to build a

strong cooperative development infrastructure for rural communities, helping support those of us doing co-op development on the ground. Headquartered in Washington, NCBA is the only national cooperative membership association representing

cooperatives of all types across all sectors of the economy, including agriculture,

childcare, electricity, housing, telecommunications and many others. NCBA’s mission is to develop, advance and protect cooperative enterprise.

First, on behalf of NCBA, I thank you for your years of support for cooperatives

of all types and your interest in their role as engines of economic growth in rural

communities. Your leadership is both recognized and appreciated by NCBA and its

members.

Cooperatives can and do play a key role in improving quality of life and economic

opportunity in rural America. Farm co-ops not only provide direct benefits to producers in the form of services, annual dividends, and often better prices; they generate jobs and income for the community. And by the very nature of co-ops, that

income stays in the communities in which it was generated; it doesn’t go to distant

investors.

Consumer-owned co-ops also provide vital services in rural communities where

other forms of business are often loath to locate. That’s because co-ops can provide

at-cost goods and services to their members and so don’t require the returns that

investor-owned businesses must generate. That’s why credit unions, farm credit

banks, and electric, telecommunications, food, housing and purchasing cooperatives

for small businesses (such as hardware store owners and local pharmacies) offer

great hope for revitalizing rural communities.

For example, many rural communities have watched their local grocery stores

close as rural populations decline, small business owners retire, and no new buyers

come forward. With the loss of a local source of food, comes greater economic decline. When people go elsewhere to buy groceries, they take their other business

with them. Co-ops can prevent that downward spiral.

Here’s one example of how innovative use of co-ops can stem that loss and promote greater economic growth. In 2001, the citizens of Barneveld, Wisconsin lost

their grocery store, forcing them to drive 30 miles roundtrip for even the most basic

household supplies—that was particularly hard on seniors who lack transportation.

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But last month, that community celebrated the opening of a new grocery store—

a co-op owned by 325 local consumers who each bought a $100 share in the business. Members also stepped forward to make loans to the co-op for the initial investment, with additional debt financing provided by the local bank. Cooperative Development Services provided technical assistance to the co-op, including the feasibility

analysis, development of the business plan and the community organizing work. The

co-op will provide four to five new jobs, with projected first year sales of $1.2 million.

Other cooperatives, such as consumer-owned healthcare clinics, childcare co-op,

housing cooperatives; landowner forestry cooperatives, small business purchasing cooperatives and others offer great promise for rural communities.

Sadly, co-ops are an underutilized rural economic development tool due to the

many economic and other barriers to their development.

Access to Capital

Among those barriers is access to capital—a key constraint for all types of cooperatives, but a particular problem for value-added, farmer-owned co-ops that often

require the construction or modification of capital-intensive processing facilities.

Generally, in a cooperative, the equity investment is provided by the members. More

than one viable co-op has failed before it ever got off the ground because the equity

drive failed—organizers couldn’t convince enough farmers to provide the equity required.

For some cooperatives, both Section 521 of the tax code as well as Capper Volstead requirements hamper a farm cooperative’s ability to bring in outside capital

by capping returns on capital stock at eight percent. Section 521 farm cooperatives

are further required to have substantially all of the voting stock held by producers

as well as a governance structure that provides for one-member, one-vote. Therefore,

to qualify for Section 521 treatment, co-ops are limited in their ability to bring in

significant outside investment.

Other cooperatives, those that neither require Capper Volstead protection nor

qualify as Section 521 cooperatives, face other limitations in their efforts to bring

in outside capital. In order to qualify for tax pass through treatment, the Internal

Revenue Service requires that cooperatives distribute profits to members based on

their patronage, rather than based on ownership share and generally requires evidence of democratic member control in the form of one-member, one-vote. Though

subchapter T cooperatives can bring in as much outside capital as they wish, they

are limited by the existing definition of cooperatives—the so-called ‘‘subordination

of capital’’ requirement—in how they can distribute earnings to those investors.

Earnings from member business must be distributed to members based on patronage.

In response, many farmers are forming cooperatives that then become co-owners

in an LLC, along with other outside investors. That is the case with virtually all

of the ethanol and biofuels co-ops that have formed in the Upper Midwest. This allows the co-op to represent their farmer members en bloc in the LLC while bringing

in outside partners into the processing business that farmers hope will ultimately

provide greater economic returns.

Alternatively, farmers are forming the initial business as an LLC owned by the

farmer-members and operate it as a cooperative, without the capital constraints.

They then enjoy single tax treatment under Subchapter K.

As you know, in response to the capital challenges, some states are creating new

state co-op statutes that allow cooperatives to bring in non-member capital, create

both patron and non-patron ‘‘members’’—that is, outside investors—and provide for

both greater financial and governance rights for those non-patron members. The coops can elect to file under Subchapter T or Subchapter K, as limited liability companies do.

Though many have greeted these hybrid statutes with enthusiasm, NCBA would

caution that they are a largely untested approach to capital generation. It is simply

too soon to tell whether they serve as an effective capital generation tool.

Uniform State Statute

The growth in these new ‘‘hybrid’’ statutes has prompted the National Conference

of Commissioners on Uniform State Laws to draft a uniform state co-op statute, confined to agricultural cooperatives, which has in turn raised questions about whether

current tax law for cooperatives needs to be modernized.

NCBA has created a working group to evaluate the myriad issues associated with

the draft uniform state statute, including the core question of when does a business

cease being a cooperative, and to provide NCCUSL with advice and input. We will

be looking at a variety of questions, including what minimum level of ownership and

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return must patrons have in order for the business to truly be a cooperative: In its

current form, the NCCUSL draft fundamentally changes the traditional definition

of a cooperative by defining members as both those who patronize the co-op and

those that invest in it. This change would be of great concern to a number of cooperatives. Key questions relate to how patrons retain control over the business to

ensure that it continues to meet the needs the business was created to address.

Cooperatives enjoy significant marketplace advantages because of their memberowned status—engendering greater consumer trust. That consumer confidence in cooperatives may be eroded if members no longer truly own and control the business.

NCBA will review the NCCUSL draft with an eye to strategies to enhance co-op

flexibility in raising capital while maintaining member ownership and control.

Subchapter T

To that end, we welcome your interest in authorizing the creation of a Subchapter

T Commission, provided for in the HIRE Act, to evaluate the many issues raised

by ongoing capital challenges and the new hybrid statutes. In particular, the need

to evaluate other laws that hamper cooperative development, including securities

laws, is long overdue. Compliance with federal securities laws is not an insignificant

thing. Currently, the Securities Act of 1933 contains an exemption for Section 521

cooperatives and the Securities Exchange Act of 1934 has an exemption for cooperative associations as defined in the 1929 Agriculture Marketing Act. The 1933 contains the basic registration requirements and exempts Section 521 cooperatives, and

should be expanded to exempt all cooperatives. Secondly, the Commission may wish

to re-examine the 1934 Act and consider whether it should be expanded as well.

Though the issues associated with securities laws are many, I can tell you that

from my perspective as a co-op developer, the costs of complying with securities registration requirements, or merely seeking exemption from them, can be burdensome

for new start-up cooperatives and majority farmer-owned LLCs.

Much of the reevaluation of cooperative structures has been driven by the significant capital barriers facing farmers seeking to develop new and expand existing cooperatives. But farmer-owned co-ops, though significant and important players in

rural economies, represent just one sector affected by Subchapter T. Virtually every

type of co-op, with the exception of credit unions and utility cooperatives, file under

the provisions of Subchapter T. This includes large purchasing cooperatives such as

ACE Hardware, with its thousands of small business owner-members in small rural

towns, as well as very small food and worker-owned cooperatives—all of which make

significant economic contributions to their communities. Their views and insights

into Subchapter T will help the Commission effectively conduct its work. Any

change in Subchapter T would have significant implications for all cooperatives.

NCBA therefore recommends that the legislation explicitly provide that members

of the Commission include legal and cooperative experts from the broadest cross-section of the cooperative sector as possible, including purchasing, consumer-owned and

worker-owned cooperatives. We would also recommend that the Commission be required to evaluate carefully any unintended consequences of recommendations it

considers.

Eliminating Tax Inequities

NCBA cautions that statutory changes that ease capital constraints on cooperatives don’t necessarily mean capital will begin to flow into rural cooperatives. Rural

areas, because of their sparse population and often less developed infrastructure will

always face challenges in attracting capital investment, regardless of the business

form. But eliminating tax inequities in concert with the provision of new tax incentives can go far in spurring new investment in rural cooperatives.

The provisions of the HIRE Act that eliminate tax inequities on cooperatives have

been long sought by cooperatives and those of us who do co-op development on the

ground.

First, eliminating the negative impact of the Dividend Allocation Rule as it has

been applied to cooperatives will provide significant benefits to cooperatives seeking

to raise additional expansion capital. The DAR unfairly increases the tax burden on

cooperatives that pay dividends on capital stock by reducing the deduction they allowed for their patronage dividends. As a result, the rule also reduces dividends

paid out to members. The triple-tax penalty imposed by the dividend allocation rule

impedes the co-op’s ability to raise investment and expansion capital. By some estimates, the DAR results in a 73 percent tax on nonpatronage earnings if a cooperative pays dividends on capital stock.

For agricultural co-ops operating in the increasingly concentrated and competitive

food industry, issuing nonvoting stock is a one avenue for raising new capital for

expansion. But those that do face significant tax burdens, lessening the overall imVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00048 Fmt 6601 Sfmt 6621 20338.000 SFINANC2 PsN: SFINANC2
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pact of stock issuance. Moreover, the rule discourages cooperatives that could issue

stock from doing so.

Though often thought to be most relevant to large agricultural cooperatives as

they issue preferred stock on public markets, the DAR also affects any cooperative,

large or small, that issues non-voting stock. And those cooperatives offer promise

for rural America.

