Iowa direct farm income ‘significant but not huge’ part of tax revenue

The recent so-called new normal in farm commodity prices and the part of it that Iowa collects in taxes looks a lot like the old normal to the state Department of Revenue.

“The levels for the new normal seem to still be in a range of what we saw in 2008 and 2009,” said Amy Harris, chief economist for the department. The “burst” of revenue the state collected from the farm sector in fiscal 2013 was a “one-time bonus from the high farm prices.”

Even if it was a one-and-done burst, it was “sure a plus” for the state to have one segment of the economy growing from 2008 through 2011 when every other sector was stagnant or shrinking, added Jeff Robinson of the Legislative Fiscal Bureau.

Although farmers have been reporting record levels of income in the past two years, Clear Lake businessman David Underwood said many people overestimate the impact of those corn and soybean prices.

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“Still the increase in reported farm income hasn't been huge,” said Underwood, one of three members of the Revenue Estimating Conference that meets three times a year to estimate the state's general fund revenues. “It's been significant but not huge.”

Put another way, “the biggest chunk of general fund revenue comes from payroll withholding,” Underwood said. “The small change in the number of people working or their pay increase or overtime will have a much more tremendous impact on total general fund receipts than corn prices.”

Farming is only 7 percent of the Iowa Gross Domestic Product, added Robinson.

“So if 7 percent of the economy is shrinking and 93 percent is growing, it will be tough to notice the 7 percent shrinking unless it shrinks considerably,” he said. “It is much more important for the other 93 percent to be growing.”

Based on about 1 million of approximately 1.5 state income tax returns for the current year, Harris says farm income accounted for 2 percent of the adjusted gross income reported. Payroll withholding, on the other hand, is about 77 percent of Iowans' adjusted gross income.

She's quick to note that her numbers reflect only direct farm income.

“Of course that income trickles down and you have all your spillovers and multiplier effects because farmers spend the money here and there,” Harris said. “So this understates the impact of the farm sector in Iowa.”

A year earlier, direct farm income amounted to 1.4 percent of adjusted gross income, Harris said. That's a difference of about $500 million. To put that in perspective, the Iowa Legislature approved $6.2 billion in general fund spending.

To Underwood, it's clear that “when we have a very good farm year, Iowa weathers things better. Great farm years really just help move us along.”

At the same time, he cautioned against doomsday thinking if the lower commodity prices become the new normal.

“Prices go down, but that doesn't mean that farming and farmers are going to lose money,” he said. “They're still likely to be profitable. As long as they are profitable … is not devastating to Iowa's general fund.”

That's because of those multipliers that Harris talked about. Multipliers like sales of new tractors, pickups, combines and grain bins, for example, and higher farm employment, Underwood said.

“As long as they are profitable, they seem to do that. They continue to buy,” he said.

Farm income is affected not only by market prices, but by a variety of factors including prices for seed and fertilizer as well as yields, Underwood said.

Add energy to that list of variables.

The combined value of the Iowa corn and soybean crop is around $13 billion, which is about the same amount Iowans spend on natural gas, electricity, and motor fuel, Robinson said.

If corn and bean prices fall to $6 and $10 a bushel, respectively, and stay there, that represents a 15 percent to 20 percent reduction in Iowa income, Robinson said.

“But if at the same time motor fuel prices fall fifty cents per gallon, much of the net impact of falling grain prices is negated, he said. “Now if corn prices decline and gas prices rise, that would be a different story.”

There are so many variables that it is hard to predict the impact on the state economy if commodity prices fall and stay lower, Underwood said.

“To say prices are down so revenue will go away, that's not necessarily what happens,” Underwood said. “I wish I had a better, easier answer, but it's really complex.”