To Sell, or Not to Sell to Coops, That is the Question

Economic Tidbits 12.18.17

Two tax code changes in the tax package passed last December by Congress are receiving much attention in the countryside.  The first change concerns the tax treatment of producers’ sales to coops.  The second concerns the loss of the Section 1031 exchanges for farm machinery and equipment.  Let’s examine these changes in more detail.

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Federal Tax Saga Enters Next Chapter . . .

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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.

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Property Taxes Can Still Be Expensed . . .

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Last week the House Ways and Means Committee released its long-awaited federal tax reform proposal.  The proposal would change how farmers and ranchers are taxed both as individuals and as businesses.  Many farmers and ranchers are wondering if property taxes paid on land, buildings, and equipment could still be expensed as business expense under the proposal.  Yes-the ability to deduct property taxes as a business expense by farmers and ranchers on Schedule F would continue.

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Disregard for Taxpayers Apparent in SCC Board Action

Steve Nelson1By Steve Nelson, farmer from Axtell, Nebraska and Nebraska Farm Bureau president

 

Can you hear me now? You’ll recall that catchphrase from the popular Verizon ad campaign promoting the company’s prowess in ensuring cell phone customers could connect from virtually anywhere. If only the Southeast Community College’s (SCC) Board of Governors had such a reliable network.

Last November, taxpayers from across the 15-county SCC area sent a message to SCC. It was loud and clear. It came in the form of voters overwhelmingly defeating a $369 million SCC bond measure with nearly 70 percent of the vote. The voters message; show restraint, don’t push massive property tax increases that we can’t afford. Despite the clarity of the message, it apparently never got through, or worse, was ignored by the SCC Board of Governors.

Despite the call for being cautious in taking more taxpayers dollars, in late September the SCC Board acted to increase their tax levy. Instead of a slight increase, the Board opted to take the maximum allowable levy authorized by the state for building construction. The Board’s action will effectively raise property taxes on SCC taxpayers and, in the process, appears to show complete disregard for the message sent by voters.

Partners in the Vote NO 369 coalition, which formed in opposition to SCC’s bond, had warned voters leading up to election day that passing the bond measure was too risky, given that should the bond pass SCC would still have the ability to raise their property taxes even more, by using the building construction levy authority.

Less than 12 months from the vote of the people, that’s exactly what the SCC’s Board of Governors did, pushing forward with their plans, and in the process showing how determined SCC was to take more taxpayer money and how easy it is to ignore the wishes of those who have to fund SCC expansion.

As a partner in the Vote NO 369 coalition, we’ve received numerous calls from angry taxpayers outraged by the SCC’s Board action. They believed, like so many others, that SCC should have gotten the message last fall. Their concerns are well founded. If a 2-1 vote against boosting taxes won’t get their attention, what will?

The smart move, and what we are encouraging the SCC Board to do, is to reconsider their action. While the heart of the matter is about the money, in the vein that SCC is intentionally and actively taking more from those who’ve signaled they aren’t ready to give it, the reality is SCC is breaking public trust, a trust that when taxpayers speak, the public entities accountable to them will listen.

We understand the SCC Board has a responsibility to juggle the needs of students and taxpayers. But we also know that strong public and private relationships are important for building educational opportunities; that includes having a relationship with taxpayers. There’s no denying SCC and the other community colleges have an important role to play in helping grow Nebraska. To keep those relationships strong, SCC’s Board would be best suited over the long-run in taking a step back at this time and recognize the needs of taxpayers. After failing to respond to their initial message, taxpayers across the area are wanting SCC to demonstrate they heard the message so they can stop asking, “Can you hear me now?”

Federal tax reform-a first impression . . .

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The Trump Administration, the House Ways and Means Committee, and the Senate Finance Committee announced last week they have agreed to a unified framework for federal tax reform.  The framework outlines several tax proposals for both business and individual filers.  Many details remain to be filled in, and legislation needs to be written, but the unified framework does provide some guidance for farmers and ranchers on issues they should monitor as the tax discussion evolves.