VHA, Inc., is a national purchasing cooperative for community-owned hospitals

with 2,200 hospital member-owners, many in rural areas including 16 members in

Iowa. VHA plays a key role in keeping rural, small-bed, nonprofit community hospitals operating in small towns across America. Like many other services, hospital

care is not a profitable enterprise in sparsely populated areas. With few beds, these

hospitals face higher per patient costs. VHA helps them keep those costs down while

constantly improving quality.

VHA has issued non-voting stock to many of its members in order to raise capital.

But because of the enormous financial hit imposed by the DAR, VHA has refrained

from paying dividends on that stock. That, of course, makes that stock a less attractive investment for others.

Here’s another example: A small, worker-owned cooperative in Massachusetts

sells non-voting shares to its worker-members and outside investors. When it pays

dividends on that stock, which it must do to keep investors happy, its employees

are hard hit as the DAR necessarily reduces the size of the dividend they receive..

Yet issuing non-voting stock that provides a reasonable return to investors can

be a key tool for cooperatives. But in order for it to become so, the negative impacts

of the DAR must be eliminated. We thank you for your inclusion of this provision

in the HIRE Act and for your successful efforts to include it in the JOBS bill. We

know you have pursued every possible legislative strategy to secure its passage and

we applaud your determination and commitment. We look forward to working with

you to move the JOBS bill through conference and onto the President’s desk this

fall.

Second, Section 104 of the HIRE Act, which allows cooperatives to pass through

tax credits to their members will help eliminate long standing inequities faced by

cooperatives. Notably, it will provide tax parity to ethanol cooperatives, allowing

them to pass tax credits through to their members, leveling the playing field for

these co-ops who have, to date, not been able to take advantage of a key benefit

available to other small ethanol producers.

Third, the provisions of the HIRE Act that expand Section 521 eligibility to a

broader range of agricultural cooperatives will also provide needed flexibility to

farmers seeking to form new cooperatives and expand business services of existing

cooperatives.

The provisions of the HIRE Act that eliminate tax inequities and improve flexibility under the tax code is a key first step in enhancing cooperative viability and

increasing access to capital.

Housing Cooperatives: The Promise of the Community Homeownership Credit

Creating new tax-related incentives to spur formation of new cooperatives is another key step in promoting further cooperative development in rural areas and we

applaud your leadership in this area as well.

Specifically, the National Cooperative Business Association supports Section 310

of the HIRE Act, the Community Homeownership Tax Credit. Most significant about

this provision is that, for the first time, the tax code would provide parity for homeownership. To date, existing tax credits for affordable housing have been limited to

development of rental housing. Though these credits have done much to create new

affordable rental housing, they have done little to encourage homeownership, the

key avenue by which average citizens build assets and wealth. NCBA applauds the

inclusion of stock in housing cooperatives under the Community Homeownership

Credit provisions and the 10 percent set aside for nonprofit housing developers.

Creating affordable housing is a critical tool for revitalizing rural communities.

In the short term, the very act of housing development creates significant benefits:

use of local legal, architectural and consulting services; creation of construction jobs

with good (and taxable) wages; increased demand for building materials and services; and increased consumption of goods when residents move in. Analysis by the

National Association of Home Builders found that the first year economic impact of

development of 100 multifamily housing units was substantial, generating 121 local

jobs, $3.5 million in wages and salaries, $1.2 million in local business income, and

more than $ 400,000 in local taxes. The same analysis found significant long-term

economic benefits for local communities. Though 100 units is a substantially larger

development than a small rural community could support, those results inform rural

housing development efforts.

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There are other intangible benefits of expanding homeownership in rural communities. According to USDA’s Economic Research Service, ‘‘Homeowners tend to become more involved in their communities and work toward community improvements, such as better schools.’’

The bottom line is that homeownership in rural areas is a critical component of

rural economic development. Without local housing, the multiplier effects communities hope to create with new business development will be stymied. Workers need

an affordable place to live, work and shop. And availability of housing prevents existing residents from leaving, taking with them their patronage of grocery stores,

healthcare providers, daycare providers, banks and much more.

For example, in the community of Lanesboro, Minnesota, population 800,

Northcountry Cooperative Development Fund is rehabilitating a landmark building

and converting it to cooperative housing. That town is enjoying growth through a

rapidly expanding tourism market. The population of Lanesboro, like that of most

other rural towns, had been declining for years. The growth in tourism has helped

stabilize the population. But Lanesboro has substantial opportunity to grow if it can

provide the appropriate infrastructure, including housing. But as a small community, housing remains in short supply. Those working in Lanesboro to supply the

tourism market cannot necessarily live there. NCDF, a sister cooperative development organization, secured local property tax breaks from the municipality to create

the 21-unit housing cooperative. Providing those who work in Lanesboro with the

opportunity to live there as well will spur even greater growth for Lanesboro.

And yet, despite the importance of housing to rural economic development, rural

areas face unique affordable housing issues. Like other forms of housing development, small communities, particularly those with a population of 5,000 or less, often

are not attractive investment opportunities for most housing developers. The costs

of development often cannot be covered by sales costs—many rural residents simply

can’t afford to pay a price that compensates builders for the construction costs and

provides them with a return.

Though homeownership rates in rural areas tend to be higher than that for urban

areas, household income tends to be lower, making affordability a key issue. Poverty

rates in rural areas exceed that of urban areas by nearly three percent. Some 14

percent of rural populations, or 7.5 million people, are poor. And poverty rates for

rural minorities are even higher. As a result, homeownership for rural minorities

and the rural poor significantly lags behind that of the general population.

Tax credits to both for-profit and nonprofit developers of nonrental housing make

up the difference between the construction costs plus a reasonable return and a

sales price that is affordable to local residents—eliminating a key barrier to the development of affordable housing and, indeed, creating financial incentives to create

it.

In many rural areas, another key barrier to the development of affordable homeownership is construction capacity. Market demand does not support the assembly

and continued use of sufficient construction capacity to create economies of scale.

The tax credit should supplement market demand to make production at a reasonable scale possible.

Obviously, of particular interest to NCBA is the potential of the tax credit to spur

greater interest in and investment in housing cooperatives in rural areas—something we believe offers significant promise for rural residents, particularly seniors,

which I’ll address in just a moment. Housing cooperatives, particularly those for low

to middle income families, are among the most difficult co-ops to develop in rural

communities.

In addition to the financial barriers common to any form of affordable homeownership mentioned above, developers of housing co-ops face some unique barriers.

Though housing co-ops are common in urban areas, rural buyers and bankers have

little experience with housing cooperatives. The concept is foreign. In a housing cooperative, owners buy a share of the corporation, not their individual housing unit.

That requires a ‘‘share loan’’ from a bank rather than a typical mortgage. Housing

co-ops can also take out a blanket mortgage for the entire cooperative building, with

the owners paying their monthly charges to the co-op, which then makes the loan

payment to the lender.

Promoting understanding and buy-in of the co-op housing concept among potential

buyers and lenders takes considerable time, effort and resources. On top of that,

once a critical mass of buyers is found, substantial education in the governance

process of cooperatives must be conducted, bylaws and governing documents of the

co-op must be drafted, and a governing board must be established and functioning

even before residents move in.

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And, as with condominiums, housing co-op developers often must pre-sell a large

proportion of their units before they can secure debt financing. That increases development time and potentially raises costs for developers.

Despite these barriers, cooperatives offer substantial benefits to their memberowners that potentially make them not just more affordable to rural residents, but

more attractive to communities.

First, because a title search is not required, closing costs are substantially lower.

A cooperative that takes out a blanket loan for the entire corporation can set flexible

terms for buying into the co-op. Those members who might not qualify for an individual loan can still become homeowners. The combination of these factors creates

lower barriers to entry compared to other forms of homeownership—making homeownership more accessible to those who might not otherwise have access to it.

Housing cooperatives are extremely flexible, and can be designed to meet the specific needs of a given community. The co-op controls who can become a member of

the co-op, allowing, for example, the creation of a housing co-op exclusively for seniors or long-time residents of the community. And generally, relative to condominiums, cooperative housing shareholders have far more control over their housing situation. If residents want the housing to remain affordable, they can create a limited-equity cooperative where the growth in the sale price of units is constrained.

This can be particularly important for senior housing, where residents have fixed

incomes.

Offering a tax credit to developers will substantially increase the incentive for

housing cooperative development, making it more likely developers will be willing

to overcome these barriers, expanding homeownership options for middle and lower

income populations—particularly seniors.

Rental Housing Conversion Opportunities

A word about rental housing. The Community Homeownership Credit may help

convert aging Section 515 rental housing in rural areas into cooperatives, offering

low-income population homeownership opportunities. The Section 515 program, operated by USDA, is the primary source of affordable rental housing in rural America. But thousands of Section 515 units, built in the late 1970’s, are aging and are

in need of rehabilitation. At the same time, many of the owner-developers of these

rental properties are looking to sell their buildings. The opportunity to use the community homeownership tax credit in tandem with a coordinated program to rehabilitate and convert existing Section 515 units to cooperatives offers great opportunity

to increase homeownership and housing quality in rural America. USDA is currently exploring the development of a program to facilitate conversion of 515 units

to cooperatives. Such a program could work hand-in-glove with the Community

Homeownership Credit.

Senior Housing Cooperatives: Affordable Housing for Independent, Active Seniors

NCBA has long promoted housing cooperatives as a solution to meet the increasingly complex housing needs of rural seniors. We believe the Community Homeownership Credit has particularly strong potential to spur development of senior

housing cooperatives.

