9 findings from USDA ERS study on Tax Cuts and Jobs Act

The reduction in average effective income tax rates resulting from the tax bill varies across family farm sizes.

An Economic Research Service report finds the biggest effects of the Tax Cuts and Jobs Act on farmers are from changes to the federal individual income tax code.

The report, “Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households,” evaluates the impact of the tax reform legislation passed in December 2017 on farmers.

What is the issue?

U.S. farms are primarily organized as passthrough entities, meaning income from the operation is taxed at the individual level along with the farm household’s income from other sources. Consequently, farm households are affected by both individual and business income tax rates. The Tax Cuts and Jobs Act doubled the federal estate tax exclusion and changed individual and business income tax rates, taxable income deductions and the alternative minimum tax.

What did the study find?

1. In 2016, more than 98% of family farms were organized as passthrough entities, which covered 98% of the total value of U.S. agricultural production.
2. The study’s authors, James M. Williamson and Siraj G. Bawa, estimate family farm households would have faced an average effective tax rate of 13.9% in 2016 versus 17.2%
3. The reduction in average effective income tax rates resulting from the tax bill would have varied across family farm sizes, with midsized farms and large farms experiencing greater reductions.
4. About 91% of family farms have gross cash farm income of less than $350,000 before expenses. It’s estimated that the average small family farm household would have experienced a decrease of 3 percentage points in its effective income tax rate had the tax bill been in effect in 2016.
5. The average midsized farm, with gross cash farm income between $350,000 and $999,999, would have experienced a decrease of 5.8 percentage points.
6. Large farms, with gross cash farm income between $1 million and $4.9 million, would have experienced a decrease of 3.4 percentage points.
7. Very large farms, those with gross cash farm income greater than $5 million would have experienced a 1.7 percentage point reduction in income tax rate.
8. The average farm household in each commodity specialization is estimated to experience a decline in its average effective tax rate with the tax bill, but the size of the change varies across commodity specialization.
9. Under the tax bill’s new estate tax parameters, only an estimated .58% of farm estates – 227 estates – would have been required to file an estate tax return in 2016, and only .11% – 43 estates — would have owed an estate tax. Under the previous law, an estimated 2.05% of farm estates were required to file an estate tax return and .86% had a tax liability.

How was the study conducted?

ERS researchers used financial and demographic data from USDA’s Agricultural Resource Management Survey and the Internal Revenue Service.