The fiscal cliff looms for ag
With the election over and President Obama up for another four years backed by a mixed Congress, the issue of the fiscal cliff is slightly less murky. But less murky doesn’t mean less concerning or less worthy of attention.
Though the phrase “fiscal cliff” is something that’s been bandied about for a while now, some definition is helpful as it rarely accompanies its casual mention.
Generally speaking, the fiscal cliff—also called “Taxageddon” in some circles—is the perfect storm when (or if) the Bush-era tax cuts expire at the end of 2012 and automatic government spending cuts to over 1,000 programs take effect at the beginning of 2013. Many economists and market analysts have predicted that, if left to occur without intervention, “falling off the fiscal cliff” would leave the American economy in a worse recession than the recent years have witnessed.
American Farm Bureau Federation (AFBF) President Bob Stallman had this to say the morning after the election on the topic:
“Farmers and ranchers, like all Americans, have a list of issues that they are relying on the administration and Congress to address. But we cannot wait until 2013 for the action to start. Serious work on the farm bill, the fiscal cliff and critical tax policy fixes all must start during the lame duck session of the 112th Congress.”
One of the most often referenced effects of the fiscal cliff for farmers and ranchers is the impending change to the estate tax levels.
Currently, the estate tax stands at a maximum of 35 percent with an exemption of up to $5 million. If the Bush-era tax cuts are allowed to expire, that will increase to a maximum of 55 percent with a $1 million exemption. USDA estimates that as many as 10 percent of farms or ranches will need to pay estate taxes next year.
Despite the justifiable attention paid to estate taxes, other less-frequently publicized expiring tax cuts could also impact farmers and ranchers. Among these are the payroll tax, the capital gains tax, and general income tax.
Payroll: The payroll tax cut of Bush’s 2001 and 2003 tax relief acts reduced what employees and the self-employed had to pay in Social Security tax by 2 percent. The cuts are compared to the Clinton-era tax levels, where Social Security taxes were 6.2 percent for employees and 12.4 percent for the self-employed. Originally the cut was set to expire at the end of 2010, but via his 2010 and 2011 tax relief acts, Obama extended this cut to the present day.
As many working in ag are both self-employed and employers, an increase in the payroll tax could have problematic results. In a letter applauding the 2011 extension, Agriculture Secretary Tom Vilsack said that, without the extension, employees would likely face $1,000 in additional taxes per year. More recently, the estimate has been higher, with one analyst with AgWeb suggesting the increase could be more like $2,200 for a top income-earning employee.
Capital gains: Bush-era tax cuts and preferential treatment on capital gains income are also set to expire. This includes taxes on dividends and other long-term capital gains.
“Long-term capital gain rates will increase from zero (for those in the 10 percent and 15 percent tax brackets) and 15 percent (for those in higher tax brackets),” said Ron Haugen, a farm economist with the North Dakota State University Extension. For those in the 10 and 15 percent tax bracket, longterm capital gains rates will go to 10 percent and for those in all other tax brackets the rate will jump to 20 percent.
Short-term capital gains will also go up should the fiscal cliff be allowed to happen unabated. The tax rates on short-term capital gains will increase in keeping with increases to overall income tax rates.
According to AFBF, 40 percent of agricultural producers report capital gains of some sort. Additionally, most ag people who have capital gains report significantly higher average capital gains than other taxpayers. Given this, ag producers could be severely hurt if this tax cut lapses.
Income: Overall income tax rates are also set to go up if Congress does not act. Generally speaking, the Clinton-era tax brackets would return. Those currently in the 10 percent tax bracket will be upped to 15 percent. Those in the 15 percent bracket will stay the same. The 25 percent bracket will move to 28 percent, the 28 percent bracket will move to 31 percent, the 33 percent bracket will move to 36 percent, and the top-tier tax bracket will move from 35 percent to 39.6 percent.
This is, of course, a simplification of a complex issue. Considerable differences exist across filing status and actual income range in dollar amounts. Another potential muddling factor comes from the current administration’s proposed budget for fiscal year 2013. It would maintain the tax brackets of the Bush tax cuts for all but the top two brackets (those earning over $250,000 in taxable income), which would return to the Clinton-era levels.
Increases in the income tax rates—even if under the Obama administration’s proposed 2013 budget’s limited scope—will very certainly have a negative impact on farmers and ranchers. According to USDA data, the median of total farm-household income for 2011 (most recent complete data) was $57,067 which is above the national median for non-farm-household incomes.
