APPENDIX III TEXAS Farm products APPENDIX III The soils of Texas range from hard clay to sandy loam, but 83 percent of Texas land, 139.8 million acres, is in agriculture. Major crops include vegetables, milk, fruits, nuts, honey, cotton, eggs, and grain. Pastures and feedlots are located in nearly all of the State's 254 counties. One of the States most important agricultural products is cattle, and Texas ranks first in the Nation. Texas is also one of the Nation's leading producers of peanuts. Over 350,000 acres in 114 counties are alloted to peanut production. Cotton accounts for over 10 percent of the State's total agricultural income. Farm income The agriculture industry adds $24 billion anually to the Texas economy. In 1978 cash receipts for all commodities totaled $7.9 billion, and total net farm income was estimated at $1.02 billion. Land transfers and values Over the past 20 years, the average farm size has increased, and it is quite common for a farmer to have over $250,000 invested in land, buildings, and equipment. Some farmers have formed partnerships for financial reasons, but the majority of farms are still one owner operations. In 1977 the average Texas farm was over 700 acres. During the last 10 years, the number of farms has dropped by 19,000, with 4.2 million acres lost from agricultural production. In 1977, the average value per acre of land and buildings was $294, which has increased to $388, as of November 1, 1979. This means that average farm values exceed $250,000. GAO county level work in Texas Farms located in Comanche and Castro Counties were selected for our interview work. The largest allotment of peanuts is in Comanche County, which encompasses 17 percent of the State's peanut acreage. The 1978 agricultural income for Comanche County was $60.5 million with production divided almost equally between livestock and crops. Castro County is an irrigated farming area located on the High Plains area. It was selected for our review because of its diversified agricultural production. The county's agricultural sales in 1978 totaled $167 million. Crops accounted for $62 million of the sales, and livestock and their products accounted for the remaining $105 million. Texas is the Nation's leading APPENDIX III APPENDIX III upland cotton producer, and Castro County accounted for 42,500 bales of Texas' 1978 production of 3.8 million bales. Comanche County According to 1979 Soil Conservation Statistics, Comanche County has 2,500 farms and ranches. The largest is 22,000 acres, but the average size, according to the 1974 Census of Agriculture, is 390 acres valued at $116,000. Most of the counties' farms and ranches are managed by 1,700 operators, and the remaining are run by part owner operators and tenants. Ranchland sells for $300 to $400 per acre. Dry land for peanut production may sell for $600 an acre, while irrigated land will cost from $700 to $800 per acre. In some cases buyers have paid $1,000 per acre for irrigated land to be used for pecan orchards. The largest single agricultural commodity is peanuts, accounting for 64 percent of crop sales and 30 percent of total sales. Peanut production came from 1,150 farms operated by 418 owners, operators and tenants. The average peanut farm size was 147 acres. We were told that land has not been converted to nonagricultural uses, and cropping patterns have remained stable over the past 10 years. The only significant change has been conversion of some peanut land to pecan orchards. We had also been told that most of the land was family owned and passes from generation to generation, but only 4 of the 12 farmers and ranchers we interviewed had inherited land from a relative. The 1974 Census of Agriculture reports the average farmer's age was 53; 24 percent were semiretired or over 65; and 70 percent were 45 or older. The 1974 Census also shows that 38 percent of the county's farmers and ranchers received the majority of their income from off-farm sources. Although there is no significant conversion of land to nonagricultural uses, a corporation is buying Comanche County's prime peanut land for conversion to pecan production. In 5 years this company, which is owned by 200 to 300 investors, mostly from outside the county, has bought approximately 10,000 acres that is being used for tax shelter purposes. Most of the corporation's purchases were small, heavily indebted peanut farms, and the owners saw selling as a way of getting out of debt. Comanche County residents prefer the family operations because the families are part of the community and, unlike the outside investors, provide income to the local community. Ranchland is usually leased on a cash rent basis. The majority of farm leases are on a crop share basis in which the owner shares some of the risk with the operator and receives one-quarter of the crop and the operator three-quarters. Some elderly or farmers in poor health have been leasing land outside of the family for several years. APPENDIX III APPENDIX III According to one county agricultural official, there were probably more farm sales in the past few years because of illiquidity; however, he could not think of any forced sales due to taxes. Most heirs at time of death chose to sell. Many heirs want to continue farming, but as land is divided among heirs, the farm units become smaller and smaller, and it becomes harder to make a profit. Sales of this acreage would probably go to the highest bidder. With the limited amount of land available, and the corporation with outside stockholders bidding prices up, other farmers are unable to expand their operations. Castro County Castro County's cropping patterns have changed over the past 5 years from grain sorghum acreage to corn when a corn starch processing plant