Most farm and ranch operations in Nebraska file federal taxes as individuals (Form 1040).  The 2012 USDA Census of Agriculture reported that 85 percent of Nebraska farms claimed the legal status of a family or individual for tax purposes.  The average annual federal income tax after credits reported on returns filed by Nebraska farm sole proprietors was $443 million for 2009-2015 according to the Internal Revenue Service (IRS) data (2013 was not included as data was not readily available).  The average annual effective rate of taxation on farm returns over this period was 14 percent, which was two percentage points higher than the effective rate for all Nebraska individual returns over the same period.

For individual filers, the unified framework proposes to double the standard deduction, consolidate tax brackets from seven to three, lower the top rate from 39.6 percent to 35 percent, eliminate itemized deductions except for mortgage interest and charitable deductions, repeal personal exemptions for dependents but increase the child tax credit, and repeal the alternative minimum tax.  So, what are the tax implications for farmers and ranchers?

Like most Nebraskans, most producers claim the standard deduction on their individual returns.  In 2015, according to IRS, 72 percent of Nebraska farm returns claimed the standard deduction.  Thus, doubling the standard deduction has the potential to reduce taxes for these filers subject to other changes in tax brackets and rates, which are not known now.  For producers who itemize, total Schedule A deductions amounted to $196 million in 2015, excluding home mortgage and charitable contributions.  Losing these deductions, and what it means in ultimate taxes paid, will depend on individual filer’s amount of itemized deductions relative to the increase in the standard deduction, and ultimately, the changes in tax brackets and rates.  The proposals addressing the child tax credit and repealing the alternative minimum tax will have little impact on farm and ranch taxes.  Combined, the two provisions amounted to $23 million for farm tax filers in 2015, or 0.7 percent of reported adjusted gross income that year.

At this point, because all the details on tax brackets and rates are not known, the implications of federal tax reform for farmers and ranchers are difficult to grasp.  The changes to business taxes will also have implications for farm and ranch operations.  Future Tidbits will highlight provisions in the unified framework for businesses and other taxes that might impact farmers and ranchers.  Tidbits will also return to the topic of changes for individual filers when more is known on changes to brackets and tax rates.

 

Jay RempeJay 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.

2017 Agricultural Land Assessed Values Stay Flat

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The taxable value for agricultural land in Nebraska declined .15 percent in 2017 according to a preliminary analysis released Friday by the Nebraska Department of Revenue.  The slight decline marks the first time the assessed value of agricultural land statewide has shrunk from one year to the next since at least the early 1990s, and perhaps as far back as the late 1980s.  Taxable value for all real property increased 3.34 percent over last year, with residential and recreational property value growing 6.5 percent, and commercial and industrial property growing 5.82 percent. The figures come from reports filed by county assessors with the Department of Revenue.  Notices of valuation changes will be sent to property owners on or before June 1.

The changes for agricultural land varied considerably across the state (see map below).  In Sarpy County, the value of agricultural land fell 9.38 percent, while in Hooker County it increased 19.28 percent, a difference of almost 30 percentage points.  Other counties seeing significant declines were Nuckolls and Douglas Counties with drops in value of greater than 8 percent.  Other counties with large increases included McPherson at 18.68 percent and Thomas at 10.76 percent.  In all, 43 counties saw decreases in agricultural land values (counties in red and orange on map), and 50 counties reported either no change or increases in total values.

Ag Land Valuations 2017

The variations across counties reflect the differences in the timing of price movements in the cattle and crop markets.  The run-up in cattle prices, and subsequently prices for grassland, started and peaked later than the run-up in corn and soybean prices and prices for crop ground.  Because assessed values are set using prices from 3 years’ prior land sales, counties made up primarily of grassland are still seeing the higher land prices reflected in the setting of assessed values.  What do the value changes mean for property tax levied?  The answer will be dependent on local government spending and budgeting decisions later this year.  Local governments must approve final budgets by September 20 and tax levies will be set before October 15.  Suffice it to say, that in some counties, the values changes might result in a slight shift in taxes levied from agricultural land to other property sectors.  For other counties, the trend of agricultural land carrying a greater share of the local tax burden will continue.

