WASHINGTON, Jan. 4, 2017 - Congressional Republicans are preparing to move a broad overhaul of the tax code that would have significant implications for farmers. A House GOP proposal could raise the cost of fuel but wipe out the federal estate tax and lower income tax rates while allowing farmers and ranchers to immediately write off expenses.
The increase in fuel costs would come from a far-reaching proposal that would help carry out President-elect Donald Trump’s pledge to discourage companies from moving jobs overseas. The House plan would lower the corporate tax rate from 35 percent to 20 percent and apply the tax to all goods that companies import – but not to products that are exported.
Taxing imports, but not exports, is a concept known as a “border adjustment,” which is designed to mimic the value added tax (VAT) that most other developed countries have. The aim is to tax products where they are consumed, not where they are produced.
Under current tax policy, products shipped overseas by American companies bear the cost of U.S. income taxes but imported products don’t. The border-adjusted tax is likely to be a more palatable approach to Republicans than the sharp tariffs that Trump has been threatening to impose on companies that move jobs offshore.
The border adjustment offers a way to “make American products more competitive,” said Nebraska Republican Adrian Smith, a member of the House Ways and Means Committee. “We can and should focus our efforts very appropriately on things we can do to export more of our products.”
According to some analysts, the tax could raise gasoline and diesel prices, but is expected to strengthen the dollar, which could have the effect of offsetting the impact of the import tax on consumers. A study by the Brattle Group estimated that the retail price of gasoline would increase by 13 percent, or about 30 cents a gallon, with the border adjustment tax. Diesel prices would rise by an estimated 11 percent, or about 27 cents per gallon.
Farm groups will be watching the plan closely. “Anything that increases exports of course is good for agriculture because such a large percentage of our commodities go overseas,” said Pat Wolff, who follows tax policy for the American Farm Bureau Federation. At the same time, she said, the tax “could make imports more expensive. For production agriculture, that would impact fuel because we import fuel and we import pesticides.”
Normally, a stronger dollar makes U.S. products less competitive, but Dermot Hayes, an economist at Iowa State University who specializes in trade policy, says the tax exemption for exported products should help offset at least some of the impact. “The tradeoff between the two forces would depend on the industry,” he said. “We economists do not really understand the forces that drive exchange rates well enough to do an accurate analysis of what would happen.”
Still, the border adjustment tax is a “huge revenue raiser,” which means that it is critical to offsetting the cost of the rest of the House tax plan, Wolff noted.
House Ways and Means Chairman Kevin Brady, R-Texas, has indicated that the border adjustment tax is essential for policy reasons, too. “We have made a pretty strong case that for America to compete and win again, we need to change the way we tax. And right now, all of our competitors border adjust their taxes,” he said in a recent C-SPAN interview. “They take the taxes off the goods and services coming our direction, so that gives them the advantage over us here in America. We don’t, sending our products around the world, and so today, we lose both here in America and we lose around the world. That can’t stand. This is the key part of our (proposal). … It is going to stay.”
Brady, however, pledged to listen to concerns from businesses that rely heavily on imported goods. “We think imports and exports are both important to the economy, but we will insist that they be taxed equally here in America,” he said.
What’s certain to be popular with most farmers and ranchers are the separate proposals to repeal the estate tax, reduce the capital gains tax, and to allow businesses to immediately expense new investments.
Allowing businesses to expense all new investment spending will do more to boost the economy than cutting tax rates, according to the Ways and Means Committee. “The reason this can be true is that full expensing applies only to new investment, whereas a reduction in rates would benefit both new and old capital,” according to the committee. The expensing allowance would apply to assets such as equipment and buildings, but not to land, according to a KPMG analysis.
Individuals would be allowed to deduct half of their capital gains each year as well as their dividends and interest. Individual income tax rates would be consolidated from the current seven to three basic rates: 12 percent, 25 percent and 33 percent.
Republicans hope to move the tax plan later in the year as part of a fiscal 2018 budget reconciliation package that would need only 51 votes to pass the Senate. That would allow Senate Republicans to sidestep a possible filibuster that would take 60 votes to break.
“The important question at the end of the day is, are farmers going to owe more taxes or less taxes?” Wolff said.
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