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Texas Agriculture Archive

July 4, 2003

Tax cuts benefit
farmers, ranchers

The tax cut package recently passed by the House and Senate, the Jobs and Growth Tax Relief Reconciliation Act of 2003, contains a cut in the capital gains tax rate that is sure to help farmers and ranchers.

"A cut in the capital gains tax rate is the biggest deal for farmers in this bill," said American Farm Bureau Federation (AFBF) Tax Specialist Pat Wolff. "Lowering capital gains tax rates will affect them when they sell land, when they sell buildings and when they sell breeding livestock."

Wolff said the final deal, part of a $350 billion growth package which includes $318 billion in tax cuts, reduces the capital gains tax rates 5 percent. The top rate is going to go from 20 percent to 15 percent and the lower rate is going to go from 10 percent to 5 percent, for assets sold between May 6, 2003 and 2007. In 2008 the rates will be 15 or zero percent, depending on income. Farm Bureau estimates a tax savings of $22.4 billion with the capital gains reduction.

"Farmers and ranchers will pay lower capital gains taxes and be able to take bigger deductions when they file their taxes this year," Wolff said. "That's big news. A cut in the capital gains tax rate has been a priority for farmers and ranchers for a long time."

According to AFBF, the capital gains tax cut is so important because farming and ranching is a capital-intensive industry that requires huge investments in buildings, equipment and land to produce food and fiber. When farm assets are sold, agricultural producers pay capital gains taxes on the amount that asset has increased in value while they owned it. AFBF said on average, farmers and ranchers own their land for 30 years, during which it increases in value five to six times.

The farm organization said to remain efficient and profitable, farmers and ranchers must constantly adapt their business to produce the goods wanted by American and overseas consumers. Taxes imposed when buildings, breeding livestock and farmland are sold hamper the effort to adapt and upgrade operations.

Farm Bureau said capital gains taxes also threaten the transfer of farmland between agricultural producers. Nearly one-fourth of farmers and ranchers are above age 65. Because capital gains taxes increase the price of farm assets, the tax makes it harder for beginning or expanding farmers to purchase land and increases the likelihood that farmland will be sold for non-farm use.

Other Farm Bureau supported tax cuts in the bill include the following:

•Section 179 Small Business Expensing: Increase Section 179 small business expensing from $25,000 to $100,000 for 2003 through 2005, and increase the $200,000 total threshold to $400,000, after which the expensing deduction is reduced dollar for dollar, also for 2003 to 2005. Estimated tax savings under these provisions are $952 million.

AFBF says increasing the amount that farmers and other small business owners can expense will assist producers and help stimulate the agriculture economy by allowing producers to recover a larger amount of the cost of purchases in the year that the equipment is purchased. Allowing additional first-year depreciation, the organization said, will also benefit farmers and ranchers.

•Bonus Depreciation: Increase bonus depreciation to 50 percent through 2004. Estimated tax savings are $9.2 billion.

•Income Tax Rates: Accelerates scheduled income tax rate cuts so that lower rates scheduled for 2006 will take effect for 2003. Current income tax rates range from 10 to 39.6 percent. The lower rates will be 10, 15, 25, 28, 33 and 35 percent. Estimated tax savings are $74.2 billion.

•Income Tax Rates: Accelerates the scheduled increase in income eligible for the 10 percent bracket from $6,000 to $7,000 for individuals and $12,000 to $14,000 for joint filers for 2003 and 2004. Estimated tax savings are $11.9 billion.

•Alternative Minimum Tax: Increases the AMT exemption by $4,500 for individuals and by $9,000 for joint filers for 2003 and 2004. Estimated tax savings are $17.8 billion.

•Child Credits: Increases the child tax credit from $600 to $1,000 per child for 2003 and 2004. The increased amount will be paid in advance for 2003. Estimated tax savings are $32.5 billion.

•Marriage Penalty: Increases the size of the basic standard deduction and 15 percent bracket for joint returns so that it is twice that of individuals for 2003 and 2004. Estimated tax savings are $35.1 billion.

The bill also reduces the tax rate on dividends to 15 or 5 percent, depending on income for 2003 through 2007. In 2008 the rates will be 15 or zero percent, depending on income. Under current law, dividends are taxed at ordinary income tax rates, which can be as high as 39 percent. Estimated tax savings are $125.7 billion over 10 years.