fraction based on the inflation rate and the real cost of money in terms of generally right now in their example they used in their package, they used 4 percent inflation rate and a 6 percent real cost of money and about 10 percent or so prime rate. Then they would say you would be allowed to deduct only 60 percent of that interest. In their proposal they also exempt, now they exempt home mortgage, the home mortgage, they wouldn't make you index that. They also have a $5,000 sort of base which would not be subject to indexing, as well. So there would be some interest expenses in a case where a farmer has substantial amount of interest expenses, say above that $5,000 cap where he would only be able to deduct, or she would only be able to deduct a portion of that. Again, you have to look in terms of the overall package. Like the Senator said, you may lose some of that, but you'll also gain in terms of the reduced tax rates and increased exemptions. So you have to look at it as an entire package. Also, Treasury has, they provide for transition periods. They may exempt or may take into account current obligations that individuals have. So I don't think the whole thing is completely worked out yet, but there is a transition period which that would take effect. There would be some expansion in terms of the tax base and loss of the deductions, interest deductions.

Mrs. FISHER. Taking it off the top of my head here, I would say that would cut my son's income tax expenses this year between 6 and 7 percent which would be quite substantial.

Senator ABDNOR. You have to realize, that's why we have to weigh the tax exemption we're going to close. We certainly want to hear how people feel about it. Maybe we can improve on it.

Mrs. FISHER. I studied the Treasury's deal and studied two others of, I studied them very thoroughly and compared my son's income for this year with them, and kind of off the top of my head, to give a little thought to it, I think that's about the percentage of his income tax would be deducted then. He had that much less income tax to pay this year.

Senator ABDNOR. Marie, we thank you for coming.

Mrs. FISHER. Thank you.

Senator ABDNOR. We're happy to have Leland Swenson, South Dakota Farmers Union. This guy has been busy. I know all the guys he prepared in getting ready for the big, successful rally yesterday. Congratulations and I commend you for it.

STATEMENT OF LELAND SWENSON, PRESIDENT, SOUTH DAKOTA FARMERS UNION

Mr. SWENSON. My name is Leland Swenson. I'm currently serving as president of the South Dakota Farmers Union, the State's largest farm organization. My home is Huron, SD.

Before I start the testimony, I want to thank the Senator for participating in the rally yesterday in Pierre, SD, and the statement you offered to those in attendance was tremendous statement on behalf of agriculture and the changes that are needed within the Federal Tax Code to provide equity in the agricultural area. Senator ABDNOR. Thank you.

Mr. SWENSON. Also, in your statement yesterday in relating to what the State can do, I think really points out that we have a deficiency even within our own State on the type of structure that we need to maintain the family farm system of agriculture, and I appreciate your support.

Senator ABDNOR. If I may add to that, I notice in today's paper some unusual steps on the part of the States. I think Minnesota and Iowa have legislation forthcoming. My point yesterday was that this is everyone's battle, therefore, we may all have to do unusual things to try to go beyond what we may have thought of was a reasonable effort in past years and unnecessary now. It was easier to say what we're going to do from Washington, but there's certain things we can do at the local level.

Mr. SWENSON. The introduction of the specific legislation under discussion here today is genuinely positive development. If passed, the bill would go a long way toward eliminating unfair tax advantages that for too long have benefited nonfarm investors at the expense of the bona fide family farmers and ranchers.

We believe the current situation is especially critical because of the economic crisis now facing agriculture. It's been estimated by reliable sources that hundreds of thousands of American family farmers and ranchers are in jeopardy of being forced off the land. In putting it into a context of the State, a survey of lending institutions said 24 percent of the farmers in South Dakota are under financial stress. You put that into the numbers of the number of farmers we have in this State, that's approximately 9,000 farmers in the State of South Dakota.

At the same time this catastrophe has settled upon rural America, we're faced with an ever increasing onslought by nonfarm investors who are actually entering agriculture with the intention of losing money. They can afford it because Uncle Sam is paying the bill. They are able to write off the farm losses against their Federal tax liability on nonfarm income.

