Illinois Farms and The Fair Tax: How Will The Farming Industry Be Impacted

By Allison Flanagan, Director of Policy Analysis

On June 5, 2019, Governor Pritzker signed P.A. 101–0008 — often referred to as the “Fair Tax” — into law. This legislation will create a new, graduated rate income tax structure to replace the state’s current flat rate income tax.[i]. The Fair Tax legislation, shown in Figure 1, cannot go into effect unless, during the November 2020 General Election, voters ratify a proposed amendment to the Illinois Constitution that would eliminate the mandate that state income taxes be assessed using only one flat rate.[ii]

Prior research indicates that a graduated income tax structure like the Fair Tax would in fact provide positive impacts for Illinois, as identified in CTBA’s report, Implementing the “Fair Tax” Will Help the Illinois Fiscal System. The prior research, however, does not include a breakdown of how specific industries would benefit from the Fair Tax. CTBA wanted to investigate how the Fair Tax would impact the industry that controls nearly 75 percent of the state’s total land — the farming industry.[iii]

Farms and their (Farm) Businesses Classifications:

There are over 72,000 farms in Illinois. Figure 2 highlights the total number of farms and profits of farms in 2017.

These farms are categorized by three major types of farm business classifications:

1. Individual/family-owned farms, which will be referred to as sole proprietor farms going forward in this post. These farms are ones in which there is no legal distinction between the owner and the business. The farm income (and loss) is calculated and reported by the owner on his/her/their individual income tax return.[iv]

2. Small Business Farms, for the purpose of this post, are farms that are registered a partnership or S-Corp. These small business farms file annual informational returns but do not pay income tax as a business. Instead, each partner/shareholder tax liability is on his/her/their share of the partnership’s taxable income.[v] This is referred to as “pass-through” income, meaning there is no entity-level taxation and the individual shareholders include their distributive share of farm profits, losses, etc. on their own returns.[vi]

3. Corporate Farms, are farms with a separate legal entity under state law. Corporations are subject to the corporate income tax.[vii]

Sole Proprietorship Farms and the Fair Tax

61,398 farms, or 84.5% of total farms in Illinois, are considered sole proprietor farms.[viii] Of the sole proprietor farms, only 64% of those farms realized a profit. The remaining 36% of sole proprietor farms realized a loss and farms that realized losses would not owe taxes, as seen in Figure 3.

For a sole proprietor farm with a profit, the average profit was $98,084 per farm.

In Illinois, about 20% of sole proprietor farms share farm profits and losses among 2 or more households.[ix] This is important because it means that even when an average sole proprietor farm realizes a profit of $98,084, that profit could be shared, and each household would actually realize a profit that is less than the total farm profit.

In order to conservatively estimate how the Fair Tax compares to the current flat tax, we chose to assume that the sole proprietor farms are operating with one owner and profit per farm is not shared among multiple owners.

The average profitable sole proprietor farm would experience about $64 in tax relief and an effective tax rate of 4.88%, as shown in Figure 4.

Small Business Farms

4,597 farms, or 6.3% of farms in Illinois, are considered small businesses, displayed in Figure 5.[x] This means these 4,597 farms pay individual income taxes on the profits for each individual owner‘s share of said profits.[xi]

The average profit for a small business farms was $224,926 per farm.

Similar to sole proprietor farms, the income for these farms would be passed on to the owner(s) or partner(s) of the farm to determine the tax liability. To conservatively determine how the Fair Tax compares to the current flat tax, and even though most small business farms have multiple owners and the profit per owner would be less than the average profit per farm, we assume that the small business farms are operating with one owner, as well, and profits per farm are not shared among multiple owners.[xii]

The average small business farm with a profit would experience about $65 in tax relief and an effective tax rate of 4.92%, as seen in Figure 6.

Corporate Farm

3,972 farms, or 5.5% of total farms in Illinois, are registered corporations, displayed in Figure 7.[xiii] This means these farms are subject to the Corporate Income Tax rate of 7 percent under the current law.[xiv]

For corporate farms, the average profit was $287,212 per farm.

Unlike sole proprietor farms and small business farms, corporate profit is not passed on to the owner, and thus, corporations are not subject to the individual income tax rates, but subject to the corporate income tax rate. The corporate tax rate would increase from 7% under current law to 7.99% under the Fair Tax legislation.

The average corporate farm would pay $2,843 more in taxes as seen in Figure 8.

So, What Does This Mean for Illinois Farms?

For sole proprietor farms and small business farms, the average farm would see a decrease in tax liability under the Fair Tax compared to the current 4.95% tax rate.