The rural elderly face unique housing challenges. About 2.5 million elderly households in rural America, or 42 percent of rural seniors, have very low incomes—at

or below 50 percent of their area’s median income. Twenty-two percent of rural seniors live below the poverty line. Although housing costs in rural areas tend to be

lower than in cities, many senior households, because they live on fixed incomes,

have difficulty meeting even these lower housing costs. Twenty-five percent of rural

senior households are cost burdened—that is, they pay more than 30 percent of

their monthly income on housing. Affordability issues for seniors that rent are even

more severe. And elderly women who live alone in rural areas are more likely than

their male counterparts to be poor and face significant housing cost burdens.

Despite high ownership rates in rural areas, particularly among the elderly, the

quality of housing continues to be an issue. The housing stock in which seniors live

tends to be significantly older. According to the Housing Assistance Council, among

all elderly households, those in rural areas tend to have the highest housing quality

problems. Not only are the homes owned by seniors generally older, seniors on fixed

incomes have limited ability to maintain them. HAC also reports that nearly a quarter of rural seniors report having one or more physical limitations which further

limits their ability to maintain their homes and increases their need for adaptive

housing.

Despite these statistics, rural seniors, including those living in substandard housing, demonstrate a strong preference for remaining in their homes, not necessarily

because they prefer that living arrangement, but because they do not wish to leave

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their community, lose their independence, or move into a nursing home. In most

rural communities, seniors who no longer are able to or want to maintain their single family homes have one of two options if they wish to stay in the communities

in which they’ve lived for decades and where they’ve raised their families: they can

move into rental housing which depletes their equity, or they can move into a nursing home—an unpalatable option for seniors who don’t need full care and one which

decimates their lifetime savings. There simply are no multifamily homeownership

options for seniors in rural communities. If they want them, seniors must leave

their communities.

These issues will not go away. They will intensify as America ages. By 2030, researchers predict that seniors, as a percentage of the population, will grow from 13

percent to 20 percent, intensifying housing and care issues. Where will they live?

Housing co-ops form at least a partial answer to that question. For rural areas

in particular, senior housing cooperatives have the potential to fill the housing gap.

Senior housing cooperatives offer a number of attractive benefits to seniors.

First, housing co-ops allow seniors to retain their equity. Second, housing co-ops

allow seniors to live independently, but with some level of supportive services. And

because housing cooperatives are controlled by the member-owners, seniors can decide what level of assistive service they want for their cooperative and how much

they will pay for them. Third, because the seniors serve on the co-op’s governing

board, they stay active and involved in the co-op. Fourth, the co-op creates a natural

community of people of similar age and with similar interests, further encouraging

seniors to be active even in their later years. The result is a homeownership situation that allows seniors to age in place. And finally, senior housing co-ops can organize as limited equity cooperatives—co-ops that control the rate of growth in the

value of the shares in order to keep the units affordable. While on its face the inability to grow one’s equity may seem unattractive, for seniors it isn’t necessarily

so. They do not necessarily need substantial equity growth. Moreover, by controlling

the costs of the units, the units are in greater demand, making it easier for seniors

to quickly sell when they need to. In some areas, senior housing co-ops have long

waiting lists of potential members.

Past development of senior housing co-ops in rural areas not only demonstrates

the feasibility of this housing option, but also high satisfaction among seniors for

their new living arrangements. Across the country, there are nearly 60 senior housing cooperatives.

Many of them are clustered in the Midwest, developed by then-Homestead Housing Center, which formed 18 senior housing co-ops in rural Minnesota, Wisconsin

and Iowa in the 1990s. Nine Homestead senior housing cooperatives are located in

Iowa in the towns of Denison, Estherville, Greenfield, Hartley, Laurens, Hull, New

Hampton, Roland and Spirit Lake.

A 2001 survey of 163 senior Homestead residents in Iowa and Minnesota found

that their choice to buy a share in the housing cooperatives was driven by two main

factors: ease of home maintenance and a desire to stay in the community. Respondents also reported high satisfaction with their housing co-op purchase, reporting a

positive impact on their ability to live independently; personal safety; life satisfaction; access to activities and entertainment; happiness; amount of contact with

friends; and their personal health. Other surveys have found similar results.

Senior housing co-ops are good for rural communities as well. Seniors are not only

active participants in the community; they are significant consumers of goods and

services. When seniors leave a community, they not only take with them their lifelong accumulation of assets, they take their banking, shopping and charitable contributions. Perhaps most important, they also take their purchasing power for

healthcare and pharmaceuticals, which can have a significant impact on Main

Street businesses. The loss of these important healthcare consumers can lead to a

decline in the supply of overall healthcare services for the rest of the town’s residents.

Additionally, when seniors leave their single-family homes for housing co-ops,

they free up that housing stock for younger families who have limited housing

choices in rural communities. Among the seniors who moved into the Homestead

Housing cooperatives mentioned above, nearly all moved in after selling their former

homes.

Since the Homestead senior housing cooperatives were developed in the 1990s,

there has been growing interest in developing senior housing cooperatives. I will be

meeting with the Iowa Institute of Cooperatives later this year to talk with them

about development opportunities in this state. I know their interest in this legislation will be keen.

Mr. Chairman, NCBA strongly supports the Community Homeownership Credit

program because we believe it can be a key tool for expanding home ownership

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through cooperative development in American’s small towns. We believe it may be

a particularly helpful in spurring development of rural senior housing co-ops—helping fill the growing housing gap facing America’s elderly population.

The only recommendation we would add for improvement of the program is to explicitly make organizational development costs part of the eligible basis for the tax

credit for those developers of housing cooperatives. These costs—the community,

buyer, and lender educational processes, the development of the organization’s governance structure and legal governing documents and processes and so forth, all impose real costs on developers. In order to put co-ops on a level playing field with

other types of housing development, co-op developers should be allowed to include

these costs among the development costs for a housing co-op project. Developing a

strong organizational structure for a housing cooperative, senior or otherwise, is as

important to the formation of a sound cooperative as the bricks and mortar.

Other Recommendations

NCBA makes two other recommendations for your consideration.

Tax Credits for Co-op Investment

In the category of tax incentives, another significant improvement in federal tax

law would be the creation of a tax credit program for farmer-members that make

equity investments in majority farmer-owned, value-added agricultural enterprises.

Variation of tax credit programs have been adopted in Missouri, Colorado and North

Dakota, which offer a credit of between 30 to 50 percent for a farmer’s investment

of between $15,000 and $20,000. Credits can be sold or applied to existing tax liabilities. A tax credit for farmers investing in value-added ventures would reduce substantially both the risks and cost of investment in value-added cooperatives. NCBA

believes this would be a valuable capital generation tool for value-added farmer cooperatives.

Similar tax credits for investment in other types of cooperatives would go far in

encouraging greater cooperative development in rural communities. For example, a

tax credit for small businesses in rural areas for their initial equity investment in

a purchasing co-op could help reduce the financial barriers small rural businesses

face in joining national purchasing cooperatives. These purchasing cooperatives help

owners of independent Main Street hardware stores, pharmacies, grocery stores,

and other small businesses survive and thrive by providing them with the purchasing power enjoyed by larger national chains.

We stand ready to work with you on legislation that would expand investment

in all types of cooperatives that can help rural communities prosper.

Maintain and Sustain the Co-op Development Infrastructure

Finally, NCBA urges that statutory changes that spur investment in cooperatives

be accompanied by a sound cooperative development infrastructure. In my experience as a cooperative developer, a solid feasibility analysis and sound business plan

are among the first capital hurdles startup farmer cooperatives face. And they need

access to cooperative development expertise in order to conduct them. While farmers

may have access to a variety of consulting services, few business developers have

expertise in analyzing markets and developing business plans specifically for member-owned cooperatives. Poor feasibility analyses and unrealistic business plans that

don’t account for the unique characteristics of member-ownership lead to failed businesses and significant financial losses for farmers.

Moreover without solid feasibility studies and a complete business plan, both equity investment and debt financing can be nearly impossible to come by. Even with

incentives, farmers and lenders are wisely reluctant to take risks on new business

ventures that lack a solid business foundation.

The nation’s 20 cooperative development centers, including CDS and the Iowa

State Value-Added Center, provide the technical assistance farmers and other startup cooperatives need to develop both feasibility analyses and business plans for new

member-owned businesses. The centers offer business and organizational expertise

in cooperatives that other business developers lack. And they are innovators—they

pioneered development of new generation, value-added agricultural cooperatives.

They also provide technical assistance to other types of cooperatives, including rural

senior housing co-ops and many others.

USDA’s Rural Cooperative Development Grants program provides core funding for

these Centers. Unfortunately, funding levels have remained largely flat over the

years. And for 2005, the House of Representatives cut the funding for this valuable

program by $1 million. We urge your support for funding for the RCDG program

at $7 million in FY2005 and for ongoing growth in the program. The RCDG program

is critical for maintaining and sustaining the cooperative development infrastrucVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 20338.000 SFINANC2 PsN: SFINANC2
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ture. Without that infrastructure, cooperative development will be significantly

hampered.

Mr. Chairman, on behalf of NCBA, we thank you for this opportunity to share

our views on the Heartland Investment and Rural Employment Act. We believe that

the cooperative and housing provisions of this bill will go far in advancing cooperative development and business expansion in rural communities, creating jobs, income and opportunity. And again, we thank you for your ongoing support for cooperatives and your leadership in developing and promoting the policies that advance them.

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PREPARED STATEMENT OF PETER K. FROELICH

Mr. Chairman, I would like to thank this committee for providing me with the

honor of speaking with you today. I thank you for your holding this hearing and

congratulate you for your wisdom in recognizing that rural issues are critical for our

nation. My name is Peter Froelich and I am an assistant to the President at Dickinson State University in Dickinson North Dakota. I was also the coordinator of the

Great Plains Population Symposium Project. I am a sociologist who has studied the

demographic trends and communities on the Great Plains. I am also a citizen from

the rural Great Plains and I have direct experience with life in the communities

there. I have been invited here to describe what I have learned about the population

trends affecting rural America and to briefly comment on the New Homestead Act

and the Rural Investment Tax Credit provisions that are included in the JOBS Act

and the HIRE Act.

