The federal tax reform saga has turned a page and is moving into the next chapter in the U.S. Congress. On the House side, the Ways and Means Committee advanced H.R. 1, the Tax Cuts and Jobs Act, to the House floor with a committee amendment. The full House is expected to take up the bill later this week. On the Senate side, Senate Republicans last week released a draft of a reform proposal which differs markedly in some provisions with the House plan. The Senate plan will be taken up by Senate Finance Committee this week.
The Ways and Means Committee amendment . . . Perhaps the most significant change in H.R. 1 for farmers and rancher with the committee amendment concerns the treatment of pass-through income. The initial draft of H.R. 1 created a 25 percent rate on a maximum of 30 percent of pass-through income. The committee amendment instead creates a 9 percent rate, phased in over five years starting with 11 percent, on the first $75,000 in pass-through income for any person earning less than $150,000 in income from the business. The 9 percent rate is phased up to 12 percent (the lowest rate for individuals under the proposal) for income levels above $75,000 and fully phased out at $225,000. The committee amendment also clarifies farmland rental income would not be subject to self-employment taxes.
The Senate plan . . . For individual filers, the plan would maintain seven tax brackets and adjust the rates slightly. It would repeal the deduction for state and local taxes, including property taxes, claimed by individual filers on Schedule A. In tax year 2015, Nebraska individual filers claimed deductions of $145 million for state and local taxes-of this, $30 million was for real estate taxes; $1.2 million for sales taxes; and $109 million for state income taxes. Itemized deductions for home mortgage interest for homes valued up to $1 million and medical expenses would be maintained. The plan would also double the standard deduction and double the estate tax exemption.
The Senate plan . . . For businesses, the Senate plan lowers the corporate tax rate to 20 percent, but not until 2019. The bill would also establish a 17.4 percent deduction for pass-through income based on the Section 199 domestic manufacturing deduction. It is unclear how these proposed changes would affect farm and ranch taxes, particularly as the plan also repeals the Section 199 deduction. More information is necessary to fully analyze potential impacts. The Senate bill would allow equipment put in service before 2023 to be fully expensed, and expands the Sect. 179 business expensing to $1 million in property. The present limit is $500,000. And finally, cash accounting would continue for businesses with less than $25 million in gross receipts and businesses would be able to deduct state and local taxes paid by the business as an expense.
Both Houses of Congress have pledged to have legislation passed before the end of the year. No doubt there will be several more page-turning chapters left in the federal tax reform saga. Stay tuned for how the twists and turns could impact agriculture producers’ bottom lines.
Jay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide in-depth examination of key issues affecting Nebraska’s farmers and ranchers.