Senator John Boozman
There’s an old trick in Washington. If you’re going to propose a controversial new spending program, give it a name everyone can get behind. That’s why it’s no surprise President Joe Biden called his “human infrastructure” proposal the American Families Plan. Despite the proposal’s feel-good name, not all families benefit from what the president put forward. In fact, family farms come out on the losing end.
To pay for his plan, Biden has proposed a number of changes to the tax code dubbed the Made in America Tax Plan, including raising capital gains tax rates, eliminating stepped-up basis, and limiting the use of like-kind exchanges.
Section 1031 of the tax code allows taxpayers, including family farmers, to exchange property and defer the capital gains tax. Family farmers often use the 1031 exchange to invest the returns from the sale of farm assets into new farm assets of similar or greater value. This incentivizes family farmers to reinvest their assets into the rural communities where they live and work. Examples include exchanging a parcel of land for one that is closer to the family farm, consolidating plots, or reinvesting in more productive soils.
The president has proposed limiting access to Section 1031 to no more than $500,000, after which point, capital gains taxes would apply. This proposal effectively imposes a “land swap tax.” In many cases, it would require very few acres to trigger this tax. For example, in California, where the average cropland value was $12,900 per acre in 2020, it would take only 39 acres to reach Biden’s land swap tax limit.
There are a number of unintended and negative consequences associated with imposing a land swap tax on family farmers.
Consider that a farmer seeking to exchange assets would need to put some of the proceeds aside to pay the land swap tax. As a result, the farmer would be faced with investing in farmland worth less than the land sold. The obvious consequence of this is the farmer would be less inclined to exchange farmland and reinvest in rural communities.
The other option is to swap the current land for new land of equal value but come up with the tax payment another way, such as a loan, dipping into savings, or selling other assets. Under this scenario, the farming operation may shift to land with equal or greater value, but the farmer must borrow more, deplete other assets, or both to pay Uncle Sam. This is another disincentive to exchange assets and reinvest in the community.
Land is a farmer’s 401(k). Farmers labor in the dirt and care for livestock for decades in the hopes of passing the farm down to the younger generation. The like-kind exchange permitted by Section 1031 has been a tool in the family farmer’s toolbox for more than 100 years. In my home state of Arkansas, it’s a particular point of pride for families to farm the same land as previous generations. Taking it away now would cause hardships for family farmers across the United States.
The land swap tax will dry up the farmland market, create barriers to entry for new or beginning farmers, and stunt agriculture business growth and reinvestment in much of rural America.
In recent years, America’s agricultural producers have faced unprecedented challenges, including trade wars, catastrophic natural disasters, and a global pandemic. Through it all, our family farmers and ranchers continued to feed, fuel, and clothe people around the world.
Biden now suggests we show our gratitude by asking them to shoulder the Made in America Tax Plan and pay for his $1.8 trillion liberal wish list. These tax increases need to be rejected so we can ensure that people continue to have the safest, most reliable, and most affordable supply of food, fiber, and renewable energy in the world.
John Boozman is the senior U.S. senator from Arkansas.
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