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The need for action to preserve the communities in much of rural America is urgent. The communities in agriculturally dependent rural areas have been

slowly eroding for decades, and many are now gone or very nearly at their end. Nowhere is this erosion more evident than in the Great Plains, at the very center of

the nation. As rural communities erode, rural American culture is also disappearing.

I believe that the conditions leading to the loss of youth and young families through

out-migration are the greatest current threat to rural America. I also believe that

an absence of viable populations and healthy local societies may eventually undermine the security of America’s vast rural territories along with the security for its

food system and large portions of its basic infrastructure for transportation, energy

production.

Rural communities are being silently destroyed by the out-migration of

young people, consolidation of agriculture, and the concentration of amenities and non-agricultural opportunities in urban places. Although the problems of rural America may be manifested at the local level, the roots of those problems are often beyond the reach of local leaders. The vision, understanding, and

support of our national leaders are critical for rural well being. Rural America needs

a national policy that aggressively addresses rural population loss and the fundamental changes in the economic underpinnings of rural communities. Today only a

small minority of rural Americans farm as their primary occupation. If rural communities are to survive, there must be a new vision for rural society that extends

beyond an agricultural base. I believe such a vision can only develop through the

understanding and considered action of national leaders such as yourselves. Your

work here is critical and the members of this body should be commended for your

continuing efforts on behalf of rural people.

It is critical that we develop a new framework for rural policy that recognizes the many rural issues that cannot be adequately addressed through

farm policy. I applaud your efforts to help rural people overcome obstacles to rural

well-being. I encourage you to continue pressing for a new and broader policy framework through which rural well-being can be assured and the diverse issues that affect rural communities can be comprehensively addressed. I strongly support the

proposed ‘‘New Homestead Act’’ (S. 602) which is a promising step toward establishing such a framework.

Trends and Conditions

There has been a consistent and continual loss of a substantial portion

of the population from rural, agriculturally dependent areas of the United

States, particularly in the Great Plains. This loss has occurred for at least half

a century in many areas and now threatens the very existence of many communities

within these regions. Figure 1 shows the distribution of population declines nation

wide between 1990 and 2000.

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Out-migration tends to be age-specific and it is younger people who are

most likely to move. The loss of younger people and the aging of those who remain have shifted the age structure of rural populations with the result that there

are declining birth rates and rising death rates. In an increasing number of rural

counties there is natural population decrease because deaths now exceed births. Figure 2 shows counties in the Great Plains states that have experienced natural population decrease between 1980 and 1999. Because the trend for out-migration from

rural areas is on-going and tends to occur most heavily among the young, we can

expect that the extent of natural decrease will spread in coming years and an increasing number of rural communities will lose the biological vitality needed to reproduce themselves.

The impact of out-migration on the populations of rural areas can also be seen

when the age and sex structure of rural counties are displayed graphically in the

form of population pyramids. The graph for a healthy population that is maintaining

itself or growing will be shaped more or less like a pyramid and will be wider at

the base where the bars for younger cohorts are displayed and narrower at the top

where the bars for older cohorts are displayed. The population pyramids for many

rural counties are beginning to look like inverted pyramids in that the bars for the

oldest cohorts are wider than those for younger generations.

As an example, figure 3 shows a population pyramid for McIntosh county in south

central North Dakota. It depicts a population with failing vital signs that is losing

its potential to maintain itself without an influx of new people in their child bearing

years. In addition, this county will face enormous social and economic problems. It

will face a staggering burden in meeting the social and health needs of a growing

population of elderly people, its schools and services for youth will be difficult to

maintain, its entry level labor force is nearly depleted, and its pool of potential new

leaders is almost gone. Out of 53 counties in North Dakota, the pyramids for all

but 3 indicate the development of a similar pattern of loss among the younger ages,

particularly young adults. The population pyramid for McIntosh county North Dakota portends an unfolding disaster. It is a pattern that is repeated in many rural

areas suffering from out-migration.

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In October of 2001, my colleagues and I hosted a symposium conference focused

on national policies for addressing the ongoing population losses from the rural

Great Plains in Bismarck, North Dakota. At the symposium we heard evidence of

a wide variety of problems impacting the Great Plains and rural America in general.

The problems faced by McIntosh County are faced by counties across rural America.

Population loss and the shifting age structure has strained the social infrastructure

and makes it increasingly difficult to maintain services for younger people while

also meeting the growing needs of the elderly. Out-migration is a growing constraint

on the potential for rural prosperity with the loss of labor, income, leadership, and

entrepreneurs.

At a time when health care is becoming a critical concern for meeting the

needs of an aging population we find that our rural health care system lags

behind the nation in terms of availability, cost, and quality. As might be expected, the health status of rural residents is also lower than that of non-rural residents. Rural health care receives inadequate support and reimbursement from government programs, and the insurance industry. There are fewer quality facilities,

and payments for services have been lower in rural areas. It is more difficult to find

and retain physicians and health professionals who want to practice in rural areas.

Rural residents are more likely to be uninsured and must often travel for even basic

care. There are fewer alternatives for care in areas with low population density and

it is difficult to achieve economies of scale. Costs for services and for prescriptions

tend to be higher. The challenge of providing even basic health care has contributed

to a lack of emphasis on preventive medicine and a higher proportion of rural residents who suffer from ailments which could have been avoided.

While rural areas and communities of the Great Plains are known for high levels

of certain aspects of what is called ‘‘social capital;’’ growing shortages of leadership,

the increasing potential for conflicts of interest, continuing social inequality, exclusion of some groups from development efforts, and the inability or unwillingness of

many rural people and communities to abandon small town rivalries are all identified as barriers to development of the kinds of social capital needed for successful

rural development.

The rural economy in the Great Plains and elsewhere in the United States continues to be dominated by commodity agriculture and low wage employment. Communities with local economies based primarily on the availability of low cost labor

and commodities which can be produced cheaply in many places around the globe

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are truly involved in a global race to the bottom of the economic ladder. For those

communities economic inequality and decline are likely to continue.

The flat opportunity structure of rural economies are out of step with a

society that values educational achievement. There is a direct relationship

between wage levels and opportunities for advancement and the number of

college graduates who leave rural areas. On average, the State of North Dakota

loses roughly the same number of college educated people as its colleges and universities produce. Rural businesses that could once rely on high rural fertility to supply

them with cheap labor are soon likely to find that they cannot hire help at any

price. Although increased wages for rural workers may be difficult for some small

business enterprises, the first response to low wages by today’s rural young people

is often simply to leave. In North Dakota, it is rare to find a young person who says

they are willing to accept low wage employment in order to stay in their community.

None of these businesses are likely to survive when their local labor pools are finally

emptied. The loss of our highly educated young people is also a severe obstacle to

new growth and diversification of rural economies.

Rural assistance has depended heavily on government payments to the

individuals involved in agriculture. In comparison with urban America, a

much smaller proportion of federal funds go to rural community development projects. The emphasis on individual transfer payments over funding for

community development contributes to a lack of investment in rural economic infrastructure and a continuing lag in rural well being. It is critical that our national

policies recognize the need for new investment in the infrastructure and economic

capacity of rural places and seek to either provide or stimulate that investment.

Eligibility for assistance through federal grants often hinges on criteria

that make sense for the conditions in urban but not in rural America such

as high levels of poverty or unemployment. While high rates of poverty or unemployment may indicate the distress of urban communities, high out-migration is

often the rural response and is a key symptom of rural economic distress. It is critical that our policy makers consciously avoid creating policies that create unintended disadvantages to people and businesses located in rural areas because by relying on inappropriate measures and criteria that fail to give adequate weight to

rural realities.

There has been job growth in some rural areas over the past decade but the economic progress of rural communities is uneven and on average rural wage earners

make only about 70% of what their urban counterparts make. Approximately 60%

of rural communities are seeking new ‘‘economic engines’’ that can provide adequate

employment for their residents. New technologies are often promoted for their promise to reduce the disadvantages of rural location, however, that promise is not being

realized. Rural communities continue to lag behind urbanized areas in the development of new technological infrastructure and commercial e-business enterprises.

There is a digital divide between rural and urban America, and rural America lags

in two key areas: access to state of the art broadband internet services and wireless

services.

Although jobs are an important reason for many people to move to or

stay in a community, our research shows that people are most likely to

come to a rural Great Plains community because of family connections. Unless forced to leave, they are most likely to stay in a community because

it is a nice place to live and because of their family connections. Rural development efforts have too often focused narrowly on primary sector economic development and ignored other aspects of the community including economic enterprises

that enhance quality of life. Social and economic relationships are both important.

The people most likely to leave rural communities are those who are the least connected to their communities, regardless of employment opportunities. They tend to

be under the age of 30, live alone, and dislike the social climate and/or the lack of

infrastructure, services, and consumer choice. People can find economic opportunities in many places, but they are most likely to stay in rural communities when

they are connected to those communities by more than a job.

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The decline of rural America is often attributed to the consolidation of

agriculture, but it can also be said that an equally important cause for

rural decline has been a failure to develop new opportunities outside of agriculture in rural areas. Figure 4 illustrates the declining number of farm dependent counties in the United States. There is a striking similarity between the

earlier pattern of farm dependency and the pattern of population loss depicted in

Figure 1.

