Race for Tax Reform Begins

Farm Leader: Tax Reform Shouldn't Lead to Tax Increases From Lost Business Deductions

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The clock is ticking on Congress to pass tax reform legislation and ag groups are urging lawmakers to do no harm in the process. (DTN file photo)

OMAHA (DTN) -- The starting gun for a flat-out sprint to pass a tax-reform bill was fired Thursday when Congress passed a fiscal-year 2018 budget resolution. The White House on Friday sent out an array of bullet points touting the need for tax reform and tax cuts.

While the race is on to cut the corporate tax rate from 35% down to at least 20% -- which is what the White House spelled out -- there's a separate race among business groups to avoid losing their current tax breaks.

The White House has its blueprint and Rep. Kevin Brady, R-Texas, is expected to release his own tax-reform bill sometime next week. Tax plans could come rapidly in Congress, as GOP lawmakers want to end 2017 with a major legislative win for President Donald Trump.

Tax-reform changes are expected to amount to at least $1.5 trillion more kept in the bank accounts of taxpayers over the next decade, and likely more. To offset at least some of impact on the national debt and the annual federal budget, lawmakers are looking to repeal or shave an array of business tax credits and deductions.

The National Council of Farmer Cooperatives sounded an alarm earlier this week over the potential loss of the Section 199 Domestic Production Activities Deduction, originally created in 2004 to stimulate domestic manufacturing. The "Unified Framework for Fixing Our Broken Tax Code," released by the Trump administration last month specifically stated that after lowering corporate tax rates, the Section 199 deduction "will no longer be necessary."

Section 199 allows companies that make things to deduct 9% of gross receipts minus certain costs of goods sold and other deductions. The deduction also is capped at 50% of W-2 wages that are tied directly to production. Originally considered for "manufacturers," the credit is used in a broad array of industries now, right down to people who package gift baskets, as a recent NPR article noted. (http://www.npr.org/…)

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Over 10 years, repeal of Section 199 would amount to about $173.7 billion that could help offset some of the costs of lowering tax rates.

Still, Chuck Conner, president of the NCFC, says the domestic production deduction returns nearly $2 billion nationally to members of farmer cooperatives. The deduction flows from the tax return of the cooperatives to the co-op owners as an income deduction.

"Co-ops were made eligible to receive the (Section 199) DPAD deduction to reflect those kinds of costs of processing our owners' products," Conner said in an interview. "In some cases, the cooperative keeps the deduction, but in the vast, vast majority of cases, it is passed back through the producers. Most cooperatives I represent pass back 100% to the producers."

According to USDA, farmer cooperative membership nationally is just under 2 million, reflecting that most commercial farmers are members of more than one cooperative business. Taking away Section 199 is a right-off-the-top rate increase for cooperatives. Conner said early analysis shows California could see nearly $175 million in lost deductions, while South Dakota would lose $66 million.

"You just can't go in and pull that kind of money out of these rural areas without it having dramatic consequences," Conner said. "If you take away the 199 deduction, no matter what else you do, farmers and ranchers are going to end up sending more cash to Washington than under the old system. That really violates the fundamental principle for even having this discussion. There's no one in the tax-reform discussion talking 'We need more revenue.' They want tax-reform relief."

Beyond the production deduction, there's broader pushback on the idea of eliminating business interest deductions. The business interest deduction amounts to roughly $120 billion annually, a major offset to lower rates.

The American Farm Bureau Federation likes the idea of immediate expensing, but AFBF also wants to keep the business interest deduction, as well as maintain cash accounting for farmers, and eliminate the estate tax but also keep stepped-up basis for inherited assets. Farm Bureau also wants to keep the real-estate Section 1031 like-kind exchanges. (https://www.fb.org/…)

The Mortgage Bankers Association is in the same camp as AFBF, wanting to protect both business-interest deductibility and expressing concern over the possible limiting or elimination of Section 1031 exchanges. The group wrote a letter to Congress and the Trump administration earlier this month stating that losing or limiting business interest deduction "would have far-reaching and damaging impact on many industries," while the current Section 1031 offers benefits to real-estate investment, "which, in turn, is a boon to continued economic growth."

Conner said tax reform shouldn't be about pitting one tax break for an industry against another. The fundamental goal is that everyone is expecting lower taxes from tax reform to stimulate more economic growth.

"You stimulate the economy by letting people keep more of their money," he said. "That's what people are expecting, not so much one deduction over the other, but more money in their pocket."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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Chris Clayton