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ISSUE BRIEFING PAPER
Tax Policies Affecting Rural Small Businesses
 Background:
Communicating for Agriculture (CA) has long worked on tax fairness and
equity issues on behalf of farmers, ranchers, rural small businesses and
self-employed people, as well as on tax incentives to encourage economic
development in critical sectors of the economy.
Policy and Legislative Recommendations:
- Raise Tax Deduction for People Who Pay Their Own Health Insurance
to 100%
A full 100 percent tax deduction for health insurance premiums should
be immediately made available to the self-employed and any individual
who pays for his or her own health insurance. Only after a full
deduction is available will these tax paying citizens be provided
equitable tax treatment compared to people whose insurance is provided
through their place of employment. Current tax legislation calls for a
phase-in of the tax deduction to an eventual 100 percent for
self-employed people. However, there is no reason why the self-employed,
as well as other workers who pay for their insurance entirely
themselves, should have to wait years to get what is fair and equitable
with other tax payers. Unequal and unfair tax policy that discriminates
against the self-employed and other small business workers is a
disincentive for families seeking to start and operate their own
business; it results in higher costs to these individuals; and therefore
contributes to the growing uninsured population.
- Estate Tax Repeal
Rural small business people, including farmers and ranchers, suffer
the effects of estate taxes that often makes it impossible for these
operations to stay in business. Many times a large percentage of assets
in an estate are tied up in property and equipment with very little
cash. In many cases, the operations must be sold to pay estate taxes
thus forcing a loss of jobs and loss of tax paying farmers and ranchers
so vital to rural communities.
- FARRM Accounts
CA strongly supports passage of legislation that would authorize
tax-differed savings accounts that would help qualified farmers,
ranchers and fisherman save in good years for use in bad years. All of
these occupations are predominantly self-employed and subject, by their
very nature, to wide swings in income from year to year. FARRM accounts
would be a useful tool that would help producers manage their widely
fluctuating income based on evening out their taxes from year to year,
but not avoiding taxes on that income. CA pioneered this concept by
proposing in years past a very similar self-help program, called Income
Balancing Accounts. If approved, farmers, ranchers and fisherman could
invest a limited amount of tax-differed income in special accounts in
good years, and take it out in bad years where upon the untaxed
contribution would be taxable.
- Raise Section 179 Expensing The amount farms and small
businesses can purchase and then expense is moving up too slowly. The
amount should be raised to $30,000 immediately.
- Self Employment Tax on Certain Rental Income
Farmland owners that rent to certain entities and then participate in
the operation in some way are being unfairly double taxed. They are
being taxed on the rental income and then have to pay the additional
self-employment tax of over 15 percent. It is not fair for farmers to be
singled out to pay extra taxes when all other rental property owners
aren't assessed the additional tax. Congress should pass legislation
that has been proposed to remedy this problem.
- Exempt Aggie Bonds from State Volume Cap on Tax-exempt Bonds
At this time, Aggie Bonds are subject to the state volume caps on
industrial revenue bonds, according to a formula set by Congress that
has long needed to be adjusted upwards to meet demand. There are a
number of states that periodically cannot meet the demand for Aggie
Bonds, because they do not have sufficient volume cap to meet overall
demand for tax exempt bonds. And, several states would like to start
offering Aggie Bonds, but are prevented from doing so because there is
already more demand for other uses than their state volume cap can
accommodate. Most of the private-activity, bond volume cap is used by
corporations for manufacturing or for multi-family housing projects.
These bonds are typically issued for millions of dollars, underwritten
and sold to investors. In contrast, Aggie Bonds are used by young farm
and ranch families, and cannot exceed $250,000 per bond. These bonds are
not rated, underwritten and sold to investors. They typically are held
by the local lender Ð a local bank or private party lender. It is an
unfortunate hindrance to Aggie Bond programs that they must compete with
large industrial manufacturing and housing projects under the current
regulations set by federal law. Exempting Aggie Bonds from the cap would
enhance opportunities for better financing for beginning farmers in many
existing and new state programs.
- Repeal Tax on Installment Sales
In 1999, legislation was passed that would severely hamper the
ability of tax payers who use the accrual method of accounting to sell
their business over a period of years. The new legislation will force
business sellers to pay income tax on the entire selling price up front,
even though they have a contract to receive payments over several years.
This new provision should be repealed.
- Reform Alternative Minimum Tax The alternative minimum tax
(AMT) was enacted in 1986 to insure big business and high income
individuals pay their fair share of taxes. Now, every year more
individuals in the medium income levels are being impacted. The AMT tax
should be repealed for individuals.
Key Contacts at Communicating for Agriculture:
Wayne Nelson, CA President Ð (605) 842-0573, fax (605) 842-0616
Bruce Abbe, Vice President of Public Affairs Ð (612) 884-5179, fax
(612) 884-6928
CA National Headquarters Ð 1-800-432-3276, fax (218) 739-3832
CA Washington, D.C. Office, Pat Pellerin Ð (202) 775-5995, fax (202)
261-6541
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