Tax Reform Impacts on Agriculture: Discussion

Anyone who has followed the recent literature on the effects of the new tax bill has seen the difficulties in analysis of its provisions. These bring significant changes in the tax environment for agricultural producers, especially in the treatment of capital. I congratulate the authors of both of these papers for their willingness to grapple with the complexities of the Tax Recovery Act (TRA) and for their success in providing us with some assessments of its important effects. The paper by Hanson and Bertelsen includes an informative discussion of the provisions of the TRA. They also note the emphasis on reducing the differences between pre-tax and after-tax evaluation of investments. There is a tendency in the literature to call this increased efficiency; this is appropriate only if the old provisions were the outcome of rentseeking or public policy goals which are no longer present. The distinction in the bill between active and passive management is consistent with this objective. How important it will be depends on how closely the Internal Revenue Service monitors the requirement. Perhaps we will see less of a reduction in off-farm investment than an increase in phone calls from off-farm investors to farm managers. Hanson and Bertelsen also speculate that an increased supply elasticity might result from the TRA, price playing a larger role and tax incentives a smaller one in producers' decisions. This will prove important to the extent that price fluctuations in some commodity markets are lessened by increased supply responses. I agree with their conclusion that tax management is a relatively low priority for many producers these days, compared with ensuring farm survival. However, as both papers made clear, tax treatment has had much to do with the pattern of investment in agriculture, and this will continue beyond the present financial crisis. In this regard, the exemption from taxes of loans forgiven as part of debt restructuring is particularly timely. I hope that we will see some studies soon which quantify the likely effects on financially stressed producers. Depending on one's perspective, this provision either acts along with commodity programs to help producers through a period of low prices and high interest rates or it is something which slows an overdue reduction of capacity in the agricultural sector. Lins, Offutt, and Richardson deal primarily with distributional impacts of the new tax law, both how agricultural producers fare relative to the nonagricultural sector and how various producers are affected. This is another very clear and informative description of the effects of the important provisions of the TRA. Their discussion of each provision and its effects is very helpful. The simulations they report reinforce these qualitative effects, though it is difficult to infer from them any magnitudes for the likely aggregate effects. The main problem is one that Hanson and Bertelsen noted in their work; the effects of the tax bill on producer behavior are not built into such simulations. It was necessary for the authors to make assumptions about land prices, output levels, and product prices. These simulations then tell us how a particular producer fares under two alterative tax codes, but they do not indicate the eventual new equilibrium in the farm sector. This is particularly important in attempting to analyze the effects on livestock commodity markets, for instance, of fewer non-farm investors engaged in production for tax purposes. Lins, Offutt, and Richardson have done a good job on the first part of the analysis of the TRA-holding behavior constant, are there any important effects? Quantitative analyses with a new equilibrium for the agricultural sector will be necessary before all of the effects are known.