Unless Congress acts before the end of the year, come Jan. 1, the U.S. economy will fall off a “fiscal cliff.” That’s when a number of tax breaks and government program spending will be cut in order to try to get the nation’s budget back on track.
Because the Joint Select Committee for Deficit Reduction failed to come up with a plan to cut at least $1.2 trillion over 10 years, as tasked by the Obama administration, what’s known as “sequestration” will be triggered. This will require proportional, across-the-board cuts of $1.2 trillion to more than 1,000 federal programs over the next decade, including those related to agriculture.
So, what exactly does this mean for farmers and ranchers?
If Congress does nothing and se- questration goes into effect, all commodity and many conservation programs will be cut 7.6 percent in 2013. As for crop insurance, nearly all subsidies will be exempt from automatic cuts under the first year of sequestration, but changes will likely come about in year two.
Ag Program Funds Affected
Discretionary programs – government spending set by Congress through an annual appropriations act – will receive an 8.2 percent cut in 2013. For agriculture, these programs include: agricultural research; education and Extension activities; some conservation programs; food safety; marketing and inspection activities; rural economic and community development; telecommunications and electrification assistance; and various ex- port and international activities.
“The impact of the cuts will really be felt in rural America,” says Matt Erickson, an American Farm Bureau Federation economist.
“While commodity program and crop insurance spending does impact farmers and ranchers, programs like rural development, agricultural research and Extension also spread throughout rural communities.”
The fiscal cliff will also have a tremendous impact on tax breaks for the entire country, and specifically for farmers and ranchers. For example, the estate tax will revert from a $5 million exemption at a 35 percent tax rate to a $1 million per person exemption at a top tax rate of 55 percent. This could be disastrous for many farm families.
It is estimated that one out of every 10 farms would owe estate taxes in 2013 if conditions dictate a transfer. Barriers are already steep for young farmers and ranchers to carry on the farming business. With the average age of a farmer now being 58 years, exorbitant estate taxes would make it virtually impossible for today’s family to transfer the farm to a willing, younger member.
When estate taxes exceed cash and other liquidated assets, surviving family members are forced to sell all liquid assets, such as land, buildings and equipment.
“Understand that 86 percent of a farm’s assets are liquid, leaving farmers and ranchers few options to pay for estate taxes,” says Erickson. “This means it becomes a lot harder for farmers and ranchers who are in partnerships with family members to pass on the farm to the next generation.”
American Farm Bureau Federation originally published this story.