Strangeness in New Tax Law for Farmers

The interesting thing about the new tax law that got rammed through is that no one really seems to have known what was in it, not even the people who wrote it. This law was literally written in secret, behind closed doors, with only a very few people being allowed to know what was actually in it. Special clauses were inserted for no other reason than to get support from members of congress who threatened to vote against it. And often the people writing it had no idea what they were actually putting into the law. Except for a few high profile items and talking points, none of it was allowed to be made public until it came to the floor for a vote. And finally it was passed in such a rush that the people voting on it didn’t know what they were actually voting for or against.

Apparently even the people who actually had specific items inserted into the law didn’t know what the clauses that they themselves had put in would actually do. Part of the new law, IRC Section 199A that applies to earned income from pass through business activities is one of the items that even it’s authors didn’t really understand.  And one section of the 199A deduction could have a huge impact on farmers and how they sell the commodities they produce. I ran across this over at WallacesFarmer and it gives a brief rundown on how it works. But if you don’t have time to go read it yourself, here is how it would work.

The law includes a deduction for income from cooperatives for members of co-ops that is calculated differently from other sources of income. Basically income derived from selling your crops to a co-op you belong to is treated entirely differently from income from selling your products to a non-co-op.

The whole thing is a bit complex. What it essentially does for farmers is that in certain situations it carves out a huge deduction for selling your commodities to your co-op instead of to a commercial grain dealer. In the example they give in the article over at Wallaces, a farmer who sells his grain to a non-co-op business like an ethanol facility and ends up with a $50K profit, will end up owing about $4K in taxes on the profits from the sale.

If he sells it to a co-op, however, the farmer will end up owing zero taxes on the net income from the sale.

The really scary part is that the senators who inserted this into the tax bill, apparently had absolutely no idea this would be the result of the clauses they put into it. Two senators, Hoeven of ND and Thune of SD seem to have been largely responsible for shoving this into the bill just hours before it passed, and both claim that they did not intend to favor co-ops over any other business, despite the fact that is exactly what this does.

And this is just one clause in a law that is hundreds of pages long. No one knows yet what kind of traps, loopholes, give aways or other little surprises are lurking in this thing, and it could be months before we really know. And you can be sure that a lot of this is going to end up going through the courts before it all gets settled.


Nebraska Gov. Ricketts Touts ‘Major’ Property Tax Bill in Nebraska

“Property tax reforms in Nebraska could help farmers, but not as much as some groups want.”

Source: Nebraska Gov. Ricketts Touts ‘Major’ Property Tax Bill |

Please have patience with me while I talk about agriculture and property taxes for a moment so I can explain why this is important for farmers and environmentalists. Talking about things like taxes and government policies tends to make my eyes glaze over and I find myself with a sudden desire to take a long nap. But if you aren’t a farmer you may not know why this move by Nebraska is important for farmers. Wisconsin already did something like this years ago, and I think it’s the right thing to do.

Property taxes are based on the value of your property, of course. If your house, for example, is valued at, oh, $100,000, you pay property taxes based on that value. If it’s valued at $200,000, your property taxes are going to be significantly higher.

It’s the same with farmland. Under law here in Wisconsin the property is supposed to be assessed for purposes of property taxes at fair market value. (That law had to be instituted because some local jurisdictions were playing fast and loose with property evaluations in order to jack up the tax money they were getting. Before that law was put in place, I knew one poor bugger who had a mobile home that was worth about $10,000 get a tax assessment for $64,000. Seriously. I saw the documents myself.)

The question now is what exactly is “fair market value”? Is it the value of the property as it currently exists, what it is being used for at the moment, or the potential value of the property if it were sold for some other purpose.

That distinction is important, because what was happening in Wisconsin and a lot of other states is that local jurisdictions were assessing property not at it the value of the property as it currently existed, but what the property could be worth if it were sold for some other purpose.

The result was that if you had a farm on the outskirts of a town or city, you were pretty much screwed. Local governments were assessing the farms not on their value as farms, but their value as if they were commercial or residential property.

To illustrate what I mean, let’s look at an example. Farmland in this area is currently going for around – well, let’s round it off to $7,000 an acre to keep the math simple. So if you have a small, 100 acre farm, it’s worth about $700,000.

Meanwhile, land being used for, oh, let’s say a fairly upscale housing development in a nearby town, is going for about $20,000 per 1/4 acre lot, or about $80,000 an acre. Over time the town grows, and now you find that your farm is on the outskirts of the town. And as a result of that, the local government is now assessing your farm not for what it is worth as a farm, but for what it would be worth if it were sold for a housing development. You are now being forced to pay property taxes not on a farm worth $700,000, but property worth $8 million. Your property taxes just went up more than ten times what they’d been before.

While that’s a bit extreme, it isn’t exaggerated by much. I knew farmers who were seeing their property tax bills shooting up into the astronomical range because the jurisdiction they were in decided to evaluate their property not for what it was, but for what it could be. Their taxes were going up five, eight times what they’d been before when their property was evaluated at commercial or residential rates rather than agricultural.

There was some very heated debates over this, of course. The towns (and the developers) claiming that the new value was fair because that was what the property was actually worth if it were sold off to some developer, and the farmers on the other side saying no it isn’t because that’s not what it’s being used for… It was nasty.

I don’t think anyone ever actually proved that the governmental jurisdictions, seeking ever more tax money, along with developers smelling profits, abused the system by ratcheting up the taxes on farms specifically to force farmers to sell at bargain basement prices to a developer, but it was pretty much an open secret that this was exactly what was going on. At the time the laws curbing this were under consideration dozens of farmers appeared before the legislature claiming that this was exactly what was going on. Developers would find a nice farm in a good location near a town, smell the heady scent of money, convince the local government that it would be to it’s advantage to annex the farm into the town, evaluate the farm as commercial or residential property rather than farmland, and the farmer would be forced to sell at cut throat prices to the developer or go bankrupt from the taxes… It was nasty.

And for those concerned with urban sprawl it was nasty as well. This kind of thing was driving the construction of huge housing developments on the outskirts of cities and towns with McMansions sitting on quarter acre “estates”, endless cookie cutter boxes, hastily constructed, looking exactly alike…

Wisconsin did finally change the property assessment laws, but local jurisdictions and developers are still griping about it and occasionally manage to bribe convince some legislator to try to introduce a measure to “reform” the system, turn back the clock and let local jurisdictions snap up all that yummy, yummy tax money by assessing farmland at utterly absurd valuations.

The change didn’t halt urban sprawl, but it did help to slow it down a tiny bit. Maybe. Depends on who you talk to, really. Certainly it helped a lot of farmers whose property is adjacent to towns and cities.