We have reached the point where these tax loss farmers are on the verge of taking over whole segments of agricultural economy. Already the vast holdings in southern cattle feedlots have tended to increase supply and depress prices for genuine farmers and ranchers.

On the State level, if I could insert here at this time, we have a bill in the State legislature to allow corporations to get into feeding of, owning agriculture land for feeding poultry and meat processing and eggs. The interesting thing is that 63 companies now have 52.2 percent of all the layers in the country. The No. 1 is Cargill, Inc., based out of Minneapolis. They have 10 million layers in nine production sites in nine States. It shows you the influx of off farm investors, corporates, into the control of agriculture.

In Indiana, a State with no anticorporate farming law, the Prudential Insurance Co. has purchased and installed irrigation equipment on extensive holdings. In two counties they've taken over 23,000 acres of land. They have managed to do this to the detriment of their neighbors and with assistance of array of loopholes in the Federal Tax Code. The U.S. taxpayers are paying them to buy that land to put in the irrigation systems and to drain the wells so there's no water for the neighbors.

The Center for Rural Affairs at Walthill, NE, has also documented extensively the growing corporate tax loss operation in the hog markets. In a recent article entitled "The Tax Shelter Undermines the Family Farm and Increases the Deficit," the center notes to compete in the tax shelter industry, one must competitively exploit the Tax Code. High bracket taxpayers with the money to invest in the most capital intensive operations, including corporate and nonfarm investors, benefit the most and thereby gain a competitive advantage. Moderate size farmers, beginning farmers, and farmers struggling to survive benefit least from the tax break and suffer most from lower hog prices.

A 50 percent bracket investor in a 500 sow confinement operation receives nearly 2.5 times the benefit per hog as a typical, established 30 percent bracket family farmer with modern facilities receives over 5 times the benefit as a 20 percent, and received 5 times the benefit as a 20 percent bracket beginning farmer using low-investment systems. This favortism is not justified by efficiency. University of Missouri research has shown that bigger hog operations aren't generally more efficient, and the University of Tennessee research has shown that moderate investment systems are more efficient than tax favored capital intensive system.

The Center for Rural Affairs goes on to estimate that the excess hogs produced by giant nonfarm investors will have a negative impact on price during future years. The estimate is that prices will decline by about $1.20 per hundredweight. In other words, the impact would be a loss of $2,000 to $3,000 per year for a typical family farmer with a hog operation.

Secretary of Agriculture John Block has contended that Federal farm price support programs have tended to distort agricultural markets. It appears to us that if the Secretary really is concerned about market distortion, he ought to join in support of the bill and other efforts to reform the Federal Tax Code.

We believe that passage of Senator Abdnor's bill to limit the amount of farm losses that could be written off against nonfarm income to $20,000 would be an extremely positive step. It would be good news for family farmers and ranchers who have very little good news to cheer about lately. It would also help to reduce the Federal deficit and establish greater equity in the Federal Tax Code. We believe these are meritorious goals and we strongly support the passage of this bill and the closing of other tax loopholes. Senator ABDNOR. Thank you. I'm happy you were able to make it here to the meeting today. Incidently, I had Secretary Block in front of my Joint Economic Committee last week. I got him to tell me this is a good bill. Let's see if we can keep him on our side as we progress. I'm sure I am quoting him right. He said he could support that. We wouldn't have to be breaking up all this land and giving all these incentives to farmers who are not farming for the benefit of the business of farming, and we do find a lot of support for this. I have to admit, we have people who are opposed to it, too. We hope we can attract the Finance Committee to have a final word on this. If I had the Agricultural Committee, I could move it along quicker. Senator Packwood is chairman of that committee and might consider putting in part of the new tax package he probably will be looking at. I just want to say we appreciate your sup

port and hope we can continue to have it as we move forward with this legislation. Actually this bill doesn't go so far as to prevent somebody from coming in and making a go out of farming and making a profit. We don't actually stop him. We'd rather not have him do it, but we should take care of the people farming for the tax law so he can use it for some other benefit.

