Death tax at top of the reform list
American Farm Bureau Federation Tax Reform Summary:
Farm Bureau supports replacing the current federal income tax with a fair and equitable tax system that encourages success, savings, investment and entrepreneurship. In addition, the new code should be revenue-neutral and fair to farmers and ranchers.
Tax reform should embrace the following overarching principles:
-Comprehensive: Tax reform should help all farm and ranch businesses, including sole-proprietors, partnerships and sub-S corporations.
-Effective Tax Rate: Tax reform should reduce combined income and self-employment tax rates low enough to account for any deductions/credits lost due to base broadening.
-Cost Recovery: Tax reform should allow businesses to deduct expenses when incurred, including business interest expense. Cash accounting should continue. Sect. 1031 like-kind exchanges should continue. There should be a deduction for state and local taxes.
-Estate Taxes: Tax reform should repeal estate taxes. Stepped-up basis should continue.
-Capital Gains Taxes: Tax reform should lower taxes on capital investments. Capital gains taxes should not be levied on transfers at death.
Tax reform is a hot topic of the week, with a number of Senate Republicans talking up big tax breaks, and producers and farmers waiting patiently on the outcome should be calling their politicians to make sure their tax base is in the decrease, not increase, balance sheet column.
Pat Wolff, tax policy specialist with American Farm Bureau, pointed out that the congressional process is moving through the steps, with the House passing its budget already with a 219-206 vote, and the Senate hopefully following suit soon.
GOP lawmakers need to vote on the FY 2018 budget, then Republicans can pass a tax reform bill by majority, avoiding a Democratic filibuster. A 52-seat majority needs the support of 50 senators, but according to reports, Sen. Rand Paul, (R-Ky.), is a potential “no” vote already.
“Congress has to pass a budget,” Wolff said. “We could see a bill by the end of this month.”
But she added that it would probably be closer to Thanksgiving, as the two chambers have to come to an agreement on a bill. “Then we will know the ins and outs,” Wolff said.
Jess Petterson, with U.S. Cattlemen’s Association (USCA), said the details, to date, have been a little vague, but USCA is watching some key areas.
“Addressing stepped up basis will be a big issue, certainly repealing the estate tax is a big deal, but how it fits with stepped up basis will be the kicker,” Petterson said.
When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it. Stepped up basis allows generations inheriting an estate, stocks or bonds, to set the new basis value of that estate at current market value, without paying additional tax on the gain.
“From the farmer and rancher’s side, we’ve got to hang on to that stepped-up basis,” North Dakota Farm Bureau President Daryl Lies told Sen. John Hoeven (R-ND), in a townhall roundtable even in Bismarck, according to The Bismarck Tribune.
Senator Chuck Grassley (R-IA) believes there’s a good chance the estate tax could be repealed, but there could be an offset in the form of a cap on stepped up basis.
“There’s a possible compromise that the stepped-up basis would be kept for people with an estate value of under $10.8 million,” Grassley told AgriTalk Radio host Mike Adams.
Grassley is an original cosponsor of legislation reintroduced in January that would permanently repeal the federal estate tax, more commonly known as the death tax. A companion version has been introduced in the U.S. House of Representatives. A previous version was adopted as part of the non-binding fiscal year 2016 budget resolution.
“It’s getting harder all the time to have a family farm or family-run business,” Grassley said. “Congress ought to do everything possible to encourage family enterprises to stay in operation and get next generations involved. The estate tax is counter-productive to jobs and economic growth. It just isn’t needed. I hope this is one of many tax burdens that will fall by the wayside through comprehensive tax reform or any other means that might be available.”
The estate tax is a heavily debated topic, with some claiming it’s a champagne problem, according to Danielle Beck, Director of Government Affairs, with the National Cattlemen’s Beef Association.
Only 1.7 percent of family-farm estates were required to file an estate-tax return in 2016 and only 0.4 percent ended up owing the tax, according to an analysis by the Agriculture Department, leading to the debate that the death tax is not an issue.
But Beck points out that producers end up spending thousands of dollars on complex plans to save the family ranch from the death tax, which lowers that statistic.
