2015 Risk and Profit Conference Breakout Session Presenters. 3. Do Kansas Farmers Pay Taxes?

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1 2015 Risk and Profit Conference Breakout Session Presenters Allen Featherstone 3. Do Kansas Farmers Pay Taxes? Allen M. Featherstone, Professor and Head of the Department of Agricultural Economics and Director of Masters of Agribusiness at Kansas State University, holds M.S. and Ph.D. degrees in agricultural economics from Purdue University. He also holds a B.S. in agricultural economics and economics from the University of Wisconsin-River Falls. Professor Featherstone is recognized as a leading scholar in agricultural finance. His work has resulted in teaching and research awards and quotation in the Wall Street Journal, the Economist, and other publications. He served as Associate Editor for the American Journal of Agricultural Economics and on the editorial board of Choices. He has more than 120 articles published in a variety of journals. He has experience lecturing and researching in Europe, Asia, Africa, and South America. Abstract/Summary During the last Kansas Legislative session proposals were introduced to change the taxes that farmers pay. This presentation will examine the property, sales, and income taxes that Kansas farmers pay using the Kansas Farm Management Association data.

2 Introduction Do Kansas Farmers Pay Taxes? Allen M. Featherstone, Kevin Herbel, Leah Tsoodle During the last Kansas Legislative session, several pieces of legislation were introduced that would affect the taxes farmers would pay Each of these would have increased the tax burden paid by farmers Some argued this would be a reversal of the tax policy put in place in 2012 and 2013 The folks in the high populated areas we have borne the burden of the government, [Senator Jeff] Melcher [R Leawood] said, adding that agriculture producers don t realize how easy they ve had it. Introduction Senate Bill 178 Change the computation base on county cash rental rates Use a capitalization rate on the interest rate on new federal land bank loans Use a five year average for rental rates and capitalization rate Senate Bill 264 Repeal of sales tax exemption for farm machinery and equipment Senate Bill 302 Place an excise tax on land of $3 per acre House Bill 2427 Elimination of sales tax exemption of dyed fuel Previous Work Featherstone, Langemeier, Delano, and Flinchbaugh examined the Impact of Kansas Tax Policy on the Farm Economy Study of Kansas taxes paid on farms from 1990 to 1994 Examined the effect of changes in the tax mix at that time on the farm economy Average tax paid was $4,865 15% state income tax 8. business sales tax 21.7% personal sales tax 55.1% via property tax Objectives Use Kansas Farm Management Data to examine the taxes paid by farmers Estimate the implications of some of the proposals from last year s legislative session Discuss the outlook for agricultural real estate taxes in the future Methods Use Kansas Farm Management Data to examine the taxes paid from 2010 through 2014 Real Estate and Personal Property Taxes are available for 851 farmers for all years Kansas and Federal income taxes represent the previous tax year Only used those farms where information was available for 5 years Personal sales taxes are estimated from KFMA family living summaries Business sales taxes are estimated in a manner similar to Featherstone et. al, 1995

3 Kansas Farmers Personal Property and Real Estate Taxes Kansas Farmers Owned Acres and Real Estate Taxes Per Acre $8,000 $7,000 $6,000 $4,000 $3,000 $2,000 $4,933 $5,220 $1,609 $1,580 $7,187 $6,478 $5,584 $1,727 $1,778 $1,904 Tax per acre $12.25 $12.28 $12.71 $14.37 $ Acres $1, Farms Real Estate Personal Property Farms Tax per Acre Acres Owned 0 Kansas Farmers Federal Income Taxes Paid Kansas Farmers State Income Taxes Paid ,000 $27,753 $6,000,000 $21,305 $22,637 $4,000 $3,993 $4,975 $4,771 $14,269 $15,856 $3,000 $3,334,000 $2,000 $1,000 $1, Farms 349 Farms Kansas Farmers State and Federal Income Taxes Paid Kansas Farmers Taxes Paid ,000 3, % 25% $35,000,000 21% 2,000 $19,659 $22,951 $26,283,000 15% 1 5%,000,000 $15,661 $13,052 $4,803 $3,355 $4,014 $7,651 $7,642 $8,275 $9,360, Farms State Taxes Federal Taxes State Percent Property Tax State Income Tax Federal Income Tax

4 Kansas Personal Sales Tax Computation Kansas Business Sales Tax Computation Used the approach of Featherstone et. al. (1995) Personal sales tax on food, household operation, upkeep, repairs, furniture, recreation, clothing, gifts, and auto expense Data from the KFMA State Summary for Family Living Date Change Rate 7/1/ /1/ /1/ % 7/1/ Used the approach of Featherstone et. al. (1995) Business sales tax on motor vehicle purchases, auto expense, and 1 of repairs, tools, and supplies expense Used Kansas sales tax rates Date Change Rate 7/1/ /1/ /1/ % 7/1/ Used Kansas sales tax rates Kansas Farmers State Taxes Paid Kansas Farmers State Taxes Paid Percentage Basis ,000 $3,487 $3,398 $2,947 $2,811 $3,928 $2,775 $2,566 $2,154 $4,803,000 $3,355 $4,014,656 $9,360 $7,651 $7,642 $8, % 1 17% 1 23% 8 15% % 7 13% 6 23% 2 23% 25% % 45% 45% 43% Issue under Senate Bill 178 Senate Bill 178 Change the Capitalization rate, move to a five year average, and use cash rent The capitalization rate would fall from 14.7 after adding on the county tax to 5.03% This would increase the tax values by a factor of 2.93 Cash rental data are not available on a county basis. A source for the cash rental data will need to be identified For this analysis, using a five year average of landlord share to determine cash rent Five year average of a five year average Land tax value would increase from $190 to $680 or 3.58 times Real estate taxes would increase roughly $16,977 per farm Year Federal Land Bank Interest Rate Cash Rent % $ % $ % $ % $ % $42.93 Average 5.03% $34.18 Current Method 14.7

