Ag Deserves Unique Tax Treatment. Here’s Why
In a nation where most of our citizens are two or three generations removed from the family farm, it's understandable that many have an incomplete view of agricultural production. Pictures of serene countryside, idyllic red barns, and amber waves of grain are certainly fun to look at, but they only tell a fraction of agriculture's story. Behind every bushel, bale, or pound of the farm products we consume is a sophisticated business person whose life's work is utilizing limited resources to create quality food products.
And, like any business person, today's farmer is particularly concerned about the future of America's tax code. Campaign promises from 2016 remain unfulfilled while Washington negotiates to create a simpler, fairer tax structure.
T he seasonal nature of agricultural production including crops grown during certain times, harvested at certain times and more means cash flows are inconsistent throughout the year. And, because farmers and ranchers are almost always price takers, income is inconsistent from year-to-year. Plus, agriculture is a business dependent on something entirely outside of the control of any farmer or rancher: the weather. (Photo by Chris Potter is courtesy www.ccPixs.com.)
An Uncertain Reality
One of the challenges in creating a tax code that works for all industries is that not all investitures are created the same. As John F. Kennedy famously said, farmers are the only ones who buy everything at retail, sell everything at wholesale, and pay the freight both ways. When agriculture examines the current tax code, it's with the needs of a unique industry in mind.
Consider, for example, the seasonal nature of agricultural production. Crops can only be grown during certain times, and must be harvested at certain times. This means cash flows are inconsistent throughout the year. And, because farmers and ranchers are almost always price takers, income is inconsistent from year-to-year. Now consider the fact that agriculture is a business dependent on something entirely outside of the control of any farmer or rancher: the weather. As our friends in Texas and Florida know all too well, a hurricane can drown thousands of cattle and destroy most of a citrus crop in days. In hours, a hailstorm in Southeastern Arizona can destroy hundreds of acres of cotton. In short, nothing in agriculture is certain. Taxes, on the other hand, are one of the only two recognized certainties in this world (the other, of course, being death), making an ag-friendly tax code more vital to the success of our industry.
What Makes Ag So Special?
In the circles I run in, it’s not uncommon for me to hear something like this while talking taxes: "Quit complaining, agriculture; nobody likes paying taxes." And of course, that’s not an untrue statement; taxes are a burden on all business, not just ag business. Nevertheless, I would argue that if any industry deserves unique tax treatment, it's agriculture.
First, remember all those uncertainties agriculture faces? Those variables will never go away. We'll never be able to control the weather. We'll never be able to manage the planting or purchasing decisions of other nations. We'll never be able to fully control pest populations. There will always be a part of the industry that is simply outside of our control.
But even more important, consider the actual product the agricultural industry produces. Yes, it's wheat and cotton and beef and all those crops that we sell in bales and bushels and pounds. But, at the end of the day, those crops turn into something much more familiar: food. The food we see on grocery store shelves. The food to which we have such ready, affordable access that we don't even think twice about eating a strawberry in December or an apple in July. The food we feed to our families without having to worry about whether it's safe.
Last week, the House of Representatives took a step toward maintaining a successful agricultural industry by passing a tax reform bill known as the Tax Cuts and Jobs Act (H.R. 1). The bill outlines a plan with the potential to reduce income taxes for farmers and ranchers by outlining lower corporate tax rates. Importantly, it also preserves important provisions such as immediate expensing, Section 179 small business expensing, and a continuation of the deduction for state and local taxes. It also continues like-kind exchanges and the use of cash accounting, two tools that are essential to helping farmers and ranchers manage cash flow and tax liabilities. Moreover, H.R. 1 finally puts an end to the Estate Tax. Beginning January 1, 2018, H.R. 1 doubles the Estate Tax exemption, and on January 1, 2024, it eliminates the tax altogether.
Arizona Farm Bureau President Stefanie Smallhouse had this to say about the Tax Cuts and Jobs Act: “[W]e feel confident that this bill is a positive step toward the end goal of reducing the overall effective tax rate for American farms and ranches. In particular, Arizona’s farm and ranch families will benefit from the continuation of the interest expense deduction, which is especially important to us and our businesses. Most growers, especially beginning producers, are highly leveraged due to the cost of farming and ranching.
The Death Tax has been devastating for family farms and ranches in Arizona and the phase out of this tax within 6 years is something we have been working towards for decades. This will do a lot for maintaining family operations during times of tragic loss.
Now it’s the Senate’s turn to act, after the Senate Finance Committee passed a bill just before the Thanksgiving holiday. Unfortunately, the Senate bill is much more of a mixed bag. For example, although it gives individuals operating pass-thru businesses the ability to deduct 17.4 percent of their business income, this deduction is limited to 50 percent of the W-2 wages that business has paid to employees. The deduction also begins phasing out when taxable income exceeds $250,000 ($500,000 for joint filers), and ends altogether when the taxable income reaches $300,000 ($600,000 for joint filers). The Senate bill also provides for lower income tax rates, but sunsets those lower rates after 2025. Similarly, the Senate bill doubles the Estate Tax exemption, but doesn’t repeal the tax – and it sunsets the doubled exemption after 2025.
What Can We Do?
Given the good-news-bad-news bills coming out of Washington, what we need now are your voices. For our congressional delegation, there’s nothing as influential as the voice of the people they represent.
Please, take a few minutes today to visit our Action Center at https://www.azfb.org/Public-Policy/Action-Center. With just a few clicks, you can send a message to our Senators to explain just how the proposed tax bill might impact our businesses, and to ask for changes in key provisions to make the bill more favorable to our industry and our families.
The business struggles of American farmers and ranchers don't just impact their bottom lines -- they impact our nation's health and prosperity. A tax code that works for farms and ranches is a tax code that helps keep safe, affordable, abundant food on America’s dinner table. Now’s the time to help Washington make our taxes one less thing outside of our control.Join Our Family