 

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.

Sound Tax Policy isn’t Education’s Foe

steve corn head shotThere are two things I’m confident about when it comes to the beliefs of the majority of Nebraskans. One, we value education; whether it’s making sure we have high quality K-12 schools, or quality secondary education opportunities. Two, we believe in sound fiscal policy; including an appreciation for spending restraint and a balanced tax structure.

We don’t believe those two things have to be in conflict, but you might get that impression based on sentiment expressed by some in the education community as Farm Bureau has weighed in on the need for property tax and school funding reform. Farm Bureau’s calls for local spending restraint and property tax relief should not in any way be construed as adversarial to public education.

You know as well as I do that Nebraska Farm Bureau and its members value quality educational opportunities for Nebraska students. For decades, numerous members of our organization have given their time and talents to serve on local school boards, while many others have offered their service to Nebraska education as teachers and volunteers. Our members are proud to support their schools and their communities.

As I’ve said on many occasions, including testimony before the Legislature’s Revenue and Education Committees, how we as Nebraskans choose to fund schools is a separate and distinct question from whether we should provide quality educational opportunities for students.

We believe in quality education, but we also believe we must address the underlying imbalance in our tax structure that has led us to a point where property taxes carry the lion’s share of school funding. Nebraska is far outside the norm in terms of our reliance on property taxes when compared with other states. For example, the nationwide average contribution of property taxes for school funding is 32 percent. In Nebraska, it’s 51 percent.

Calls for reform are not an indictment of whether our schools are doing a good job, but rather an indictment of an imbalance in the way in which we fund schools in Nebraska and the over-reliance on property taxes to do so.

And make no mistake, Nebraskans want lower property taxes.

Over the last 10 years, (2005 to 2015) total statewide property tax collections for real property increased 66 percent, with property taxes levied on agricultural land increasing 176 percent, commercial property taxes 49 percent and residential property taxes 35 percent.

In 2015 alone, property tax collections increased statewide by six percent, a total increase of $216 million. That clearly outpaces the $204 million put into the state’s property tax credit program that was targeted to provide property tax relief.

We’re not getting ahead. We’re not even treading water.

To solve the property tax problem we as Nebraskans have to think bigger. We need visionary leadership. That’s the reason delegates at Nebraska Farm Bureau’s annual meeting adopted policy that seeks to set a limitation that no more than 40 percent of school spending could come from property taxes, bringing us closer to the national norm. The goal isn’t to harm education. The goal is to alleviate the pressure on property taxes and force the conversation that must take place about balancing the tax burden on Nebraskans. This is about fixing a problem that continues to be kicked down the road.

Those who believe that calls for property tax reductions and school funding reform are attacks on education, are simply missing the point.

We can work together to determine how much money it takes to provide adequate funding for schools. But, until we reform how we fund schools, there will continue to be undue pressure on property taxes.

There’s no question that re-balancing the tax burden and how we fund schools is challenging. But having the ability to problem solve and tackle these types of challenges is why we invest in education in the first place.

It’s time to think bigger on Nebraska tax policy. Reducing our over-reliance on property taxes to fund education is the right place to start.

Sincerely,

Steve Nelson

President

NEFB President Steve Nelson Testifies at Legislative Hearing About School Funding and Tax Issues

On Thursday, Nov. 12th, the Legislature’s Education and Revenue Committee held a joint public hearing to hear testimony on school funding in the state of Nebraska.  The hearing is part of joint interim studies being conducted by the Committees (LRs 332 & 344) on funding of public schools.   The Committees hope to make recommendations for improving the funding of schools to be discussed during the 2016 Legislative session.  Nebraska Farm Bureau was invited to testify before the Committees and urged the senators to undertake fundamental reform of school funding to reduce property taxes and improve taxpayer equity.

Watch NEFB President Steve Nelson’s testimony here.