was constructed in the county. In 1978 there were 624 farms in the county and the average farm size is 923 The 1974 Census of Agriculture shows average farm land values at $415 per acre making the average farm worth over $380,000 in land and buildings. Interviews with farmers indicated that 1979 land values are now up to $1,000 per acre, making the average farm worth from $900,000 to $1,000,000. Individuals or families own 88 percent of the farms in Castro County. The farmers we interviewed generally owned land jointly with their spouse, and at least part of the acreage was inherited or purchased from a relative. All of them worked exclusively on the farm. Most farmers own part or all of the land they farm. County agricultural representatives believe that landownership in the county is fairly stable. Very little land is available for expansion or for new farmers to get started. Most farms are family owned and pass from generation to generation. County officials are unaware of any land sales by heirs in recent years and sales that have taken place were not related to the death of the owner. They were not aware of any tax forced sales. Renting is a is a common practice with cropsharing used almost exclusively. Most acreage is rented on a one-third to two-third crop share basis. The number of farmers in the county increased over the past 20 years because of irrigation development. However, the last 5 years have shown a decrease of about 15 percent as farms have become larger. This trend can be partially explained by the fact that recent years' poor crops have forced more land sales. DEPARTMENT OF AGRICULTURE OFFICE OF THE SECRETARY 0 6 JUL 1981 Comments on GAO Draft Report entitled, The Effects of Special Estate TO: Henry Eschwege, Director Community and Economic Development Division This report assesses the effects of the special use valuation law on the transfer of family farms from one generation to another. It reviews the points of the law in a comprehensive manner and discusses the major concerns and problems arising since the law's enactment in 1976. While much of the discussion in the report has been seen before, new descriptive statistical information is introduced. The statistical information and analysis provide a useful overview of the benefits accruing to farm owners who elect the special use provisions. The report indicates that farm owners who elect the special use provisions receive a significant reduction in their tax bills. The findings are consistent, from a tax point of view, with the Congressional intent of providing tax reductions to facilitate the perpetuation of land in farming. The study does not, however, measure the extent to which land has been kept in farming, the primary intent behind the enactment of the law. (Committee on Ways and Means Report #94-1380, p. 22; and Supplemental Report of the Committee on Finance #94-938, part II, P. 15). Summary Comments The special use valuation law (section 2032A of the Internal Revenue Code) allows qualified estates to value their real property at its "use" rather than its "fair market" value, thus reducing the burden of estate taxes. Congress was concerned that high values for farmland near urban areas were creating artificially high estate tax liabilities that were forcing the owners and heirs to sell to development interests. Advocates of the provisions also argued that farm estates were unfairly taxed since they are inherently less liquid than other classes of estates and that forced sales to pay estate taxes are contrary to encouraging family farms. Since its enactment in 1976, the special use valuation law has proved to be a The GAO report finds that the number of farm estates sold to satisfy estate tax obligations is low. This finding is consistent with other recent research findings in this area. Apparently, most of the estate tax related farm sales are incurred to compensate nonfarm heirs. The GAO report also concludes that farm estates do not appear to be "unavoidably illiquid or cash-starved." The APPENDIX IV APPENDIX IV 2 Mr. Henry Eschwege report concludes that estate and financial planning can alleviate potential estate tax problems of illiquidity. The findings indicate that while farm owners do not appear to be taking full advantage of estate planning devices, some planning does occur prior to transfer. Many farmers have benefited from the special provisions. The report suggests, however, that the special use valuation law may have unintended effects. The law benefits those who own land and "may promote greater concentration of farm wealth than would otherwise be the case." Heirs of farmland owners tend to receive an advantage over those who inherit farm machinery or nonfarm assets. The report also concludes that the law may increase the attractiveness of farmland as a tax shelter, encourage nonfarmers to invest in farmland, and push up land prices. Section 2032A has been criticized by many for being too complicated and benefiting primarily the wealthy. The GAO report supports these contentions. Major restrictions were developed in the original law to prevent nonfarm investors from taking advantage of the special law. However, some bona fide farmers have found themselves closed out as well. The GAO report outlines some of the definitional and restrictive problems of the law. The report concludes that the law should be revised (assuming it remains in effect). Comments on Specific CAO Recommendations I. THE SPECIAL USE VALUATION LAW IS EXTREMELY COMPLEX; BOTH COMPLIANCE AND GAO RECOMMENDATION A: Eliminate the special use valuation law in favor of an The Department has reservations regarding this recommendation. A tax deferral The GAO proposal would tend to benefit the larger estates more than their |