ISSUE BRIEFING PAPER Tax Policies Affecting Rural Small Businesses Background: Communicating for Agriculture (CA) has long worked on tax fairness and equity issues on behalf of farmers, ranchers, rural small businesses and self-employed people, as well as on tax incentives to encourage economic development in critical sectors of the economy. Policy and Legislative Recommendations: Raise Tax Deduction for People Who Pay Their Own Health Insurance to 100% A full 100 percent tax deduction for health insurance premiums should be immediately made available to the self-employed and any individual who pays for his or her own health insurance. Only after a full deduction is available will these tax paying citizens be provided equitable tax treatment compared to people whose insurance is provided through their place of employment. Current tax legislation calls for a phase-in of the tax deduction to an eventual 100 percent for self-employed people. However, there is no reason why the self-employed, as well as other workers who pay for their insurance entirely themselves, should have to wait years to get what is fair and equitable with other tax payers. Unequal and unfair tax policy that discriminates against the self-employed and other small business workers is a disincentive for families seeking to start and operate their own business; it results in higher costs to these individuals; and therefore contributes to the growing uninsured population. FARRM Accounts CA strongly supports passage of legislation that would authorize tax-differed savings accounts that would help qualified farmers, ranchers and fisherman save in good years for use in bad years. All of these occupations are predominantly self-employed and subject, by their very nature, to wide swings in income from year to year. FARRM accounts would be a useful tool that would help producers manage their widely fluctuating income based on evening out their taxes from year to year, but not avoiding taxes on that income. CA pioneered this concept by proposing in years past a very similar self-help program, called Income Balancing Accounts. If approved, farmers, ranchers and fisherman could invest a limited amount of tax-differed income in special accounts in good years, and take it out in bad years where upon the untaxed contribution would be taxable. Self Employment Tax on Certain Rental Income Farmland owners that rent to certain entities and then participate in the operation in some way are being unfairly double taxed. They are being taxed on the rental income and then have to pay the additional self-employment tax of over 15 percent. It is not fair for farmers to be singled out to pay extra taxes when all other rental property owners aren't assessed the additional tax. Congress should pass legislation that has been proposed to remedy this problem. Exempt Aggie Bonds from State Volume Cap on Tax-exempt Bonds At this time, Aggie Bonds are subject to the state volume caps on industrial revenue bonds, according to a formula set by Congress that has long needed to be adjusted upwards to meet demand. There are a number of states that periodically cannot meet the demand for Aggie Bonds, because they do not have sufficient volume cap to meet overall demand for tax exempt bonds. And, several states would like to start offering Aggie Bonds, but are prevented from doing so because there is already more demand for other uses than their state volume cap can accommodate. Most of the private-activity, bond volume cap is used by corporations for manufacturing or for multi-family housing projects. These bonds are typically issued for millions of dollars, underwritten and sold to investors. In contrast, Aggie Bonds are used by young farm and ranch families, and cannot exceed $250,000 per bond. These bonds are not rated, underwritten and sold to investors. They typically are held by the local lender Ð a local bank or private party lender. It is an unfortunate hindrance to Aggie Bond programs that they must compete with large industrial manufacturing and housing projects under the current regulations set by federal law. Exempting Aggie Bonds from the cap would enhance opportunities for better financing for beginning farmers in many existing and new state programs. Reform Alternative Minimum Tax The alternative minimum tax (AMT) was enacted in 1986 to insure big business and high income individuals pay their fair share of taxes. Now, every year more individuals in the medium income levels are being impacted. The AMT tax should be repealed for individuals. Key Contacts at Communicating for Agriculture: Wayne Nelson, CA President (952) 746-6618, fax (952) 746-6611 Bruce Abbe, Vice President of Public Affairs (952) 746-6612, fax (952) 746-6611 CA National Headquarters 1-800-432-3276, fax (218) 739-3832 CA Washington, D.C. Office, Pat Pellerin (202) 364-6486, fax (202) 362-6008