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Facts, myths and policy directions for ag

Curt Arens Cattle in pasture
PASS IT DOWN: Proposed changes to capital gains and estate taxes have gained a lot of attention from farmers and ranchers lately. Many of those proposals could affect how land and farm assets are taxed as they are handed down to the next generation of producers.
Policy Report: Broadband, conservation and taxes are among the issues up for debate.

For much of the year, there had been substantial discussion and speculation about major policy initiatives being pushed through trillion-dollar-plus infrastructure bills.

The first included more than $1 trillion in physical infrastructure investments. Commonly called the Bipartisan Infrastructure Framework (BIF), the legislation committed more than $1 trillion in federal spending on hard or physical infrastructure, although a large part of the bill was reauthorization of existing transportation legislation. The rest of the bill added a reported $550 billion in new spending, although much of it also came from unspent COVID-19 relief funding.

The second package was the much broader package on soft or human infrastructure of up to $3.5 trillion in spending called the Build Back Better Act (BBBA). It includes various policy proposals and program expansions funded in large part by substantial tax changes.

During the debate over the two bills, much of the focus from agricultural interests has been on new investments in broadband deployment proposed in BIF, along with two key elements of BBBA — conservation spending and tax changes. For all three of these issues, there are substantial questions with only some answers, leaving a great deal of uncertainty as to policy and program directions.

Better broadband

For broadband, BIF included substantial new investments in broadband deployment, adding to various existing farm bill and other programs that have supported broadband over time. The legislation focuses on bridging the “digital divide” of those with and without reliable broadband service across the country. BIF proposes tens of billions in broadband investment, with a small portion allocated specifically to rural broadband.

Focusing specifically on rural broadband where service and access speeds have often been limited, the policy discussion has arguably elevated rural broadband to the ranks of rural electrification and rural telecommunications as critical utilities that the market alone won’t provide. There have been competing data points that have clouded the issue over time.

While maps of broadband service providers seem to show most rural areas being served by multiple providers, having service available in a given area is not the same thing as everyone in the area having available service. Different maps that track actual access speeds of users show the limitations and challenges that are much more common in rural areas.

With the growth of digital commerce and data transmission for everything from education and government services to telemedicine and precision agriculture, the need for improved rural broadband is apparent. Understanding how the new investments would add to the existing portfolio of programs and incentives, and how well it may complete the build-out of broadband infrastructure, is more complicated.

Conservation funding

For conservation, the potential new investments show up in the proposed BBBA legislation. The language reported by House Democratic leaders shows $28 billion of new spending, including increases of $22 billion for existing conservation programs and $5 billion for new cover crop programs that could expand on the pandemic assistance cover crop incentive payments made to producers this past summer.

The proposed bill would reportedly focus on practices that address carbon or related greenhouse gas emissions and could substantially increase total conservation spending in advance of the next farm bill debate, due in 2023.

However, there are numerous questions as of early October. The House language has yet to be reconciled with the Senate, or even among Democratic caucus members who are pushing the overall legislation. More specifically, the conservation language has yet to be debated at all as the entire $28 billion section was added to the bill reported from the House Agriculture Committee after the committee met and debated proposed language.

While the fate of the conservation language is unclear at the time of this writing, it will at a minimum establish a marker and a priority for discussion during the next farm bill debate.

Proposed tax changes

Another part of the BBBA Act discussion has drawn arguably the most attention and the most resistance from agricultural interests, namely the potential changes to capital gains taxes and estate taxes. The original discussion of tax changes to pay for the $3.5 trillion in proposed spending included changing both capital gains tax rates and the recognition of capital gains.

Specifically, the discussion had focused on negating what is called stepped-up-basis when appreciating assets such as land are passed on through an estate. Instead, the original proposals called for recognizing those unrealized gains when land was transferred, including through an estate, and taxing them at revised capital gains tax rates that could exceed 40% for top earners.

There was substantial reaction and resistance to the proposed capital gains tax changes that would have come in addition to proposed estate tax changes that would reduce exemption levels and increase tax rates. Competing analysis of the issues added to the confusion and uncertainty.

The secretary of agriculture originally noted that the proposed changes would affect only a very small percentage of farms across the U.S. On the other hand, Texas A&M University’s Agriculture and Food Policy Center conducted analysis of the representative farms in its policy and economic models and concluded that nearly all of them would owe substantial new taxes under the proposed capital gains and estate tax provisions.

Neither statement fully described the situation, as the secretary’s discussion referred to the population of all U.S. farms, including the vast majority of which are small and largely not commercial-sized operations. Conversely, the representative farms in the AFPC analysis are all large commodity operations designed to study and illustrate the effects of federal farm program policy decisions.

As such, almost all of the AFPC farms likely fit within the very small percentage of farms originally claimed by the secretary. A recent study from USDA’s Economic Research Service of farms in their Agricultural Resource Management Survey database pegged the number at close to 20% of farms that would either owe increased taxes or potentially owe deferred taxes.

At this point, the capital gains tax changes have been reportedly removed from the discussion to address farmer and other small business concerns, but proposed estate tax changes remain, and all of it remains subject to further deliberation if BBBA moves forward toward passage.

Ultimately, the issue of capital gains taxes and estate taxes both boil down to a political discussion and divide over wealth versus income and intergenerational operations. The proposed capital gains and estate tax provisions still included exemption levels at the lower end that meant taxes wouldn’t apply until estates were of a size that most would consider wealthy.

Thus, a political position that is framed around taxing and redistributing wealth and, particularly, intergenerational wealth will always see capital gains and estates as a target. Yet, the same policies can seriously cripple the transition of an operation to the next generation, burdening any heirs with combined capital gains or estate tax burdens that essentially translate into having to buy much of the operation again every generation.

The common thread through the broadband, conservation and tax issues is that all of them are part of an unprecedented policy debate this year amid economic recovery from the COVID-19 pandemic, where spending and policy priorities seem unconstrained. The discussion has been further clouded by various facts, many of which present competing pictures of the real landscape across the country. Regardless of the ultimate outcome regarding the infrastructure bills and tax proposals, it remains critical to understand the issues and the real facts behind the debate.

Lubben is the Extension policy specialist at the University of Nebraska-Lincoln.

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