TAX BILL CULTIVATES FARM AND RANCH TAX PRIORITIES
Beloved American writer E.B. White, author of Charlotte's Web, lived on a farm in North Brooklin, Maine. Some years ago he observed that, "Farming is about 20 percent agriculture and 80 percent mending something that got busted." The same could be said of the federal tax code.
Several "busted" parts of the tax code have a particularly adverse affect on farmers and ranchers. The taxpayer refund bill approved by Congress earlier this month and sent to the President for his signature would provide farmers and ranchers with tools they can use to manage the extreme, year-to-year fluctuations in income that are a hallmark of agriculture.
- Risk Management: Prime among the provisions aimed at agriculture is the creation of Farm and Ranch Risk Management (FARRM) accounts that can be used to even out the extreme, year-to-year fluctuations in income that are a hallmark of agriculture.
Setting aside funds for unprofitable years is difficult for agriculture producers because farm income is needed for operating expenses and to purchase supplies for the next production cycle. Under the FARRM provision of the tax bill, farmers and ranchers could reserve 20 percent of their net farm income in a tax-deferred FARRM account. Funds could be left in the account for up to five years, a risk management strategy that would help ease some of the pain caused by weather or market-related disasters.
Combined with last year's legislation allowing permanent income averaging for agriculture producers when they prepare their federal tax returns, FARRM accounts provide another tool to help farmers and ranchers.
- Phase out of death tax: Another element of the tax bill that would be of great benefit to farmers and ranchers is its phasing out of the death tax (estate tax) by the year 2009. According to the Farm Bureau, individuals, family partnerships or family corporations own 99 percent of U.S. farms. But the death tax can wipe out a family business – destroying a lifetime's worth of work – because taxes due at death often force the sale of farm and ranch assets. This drains capital from a business that it is no longer viable, and these kinds of assets are hard to sell quickly, bringing only fire-sale prices.
- Deductibility of health insurance costs: Most farmers and ranchers are self-employed, and have to buy health insurance out of their own pockets. Because of high costs and low profit margins, many cannot afford high-quality coverage or simply go without insurance. Current law allows the self-employed to deduct only 60 percent of their health insurance premiums, although corporations that provide their employees' health insurance can deduct 100 percent of the cost. The taxpayer refund bill extends 100 percent deductibility to the self-employed next year.
- Capital gains tax lowered: The taxpayer refund bill reduces the tax rate on capital gains to 18 percent and indexes assets for inflation. Agriculture is capital intensive. It requires a hefty investment in land, equipment and buildings to continue to produce what America and the rest of the world want to consume. Farmers and ranchers pay punitive capital gains taxes on inflationary – rather than real – increases in the value of their investments, especially land. The taxpayer refund bill would allow farmers and ranchers to keep more of the money they've earned and re-invest it in ways that make American agriculture even more productive.
Agriculture plays a key role in the Texas economy. The taxpayer refund bill addresses some of agriculture's most pressing concerns, and would remove some of the largest roadblocks to stability and growth that are embedded in current law.
August 13, 1999