Mr. SWENSON. If we're concerned about the deficit and tightening up the loopholes, it's not just an agricultural issue. It's an issue of business community, small businesses that are struggling to survive, that loopholes in our current tax law allows corporate business a major upper hand in trying to drive small businesses and locally owned businesses out of existence in our small towns and rural communities, communities such as Sioux Falls, Rapid City, Aberdeen, Huron, and so forth. I really think the issue of tax reform and lowering the national debt is one that should take pretty high priority over that of many other issues that are before Congress. I would sure hope that those Congessmen and Senators that are out advocating that we have to control the deficit and we have to cut spending would look at a way that we could also cut or provide equity among the people of this country. One of the ways they could do it is closing many of the tax loopholes.

Senator ABDNOR. I think that's good. One of the real telling points is that the IRS has told us, that if they forego tax payments from farm income, but by the same token did not allow any tax law farm loss in the way of a tax benefit, the Treasury will be many dollars ahead. They are losing more dollars out than they are taking in. This came from the IRS. We asked for the study one time. If the farm sector neither paid or took deductions, the U.S. Treasury would be better off. Farm net income reported to the IRS in 1981, this is as far as current as they could do, amounted to $8.5 billion. Farm net losses totaled some $16.3 billion. This demonstrated both the poor financial condition of farmers and tax loss farming. I don't think it contributes much to the picture. That kind of farm will soon be benefited by the farm supports that come out of Washington that contributes extra bushels to production we don't even need. We certainly don't need the incentive in that direction. That was certainly one of the real things we were trying to get to. We hope we can continue to pick up support from other farm and State Senators and even Congressmen and keep this thing moving. Lee, I know how busy you've been and the strain you've been under putting this altogether. We appreciate the fact you took the time to come over so we could have your testimony for the record, because this is going back to Washington where we can use it.

Mr. SWENSON. If we're interested in the long term survivability of family farm agriculture, the area of Tax Code is just as good as getting a good farm program. If you take away the equality of operation from now into the future and just provide income, you're still providing the advantages to the off farm investor. If you put profitability out there and don't close some of the incentives for him to come into agriculture, you're providing him the advantage over the farmer and rancher out there trying to survive through generating his own capital and own wealth, and we would sometime just be defeating our own purposes. I do appreciate the opportunity and felt it very important to be here.

Senator ABDNOR. Thank you very much. Is there anyone else that wants to testify?

Mrs. FISHER. Could I make one statement? I would just like to add, I made the statement my son made some money this year. The only reason we made money, and I've been on that place since 1950, we had the best crop we have had as long as I've been on that place. That's the only reason we made money this year. If Block gets his new program in and we don't get a good crop, we'll be really hurting, too. I would like to stress that point because I made the point, kind of going against what we're working at. It's just fortunate we have had a good crop.

Senator ABDNOR. That was a real blessing. Some of the areas in my section of the country have had three good crops. Well, I'm afraid a moment ago there were some people that wanted to testify. I guess they had to leave. With that, I will adjourn the committee meeting and thank everyone who made the effort to come out. We have two things we're concerned with here, how you see the new tax reform affecting you and how you feel about it, and more especially, how we will respond. It is important to hear how you respond to this type of legislation, the tax loss proposal I have. I mentioned earlier, before you were here, Lee, that we're still working on that motor vehicle logging. That has nothing to do with taxes, except the IRS is the one that puts it in effect. We have to have a hearing on my Subcommittee on Appropriations that I chair that has the budget of the IRS. I have some tax experts that I'm not too happy with it, either. I hope we can build enough continued fire under that to get it moving. We are looking forward to legislative delegations coming in. I understand on the 25th or 26th we've been asked by the Nebraska people for a regular hearing with the Joint Economic Committee and Chairman Obey of Wisconsin is extremely happy to have this. We'll be seeing a lot more. I don't know if you're coming in at that time or not or anyone else. That should be an interesting 2 days in Washington when we all come in. Thank you once again for coming out. The subcommittee is adjourned.

[Whereupon, the subcommittee adjourned, subject to the call of the Chair.]