USDA’s Ibach endorses 199A fix
March 15, 2018
Agriculture Department Undersecretary for Marketing and Regulatory Programs Greg Ibach today endorsed a fix to Section 199A of the new tax law that gives farmers an incentive to sell their products to co-operatives, rather than private companies, while the National Farmers Union rejected the change.
The statements from Ibach and the NFU came a day after the National Council of Farmer Cooperatives (NCFC) and National Grain and Feed Association (NGFA) on Tuesday said they supported the legislation developed by Sens. John Thune, R-S.D., and John Hoeven, R-N.D. The two groups said it should be attached to the fiscal year 2018 omnibus appropriations bill that Congress needs to approve by March 23, when the current law funding the government expires.
All the statements play a role in a situation in which Congress is deciding what provisions to add to the omnibus. While the joint statement by NCFC and NGFA is powerful and Ibach's statement amounts to a Trump administration endorsement, National Farmers Union members tend to vote Democratic, and NFU's opposition could sway Democratic officeholders who are already raising questions about what additional legislation should be added to the omnibus.
Lawmakers have said that the favoritism toward co-ops in the tax bill was an unintentional consequence of trying to replace a tax break that the tax bill eliminated.
“Corporations just received one of the largest tax breaks in their history. The addition of 199A was an attempt to level the playing field for cooperative businesses. To repeal parts of this important tax break would be to strike at the single most important benefit family farmers received from tax reform. Not only would corporations be better off, but farmers would be disadvantaged by working with their cooperatives. Wage limits contained in this proposal will discriminate against family farms that don’t hire outside workers, especially if they work with small cooperatives who also have a limited wage base.”Roger Johnson, NFU president
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According to a summary of the bill on the Senate Finance Committee website, the modification of Section 199A would take the following approach:
▪ Cooperatives would be permitted to determine their deduction based on rules substantially similar to those under old section 199, including the flexibility of retaining a portion of their deduction to offset income at the entity level and/or pass through some or all of the deduction to their farmer patrons.
▪ Farmers selling their agricultural products to independent buyers would continue to determine their deduction as under current law Section 199A.
Senate Finance Committee Chairman Orrin Hatch, R-Utah; Senate Agriculture Committee Chairman Pat Roberts, R-Kan.; Thune and Hoeven said in a joint statement, "The new, pro-growth tax law was designed to lift hard-working, middle-class families – whether they are farmers, ranchers or entrepreneurs – and the economy as a whole. After discovering an unintended consequence that created an inequity within the agricultural business community, we've worked extensively with stakeholders, our colleagues and the administration to develop a solution that will level the playing field and ensure the nation's cooperatives, independent small businesses and publicly traded firms can fairly benefit from pro-growth tax reform. The stakeholder-driven agreement announced today achieves this goal and restores balanced competition within the marketplace. We're committed to working with our colleagues to act swiftly on the measure and get it signed into law as soon as possible."
Noting that some agriculture stakeholders had raised questions about potential market effects on cooperatives and independent grain-related businesses, Ibach said, "The sweeping tax cuts and reform package championed by President Trump and passed by Congress is already working as designed, empowering growth across all economic sectors, including agriculture. An unintended consequence of the new law caused disparate treatment among independent operators and cooperatives in the same industry. Federal tax policy should not be picking winners and losers in the marketplace. We applaud Congress and stakeholders for coming together and agreeing to a solution for the good of all agriculture. At USDA, we will provide whatever information is necessary to support Congress in their efforts to have the proposal included in the omnibus appropriations bill."
NCFC and NGFA said the legislation is "designed to achieve the two fundamental objectives of stakeholders:
▪ "First, to replicate to the greatest extent possible the tax benefits accorded to farmer-owned cooperatives and their farmer-patrons under the previous Section 199, also known as the Domestic Production Activities Deduction (DPAD), of the tax code, as it existed prior to its repeal in the Tax Cuts and Jobs Act enacted on Dec. 23, 2017; and
▪ "Second, to restore the competitive landscape of the marketplace as it existed in December 2017 so that the tax code does not provide an incentive for farmers to do business with a company purely because it is organized as a cooperative or private/independent firm."
"Throughout the tax reform process that began last year, NCFC has consistently called on Congress to retain DPAD for farmer co-ops and their member-owners, and this legislation largely meets that goal. The old Section 199 had a proven track record of letting farmers keep more of their hard-earned money. We expect these provisions to do the same," said NCFC President and CEO Chuck Conner. "By combining the individual-level business deductions that farmers can claim and the pass-through from their co-ops, farmers selling to cooperatives have the opportunity to see benefits in excess of the 20 percent 199A pass-through deduction."
"We would also like to recognize the tireless efforts of [Republican] Sens. John Thune of South Dakota and John Hoeven of North Dakota to ensure fair treatment for farmer co-ops and their member-owners," Conner continued. "They have brought together both sides and fostered an atmosphere that has made today's proposal possible."
NGFA President and CEO Randy Gordon said great care was taken by stakeholders to develop a concept that provides tax relief to farmers, as envisioned in the tax-reform law, while restoring to the maximum extent possible the competitive balance in the marketplace. NGFA noted its members consist of an almost equal number of grain, feed and grain-processing businesses organized as cooperatives and private/independents.
"Given the complexities of the issue and the different types and sizes of businesses, no legislation will ever be perfect for every income or business situation," Gordon said. "But the stakeholder concepts on which this legislative language is based have been analyzed and reanalyzed in excruciating detail by tax experts representing both cooperative and private/independent businesses, as well as Congressional tax staff experts. We believe the solution merits enactment so that competitive choices remain available to agricultural producers, and the marketplace – not the tax code – determines with whom they do business. We appreciate the commitment of members of Congress, Republicans and Democrats alike, to get it fixed."
Late today, the American Farm Bureau Federation sent congressional leaders a letter of support for the measure, and the International Dairy Foods Association announced its support for it.
But National Farmers Union said, "Members of Congress are proposing to undo a newly instated tax break that is meant to level the playing field between agricultural cooperatives and corporations who received a dramatic tax break under the Tax Cuts and Jobs Act."
NFU President Roger Johnson added, "Corporations just received one of the largest tax breaks in their history. The addition of 199A was an attempt to level the playing field for cooperative businesses. To repeal parts of this important tax break would be to strike at the single most important benefit family farmers received from tax reform.
"Not only would corporations be better off, but farmers would be disadvantaged by working with their cooperatives. Wage limits contained in this proposal will discriminate against family farms that don't hire outside workers, especially if they work with small cooperatives who also have a limited wage base," the NFU stated. "Farmers could alternatively see the 20 percent deduction on taxable income reduced to 11 percent, if they do business with a co-op. Under this new proposed language, farmers could sell to a private company and lock in the 20 percent deduction, or they can sell to a co-op and receive an 11 percent deduction.
"Farmers Union calls on Congress to reject this draft language as it currently stands. We urge lawmakers to advance bipartisan legislation that removes wage limitations and maintains a farmer gross sales deduction that evens the playing field between corporations and cooperatives."
–The Hagstrom Report