The government is offering a record $48.4 million in subsidies for 173 acres (70,000 hectares) of rice crops if farmers don't plant this season.
The Independence Evening News report says farmers in central and southern Taiwan who say the subsidies are too low are digging for underground water, a practice that has been blamed for serious soil depressions along Taiwan's west cost.
The drought is most severe in the north, where the Shimen reservoir has only enough water for a week. Officials in central Taiwan say they have enough water to last six months.
The government has revealed a $14.6 billion plan to build 18 reservoirs by the year 2011, bringing the total to 58, to cope with rising water needs.