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Local entrepreneurship is critical to the future of rural America. Rural

economic development has also often relied on strategies aimed at attracting businesses from outside, especially branch manufacturing plants. Globalization has

made this strategy more difficult as many of the businesses that are willing to relocate are now likely to move out of the country. Figure 5 illustrates how the loss of

manufacturing jobs in the United States has corresponded with increased exports

of manufactured goods from developing nations. In effect, globalization is causing

industrial development to leap-frog over rural communities in the United States and

take root in other countries where the lowest production costs can be found.

If rural places are to prosper, they must have a national rural policy that

encourages rural people to be builders and that supports local institutions

that can help them identify and address a diversity of opportunities and

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conditions. Rural economic development is most likely to have long term success

when it fosters local entrepreneurship. It must support a range of enterprises, both

those in primary industries and those that lead to a high quality of life and build

the economic multiplier effect within the community.

In the United States today, achieving such a policy is an immense challenge because there is no unified vision for the future of rural America and

rural people are continually challenged to define the contemporary value

of their communities to the nation as a whole. Rural Americans need leaders

who can help them articulate a vision that brings them back into the mainstream

of American life. They need policies that are sensitive to the differences between

rural places, that protect and enhance rural environments, and that help rural communities develop from within in new directions.

Comments on the New Homestead Act, The JOBS Act, and the HIRE Act.

The willingness of Congress to fund programs such as the Great Plains Population

Symposium, and propose legislation such as the ‘‘New Homestead Act’’ (S.602) show

that our nation’s leaders are concerned with the future of rural America. S.602 provides strong incentives for young people to stay in or relocate to the rural communities that have been most heavily impacted by the out-migration of youth. The bill

counters a number of issues that may drive young people away from rural places

by offering to help repay college loans, provide tax credits for the purchase of new

homes, protecting from losses of real estate values. By establishing homestead savings accounts with matched deposits the bill also provides a source of financial support for aspiring entrepreneurs and a clear advantage to those who would stay in

the effected areas.

The findings of the Great Plains Population Symposium project strongly suggest

that the future of rural communities depends heavily on their ability to foster entrepreneurship. The tax credits for small business investments in 5.602 are especially

important for supporting entrepreneurs in high out-migration areas. These incentives will help rural people in high out-migration areas build and expand the businesses needed to re-establish economic vitality in their communities. The difficulties

that rural entrepreneurs encounter in obtaining appropriately scaled equity investment capital was also frequently mentioned as an obstacle to rural entrepreneurship

in our discussions of the impediments to rural development. The provision in S.602

for the establishment of a New Venture Capital Fund will have a major impact on

rural entrepreneurship by ensuring that rural entrepreneurs and companies in high

out-migration areas will have access to the equity capital they need.

I would like to thank you for moving ahead with some of the provisions of S.602.

It is my understanding that both the JOBS Act (5.1637) which was passed by the

Senate in May and the proposed HIRE Act include rural investment tax credits

similar to those proposed in S.602. ‘‘Rural Investment Tax Credits’’ will encourage

investments in high out-migration counties by annually allocating $185,000 for each

high out-migration county to offset business costs of up to 70% of the present value

for new buildings or 30% of the present value for existing buildings over 10 years.

These credits will create a clear advantage for businesses that are able to take advantage of them. ‘‘Rural Small Business Investment Credits’’ will also be made

available to help offset up to 30% of the costs of small businesses in high out-migration counties in states that choose to allocate a portion (up to 10% in the JOBS Act

or 20% in the HIRE Act) of the rural investment tax credit allocation for that purpose.

I strongly support these tax credits because they will help support the entrepreneurs who are needed in our declining rural areas. The evidence I have reviewed

suggests that for most declining rural places the best development opportunities will

involve supporting local entrepreneurs and small businesses. These Rural Small

Business Investment Credits are especially important because they are specifically

targeted to small businesses with 5 or fewer full time employees. In southwestern

North Dakota, where I live, nearly a third of all jobs are due to self-employment.

Though they are seldom recognized, such small businesses are a mainstay of the

local economy and will likely be a key for the revitalization of rural areas.

Given the resource constraints under which you must act, I applaud the wisdom

and courage you have displayed in advancing these measures. If I were to make any

adjustment to these provisions it would be to strengthen the level of support for

small business development by raising the limit for the proportion of funds that can

be allocated for Rural Small Business Investment Credits to at least the 20% level

that is specified in the HIRE Act so that there can be more flexibility in supporting

aspiring entrepreneurs who may or may not need to make investments in real estate in order to address the opportunities they have identified. I also urge you to

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continue your efforts to fully enact the provisions in the New Homestead Act

(S.602).

I would like to thank you again for the opportunity to be here today and I hope

that my comments are useful for your important work.

PREPARED STATEMENT OF HON. CHARLES E. GRASSLEY

I am very happy to be in Sioux City, Iowa today, to bring national focus on an

issue that I find disturbing—the continuous loss of our young people and our families from the rural Midwest. I see many people in this room that I have known for

years. I met many more of you this morning, and I am pleased to see such a collection of talented, dedicated leaders of our communities. These are leaders not only

from Iowa, but Nebraska and the Dakotas and several other surrounding states. All

of you have come here with a common concern, that being how to stem this tide

of rural out-migration.

Now I am the chairman of the Finance Committee of the United States Senate,

and we have begun to examine the role of tax incentives in preserving rural communities. In some areas, tax laws are unfair to rural communities or don’t do enough

to build economic growth. In other areas the tax code is out of date and needs to

come into the 21st Century. Today we will discuss a series of proposals that address

those issues. Specifically, the witnesses that have joined us today will focus on a

bill that I introduced called the Heartland Investment and Rural Employment Act,

known as HIRE. My goal with this legislation is to update tax laws and create new

incentives that make sense for rural America.

Now don’t get me wrong, rural America has a lot to be proud of, but while the

agricultural economy is showing strength that we have not seen in years, I think

Congress should do its part to help bolster some of our successes. Just think, in the

last 10 to 20 years, rural America has built 12 farmer-owned cooperative ethanol

plants in Iowa, and several additional plants are under construction. Nationally we

have 74 ethanol plants producing 2.9 billion gallons and 14 plants under construction to bring industry production to 3.4 billion gallons this year. To put this in perspective, the U.S. produced 10 billion bushels of corn in 2003. Of that, nearly 1.1

billion bushels of corn were used to produce the 2.9 billion gallons of ethanol. The

ethanol industry has created rural jobs and economic diversity, not to mention decreased dependence on foreign oil. It is truly a hometown success.

What’s more, we have more rural success stories. Iowa ranks fourth in the nation

in terms of installed wind generation capacity, generating enough electricity to serve

over 300,000 homes. Rural America is clearly on the forefront of reducing our nation’s dependence on foreign sources of energy. But we need more of these success

stories, and I believe a few changes to a very complex tax code could help make

those stories come true.

Now let’s talk about unfinished business. Today some of the things we’ll talk

about will sound familiar—that’s because we have been fighting for them for years.

They are good ideas that enjoy strong bipartisan support and were actually approved in 1999 as part of the Taxpayer Relief Act, which then-President Clinton vetoed.

The first is a proposal I call FFARRM Accounts—that stands for Farm, Fishing

and Ranch Risk Management Accounts. These farmer savings accounts would allow

farmers to contribute up to 20 percent of their income in an account, and deduct

it in the same year. FFARRM accounts would be a very important risk management

tool to help farmers put away money when there’s actual income, so that in really

bad times there would be a safety net.

The other proposal—and my good friend Senator Sam Brownback of Kansas has

taken the lead on fixing this problem—is the unfair IRS decisions on self-employment tax on farmers who participate in the Conservation Reserve Program.

And of course, there is our ongoing effort to address the Dividend Allocation Rule,

and end the unfair third level of tax on cooperative dividends. This provision has

been included in my Jumpstart Our Business Strength Act, known as JOBS, which

will be in conference with the House as soon as we return after Labor Day, so with

any luck and a lot of hard work on the conference, we could have a bill to the President by October.

In addition, our witnesses today will be discussing the issues of out-migration and

the potential effect the proposals of the Heartland Investment and Rural Employment Act could produce.

Now, before introducing our witnesses for today’s hearing, I will be reading Senator Max Baucus’ opening statement. He is in his home state of Montana and was

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unable to join us today. I know cooperatives are just as important to Max as they

are to me.

We have included some of the important provisions from the New Homestead Act, which was originally sponsored by Senator Byron Dorgan of North Dakota and 12

original co-sponsors including Senators Chuck Hagel of Nebraska, Tom Daschle

from South Dakota and Sam Brownback of Kansas. Senators Dorgan, Daschle and

Hagel were unable to join us today, but their statements will be included in the

record and copies are on the table for the audience to review. We have included

these provisions in both the HIRE Act and the JOBS Act, which awaits conference

with the House. Under current law, there is no special assistance for businesses in

counties that are losing population. My good friend Senator Brownback has joined

us today to more fully explain the motivation and tax policy behind the New Homestead Act. Even though Senator Brownback is not a member of the Finance Committee, he always shows leadership and insight on agriculture and rural economic

issues, and I value his insight and support in these important matters. Senator

Brownback, would you like to begin?

PREPARED STATEMENT OF HON. CHUCK HAGEL

Mr. Chairman, I want to thank you for holding this important hearing concerning

the preservation of America’s rural communities and for your strong support of this

effort. Rural America has seen a steady deterioration over the past several decades.

During the last 20 years, residents of small Midwestern towns have deserted rural

America in ever increasing numbers. Raised and educated in small towns throughout the Midwest, rural youth have moved to larger cities in search of opportunities

unavailable in small-town America. Main Street businesses have closed, and family

farms continue to be consolidated into larger, less labor-intensive, operations.

The lack of economic development and opportunities in rural areas has forced individuals and businesses to migrate from rural to urban areas at unprecedented

rates. In March 2003, Senator Dorgan and I introduced the New Homestead Act in

an effort to help reverse the longtime trend of population decline in rural America.

