More on Tax Reform and Agribusiness Concerns

Tax reform is good, if agriculture can keep its current tax deductions

Farm-state lawmakers and especially farm groups are always good at wanting to keep things they have, wanting more things that benefit them, but never wanting to give up things even if it means reform. Such is the case with tax reform.

Farm-state lawmakers urge leaving interest deduction, cash accounting alone. House Republican leaders heard a clear message from farm-state lawmakers on Wednesday regarding tax reform: Make sure that farmers can continue deducting interest expenses and use the cash basis method of accounting. A pending House GOP tax reform plan would do away with the exemption for interest expenses. The plan would exclude land purchases from a provision allowing full expensing of capital investments.

Farm Bureau: Disallowing interest deductions is unfair to farmers, who usually have no way to raise capital except to borrow money. Patricia Wolff, who analyzes tax policy for the American Farm Bureau Federation, said. She added that the GOP proposal “would make borrowing money harder and more expensive.”

The House tax reform plan would not affect cash accounting, but… the committee was warned that option could surface at some point because it could raise revenue necessary to pay for cutting tax rates. Without cash accounting, farmers could be forced to pay taxes on income before they had actually received it, the committee was told.

BAT impact murky. On another topic, tax experts told the House Agriculture Committee they need written details on the contentious border adjustment tax (BAT) under consideration by congressional tax writers before the benefits and disadvantages to farmers can be determined. Taxes are outside the jurisdiction of the Agriculture Committee, but Chairman Mike Conaway (R-Texas) said panel members can weigh in with the House Ways and Means Committee on tax proposals they deem detrimental or beneficial for segments of agriculture. The House tax writers have outlined a tax package that includes the BAT and other provisions. The BAT is expected to raise $1.2 trillion over 10 years to help reduce tax rates for individuals and corporations under the House GOP tax plan. House Speaker Paul Ryan (R-Wis.) backs the border tax and said Wednesday that he believes support will build for it. “Once people kind of understand what this is, you see a lot of minds turning,” Ryan said, downplaying talk of opposition. “A border adjustment tax is a mechanism not to affect trade but to get to a cash flow tax,” he said.

The hearing witnesses backed continuing use of Section 179 of the tax code that provides for immediate write-offs for equipment, production supplies and other related costs and as noted previously, continuing cash accounting. They also supported retaining Section 1031 for tax-deferred exchanges; retention of farm income averaging to spread a tax liability over several years; and protecting interest deductions for business expenses.

About those in-kind exchanges… Rep. Collin Peterson (D-Minn.), ranking member on the House Agriculture Committee, said there was push-back in his Minnesota district against the Section 1031 tax provision that allows people to escape capital gains taxes if they make a “like kind” purchase. “It keeps land prices high,” said Peterson because Section 1031 allows non-farm investors to acquire cropland and crowd out farmers who are looking for land. If this is changed in tax reform, it would have major implications for the farmland market and farmland investors.

Several witnesses supported repealing the estate tax. The tax falls to heirs to pay if an estate exceeds $5.5 million in value. The Tax Policy Center of the Brookings Institution reported that the federal government expects to raise $19 billion from estate taxes in the 2016 tax year. Farm Bureau’s Wolff said the organization continues to support repeal of the estate tax although most farm families are exempted from the tax. Wolff said the exemption threshold creates a cutoff line for tax winners and losers. She noted that farmers who worry that their estate could be taxed often spend money on estate planning that could be better invested in their operations.

Outlook: We have said repeatedly that before one can say if upcoming tax reform is beneficial to the business of agriculture, a total accounting of gains and losses (ready that deductions) is needed. Regarding doing away with the estate or “death” tax, the key policy issue that its proponents never want to talk about or confront is this: “The funding lost as a result of doing away with the estate tax could be used for other policies impacting far more people than the estate tax. Equity issues are always sensitive but that does not mean they should be discounted and never dealt with.

As for timing of any major tax reform, House Speaker Paul Ryan (R-Wis.) on Wednesday suggested that the executive and legislative branches of government were not in sync on tax policy. Ryan said changing tax policy could take longer than overhauling healthcare. Read that last statement again and tell us if you think this dysfunctional Congress (both parties) can get tax reform done this calendar year.