This is assuming that all of the sole proprietor farms and small business farms are not sharing the profits by multiple owners, which we know is not the case. If the profits of a farm are being shared by multiple owners, then the amount of taxable income being passed on to each of the individual owners of said farm would be less than the total profit of the farm. This only reinforces that most sole proprietor and small business farms that experience profits in a given year would see some tax relief. All corporate farms with profits would have a higher corporate tax rate under the Fair Tax legislation.

Even more, if implemented, the Fair Tax legislation can be expected to help Illinois’ private sector economy — like farming and agriculture — recover more quickly from the current downturn, and grow faster after this recession ends.[xv] That’s because an increase in tax revenue from the increase to the corporate tax rate and increase in tax rates for the top 3% of income earners in the state would mean Illinois could avoid spending cuts on public services. For example, the Illinois Department of Agriculture would benefit from Fair Tax revenue because General Fund revenue already provides public service spending of about $17 million for promotion of farm sales, infrastructure, inspections, and many other vital programs to aid in farm operation. If the Fair Tax does not pass, Illinois’ contingency plan is to increase the flat rate income tax for all residents or cut services spending, both of which would hurt sole proprietor and small business farms far more than the Fair Tax.

Since the tax increases under the Fair Tax would impact few sole proprietor and small business farms in Illinois, those farms would not only benefit from the tax relief but would also benefit from the revenue raised by the Fair Tax.

For more information about the Fair Tax, please read, Implementing the “Fair Tax” Will Help the Illinois Fiscal System.

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This post was updated on October 28th, 2020 to correct an error. The listed average farm profit for sole proprietor farms was corrected from $94,084 to $98,084.

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[i] Illinois Public Act 101–0008, The Illinois Income Tax Act, http://www.ilga.gov/legislation/publicacts/101/101-0008.htm (June 2019).

[ii] https://www.ilga.gov/legislation/publicacts/101/101-0008.htm

[iii] Illinois Department of Agriculture, “About Us,” https://www2.illinois.gov/sites/agr/About/Pages/Facts-About-Illinois-Agriculture.aspx

[iv] Portman, Carol, “A(nother) Business Income Tax Primer,” Taxpayers’ Federation of Illinois, 2019. https://www.illinoistax.org/index.php/another-business-income-tax-primer-carol-portman/

[v] Portman, Carol, “A(nother) Business Income Tax Primer,” Taxpayers’ Federation of Illinois, 2019. https://www.illinoistax.org/index.php/another-business-income-tax-primer-carol-portman/

[vi] Portman, Carol, “A(nother) Business Income Tax Primer,” Taxpayers’ Federation of Illinois, 2019. https://www.illinoistax.org/index.php/another-business-income-tax-primer-carol-portman/

[vii] Portman, Carol, “A(nother) Business Income Tax Primer,” Taxpayers’ Federation of Illinois, 2019. https://www.illinoistax.org/index.php/another-business-income-tax-primer-carol-portman/

[viii] National Agriculture Statistics Service, “2017 Census of Agriculture: Illinois State and County Data,” U.S. Department of Agriculture, April 2019, https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_State_Level/Illinois/ilv1.pdf.

[ix] Only 80% of individual or family owned farms are shared by one household. The remaining 20% are of farms share income between 2 or more households, potentially lowering the farm income declared on a farm owners taxes.

[x] 3,215 farms, or 70% of farms classified as partnerships are actually registered as partnerships in the state. National Agriculture Statistics Service, “2017 Census of Agriculture: Illinois State and County Data,” U.S. Department of Agriculture, April 2019, https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_State_Level/Illinois/ilv1.pdf.

[xi] LLCs have more flexibility in choosing the rate of taxation.

[xii] Only 35% of small business farms are shared by one household. The remaining 40% of net income is shared among two households and the remaining 25% of farms share net income between 3 or more households, significantly lowering the farm income declared on a farm owners taxes.

[xiii] National Agriculture Statistics Service, “2017 Census of Agriculture: Illinois State and County Data,” U.S. Department of Agriculture, April 2019, https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_State_Level/Illinois/ilv1.pdf.

[xiv] Illinois Public Act 101–0008, The Illinois Income Tax Act, http://www.ilga.gov/legislation/publicacts/101/101-0008.htm (June 2019).

[xv] Kitty Richards, “BOLSTERING STATE ECONOMIES BY RAISING PROGRESSIVE TAXES,” Roosevelt Institute, July 2020. https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI_BolsteringStateEconomies_IssueBrief_072020.pdf; and Peter Orszag and Joseph Stiglitz, “Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?” November 2001. https://www.cbpp.org/archives/10-30-01sfp.htm