5 Kansas Farmers State Taxes Paid ,000 $35,000,000,000 $3,487 $3,398 $3,928 $2,947 $2,811 $2,775 $27,633 $2,566 $2,154 $4,803,000 $3,355 $4,014 $7,651 $7,642 $8,275 $9,360, SB 264 Senate Bill 264 Repeal of sales tax exemption for farm machinery and equipment Kansas Business Sales Tax Computation Kansas Farmers State Taxes Paid Business sales tax on machinery repairs, building repairs, auto expense, repairs, tools, and supplies expense, motor vehicle purchases, and machinery and equipment purchases Used Kansas sales tax rates Assumes sales across state lines would be captured Sales taxes would increase an average of $7,683 per farm Date Change Rate 7/1/ /1/ /1/ % 7/1/15 6.5,000,000 $3,487 $3,398 $3,928 $2,947 $2,811 $2,775 $2,566 $2,154 $4,803,000 $3,355 $4,014,656,656 $7,651 $7,642 $8,275 $9, SB 264,510 Senate Bill 302 $3 Excise tax per acre Senate Bill 302 Multiplied acres owned by $3 Ignores any potential effect on rented land Modified 2014 only Property taxes would increase an average of $2,892 per farm

6 Kansas Farmers State Taxes Paid ,000 $3,487 $3,398 $2,947 $2,811 $3,928 $2,775 $2,566 $2,154 $4,803,000 $3,355 $4,014 $13,548,656 $9,360 $7,651 $7,642 $8, SB 302 Summary A sample of Kansas Farm Management farmers paid an estimated $17,369 in Kansas tax during 2014 Down from,461 in 2013 Under a change in the capitalization rate and the time frame for landlord return (SB 178), it is estimated that the Kansas tax paid in 2014 would have been $34,346 Under a repeal of the state sales tax on Machinery and Equipment purchases (SB 264), it is estimated that the Kansas tax paid in 2014 would have been $25,052 Under a $3 per acre excise tax (SB 302), it is estimated that the Kansas tax paid in 2014 would have been,261 Property Tax Computation Agricultural Property Tax Implications Defined as the eight year average of eight year average of return to landlord This eight year average is then capitalized at the statute defined capitalization rate Process places a weight on middle years of the process Designed to have a more smoothing effect on tax values Goal is to remove the variability of year to year changes Landlord net return made up of last 15 years return to the landlord Non irrigated Single Year Landlord Return for Barton County (Central) Property Tax Computation Process Eight Year Average of an Eight Year Average $

7 Non irrigated Computation Process for Barton County Impact of Moving Forward One Year for Barton County 1 1 $50 $25 1 $15 $ Weight Landlord Return Non irrigated Computation Process for Kansas Impact of Moving Forward One Year for Kansas (Tax Years 2014 to 2015) 1 0 $90 1 $80 1 $70 $50 Weight Thomas Greeley Ford Jewell Barton Sumner Marshall Anderson Butler $35 $25 $15 $5 $ $28.59 $31.43 $24.65 $26.53 $27.82 $28.85 $28.98 $31.17 $11.56 $12.46 $6.73 $7.26 $8.61 $9.65 Barton Sumner Marshall Anderson Butler Jewell Ford Greeley Thomas Impact of Moving Forward In Barton County Kansas Turning Point of Landlord Returns $50 $45 $35 $25 $15 $5 $29.43 $31.12 $32.85 $34.40 $35.53 $36.20 $36.19 $35.44 $34.57 $29.51 $31.36 $33.32 $35.18 $36.70 $37.84 $38.38 $38.25 $37.93 $29.59 $31.59 $33.79 $35.97 $37.88 $ $41.06 $41.29 $29.67 $31.83 $34.25 $36.75 $39.05 $41.12 $42.75 $43.88 $ Expected Future Return to Landlord How long will landlord returns increase? How much will they have increased by then? All based on future assumption of landlord returns Assuming a constant return for 2014 and after Turning Point % Increase from % % $ % $ % $

8 Irrigated Computation Process for Southwest Kansas Irrigated Computation Process for Kansas 1 $120 1 $ $140 1 $80 1 $120 0 $80 Weight Southwest Weight Northwest West Central Southwest North Central Central South Central Native Pasture Computation Process for Northeast Kansas Native Pasture Computation Process for Kansas 1 $16 1 $ $14 $12 $8 $6 $4 $2 1 1 $14 $12 $8 $6 $4 $2 $2 $4 Weight Northeast Weight North Central Central South Central Northeast East Central Southeast Summary Kansas real estate tax values on non irrigated land are likely to increase for the next 6 years Any scenario that this would not occur would be dire for Kansas farmers as the return to the landlord would need to fall below per acre in Barton county for this to occur Kansas real estate taxes on irrigated land are likely to increase for the next 6 years Any scenario that this would not occur would be dire for Kansas farmers as the return to the landlord would need to drop substantially for this to occur Kansas real estate taxes on pasture land are likely to be fairly stable over the next few years