Washington Insider -- Friday

Washington Insider: Lots of Tax Reform Possibilities

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

AMS Publishes Final Rule on COOL

USDA's Agricultural Marketing Service (AMS) on Wednesday issued a final rule that allows more stringent enforcement actions, including fines, against retailers and suppliers who have not made a good-faith effort to comply with the agency's Country of Origin Labeling (COOL) regulations. The rule also allows USDA to assess fines of no more than $10,000 for each violation against any packer or other person who violates the agency's Livestock Mandatory Reporting (LMR) regulations.

AMS conducts compliance audits at all federally inspected plants required to submit data for the LMR program. AMS audits these plants at least twice a year to ensure data is reported as required, according to an AMS spokesperson. It conducts additional audits at plants with noncompliance issues that are not corrected within the specified timeframe.

The LMR Act allows a civil penalty of up to $10,000 for each violation. The act also provides for notice and hearing of violations, judicial review, issuance of an injunction or restraining order, and establishes a civil penalty for failure to obey a cease and desist order.

While COOL was repealed for ground and muscle cuts of beef and pork, it remains in place for other products including muscle cut and ground chicken, lamb, and goat; wild and farm-raised fish and shellfish; fresh and frozen fruits and vegetables; peanuts, pecans, macadamia nuts; and ginseng.

US Pushes for Duties on Chinese Aluminum Foil

The U.S. Commerce Department continues to seek duties on imports of aluminum foil from China. The agency argues Chinese state subsidies unfairly disadvantage American aluminum producers.

The "affirmative preliminary determination" was announced earlier this week by U.S. Secretary of Commerce Wilbur Ross in Washington, following an investigation into the practices of Chinese makers of the material. Subsidies of as much as 81 percent were found to be in place, according to a fact sheet released on the department's website.

If implemented, the duties could increase trade tensions between the world's two largest economies. The aggressive posture the Trump administration has taken towards aluminum foil could portend more trade actions on Chinese steel and other aluminum products. Under the rarely used Section 232 authority in the 1962 Trade Expansion Act, the U.S. can restrict imports of goods if an investigation reveals U.S. national security is threatened. Should the Trump administration make such a move it could further increase the risk of a U.S.-China trade war.

"The United States is committed to free, fair and reciprocal trade, and will continue to validate the information provided to us that brought us to this decision," Ross said in the statement explaining the action on foil. "The Trump administration will not stand idly by as harmful trade practices from foreign nations attempt to take advantage of our essential industries, workers and businesses."

The foil decision must be confirmed by a final department ruling by October and a determination by the U.S. International Trade Commission (ITC). U.S. Customs and Border Protection will be instructed to collect cash deposits based on the preliminary rates for aluminum foil being imported.

"Aluminum has become a hot spot in China-U.S. trade in recent years, as Chinese output of aluminum products has surged a lot, and its exports increased very fast, which has raised eyebrows from trading partners," said Yang Rongzhen, a professor at the China Institute for World Trade Organization (WTO) Studies at the University of International Business and Economics in Beijing. "This is just one of several cases the U.S. has launched, but it is still within the normal trade frictions. I wouldn't say this is a trade war."

Washington Insider: Lots of Tax Reform Possibilities

Both Congress and the administration are worried about passing tax reforms this year and Republicans are struggling to find overhauls that don't add to the federal deficit, Bloomberg says. They are focusing especially on "a kind of compromise: mixing permanent revisions with temporary rate cuts for individuals and businesses."

Mixing and matching proposals -- making some permanent and others temporary --- could be a potential workaround for GOP leaders who want to use budget reconciliation to prevent Senate Democrats from blocking the legislation. That course limits the scope of the overall bill because it requires that any tax changes that add to the nation's long-term deficit would have to expire.

"It's the best of both worlds," said Daniel Clifton, a former tax lobbyist who was involved in the tax-cut negotiations under former President George W. Bush in 2001. "But if you're a purist for tax cuts or a purist for tax reform, it's going to be neither."

Critics argue that temporary changes won't spur the level of economic growth that President Donald Trump and congressional leaders have targeted.

A hybrid plan isn't a new idea, but it may be gaining traction now that the controversial border-adjusted tax on imports has been dropped. Without it, tax writers are forced to find other revenue raisers to offset rate cuts if they want permanent changes.

White House advisers, along with some top congressional leaders, said last month their plan "places a priority on permanence," but some have individually signaled openness to shorter-term changes. Treasury Secretary Steven Mnuchin said in May: "Permanent is better than temporary, and temporary is better than nothing."

House Speaker Paul Ryan, R., Wis., has been more resistant, pushing especially for the corporate rate cut to be permanent, Bloomberg says.

The White House says no decisions have been made yet on the issue.

The one-page outline of a tax plan that the White House released in April called for cutting the corporate tax rate to 15 percent, down from the current 35 percent. It also would condense the existing seven individual income tax rates to three, cut the top rate to 35 percent from the current 39.6 percent and double the standard deduction. Overall, the plan might cost as much as $5 trillion over 10 years, according to the nonpartisan Committee for a Responsible Federal Budget.

Administration officials disagree, but even coming up with half of it by raising new revenue, closing out deductions and other benefits or cutting federal spending would require a delicate balancing act that has bedeviled negotiators in the past.

Trump has repeatedly emphasized that one of his main objectives is to provide the middle class with a tax cut.

The corporate side is more complicated but necessary, some say—and it must be permanent before companies commit to hiring new workers or building more factories in the U.S.—and, in order to achieve the White House's goal of 3 percent annual economic growth.

Some companies would prefer a smaller cut—to no less than 25 percent -- even if it's just for 10 years. It's not clear how long a temporary corporate rate cut could last without adding to the deficit.

A study Speaker Ryan requested from the Joint Committee on Taxation showed that cutting the corporate rate to 20 percent for just three years would result in lost revenue more than a decade later. A temporary cut more likely benefits shareholders according to that June report, while a permanent cut's benefits trickle down to workers.

Meanwhile, there's broad agreement that rules to shift the U.S. tax code to a territorial system with most foreign profits exempt from U.S. taxes would be beneficial. Currently, the U.S. taxes business income no matter where on Earth it's earned, though businesses can defer taxes on offshore income until they return it to the U.S. Those features of the tax code spur companies to shift their profits offshore, and leave them there.

As a result, GOP officials are discussing how to pair a territorial system with another mechanism to prevent such profit-shifting.

Other tax proposals -- such as a costly one that would allow companies to fully deduct their capital spending from income immediately instead of over years -- are being evaluated on becoming temporary or permanent. Allowing full and immediate expensing on a temporary basis could encourage companies to accelerate their investment plans and help get the growth the White House is banking on.

The tax puzzle is as difficult as ever, and current politics make it more so. Assuming the pitfalls that await a returning Congress are avoided, that the government stays open and that the debt ceiling is raised, Congress faces a tough fight over taxes that producers should watch closely as it unfolds, Washington Insider believes.

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