A midyear review and what’s ahead
What a year it has been for taxes. There hasn’t been this much change in our tax system since before the fall of the Berlin Wall. And like that historic event, the new federal tax structure has unleashed freedom of enterprise to build, create and grow. Optimism in our economy is surging to all-time highs and expectations are lofty. However, while the federal government has come to the realization that loosening the binds of taxation brings prosperity, at the state level there is an altogether different story.
This article will explore the increasing trend of state lawmakers’ proposals to increase taxes on agriculture and why equipment dealers need to remain vigilant about educating policymakers at the state level on the effects of raising taxes at a critical time for agriculture.
Over four years ago, agriculture began its descent from all-time price and productivity highs. For nearly seven years prior, agricultural production bucked the trend of an otherwise lethargic economy, pumping money into anemic state budgets and keeping them afloat during the recession. Without much recognition, agriculture remained a steady and dependable source of revenue for many states – not just in the Midwest.
At the same time, oil and gas exploration expanded through the advent of fracking technology, swelling state coffers with additional revenue. From the Bakken to the Eagle Ford, America realized it was sitting on a wealth of previously inaccessible natural resources. The rapid escalation of new wellheads across the country generated billions in new economic development in depressed areas. Record high prices at the pumps continued to fuel growth in the oil and gas sector and, for a while, incentivized lots of people to purchase a Prius (why else would you?).
Together, these two industries created a sense of revenue stability for state governments. Even in states where tech and manufacturing seem to dominate, like Washington State, agriculture still holds the position as the second largest industry and provides a baseline of revenue for the state. For other states like Kansas and Oklahoma, state budgets are primarily dependent on revenue from agriculture and natural resource extraction, namely oil and gas.
When record revenues from both of these industries combined with the eventual recovery of the rest of the economy, legislators began to collectively adopt the attitude of our Louisiana friends, “laissez les bons temps rouler,” otherwise known as “let the good times roll.” State budgets got fat and legislators began doling out the rewards. Tax credits and exemptions began to proliferate in many states for all types of industries, not just historic exemptions for agriculture based on sound policy developed over the decades. Major tax reforms were enacted in many states based on the premise that state revenue would continue on current projections for time immemorial.
As anyone in agriculture knows, though, the good times don’t last and you have to put away during the good times for that eventuality. Lawmakers are not fond of that concept, however.
The signs that the baseline industries of agriculture and oil and gas were beginning to lag did not appear at first to be a cause for concern. By 2014, the rest of the economy had finally revived itself enough that many believed any losses from natural resource industries would be offset by the growth in other sectors. For some states with diverse economies, this has remained true. But the states whose economies are still predominantly agriculture-based (with oil and gas acting as a buffer), the result has been far from optimal.
It’s no news to the readers of this article that net farm income has decreased by over 50% in the last four years. To many legislators, even in agriculture powerhouse states, that is entirely surprising. It shouldn’t be if you look at the revenue streams of those states’ budgets. The precipitous drop in farm income coincides closely with the decline in state revenues for states like Oklahoma and Kansas. Add to that the decline in oil and gas prices at the same time as the decline in commodity prices, and you have a problem.
For the last few years, Midwest states, such as Kansas, began their legislative sessions with budget gaps in the hundreds of millions. This year, Oklahoma teachers staged a two-week walkout because the state lacked the resources to provide raises. There are a number of factors that create these situations, but the underlying reality is that commodity prices are in the tank and states dependent on them for revenue have been dramatically changed.
Looking for Taxes in All the Wrong Places
I’m fond of quoting Winston Churchill when describing the desire of legislators to increases taxes on agriculture to close the persistent budget gaps they face. To me, increasing taxes on the hardest hit segment of the economy “is like a man standing in a bucket and trying to lift himself up by the handles.” Yet, that is precisely what has occurred.
When faced with a shortfall of several hundred million dollars, legislators begin looking under every rock to find revenue. This is especially true for states that have to adhere to a balanced budget, unlike our federal government. The easiest targets are the tax credits and exemptions they created during the good times. When looking at exemptions, there is often a pile of money legislators can quickly add back by simply eliminating a sentence or two of the tax code. That is often times much easier than finding revenue to cut from existing programs and services.
Eliminating exemptions is precisely what legislators have been attempting to do. Except that in scrutinizing all exemptions alike, elected officials are succumbing to the fallacy that all exemptions were created equally. Many exemptions for various industries were created recently because good financial footing allowed for it; other exemptions, notably the sales tax exemptions on farm equipment, have been in place for much, much longer and for sound policy reasons.
In 2017, Kansas convened its legislative session with a projected $350 million-dollar budget shortfall. One of the first bills out of the chute was a bill to eliminate exemptions. Prior to printing of the bill, WEDA was alerted that the sales tax exemption on farm equipment would be incorporated in the bill. The Kansas Revenue Department stated the exemption accounted for $78 million annually. At first glance, eliminating the exemption would quickly plug a significant portion of the budget gap, legislators thought.
Immediately WEDA took action to engage dealers and educate legislators about the effects of the legislation. The message was clear – every neighboring state had a sales tax exemption and customers would flee to outside the state for purchases, thereby decreasing any projected gains significantly while reducing income for Kansas businesses. Not only would the revenue projections be wrong, but any revenue generated from the tax increase should be seen as additional cost or debt heaped on farmers and ranchers at a time when farm income is near an all-time low. Once informed of the consequences, legislators backed off the proposal and did not include elimination of the farm equipment sales tax exemption in the bill.
In the same year, Oregon was looking for funds under similar circumstances. Because of state pension funding problems, the legislature was looking for additional revenue and set its sights on ad valorem property taxes for farm equipment. This was the first time the legislature had targeted the exemption for elimination in the several decades since it was created. The tax increase would have completely dissuaded farmers and ranchers from purchasing new equipment of any kind for fear of the additional tax burden it would create.
Swift action by WEDA and collaboration with farming interests quashed the proposal before the bill was heard in committee.
This year, Oklahoma has targeted farm equipment exemptions in more than one bill. First, a bill was introduced that would have sunset all tax credits and exemptions by 2021. That would have set up a scenario where each industry would be required to pass legislation to reenact their exemptions or credit prior to the sunset date. That radical proposal was drastically amended to remove any threat to tax credits or exemptions.
Second was a bill that would have raised the farm equipment sales tax exemption threshold to at least $25,000 in purchases annually. The bill made it out of subcommittee before being killed.
This slate of bills and others in the past two years are a disturbing trend for equipment dealers. As lawmakers across the country become more urban in perspective and more removed from agriculture, they fail to understand the rationale for agricultural exemptions of any kind. Mixing that with persistent budget problems leads many legislators to see a revenue windfall when examining agriculture tax exemptions, specifically sales tax exemptions for farm equipment.
With numerous threats from ongoing NAFTA negotiations to retaliatory tariffs from China, agriculture is at a precarious point. Commodity prices have not rebounded as of yet, and there is lots of uncertainty on the horizon. Now is the worst possible time to increase taxes on agriculture.
WEDA remains diligent in advocating for dealers and educating lawmakers about the pitfalls of increasing taxes on agriculture and upending years of sound public policy. If dealers want to be prosperous, they cannot afford to ignore how decisions at their state capitols affect their profitability. All the more reason for dealers to be engaged in government affairs activity and on the winning side of these policy debates.
Podcast By Eric Wareham
ERIC WAREHAM is the vice president of government affairs for the Western Equipment Dealers Association. He is a graduate of the Willamette University College of Law and Augusta State University. Eric may be reached by writing to email@example.com.