Who's paying for the environmental costs of farming?

Claims environmental regulation and taxes are unfair to farmers aren't backed by economic data, argue Mike Joy, Lisa Marriott and Simon Chapple.

Prime minister Jacinda Ardern is due to meet the leaders of last year’s Groundswell protests, who argue that environmental regulation and the “ute tax” have hurt parts of the primary sector and, by extension, the rest of the country. But economic data tell a different story than the farmers claim.

The financial contribution the agriculture sector makes to society by way of tax paid is dwarfed by the financial benefit that the sector receives by way of subsidies, concessions and other forms of assistance.

Considering the net benefits already delivered to farmers, there’s no justification to provide more support for the sector by further subsidising their environmental damage.

Special concessions

In terms of support, there are several unique tax concessions offered to parts of the agricultural sector not extended to other industries. These include special rules for deductibility of housing and capital expenses that aren’t available for other businesses.

In another tax workaround, agricultural industry access to an income equalisation scheme allows income smoothing.

Under this scheme, primary sector businesses are able to deposit money into the scheme during profitable years and build this up as a deduction. The money is then treated as income in the year it is withdrawn, reducing taxes in lean years.

More support in tough times

Government support for farmers is not limited to tax exemptions. Spending on primary services in 2019/20 was NZ$961 million and forecast to increase to $1.3 billion in 2020/21. Public money goes into biosecurity risk management, food safety and fisheries management.

Between 2018 and 2021, the Ministry for Primary Industries (MPI) spent $368 million on mycoplasma bovis eradication. Farmers were compensated an additional $151 million during that time.

The cost of recovery was meant to be split 32%-68% by industry and the ministry respectively. But as of June 30 2021, MPI reported recoverable costs of $172.6 million, of which a $72.4 million bill to farmers remained outstanding.

Environmental cost

It is not that the agriculture industry does not add value. About 5.5 percent of total New Zealand jobs were in agriculture, forestry and fishing in March 2019, according to the Household Labour Force Survey. At the same time, the industry made up 10.6 percent of the national gross domestic product.

Agriculture’s higher share of GDP than employment reflects the sector’s high reliance on our natural environment to produce its output. However, this economic value comes at both a significant financial and environmental cost, often hidden, much of which falls on future generations.

The decision-making around Te Waihora (Lake Ellesmere) in Canterbury is one example of an indirect subsidy to intensive farming. Te Waihora is dying due to excess nutrient inputs, 95 percent of which come from dairy farms.

Analysis by the regional council Environment Canterbury (ECan) and the Ministry for the Environment (MfE) found two key measures to stop the lake declining would result in an annual loss of revenue for local dairy farmers of about $250 million.

ECan concluded this economic impact for farmers was too high and did nothing. By not charging the polluters for this harm, ECan effectively handed a subsidy to dairy farmers in this catchment to the tune of $250 million every year.

The ECan decision is similar to those made by other councils.

A recent study by Christchurch City Council estimated the costs to remove the nitrate from dairy farming from their drinking water to protect human health came in at $1.5 billion or almost $4,000 per person in the city.

Almost half of New Zealand’s greenhouse gas emissions come from agriculture in the form of methane and nitrous oxide from farmed livestock. Here, the decision to exempt livestock from New Zealand’s emissions trading scheme is another subsidy to the sector. In dollar terms, the 2019 annual net emissions from agriculture at today’s carbon price ($72/tonne CO2e) amounts to $878 million.

Uneven tax burden

There is no doubt agriculture provides some benefit to New Zealand but this benefit is declining, at the same time that subsidies to the sector are increasing.

While the sector pays tax on income like everyone else, the amount paid by the dairy sector ($531.7 million in 2019/20—or 0.7 percent of total tax revenue) looks to be substantially less than the costs associated with transfers from the government back to the sector and remediation of environmental damage caused by the sector.

briefing paper to the Tax Working Group in 2019 observed that the tax deduction rules for agriculture had not been reviewed in 30 years, revealing a lack of appetite to challenge the industry’s privileged position.

The political reluctance to hold the sector to account for its environmental damage while passing the cost on to the rest of society is even more problematic. This damage reduces the standard of living of many people living in Aotearoa and increases the economic and environmental debt for future generations.

So, while some in the agricultural sector argue that environmental regulation hurts the industry and therefore the rest of the country, there is a clear counterproposal: harm is done to the country when the rest of society pays for the damage created in the agricultural sector.

Read the original article at The Conversation.

Mike Joy is a senior researcher at the Institute for Governance and Policy Studies (IGPS), Simon Chapple is the director of the IGPS and Lisa Marriott is a professor of taxation at Te Herenga Waka—Victoria University of Wellington.