The New Homestead Act would create new economic incentives for small businesses and individuals in counties with high out-migration. Just as the original

Homestead Act of 1862 enabled the settlement of the frontier, this legislation would

help attract entrepreneurs and younger workers to rural areas suffering from high

population loss, while giving current rural residents a better chance to preserve

their heritage.

For decades, family farms and main street businesses have been disappearing

from America’s Heartland. As those farms and business fade away, so too do the

small towns—from the Great Plains to the Deep South—from the Midwest to the

Southwest. Young people move away, forced to look for jobs and opportunities in already-overcrowded metropolitan areas. As a result, hundreds of small communities

now struggle for survival.

Half the rural counties in America lost population in the 2000 census. Three of

every four rural counties experienced below-average economic growth—despite the

record levels of farm subsidies in the 1990s.

During the past fifty years, rural America has stagnated; over the same time

span, the number of people living in urban areas has more than doubled.

More than 140 years after President Lincoln signed the original Homestead Act—

Nebraska is one of the states hardest hit by the trend of rural out-migration. Of

Nebraska’s 93 counties, 55 have lost at least ten percent of their residents over the

past twenty years due to out-migration. Most of these counties will see similar population losses over the next two decades without an expansion of non-agricultural industry.

The problem is that America has no comprehensive rural development policy. We

must recognize there is more to stimulating the rural economy than just providing

farm price supports and that national agricultural policies have not helped farming

communities reverse rural decline. As an example of our insufficient farm policies,

less than one percent of the funding in the recently passed farm bill was allocated

for rural development.

The New Homestead Act offers some real solutions that will help close the gap

between rural America and the rest of our country. It targets three categories—individuals, businesses, and capital formation.

The first section provides incentives for individuals to migrate to rural communities. The bill would repay up to 50% of college loans for qualifying individuals in

rural areas. In addition, the bill would provide tax credits for home purchases, and

tax deductions for losses in home values. It would also create tax-favored HomeVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00065 Fmt 6601 Sfmt 6621 20338.000 SFINANC2 PsN: SFINANC2
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stead Accounts, that could be used to build savings, to pay educational expenses,

to make first-time home purchases, or to start a small business.

The second section would help provide new jobs and opportunities by encouraging

business growth in high out-migration areas. Rural Investment Tax Credits, administered by the states, would provide incentives for new businesses to locate in rural

areas, while existing rural businesses could expand operations.

The third section would create a $3.3 billion Venture Capital Fund that invests

in high out-migration counties. As in metropolitan areas, rural businesses need capital to exist and expand. This would bring together federal, state and private funds

to help rural business ventures attract necessary equity funding.

It is in the broad interest of the country that we do not forget our rural areas.

Again, I thank you, Mr. Chairman, for holding this hearing and focusing on a

major problem facing rural America. I hope this hearing will help raise a new

awareness of rural America’s plight and the policies necessary to help restore a new

vitality.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF CHUCK HASSEBROOK

Thank you for the opportunity to testify. I will speak in support of the New Homestead Act and share some thoughts on agricultural provisions of the Heartland Investment and Rural Employment (HIRE) Act.

We strongly support the New Homestead Act. It is particularly critical in the farm

and ranch communities of our region. Our 2003 report; Swept Away analyzed the

182 counties in Iowa, Kansas, Minnesota, Nebraska and the Dakotas that directly

rely on farming and ranching for at least twenty percent of income.

More than 80 percent of these counties are losing population. As a group, they

suffer poverty at significantly higher rates than the region’s metropolitan counties.

Average earnings are a little over half of earnings in the region’s metropolitan counties.

The New Homestead Act offers bold action to reverse decline in these counties.

Most important, it makes a statement that the communities of rural America matter. Strong communities bring out the best in us. They restrain our most selfish impulses and elevate our instinct to help others; essential to building a strong society.

It’s time for public policy to recognize that. The New Homestead Act does so.

Its college loan forgiveness provisions would enable young people who want to return home to make that choice, rather than being forced to move.to higher paying

areas to service college loans. The tax credit for home purchases could make the difference in enabling many modest income families to buy homes and put down roots.

in rural America, where they want to be, rather than being forced by economics to

pursue their dreams elsewhere.

We are especially supportive of two provisions aimed at stimulating small business development and creating opportunities for modest income rural people to build

assets:

1. The Rural Small Business Investment Credit provides a 30 percent credit

up to $5,000 annually and $25,000 lifetime to establish or expand owner-operated small businesses with five or fewer employees. The credit would be for all

business investments (working capital, inventory, wages, etc.).

2. Individual Homestead Accounts provide tax incentives and matching funds

for saving money to start a business, buy a home, get education or pay for

health care.

We strongly laud your leadership Senator Grassley in including the Rural Small

Business Investment Credit in HIRE and the JOBS tax bill passed by the Senate.

We encourage you to work in the JOBS Conference Committee to secure its adoption. However, we ask you to make one refinement.

The Senate JOBS provision would provide Rural Investment Tax Credits of

$165,000 per eligible county. But no more than 10 percent of that amount—$16,500

per county—could be allocated to the Rural Small Business Investment Credit. The

other 90 percent would be dedicated to credits for constructing or rehabilitating

buildings.

We urge you to remove the 10 percent cap on small business credits and allow

states and communities the flexibility to determine how to best use their credits and

decide which development path makes most sense for them.

Our research suggests that the most effective and desirable economic development

strategy for most agricultural communities is small entrepreneurship—development

based on locally owned, owner operated small businesses. Often called micro-enterVerDate 11-MAY-2000 15:05 Apr 20, 2005 Jkt 095484 PO 00000 Frm 00066 Fmt 6601 Sfmt 6621 20338.000 SFINANC2 PsN: SFINANC2
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prise development, it has been proven to work in the agricultural areas that have

not been successful in attracting large employers from outside.

In the farm and ranch counties of Nebraska, Iowa, Kansas, Minnesota and the

Dakotas; roughly half of the net job growth stems from non-farm self-employment—

people creating their own job by starting a business. In the most rural counties,

those with no community over 2,500 people, non farm self employment accounts for

nearly 60 percent of total job growth and 80 percent of net job growth.

Rural people have an entrepreneurial bent. Agricultural counties in the nation’s

mid-section have several times the rate of self-employment as metropolitan counties.

Small entrepreneurship is especially important as companies that formerly looked

to rural areas are now moving off shore for lower wages.

There are social advantages to small entrepreneurship. It keeps profits in the

community. It creates a mix of opportunities—some low wage jobs but also significant opportunities for people to build assets and earn middle class incomes as business owners. When real wages are falling in many industries, creating opportunities

for people who work to bebusiness owners creates more quality opportunities. Finally, small business development puts the future of the community in the hands

of its own members, people committed to its future. That builds leadership and reduces dependency on outside forces.

The Senate was wise to include the Rural Investment Tax Credit in its bill, but

it could be improved by removing the ten percent cap on its use for small business

development. We must allow our investment to go where the return is greatest—

in small business development. It has been proven to work in rural America.

I would also like to comment on the Heartland Investment and Rural Employment (HIRE) Act. We support its call for an examination of the impact of securities

law on new cooperative formation.

The Center for Rural Affairs is working with a group of farmers and ranchers

from Iowa, Nebraska and South to form a cooperative to market naturally raised

hogs and cattle. The greatest expense we have faced is the legal cost of meeting the

securities requirements of three different states. We urge that means be examined

for streamlining the securities requirements for small cooperatives operating across

state lines.

Such cooperatives are essential in enabling family farms and ranches to tap the

opportunities in today’s markets. Markets are segmenting into groups of consumers

willing to pay substantial premiums for food products with unique attributes.

For family farmers to thrive in the 21st century, they must band together to market effectively to those niches. Though the opportunities can be great, they do not

necessarily start big. They often involve small numbers of producers in their initial

phases who cannot afford exorbitant filing fees. Streamlining the filing process and

reducing its cost would help stimulate rural entrepreneurship through cooperatives.

HIRE also proposes removing First Time Farmer Bonds from the state-by-state

volume caps on private activity bonds. We support that provision. First time farmer

bonds provide beginning farmers with affordable access to land and capital by providing a tax exemption on the interest earned by investors on bonds used to raise

loan funds.

We suggest one additional provision with respect to first time farmer bonds. Current law prohibits federal guarantees of loans made with the proceeds of tax exempt

bonds, with some exceptions. We urge that a provision be added to HIRE to also

exempt first time farmer bonds from the federal loan guarantee prohibition. That

would enable the USDA Farm Service Agency to guarantee loans made to beginning

farmers with the proceeds of first time farmer bonds.

USDA has had difficulty in reaching its statutory targets of providing 25 percent

of loan guarantees to beginning farmers. Removing the prohibition on guaranteeing

first time farmer bonds would help USDA achieve the objectives set by federal law.

And it would enhance the effectiveness of first time farmer bonds in opening opportunity to a new generation of farmers and ranchers.

In closing, I offer one additional thought—a caution regarding the extension of favorable tax treatment to production agriculture. Agriculture was a significantly tax

favored industry prior to the Tax Reform Act of 1986. The experience was not good.

Tax shelter induced over investment led to tax shelter induced over production—

which lowered commodity prices.

Even more serious, tax shelters changed the rules of competition in agriculture.

To compete effectively in a tax shelter industry, one must be able to competitively

exploit the tax shelter. The advantage shifted to large farms and investors with the

high bracket incomes and large amounts of capital needed to fully exploit tax shelters. Medium size owner operated farms and ranches were placed at a competitive

disadvantage.

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Farmers and ranchers recognized the problem in the 1980s and asked Congress

to help. Senator Grassley played the lead role in correcting the problem.

