Federal tax policy plays an important role in the well-being of farm and rural households and the viability of farm operations. In recent years, Federal income taxes on both farm and nonfarm income accounted for nearly two-thirds of the total Federal tax burden for farmers, while Social Security and self-employment taxes represented nearly a third. These taxes can have a significant effect on the financial well-being of farm households, with impacts varying by farm household type. Beyond a farm operation's income, the tax code influences farm management and other decisions, such as capital purchases and dispositions, and farm estate planning. The tax code can also affect eligibility for Federal program payments, because they are linked to measures of adjusted gross income.
The Federal tax code also affects the well-being of rural households. Rural households have lower incomes than urban households and are more likely to live in poverty. Through the use of refundable tax credits, the tax code assists low-income families, particularly those with children.
ERS research focuses on features of Federal tax law, the effects of Federal taxes on agriculture and the broader rural economy, and the impact of significant tax reform and other tax proposals. ERS also conducts research related to the use of the Federal tax system for the delivery or targeting of farm program benefits, including income caps for farm program payment eligibility.
ERS research findings indicate that:
- Changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, while increases in the amount of property that can be transferred free of estate tax have greatly reduced the number of farm estates subject to the Federal estate and gift tax and the amount of tax owed. See The Potential Impact of Tax Reform on Farm Businesses and Rural Households (EIB-107, February 2013) for more information.
- The expanded use of tax credits, such as the earned income and child tax credits, has provided a substantial boost in income to low- and middle-income rural taxpayers and has reduced the rural poverty rate. See Rural America Benefits From Expanded Use of the Federal Tax Code for Income Support, in the June 2011 Amber Waves.
- The current income caps on eligibility for farm program payments affect only a small number of farm payment recipients each year, and the impact varies by farm type and organizational structure. See Effects of Reducing the Income Cap on Eligibility for Farm Program Payments (EIB-27, September 2007) for more information.
- Using data from USDA's Agricultural Resource Management Survey (ARMS), ERS estimated the impact of the estate tax for the roughly 38,000 farm estates (out of a total 2.1 million family farms) likely to be created in 2016. An estimated 663 farm estates, representing 1.7 percent of estates, would be required to file an estate-tax return. After accounting for adjustments, deductions, and exemptions to the estates, only 161 farm estates in 2016 are estimated to owe any estate taxes—for a total of $344 million.