Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.
Biden Plan Carves Out Exemption For Ag Land, But Proposes Big Limit On 1031 Exchanges
The $1.8-trillion plan unveiled in a joint session of Congress Wednesday evening by President Joe Biden included proposed increases in the capital gains tax rates with an exception included for agricultural land.
USDA released an analysis, noting the plan would defer any tax liability on family farms "as long as the farm remains family-owned and operated." USDA also said assets subject to the $1 million-per-person exemption would continue to receive a step-up in basis when sold.
Only 2% of farms would owe any tax, and that would be on non-farm assets, USDA detailed. "No capital gains taxes at death for family farms. This plan includes a special protection for family-owned farms and businesses," USDA said. "It defers any tax liability on family farms as long as the farm remains family-owned and operated. No tax is due if the farm stays in the family. No one should have to sell a family farm they inherit to pay taxes and the President's tax reform guarantees that."
There would an exclusion on the first $2 million in capital gains for married couples. "This plan also excludes the first $2 million of gains per couple ($2.5 million if the farm also includes the family home) from capital gains tax and heirs continue to get step up in basis on those first $2 million in gains. If an heir decides to sell the family farm, the first $2 million in gains is tax free."
In a proposed change that will raise concerns for agriculture, the plan proposes dramatically curtail what are called 1031 exchanges which allow taxpayers to defer gains on real estate if they exchange that for a like property within six months of the sale. The plan would end the 1031 exchanges on real estate profits of more than $500,000.
USTR Tai Lays Out More Of The Biden Trade Agenda
U.S. Trade Representative (USTR) Katherine Tai faced lawmaker questions Wednesday on trade policy plans by the Biden administration as she testified on the Fiscal Year (FY) 2022 budget plan for USTR.
She touted the four-month pause in tariffs between the U.S., UK and European Union (EU) as a significant move and stressed to lawmakers she was committed to ending the dispute that goes back more than 10 years.
As for the U.S.-China Phase One agreement, Tai indicated that she was looking forward to kicking off a top-to-bottom review of the agreement and China's compliance. "The picture is more nuanced than you might think, by just looking at the trade data," Tai told lawmakers. A top-level review meeting between the U.S. and China has not yet been scheduled, but Tai said such a session would be scheduled "soon."
Tai also pledged to use the enforcement mechanisms in the U.S.-Mexico-Canada Agreement (USMCA), noting she has raised compliance issues with her Mexican counterpart and the U.S. has already launched dispute settlement mechanisms on dairy with Canada. On matters regarding Mexican bans on imports of glyphosate and GMO corn and other ag-trade barriers, Tai said USTR is "looking at it in terms of what our options are to resolve these issues soon."
There was not perhaps a lot more information about the Biden trade plans than was known ahead of the meeting and it may be somewhat surprising that it appears USTR has either just started or will start a broad review of the Phase One agreement with China. This appears to underline that trade policy has not been a high focus for the Biden administration.
Washington Insider: Child Care Programs in Biden's Agenda
One of the key features of the new family supports President Joe Biden is proposing is more generous tax credits for children. Bloomberg says that eligible families can expect their first monthly payments from the IRS in July – the recent pandemic relief law expanded and extended the Child Tax Credit to $3,600 this year for those under the age of six and $3,000 for those six and older.
"That will help more than 65 million children and help cut child poverty in half," Biden said during his joint address to Congress on Wednesday, urging lawmakers to back an extension. "We can afford it."
A number of congressional Democrats want to make that provision permanent. But, citing budgetary constraints, the White House has proposed an extension of the still-fledgling program until 2025, when Republican-supported tax cuts are due to expire. That sets up a fiscal cliff fight that supporters think will eventually make the payments permanent.
The Democrats have a broad coalition to "push back very hard against any future attempts to let the expansion expire," said Joshua McCabe, an assistant dean of social sciences at Endicott College and a senior fellow at the nonpartisan Niskanen Center.
Republicans are wary of raising capital gains taxes to pay for the program, arguing that doing so would stifle investment coming out of a recession. So Democrats may move ahead with budget reconciliation, which allowed them to pass the nearly $2 trillion relief and stimulus law earlier this year on a party line vote in the Senate.
That complicates the administration's plan to pay for the program using only tax hikes on the wealthy, Bloomberg notes However, taxing most capital gains at death is always a tricky political effort. For example, changing the taxation of property like residences, 401(k)s, or art passed on to next-of-kin or other inheritors tends to be extremely unpopular. Capping the tax on capital gains at death above a certain threshold – the way the estate tax works, which currently begins at $11.7 million – might not raise enough money to help pay for the cost of making the tax credit permanent.
A large group of senior Democrats say they don't want to take the chance on a temporary extension, citing prior laws that expired without extension. On a Tuesday press call, House Appropriations Committee Chairwoman Rosa DeLauro, D-Conn., pointed to the expiration of the assault weapons ban in 2004 as an example.
As a result, how Democrats would come up with the money to make the newly expanded credit permanent remains unclear, Bloomberg says. Sen. Michael Bennet, D-Colo., said Wednesday that the Democrats need to make the credit permanent now. "The president supports this goal, and we can't afford to wait to get it done," he said.
The Washington Post said this week that one way the White House officials could make increased family support spending permanent is to boost spending on enforcement at the Internal Revenue Service. The tax side of the family spending plan includes increasing the amount of capital gains paid by investors who earn more than $1 million annually, as well as increasing the top income tax rate.
But probably the single biggest source of new revenue in the plan comes from dramatically expanding the clout of the nation's tax agency. It seeks to beef up the number of agents and give the IRS new tools and technology to execute collections and crack down on avoidance. White House officials have eyed raising as much as $700 billion from toughening enforcement.
If approved, the coming White House proposal would represent a remarkable change to the IRS. The agency has been beset for more than a decade by problems from steep budget cuts and a growing list of responsibilities. It lost roughly 18,000 full-time positions after 2010, due primarily to cuts pushed by Republicans in Congress under President Barack Obama, with the number of auditors falling to lows unseen since the 1950s.
Those changes have hampered the IRS's ability to collect taxes even from those who legally owe them, particularly among the rich. Former IRS commissioner Charles Rossotti joined economists Larry Summers and Natasha Sarin in a recent analysis that found the tax agency could raise as much as $1.4 trillion in additional tax revenue with better data, technology and personnel.
White House officials learned during the process of drafting the American Families Plan that they could raise significantly more money from the plan than they initially anticipated, Bloomberg said.
Pinning a significant part of the plan on strengthening the nation's tax collector is not without its political and budgetary risks, however.
Republicans frequently attacked Obama's handling of the tax agency for what they called its excessive overreach, culminating in a major controversy over the agency's handling of conservative nonprofit groups. Some Republicans have expressed openness to increasing the IRS budget but are unlikely to go along with the increases proposed by the White House as it seeks to raise trillions of dollars in new revenue.
So, we will see. Liberal tax experts see Biden as capitalizing on an important opportunity to both combat inequality and raise government revenue. The richest 1 percent of Americans underreport more than one-fifth of their actual income, according to a National Bureau of Economic Research paper published last month. Audit rates for that richest 1% have fallen from about 8% in 2011 to 1.6% in 2019, the paper found. These are trends producers should watch very closely as they emerge, Washington Insider believes.
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