“You’d think in operating a business like this, the most important decisions would be strategic decisions about buying or selling cattle or buying and selling land. Instead the most important decisions I’ve made have been estate-planning decisions, and they have impacted our ability to maintain our operation more than anything else – and that doesn’t really seem right,” Nebraska producer Jay Wolf shared.
“There isn’t an easy fix for a family that is facing that kind of a [Death Tax] burden. We see a lot of folks going through a lot of complicated planning, that costs a lot of money, and putting operations in structures that are not particularly good for the business. But they are doing it to be able to preserve their son or daughter, or niece or nephew, being able to come into the operation,” South Dakota producer Todd Wilkinson said.
Reducing effective tax rates is another area to watch, according to Wolff.
“The bottom line is will farmers have a tax increase or a decrease? We want to make sure at the end of the day, that it is a decrease,” Wolff said.
The proposal would cut the corporate tax rate from 35 percent to 20 percent, reduce the seven income tax brackets, which range from 10 percent to 39.6 percent, to three (12 percent, 25 percent and 35 percent), and raise the standard deduction by almost double.
Sen. Heidi Heitkamp, (D-ND) has also been actively holding roundtables to gather input on tax reform, from her constituents, with simplification as a key topic.
“There is still a lot we don’t know about the president’s tax reform proposal, and we need more details to determine if it truly supports hard working North Dakotans,” Heitkamp said in a statement.
But a simple tax code may not be in the best interest of producers.
“Simplification can be dangerous to agriculture,” Beck pointed out, considering there are a number of beneficial tax codes on the books that producers utilize.
Other areas AFB is watching include cash accounting, like kind expensing, interest deductions and business deductions for state and local taxing.
“Farmers everywhere need to call their members and tell them that they want lower tax rates, but not at the expense of losing the interest deduction, losing cash accounting or losing like-kind exchanges,” Wolff said.
“We are also watching to see what will happen with capital gains,” Wolff added.
“Farmers and ranchers work on a very thin profit margin,” Lies pointed out in the roundtable meeting. “Those kinds of things are extremely important to us.”
U.S. Secretary of Agriculture Sonny Perdue touted the tax reform as a great benefit to American agricultural producers. And President Trump highlighted the tax reform proposals in an event in Pennsylvania featuring truckers and representatives of the trucking industry.
“The President’s proposed tax cuts and reforms will boost job creation and growth across all American economic sectors, and agriculture is no different. Some of the benefits are self-evident, such as eliminating the ‘Death Tax’ on family farms or reducing the time and expense involved in merely complying with the onerous tax code,” Perdue said in a statement. “But others help agriculture in less obvious ways, as in easing the burden on truckers. Without the trucking industry, many products of American agriculture would have a much more difficult time getting to market. Anything that helps keep trucks on the road and facilitates commerce is good for the farmers, ranchers, foresters, and producers of American agriculture.”
The need to pass a tax reform bill by the end of the year is on the minds of Republicans, in part, because of the 2018 election.
“If tax reform crashes and burns, if [on] ObamaCare, nothing happens, we could face a bloodbath,” Senator Ted Cruz, (R-Texas) who is up for reelection in 2018, reportedly told a group of supporters, at a New York event.
And Senator Lindsey Graham, (R-S.C.), told CBS’s Face the Nation that a tax plan was imperative. “If we’re not [successful], we’re all in trouble. We lose our majority, and I think President Trump will not get reelected.”
While Wolff points out that there are still lots of unknowns until the final bill comes out, it’s important for producers in House Ways and Means Committee districts to contact their representatives, along with their senators.
“The bottom line, now is the time to be calling Washington,” Wolff said. “It’s a lot harder to change the bill after it is released.”
Producers need to tell their stories, Beck added. The personal stories, of how the current tax system impacts them, both good and bad.
“[Politicians] live in the bubble of D.C.,” Beck said, and most don’t understand the “cash poor, asset rich” farm and ranch business. “We aren’t tearing down malls, to till up land for production. Once [the land] goes out of production, it never comes back.”
Beck said there is some concern that the House and Senate budget bills will have tome significant differences, leading to what could be lengthy conferencing, but a budget is imperative for tax reform.
“We’ve been told, no budget, no tax reform,” Beck said. “But at the end of the day, we know what we want. A tax code that’s fair and equitable for ag producers.” F