It is a lesson worth remembering. We must exercise caution so as to avoid repeating the mistake. For example, tax incentives in the New Homestead Act for buildings and venture capital should either exclude production agriculture or be targeted

to small and medium size owner operated farms.

Likewise, the tax exemption in HIRE for livestock production cooperatives should

be carefully scrutinized to ensure that it does not subsidize large industrial livestock

operations to drive family livestock farms out of business.

Thank you for the opportunity to testify.

PREPARED STATEMENT OF GLEN KEPPY

Good morning Senator Grassley and Senator Brownback. My name is Glen Keppy.

I am a farmer from Davenport Iowa and serve as a Director on the CHS Board.

CHS is a regional agricultural cooperative with over 1,100 local co-ops representing

nearly 350,000 producers centered in 28 states, to include Iowa, Montana, and Kansas, in fact CHS continues to be the second largest employer in the state of Montana. Our company is the result of the merger of the cooperatives CENEX and Harvest States, and thus the name CHS.

CHS appreciates being able to speak to several issues concerning the focus of this

hearing today on rural America. For fifteen years, CHS Directors and management

have been coming to Washington, DC urging help for rural America especially for

agriculture.

CHS has worked hard supporting many of the items in bills produced by this Senate Finance Committee and applaud the committee, especially its leadership, in

finding every means it can to advance hope to rural America.

I will highlight a few tax bills produced in 2004. In the highway bill, you have

offered tax help for ethanol and biodiesel. This will help many farmers by providing

another outlet for their crops, It will also help the environment by providing cleaner

fuels for motor vehicles.

In the energy bill, you have offered several items to include tax credits for the

small petroleum refiners that dominate rural America, as they try to meet the costly

EPA diesel desulfurization requirements by 2006, These tax credits are critical to

the last three remaining farmer-owned refineries in America today—one of which

is in Montana and one in Kansas.

In the corporate tax bill, you have offered help to ag exporters of American grain

and granted farmers the right to economic tax assistance by classifying their co-ops

as manufacturers. Both of these measures will help, as the United States transitions

away from export supports found illegal by the World Trade Organization and under

which the United States is now being penalized, with tariffs increasing each month

up to $4 billion.

And this month, you introduced a bill for ‘‘Heartland Investment and Rural Employment,’’ called HJRE, that continues your efforts of helping rural America. This

is the topic for today.

Having supported many of the sections of HIRE legislation in previous bills, CBS

knows first hand that they are good provisions. The first part of the HIRE bill, Title

I, has items we know will help cooperatives and producers. For example, you have

been trying to eliminate the unfair third tax on co-ops that issue stock. Your proposed provision that allows co-ops to issue stock without reducing patronage dividends—which we know as the Dividend Allocation Rule—would certainly help cooperatives like CHS.

CHS looked at how elimination of the Dividend Allocation Rule would specifically

help us in our CHS preferred stock offering nearly two years ago. We determined

that elimination of the Dividend Allocation Rule would help us keep more patronage

for our member-owners More importantly if the Dividend Allocation Rule is no

longer in place, we believe more co-ops would issue stock, thereby providing cash

strapped farmers and ranchers more liquidity and financial strength. There is a lot

of co-op interest in this. Our CFO and CEO have been giving briefings to other coops on the stock offering mechanism and the Dividend Allocation Rule’s impact.

The second part of this HIRE legislation we would like to comment on is in Title

III. Title III has another good group of provisions. We want to thank Senator

Brownback for his work on these issues and on the New Homestead Act along with

Senators Dorgan of North Dakota and Senator Bagel of Nebraska,

We see the two provisions called ‘‘Rural Investment Tax Credits’’ and ‘‘Qualified

Rural Small Business Investment Credits’’ as very useful for rural America.

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Rural gas stations with convenience stores and stores for crop inputs like fertilizers and crop protection items might be good candidates for these rural America

credits. Why? Let’s take gas stations as an example. The trend in the number of

retail stores selling motor fuel in the United States has been a steady downward

one. Since 1994, there has been a loss of 35,532 stores, for a decline of 17.5% nationwide. Since 1994, retail stores selling motor fuel in 10 of CHSTs core states, which

include Iowa and Kansas, have declined by 3,491 stores or 12.6%. The three hardest

hit states for CHS are Wyoming with a decline of 42%, Kansas declining 21% and

Montana declining 20.9%. We see that as a serious factor in contributing to the

shrinking of rural communities. We are a mobile society and as gas stations close

in a given area, people move.

CHS has been working on reversing this. It has a business program that gives

co-ops the business tools to build local gas stations and convenience stores. But

some are reluctant to make the financial commitment. This tax credit could help.

Our tax people have looked at the ‘‘Rural Investment Tax Credits’’ and would suggest several things the committee should consider. First, reduce the numbers of

players in the oversight of the program. Second, set up a simple administrative

process. Third, insure the program has restraints and constraints so it does not become slanted to a ‘‘who you know process’’. Our tax people would be happy to work

with your staffs on these suggestions. All-in-all this is a good provision.

In summary, we commend the efforts of this committee and its leaders in pushing

for tax relief for agriculture and rural America. The committee continues to do its

job well. The problem is the Congress.

First, Congress cannot seem to find the means to pass the energy bill or corporate

tax bill—both, which I mentioned earlier, have some great tax help for agriculture

and rural America. We need just two senators to change their filibustering vote on.

the energy bill, H.R. 6, and that, with its helpful ag and rural tax provisions, would

become law.

Second, Congress needs to pass the corporate tax bill. It would be an embarrassment if the corporate tax bill with the tax provisions did not pass Congress this

year; otherwise the WTO continues to levy more and more tariffs on our goods.

This legislation called HIRE is another good bill that warrants passage. Once improved, CHS will actively urge members of Congress to give the HIRE bill their full

support.

Lastly, you should know that as producers, we are concerned about the potential

loss of an American farmer owned and controlled cooperative lender. We urge the

U.S. Congress and the Farm Credit Administration to hold oversight hearings on

the proposed sale to ensure that the credit needs of mid-west farmers and ranchers

will continue to be met in both good times and in bad.

Thank you for this opportunity and thank you for your continuing efforts to help

rural America.

PREPARED STATEMENT OF JEAN-MARI PELTIER

Thank you, Mr. Chairman. We appreciate very much the opportunity to appear

before you today and want to commend you for holding this important hearing on

promoting economic growth and opportunity in rural America.

My name is Jean-Mari Peltier and I am President and CEO of the National Council of Farmer Cooperatives, which is headquartered in Washington, DC. Farmer cooperatives, their farmer owners, employees and their families all have a significant

interest in the subject of today’s hearing because rural America is where they call

home.

NCFC is a national trade association representing America’s farmer-owned cooperative businesses. Our members include nearly 50 national and regional marketing, supply and credit cooperatives that, in turn, are comprised of more than

3,000 local cooperatives whose member owners represent a majority of our nation’s

nearly 2 million farmers. Here in Iowa, there are over 160 farmer cooperatives,

making it the 7th largest state in terms of number of cooperatives. In addition,

NCFC’s membership includes 26 regional and state councils, such as the Iowa Institute of Cooperatives.

These farmer cooperative businesses handle, process and market virtually every

type of commodity produced in the U.S.; manufacture and sell farm supplies; and

provide credit and related financial services for and on behalf of their member owners. They provide farmers with the opportunity to:

• Improve their income from the marketplace;

• Better manage their risk;

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• Capitalize on potential value-added business opportunities beyond the farm

gate; and

• Compete more effectively in a changing global economy.

Being farmer owned and controlled, the earnings from these activities are returned to their farmer members on a patronage basis. This not only helps improve

their overall income from the marketplace, it also promotes additional economic activity in their rural communities.

Farmer cooperatives also play another important role when it comes to our rural

communities by providing jobs for over 200,000 full and part-time employees with

a combined payroll of more than $8 billion. These include an estimated 22,000 jobs

here in Iowa.

Clearly, maintaining and strengthening the ability of farmers to join together in

cooperative self-help efforts is critically important to their economic well being as

well as rural America. Rural America faces a number of challenges as a result of

a combination of factors, including changing demographics, the advent of new technology, and globalization.

It has been pointed out that over the last 20 years approximately one-third of

rural counties nationwide have experienced out-migration of more than 10 percent.

In the Great Plains, this pattern is significantly larger and encompasses a majority

of rural counties. Such losses have had a ripple effect on many communities in

terms of their available work force and tax base, as well on their schools and the

availability of various services.

To help illustrate this, I have included with my testimony a map (Exhibit 1) highlighting those counties that have experienced high out-migration of 10 percent or

more in recent years, along with a separate map (Exhibit 2) showing the location

of America’s more than 3,000 farmer cooperatives. As you can see, many of these

counties continue to be the home of a significant number of farmer cooperatives and

their farmer owners, their employees and families.

This has strategic importance. Job growth in agricultural areas is now more likely

to come from rural industries related to farming rather than farming itself. Farmer

cooperatives and other agribusinesses involving agricultural inputs, processing and

marketing of agricultural products, as well as the wholesale and retail trade of agricultural products, have increased their presence in rural communities.

Farmer cooperatives and their farmer owners have a strong commitment and

vested interest in their communities. Again, as I indicated at the beginning of my

testimony, rural America is where they call home.

Addressing the challenges facing rural America, however, will require not just a

strong commitment on the part of those who call it home, but a combination of public policies and programs, including tax incentives and other initiatives.

Accordingly, we want to commend you and Senator Baucus, among others, for introducing the Heartland Investment and Rural Employment (HIRE) Act of 2004 (S.

