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April 2012 Policy Study, Number 12-5

   

The Negative Consequences for Iowa of an Enterprise Value Tax

   

Why the EVT is bad for Iowa:

Impact on Iowa's Agricural Sector:

   

 

Given that 89 percent of the land in the state of Iowa is classified as agricultural, and given that our state is number one in the production of corn, soybeans, pork, eggs, and ethanol it would be instructive to explore the impact of the imposition of an EVT on these various sectors of the agricultural economy of the state.[9]

 

Table 1 and Table 2 give the reader a quick overview of the importance of the agricultural sector to the economy of Iowa. It has been estimated by economists at Iowa State University that directly and indirectly, agriculture counts for 24 percent of the Iowa economy.[10]

 

 

Each sector of the Iowa agricultural economy will be impacted differently by the imposition of an EVT, however our model assumes a 5 percent turnover rate which accounts for various issues that may impact the sale of a farm: farmers of different ages have different propensities to retire or keep working, some family farms will be passed on as an inheritance rather than sold, and farmers of different types of agriculture may hold on to their farms longer than others. Our turnover rate takes into account these factors, but is an assumption based on average industry turnover rates across the United States; for that reason we’ve conducted a sensitivity analysis of different turnover ranges from 4 percent-6 percent. Good data are not yet available to project the impact of an EVT – which has yet to be adopted – on farmers’ decision making.

 

 

Based on current conditions, however, one can make educated speculations. “Average Iowa farmland value is estimated to be $6,708 per acre, an increase of 32.5 percent from 2010, according to results of the Iowa Land Value Survey conducted in November.”[11] The increase in just one year is breathtaking, but over the last ten years, the time a typical farm owner might have acquired and held the land, the increase is a staggering 261 percent or $4,851 an acre, from $1,857 in 2000 to the $6,708 in 2010.[12] If sold, this increase in value is going to be taxed as ordinary income rather than as a capital gain.  If the EVT has the effect of doubling the rate at which the increase in value from the sale is taxed, any rational farmer would think twice before selling and taking that large a hit.

 

If less farm land is sold, it may stifle increases in productivity attributable to use of larger and more efficient equipment on consolidated operations. Less sales of this new more sophisticated, more expensive equipment also will impact the economy. Older and less healthy farmers who might otherwise have sold their land might also be less productive. Land not coming on the market might slow adjustments to market signals about the relative utility of planting soybeans instead of corn, or raising hogs instead of cattle.

 

In earlier legislative proposals to impose an EVT, a “carve out” for family farms was included in the legislation, the intent of which was to exempt family farms from being subject to the EVT. The sponsors of those legislative proposals obviously believed that the EVT would have an adverse impact on family farmers. However, in the case of Obama’s America Jobs Act, the proposed legislation does not include an exemption or “carve out.” Regardless of a carve-out or exemption, we still believe policy makers should pause before considering this new tax for two reasons related to family farms: 1) even with a carve-out or exemption, many family farms could be ensnarled in this new tax as it will depend on the assets and other ancillary businesses it may operate; 2) policies that require special carve-outs are typically inherently unfair and often lead to the implementation of bad policies.

 

   

 

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