The Chairman of the House Ways and Means Committee, the tax writing committee of the House of Representatives, announced a draft of the federal tax reform bill will be released November 1. Leaders in both the House and Senate have expressed hope a tax package could be passed by Thanksgiving. One taxing concern on the minds of many farmers and ranchers is the fate of the deduction for state and local taxes (SALT). The concern is especially acute in Nebraska given the large amount of property taxes paid by agriculture, roughly $1.3 billion in 2016.
Under the unified framework for tax reform, the Trump Administration and Republican Congressional leaders said they want to simplify the federal tax code by repealing all itemized deductions, except deductions for home mortgage interest and charitable contributions. Itemized deductions are claimed by individuals on Schedule A filed with Form 1040. Most farmers and ranchers file taxes as individuals-the 2012 USDA Census of Agriculture showed 85 percent of Nebraska farms filed taxes as either an individual or family. Additionally, only 28 percent of farmers and ranchers itemize deductions. It is these operations who itemize deductions the loss of the ability to deduct state and local taxes could affect. The average annual deduction for state and local taxes reported by farm sole proprietors on Schedule A for 2009-2015 (excluding 2013) was $128.4 million. Presumably, the deduction is for state income taxes, property taxes on farm residences, and taxes on personal vehicles. For these operations, the loss of the deduction could increase federal income taxes an estimated $18 million per year if not offset by other changes.
Farmers and ranchers also deduct state and local taxes paid as a business expense for their operations, be it as sole proprietors, partnerships, or corporations. It is here where most of the property taxes paid by agriculture on land and machinery are likely reported and losing the ability to expense state and local taxes would result in a significant increase in federal taxes. Fortunately, according to the lobbyist for American Farm Bureau, the ability to expense state and local taxes as a business expense will continue. Congressional leaders have indicated the repeal of the state and local taxes deduction would only apply on individual returns, and not affect the expensing of taxes by businesses. But stay tuned, the reform discussions are now beginning in earnest, and no one can predict what might happen.
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.