2761). Title I of this important legislation contains a number of key provisions for

farmer cooperatives and their farmer members, including:

• Elimination of the triple tax on cooperative dividends paid on capital stock. Such

a provision is a top priority for NCFC. Currently, such dividends are taxed 60%

higher than regular corporate dividends. Eliminating this unfair tax penalty

would better enable farmer cooperatives to raise the equity capital they need

to modernize and expand, and would help their farmers capitalize on valueadded business opportunities beyond the farm gate. This, in turn, would also

help maintain and create needed new jobs in many rural communities.

• Clarification of the definition of ‘‘cooperative marketing’’ to include value-added

animal processing such as the conversion of corn into feed for chickens that lay

eggs that are then marketed by a cooperative on behalf of its farmer owners.

The IRS has held that since this involves a biological process rather than a mechanical process it doesn’t qualify. This provision addresses that issue.

• Extension of Declaratory Judgment Procedures to Section 521 cooperatives on

the same basis as other similar types of entities, which would allow a cooperative whose application for Section 521 tax status is rejected to seek judicial review of the denial without first creating a tax controversy.

• Establishment of a general business credit that would allow cooperatives to pass

through certain tax credits to their farmer members. The ability to pass

through credits will enable cooperatives to take advantage of tax incentives otherwise available to businesses.

The HIRE Act would also establish a special commission to help identify and recommend additional tax changes to encourage and promote cooperative self-help efforts by farmers. NCFC would welcome the opportunity to work with you to develop

the composition of this Commission.

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The HIRE Act also includes several other individual tax provisions relating to

farmers, including Alternative Minimum Tax (AMT) relief, exclusion of certain income such as Conservation Reserve Program (CRP) payments from self-employment

taxes, establishment of Farm, Fishing, and Ranch Risk Management (FFARRM) Accounts, along with charitable deductions for food contributions.

In addition, the bill incorporates several other provisions to help revitalize rural

America and address the challenges resulting from out-migration. These include:

(1) Rural Investment Tax Credits for businesses, including farmer cooperatives, in high out-migration counties. The credits would allow businesses that

construct new buildings to offset as much as 70 percent of the construction expense over a 10 year period; and

(2) Micro-Enterprise Tax Credits for small business for qualifying start-up or

enterprises with 5 or fewer employees.

These initiatives, originally included in the New Homestead Act (S. 602) introduced by Senators Dorgan and Hagel, and also included in the Rural Renaissance

Act (S. 1796) by Senator Coleman and others, would help provide needed capital and

encourage greater investment in rural America.

Many of these provisions have been incorporated in several other bills, including

the FSC/ETI or JOBS Act (S. 1637) as passed by the Senate, and we appreciate your

continued strong leadership and support for such initiatives.

It is important for Congress to complete action on legislation relating to FSC/ETI

(S. 1637/H.R. 4520). Unless Congress acts, European tariffs on many U.S. exports,

including agriculture, now at 10 percent, will continue to increase 1 percent monthly

until reaching a high of 17 percent.

Both the House and Senate bills address this issue by phasing out FSC/ETI benefits and providing new tax incentives and other provisions for domestic manufacturers, including farmer cooperatives and their farmer members, to help maintain and

improve U.S. global competitiveness. In addition, the Senate bill provides special

rules for farmer cooperatives to allow the pass-through of such tax benefits to their

farmer members, which we hope will be included as part of any final agreement.

It is essential that any new tax incentives for domestic manufacturers are also

available to farmer cooperatives.

Since it continues to be a top priority, it should be underscored that both the Senate and House-passed FSC/ETI bills (S. 1637/H.R. 4520) also include legislation as

introduced by you, Mr. Chairman, and Senator Baucus, and by Representatives

Herger and Pomeroy in the House, to eliminate the triple tax on cooperative dividends on capital stock. Enactment of this legislation is critically important to farmer

cooperatives and their farmer members and we appreciate your efforts to help

achieve this important objective.

Congress should also complete action on comprehensive energy legislation. Many

of its important tax provisions, however, are included in the Senate-passed FSC/ETI

or JOBS bill (S. 1637). These include tax incentives for ethanol and biodiesel, along

with provisions for farmer cooperatives, and to help small petroleum refiners—including farmer cooperatives—comply with costly EPA low sulfur regulations. Such

provisions are important not only to meet environmental requirements, but also to

help ensure U.S. agriculture and rural America have access to a dependable supply

of energy at reasonable prices since farther cooperatives provide for as much as 40

percent of on-farm fuel use. Passage of these provisions would also have a positive

impact on the rural economy in terms of strengthening farm income, providing new

value-added business opportunities, maintaining and creating jobs, and promoting

economic growth. Again, we appreciate your leadership, along with that of Senator

Baucus, in support of these important provisions.

Given the important role that farmer cooperatives and their farmer members play

when it comes to the overall economic health and vitality of rural America and local

communities, there are a number of other actions that Congress can and should

take.

These include:

1. Strengthen USDA programs, including research, technical assistance, and education, in support of fanner cooperatives. This includes providing full funding of $40

million as authorized under the 2002 Farm Bill for the Value-Added Producer

Grants Program. The program provides matching grants up to $500,000 to farmer

cooperatives and other eligible participants to help farmers capitalize on new valueadded business opportunities and create jobs. It has been a tremendous success by

any measure. Value-Added Grants awarded to Iowa businesses in 2003 totaled over

$2.8 million and included grants for pork production, bio-diesel generation, dairy

processing, and other ventures.

2. Ensure that farmers that choose to cooperatively market their commodities and

related products are fully eligible to participate under USDA and other programs,

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including federal procurement programs. In addition, farmer cooperatives can play

a key role when it comes to environmental and other types of programs in terms

of helping improve the delivery system, encouraging participation, and providing important services to their farmer members.

3. Modernize the Federal Farm Credit Act. In an effort to better finance and capitalize their businesses, farmers and their cooperatives are looking at various business models and corporate structures that were not contemplated just a few years

ago. In response, Minnesota and Wyoming are among the states that have adopted

new cooperative laws to provide farmers and cooperatives with more organizational

flexibility to meet their capital needs. Several other states, including Iowa, have

similar proposals under consideration. There is also under consideration a proposal

to establish a uniform cooperative statute. As a result of changing state laws, the

Federal Farm Credit Act needs to be modernized to ensure that both existing and

evolving new types of cooperatives continue to have access to a competitive source

of credit through CoBank and the cooperative Farm Credit System.

4. Maintain support for basic farm and export programs to provide an adequate

safety net for producers, meet subsidized foreign competition, achieve important environmental goals, and help ensure consumers a dependable supply of high quality

food and fiber at reasonable prices.

5. Create a Cooperative Conservation Initiative. According to a recent USDA report

on trends in rural America, ‘‘Natural amenities are the trump card for rural areas.’’

Programs to enhance and protect the quality of these natural resources are in the

interest of rural residents and the tourists they can attract. However, compliance

on the farm with environmental regulation can be complex and costly.

In an effort to address some of these burdens and to strengthen rural environmental stewardship, the 2002 Farm Bill increased authorized expenditures for a

wide range of conservation programs by over 80%. The very structure and mission

of farmer cooperatives makes them ideal organizations for the efficient implementation of these green programs. Because farmer-owned cooperatives represent producers and marketers, as well as input suppliers, they are uniquely qualified to provide specialized expertise and help craft practical conservation solutions to complex

environmental challenges facing rural America.

New conservation programs call for USDA (and the Natural Resource Conservation Service) to help farmers address increasingly intricate conservation issues involving soil erosion and water quality, along with air pollution issues and pest management concerns. These latter two areas of involvement are largely beyond the expertise of most NRCS staff—thus underscoring the need for a functional program

for certifying third party vendors to provide these services to farmers. Cooperatives

could lend much needed technical assistance to NRCS, at the same time helping

their farmer members by providing technical services (such as developing nutrient

management plans, or pest management plans) while accessing government funding

assistance for these services. Much the same as cooperatives serve as a delivery

mechanism for Farm Services Agency support programs in rice or cotton, farmerowned cooperatives should be allowed to help deliver conservation payments, adding

environmental expertise and streamlining the delivery mechanism for government

conservation program payments. Instead of multiple contracts with individual farmers for conservation activities, NRCS could administer single contracts with fanner

cooperatives, which could in turn help the Agency track environmental benefits of

programs across a wider scale.

Given the unique farmer-focused mission of America’s farmer cooperatives, they

are an ideal delivery mechanism for conservation programs. Their ability to serve

as an efficient interface between the federal government and farmer members will

enhance the viability of current and future green programs.

Tax provisions you have championed, Mr. Chairman, could play a major role in

this process. For example, dairy farmers are increasingly called to reduce potential

run off of nutrients into waterways, as well as address concerns about air emissions

of hydrogen sulfide and ammonia from animal feeding operations. One potential solution to both issues is to run manure through anaerobic digesters, where the methane captured could generate electricity, which would in turn be wheeled out to the

power grid. One of the stumbling blocks to implementation of this technology can

often be price differentials. The provision in the JOBS bill that would modify section

45 to allow for a 1.8 cent per kilowatt hour credit for the production of electricity

from animal waste could benefit cooperatives’ farmer members by off-setting these

price differentials.

However, another significant impediment is the reluctance of farmers to undertake the role of power generator. Here, farmer cooperatives could provide the expertise to install the digester systems and help in the movement of the product to the

electric grid. With the enactment of a general business credit for cooperatives, the

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section 45 credit could be passed through in the form of patronage to the cooperatives’ farmer members. We are happy to see that the HIRE Act includes language

that would amend the IRS code to include such a general business credit.

Again, Mr. Chairman, on behalf of America’s farmer cooperatives and their nearly

2 million farmer owners, we appreciate this opportunity to share our views and we

look forward to working with you and the members of the Senate Finance Committee to achieve these important objectives.

Attachments:

1. Map of U.S. counties with high out-migration

2. Map of U.S. farmer cooperatives

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