Senate Republicans early Saturday narrowly advanced a sweeping package of business and individual tax cuts after a series of last-minute deals that included a bigger reduction in taxes for farms and other small businesses.
Under an agreement the senators reached on Friday, a new deduction on pass-through business income was increased from 17.4 percent to 23 percent, effectively reducing the overall tax bills for S corporations, partnerships and sole proprietorships, which aren’t organized as C corporations. Farms would qualify for the deduction, although experts say the benefit could be muted for large operations.
The Senate passed the bill on a party-line vote, 51-49, at 1:36 a.m. The House, which passed a different version of the bill last month, is scheduled to vote Monday to set up negotiations with the Senate on a final bill. Only one Republican, retiring Sen. Bob Corker of Tennessee, voted against the Senate bill, and no Democrats supported it. Corker cited concerns about the increase in the federal deficit.
The expansion of the pass-through deduction was crucial to winning the support of two Senate Republicans, Ron Johnson of Wisconsin and Steve Daines of Montana, to ensure the bill would have at least 50 votes, the minimum needed to get it out of the Senate.
“Farmers and ranchers have long called for a fair tax code that recognizes our hard work as well as the unique challenges we face in growing our nation’s food, fiber and fuel. The Senate’s passage of tax reform legislation ... puts us within reach of that goal,” said Zippy Duvall, president of the American Farm Bureau Federation.
Republicans said that the agreement on a series of amendments to a bill the Senate Finance Committee drafted in November ensured that the legislation would squeak through the Senate.
The Senate bill would offer a number of benefits to agriculture in addition to the pass-through deduction. The Section 179 expensing allowance would be expanded; the estate tax exemption would be doubled to $11 million per individual; and farmers could continue deducting interest expenses and using the cash accounting method.
“We applaud the Senate’s commitment to key tax provisions farm and ranch businesses depend on, such as immediate expensing, business interest deduction and cash accounting," said Duvall. "While we also had hoped to see the estate tax finally put to death, increasing the exemption should bring relief for many farm and ranch families looking to preserve their agricultural legacy."
Citing in part the projected increase in the federal deficit, the National Farmers Union came out against the tax bill even as Republicans were still negotiating on changes.
NFU President Roger Johnson said Saturday that the "Senate voted to cut taxes for the wealthiest individuals and corporations in our country, and pay for those cuts by adding $1.5 trillion to the deficit and shifting the tax burden onto the rest of us, and to our children and grandchildren. This legislation and its counterpart on the House side are inherently flawed, and Congress should reject any combination of the two.”
Farmer cooperatives lobbied into Friday with limited success to preserve some benefit from repeal of the Section 199 domestic production deduction that co-ops either pass on to members or retain to pay for improvements.
For co-op members, Section 199 would be replaced by the new "199A" pass-through deduction. But co-ops were unable to persuade Senate leaders to fully replace the portion of the deduction proceeds that they had been retaining. A Nov. 13 letter to Congress supporting the co-ops said that the deductions total about $2 billion a year, 95 percent of which is passed on to members, suggesting co-ops retain an average of about $100 million.
Some 193 farm groups, co-ops and other agribusiness interests made a last-minute appeal to GOP leaders on Friday to support an amendment by Sen. John Hoeven, R-N.D., to preserve the deduction for co-ops.
“Without this amendment, farmers and their co-ops across the country will see their taxes increase; rural communities will see money that had been invested locally transferred to Washington,” the letter said. “A vote against the Hoeven amendment is a vote to increase taxes on farmers and their co-ops.”
In the end, the bill included a provision that co-ops fear would provided little benefit. The cost estimate for the provision is just $100 million over 10 years.
The House bill also would repeal Section 199.
There are some sharp differences between the House and Senate bills, particularly on the pass-through provisions.
Under current law, pass through income is taxed at individual tax rates, which range from 10 percent to 39.6 percent. The House bill would create a new top rate of 25 percent for the 30 percent of pass-through income that would be considered return on capital.
The Senate bill would leave pass-through income subject to individual rates but instead create the new deduction, which was sweetened to 23 percent.
The value of the deduction would be reduced for larger farms in high-income years because of a wage-expense limitation for income exceeding $500,000, according to analysts with the American Farm Bureau Federation.
"Farmers depend on higher income years to help them through low or negative income years. Losing deductions based on this natural, cyclical income change would add additional, unnecessary complication to commercial farmers business planning," said Farm Bureau economist Veronica Nigh.
Sen. Johnson argued that the higher deduction was needed to ensure that small businesses are on a level footing with C corporations, which would see their tax rate drop from 35 percent to 20 percent under both the House and Senate bills. Raising the deduction from 17.4 percent to 23 percent cost about $114 billion in lost revenue over 10 years, according to the Joint Committee on Taxation.
“There’s so many advantages to C corps, access to capital markets, that pass-throughs don’t have,” Johnson said.
Another difference between the House and Senate bills: Like the Senate bill, the House version would double the estate tax exemption, to $5.5 million per individual, but the House bill would then repeal the estate tax after 2023. The Senate bill leaves the tax in place.
Doubling the exemption “should take care of the vast number of American families,” said Sen. Mike Rounds, R-S.D.
The Senate bill would also leave in place tax credits for wind and solar power. The House bill would repeal them. The Senate bill also includes a provision, strongly opposed by environmentalists, to open the Arctic National Wildlife Refuge to oil drilling.
The overall Senate bill would increase the deficit by about $1 trillion over 10 years even after taking into account the economic growth it would spur, according to the nonpartisan Joint Committee on Taxation. Without the economic growth projection, the deficit would rise by nearly $1.5 trillion, according to JCT's analysis.
Democrats cited the deficit increase and the potential benefit of the tax cuts to businesses and high-income individuals to argue that the bill was skewed against the middle-class.