Linda Benedict, Gauthier, Wayne M. | 9/13/2013 12:05:04 AM
Wayne M. Gauthier
In the past three decades, Louisiana’s total milk production has been declining annually, while total U.S. milk production has been increasing. This observation suggests that the economics of milk production have not been as favorable for milk production in Louisiana as they have been in other parts of the United States. Milk production is positive for economic development because of its multiplier implications for employment, incomes and tax receipts. Creation in 2007 of the Louisiana Dairy Refundable Tax Credit Program by the Louisiana Legislature was an initiative to enhance the economics of dairying in Louisiana by awarding subsidies to Louisiana dairy farmers in the form of refundable tax credits.
A subsidy is an expenditure of public monies. Accounting for those monies and documentation of the tax credit program’s outcomes builds trust between the taxpaying providers and dairy farmer recipients of those monies. It also provides baselines for assessing both the relative effectiveness and weaknesses of the tax credit program in increasing Louisiana’s total milk production over time and provides a foundation for proposals to modify the tax credit program so as to overcome its weaknesses. The purpose of this article is to use performance indicators to: (1) establish historical accountability records of annual levels of the refundable tax credits and their distributions between and within annual milk production levels of Louisiana milk produc ers and (2) identify and track structural changes within the annual milk production levels of the milk production sector of the Louisiana dairy industry since the inauguration of the Louisiana Dairy Refundable Tax Credit Program.
The use of performance indicators to assess structural change in an economic entity, such as the production sector of the Louisiana dairy industry, is consistent with the economic dictum that structure influences conduct, which, in turn, influences performance. The seven different performance indicators created by milk production level and year were: (1) the refundable tax credit awarded to an individual producer; (2) the number of producers; (3) the dollar value of the aggregate tax credits awarded; (4) the relative (%) value of the refundable tax credit for the year; (5) the relative (%) number of producers; (6) the relative (%) contribution of milk production within the annual milk production level; and (7) Louisiana’s total pounds of milk production for the year.
For each performance indicator, unique values associated with a specific level of annual milk production and year were calculated and incorporated into a table. The totals are in Table 1. A complete table with the ranges for pounds and awards is available on the magazine’s website. Go to www.LSUAgCenter. com and click on Louisiana Agriculture Magazine.
Table entries indicate that Louisiana’s annual total milk production in 2007 of 312,351,996 pounds declined every year to 209,830,549 pounds in 2012. During this period, refundable tax credits totaling $9,652,500 were distributed annually to declining numbers of dairy farmers. The initial awarding of refundable tax credits in 2007 of $1,257,500 was made to 207 Louisiana dairy farmers. In 2012, an awarding of $1,665,000 in refundable tax credits was made to 137 Louisiana dairy farmers. The performance indicators document ongoing erosion in the structure of the Louisiana dairy industry as assessed by declines in the number of producers and in annual total milk production. However, this interpretation should not prompt a conclusion that the tax credit program has not been an effective dairy policy in maintaining and increasing total Louisiana milk production.
Consideration should be given to the contention that there is a design flaw in the tax credit schedule. This flaw effectively minimizes the number of producers for whom the program provides an incentive for increasing total milk production. The flaw exists because the schedule provides for a $5,000 refundable tax credit increase to be awarded whenever a producer’s annual milk production level increases sufficiently to reach the threshold of the next higher annual milk production level. The difference between the threshold annual milk production levels in the schedule is 500,000 pounds. Only dairy farmers whose current annual milk production levels are at their upper ends and thus approaching the thresholds of the next higher level are likely to view an additional $5,000 refundable tax credit as an incentive to increase their annual milk production. Increasing production increases total costs that would be offset by the additional returns from the sale of the additional milk and dairy beef plus the $5,000 refundable tax credit.
Consider the case where dairyman A’s annual milk production level is within 10 percent or 50,000 pounds of the next higher level and dairyman B’s production is 90 percent or 450,000 pounds distant from the next higher level. Assume each dairyman’s per cow milk production is 16,500 pounds/year. Dairyman A, by adding four cows, could increase his annual milk production level by 66,000 pounds and qualify for the higher tax credit. Dairyman B would have to add 28 cows to his herd. The magnitude of the difference in costs alone of adding 28 cows and the supporting infrastructure investment costs versus four cows in order to qualify for the same $5,000 tax credit explains why dairyman A would be more likely to respond to the $5,000 tax credit incentive, while dairyman B would not increase his production in response to that incentive. The prescription for remedying the flaw would be to modify the program by increasing the number of levels in the schedule from the present 6 to 60 without changing the requirements to cap program costs at $2.5 million and the individual farmer cap of $30,000. This can be done by changing the increments for the tax credits from $5,000 to $500 and changing the increments for pounds of production from 500,000 to 50,000. Thus, a dairy farmer would qualify for a $500 credit for each additional 50,000 pounds of milk production.
Research to assess the potential of substituting a revised schedule in the program featuring sixty 50,000 pound levels and $500 tax credit thresholds has been recommended.
Wayne Gauthier is an associate professor in the Department of Agricultural Economics & Agribusiness.
(This article was published in the summer 2013 issue of Louisiana Agriculture magazine.)