New Homestead Act
| This article first appeared in the Center's newsletter and was later published by the Associated Press. Additional New Homestead Act resources available on our website include a Bill Summary, a Rural Action Brief, Testimony given on the proposed legislation, and a more recent update on the legislation.
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Building Wealth in Rural Communities: The New Homestead Act and Individual Homestead Accounts
A bi-partisan group of U.S. Senators has re-introduced the New Homestead Act, a menu of incentives and policy prescriptions to address rural depopulation.
The Center recently published a report examining a provision of the New Homestead Act and the impact it could have on rural communities. Building Wealth in Rural Communities: The New Homestead Act and Individual Homestead Accounts analyzes the Individual Homestead Account provision of the bill, a significant proposal for asset and wealth-building in rural communities across the nation.
New Homestead Act counties
The 698 New Homestead Act qualifying counties are located in 38 states, with the largest number in the Midwest and Plains states. To qualify as a New Homestead Act county, a county must 1) be rural, and 2) have experienced net out-migration of 10 percent or more over the past 20 years. Texas, Nebraska, Iowa, Kansas, and North Dakota have the most qualifying counties.
Individual Homestead Accounts explained
Individual Homestead Accounts (IHAs) are savings accounts (generally matched with public funds) that allow tax-free withdrawals for certain purposes. IHA allowable purposes are unreimbursed medical expenses, first-time home purchases in New Homestead Act counties, costs incurred in developing a business in New Homestead Act counties, expenses related to obtaining higher education, and qualified retirement account rollovers.
Any individual who is a bona fide resident of a qualifying county is allowed to create an IHA. The IHA provision is generally identical to Individual Development Account legislation that has been successfully used primarily in urban settings.
Over 3 million would qualify Federal matching funds would be deposited into IHAs on a sliding scale based on the income of the accountholder. Based on 2000 Census data, we estimate that over 3.3 million rural households would qualify for IHA matching funds – about 16 percent of all rural households in the nation and 81 percent of households in the qualifying counties.
Top 10 States with IHA Qualifying Households
1. Iowa
2. Illinois
3. Texas
4. West Virginia
5. Ohio
6. Mississippi
7. Kansas
8. Kentucky
9. Minnesota
10. Louisiana
* highest number of households that could potentially qualify for IHA matching funds
Many essential uses for IHAs
We made the following findings on the uses of the proposed
Individual Homestead Accounts:
- These households incur nearly $11 billion annually in out-of-pocket health care costs.
- Over 1.1 million of the households are significantly at health care expense risk – either uninsured or underinsured.
- With homeownership rates already higher in rural areas, it is difficult to estimate the use of IHAs for first-time home purchases. Affordability and housing quality are more important issues in rural areas.
- If home repairs and renovation were added to the list of allowable use, and based on the experience of Individual Development Account programs, over 1.1 million households would obtain necessary home repairs and improvements.
- College-level education may be a questionable use of IHAs – most New Homestead Act counties are remote and a great distance from colleges and universities, and data indicate that fewer college-educated people return to live in rural communities. However, community college-level education, vocational education, and occupational training would fit today’s workplace, are generally more common in rural areas, and would help build the human capital resources of rural communities.
- Retirement savings is a major issue among rural people, with, for example, farmers, ranchers, and their employees about half as likely as workers nationwide to have pension or 401(k)-type plans.
- The experience with Individual Development Account programs shows that when offered, retirement savings is a popular choice of account holders. This is an important consideration in rural communities where there is a large senior population and a relative lack of private retirement savings programs.
More businesses and jobs
Most of the New Homestead Act counties are qualifying counties because they lack economic opportunity. This lack leads to a downward spiral of decreasing population and community institutions which continually feeds on itself over time. Individual Homestead Accounts have the potential to break this cycle by providing opportunities for residents or newcomers to expand or create businesses and jobs in their own communities.
Because of the importance of developing economic opportunities, our report estimated the number of businesses expanded or created and the number of jobs created by those businesses in each state with New Homestead Act counties.
Because of the small nature of IHAs (a maximum of $5,000 annually from both individual deposits and matching funds for five years is allowed), it is assumed the businesses expanded or created will be self-employment or small businesses (likely meeting the definition of microenterprises, a business with five employees or less).
As we have often written, nonfarm self-employment and entrepreneurship is becoming a major factor in rural economic development. Entrepreneurship is viewed as potentially the best option rural people have to create economic opportunities and jobs and counteract the decline in rural manufacturing and agricultural employment. IHAs would offer another economic development tool to promote rural entrepreneurship.
Based on a set of assumptions on the use of Individual Development Accounts throughout the nation for small business development and the rate of employment for such businesses, we estimate that nationwide over 153,000 businesses would be expanded or created and over 268,000 jobs would be created in rural communities through the use of Individual Homestead Accounts.
Top 10 States — Total Jobs Created by IHAs
1. Iowa
2. Texas
3. Illinois
4. West Virginia
5. Mississippi
6. Ohio
7. Kansas
8. Kentucky
9. Louisiana
10. Indiana
Top 10 States — Jobs Created by IHAs Relative to Population*
1. North Dakota
2. West Virginia
3. Iowa
4. Wyoming
5. South Dakota
6. Nebraska
7. Montana
8. Mississippi
9. Kansas
10. Arkansas
* jobs created per 1,000 population
From these figures it is obvious some states would greatly benefit from the New Homestead Act, and specifically from the Individual Homestead Account provision – Iowa, West Virginia, Mississippi, and Kansas, for example, would benefit significantly both in terms of total jobs created and in jobs relative to population.
The New Homestead Act has often been portrayed as a Midwest/Great Plains bill, a policy proposal that would benefit primarily the rural areas in those states. It is clear that states in many areas of the nation would benefit from the IHA provision through the creation of jobs and businesses and enhanced economic opportunity. Further, urban areas of the states with New Homestead Act counties would benefit from a stronger rural economy.
Ways to make IHAs stronger
While the Individual Homestead Account provision is one that will benefit many rural people and communities, there are some minor recommendations we feel would make the program stronger.
Among them are:
- Add home rehabilitation, renovation, and repair to allowable uses.
- Specifically include payment of health insurance premiums in the definition of “qualified medical expenses” to address the issue of the uninsured in rural areas.
- Allow home purchase costs for people in qualified counties to include those who are not first-time home buyers. >> Allow use for costs related to training and skill development that are not connected to a post-high school institution.
- Relax the IHA trustee requirements to allow for non-profit organizations, faith and community-based organizations, community action agencies, government agencies, and others (as well as banks and other financial institutions) to act as account trustees; this would address the scarcity of banking institutions in New Homestead Act counties.
- Target the allowable use of IHAs for business capitalization to investments in owner-operated businesses rather than any business investment. The goal of the program should be to broaden the base of people in the community who own and operate businesses.
- Add business technical assistance and business plan development as qualified business costs. It should be a goal of the IHAs to provide a path for the success of individuals and businesses to the extent possible. Technical assistance and a good business plan will make for a straighter path.
Individual Homestead Accounts clearly have the potential to bring about positive impacts to individual well-being and community welfare – business startups and expansions, job creation, education and skill enhancement, improved housing, and greater retirement security.
At a time when the out-migration of population in many rural communities is tied to deficits in opportunities offered by such communities, the Individual Homestead Account provision of the New Homestead Act offers a vision to create a true, nationwide ownership and opportunity society.
Contact: Jon Bailey, jonb@cfra.org or Kim Preston, kimp@cfra.org for information.