This accounts for all things counted as farms by USDA—both “hobby farms” to commercial operations— and for both on- and off-farm income. Median is often used rather than mean averages to give a more realistic look at farm-household finances.
Even when looking at mean averages, farm-household incomes, at $87,366 in 2011, are above the national average incomes of non-farming households. Those operations classified as commercial operations—estimated at roughly 10 percent of all farming operations in the country—averaged $205,965 total household income.
Other tax-related issues involved with the fiscal cliff come not from the expiration of existing tax cuts, but from the active implementation of new taxes. Among the more well-known of the new taxes involve Medicare and other insurance-related taxes incurred through the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively and casually known as “ObamaCare.”
Another impact of the fiscal cliff that rarely gets the attention it deserves is the impact the automatic spending cuts will have on agricultural and rural programs.
“The automatic spending cuts would take away $1.2 trillion from federal programs over nine years and many farm programs would be on the list, which will affect more than just farmers and ranchers,” said Miranda McDaniel of AFBF in a recent report. Matt Erickson, an economist with AF- BF, agreed.
“I think the loser of all of this is going to be rural America. When we look at farm bill program spending, it’s not just about crop insurance, it’s not just about commodity programs, but it’s also about rural America, rural development and economic programs, also about food safety programs, agricultural research and Extension.
“Programs such as agricultural research, Extension, rural development and community-type programs. Those are expected to be cut by 8.2 percent in the first year. Commodity programs will be cut by 7.6 percent.”
Many of the impending ag-related spending cuts will be a continuation of some belt tightening already seen. Efforts at streamlining USDA and its subsidiary groups—which has included the removal of market reporting offices, the combination of complimentary or redundant programs, and reductions in certain types of food safety inspections—is set to continue.
Spending cuts to the Extension program alone could cause widespread difficulties on a local scale. The Extension program is charged by National Institution of Food and Agriculture with providing “useful, practical, and research-based information to agricultural producers, small business owners, youth, consumers, and others in rural areas and communities of all sizes.”
There is still time to forestall the fiscal cliff. Whether that will happen, however, is uncertain.
The election has narrowed the economist-suggested likely possible fiscal cliff treatments. The two most likely options remaining are that Congress does something to prevent the full force of the fiscal cliff from hitting the U.S. economy, or it doesn’t.
To mitigate the impact of the fiscal cliff, either the tax cuts would have to be extended in full or in part— something Democrats have historically resisted—or some of the automatic spending cuts will need to be pushed off to a later date—something Republicans have historically resisted. If Congress—still divided with the Senate majority Democrat and the House majority Republican—persists in its four-year habit of partisan deadlock, the fiscal cliff will hit with full force.
The Congressional Budget Office (CBO), a nonpartisan governmental body created in 1974, assesses budget and financial issues. Earlier this year, CBO reported that the effects of the unmitigated fiscal cliff would result in a contraction of the economy; a recession. It estimated the economy would contract at an annual rate of 1.3 percent of the country’s gross domestic product (GDP) in the first half of 2013 then grow at an annual rate of 2.3 percent in the second half of the year.
Industry and academic economists are now calling that earlier projection optimistic, estimating a far more drastic recession if the fiscal cliff hits unabated. Some have suggested that for every dollar the tax increases and automatic spending cuts remove from the deficit, 90 cents to $1.70 will be removed from GDP as well, with impact estimates frequenting the $600 billion area. A recession of that magnitude would be greater than what has been experienced in recent years.
Economic optimists, however, suggest that Congress will likely be motivated to act given the potential seriousness of the situation.
“No political party wants to go down in history as the one that triggered the second half of the worst recession since the Great Depression,” Paul Dales, an economist with Capital Economics in London, told Reuters.
Investors and market analysts with Colorado-based Presidential Brokerage—associated with JP Morgan—issued an optimistic report on potential outcomes of the fiscal cliff. In what they called the “fiscal ladder” scenario where Congress successfully works together, they suggest a mix of both austerity steps to reduce the deficit and efforts to soften the blow of the fiscal cliff.
They suggest this might be accomplished by extending the Bush tax cuts for all of 2013, then in part for 2014, allowing some of Obama’s medical-related taxes to occur on schedule, and by putting off roughly half of the program spending cuts to a later date.
Other economic and investing-related groups and individuals have voiced similar projections as the likely best-case scenario.
Despite predictions, there is no way to know what Congress will do in its remaining 16 joint days in session this year. The adage of “hope for the best and plan for the worst” could be timely in this situation. — Kerry Halladay, WLJ Editor