Negotiations continue on a tax break for cooperatives that spilled out of December’s big tax bill and generated competitive concerns from the private sector. But thus far, a final fix remains elusive.
“Members are actively working with the Senate, the Administration and stakeholders on a solution that is carefully and thoughtfully vetted. The urgent objective for all involved is ensuring that America’s farmers and ranchers reap the benefits of pro-growth tax reform and that balanced competition in the marketplace is restored," said Lauren Blair Aronson, press secretary for the Committee on Ways and Means.
The original intent of the tax code change was to replicate the tax treatment previously available to co-op farmer-members so that they would not be put at a competitive disadvantage. But the final language in the bill inadvertently rechanneled billions of dollars within both the U.S. agricultural marketplace and the collection of tax revenues in the years ahead.
At issue is the 20-percent, Section 199A deduction that the bill created for small businesses to keep them on a level playing field, considering that the tax bill slashed the tax rate for corporations by 40 percent. However, the bill also gives 20 percent write-offs separately to both cooperatives’ own sales (though with a certain dollar ceiling), but also to co-op members’ sales to their cooperatives (with no dollar limit).
Rep. Collin Peterson (D-Minn.), a certified public accountant who is the top Democrat on the House Agriculture Committee, said the provisions mean most farmers who sell their products to co-ops will never owe federal income tax, assuming the provision remains in place
Because of that, the provision implies such a great potential for financial disparity between agricultural cooperatives and proprietary companies that some of the latter are preparing to restructure all or parts of their operations to co-ops to access the new write-off. The chief executive for Omaha-based Green Plains, Inc., a diversified commodity processing company, recently announced, for example, that his firm is creating a grain co-op in Kansas
Thus, it’s no surprise that several lawmakers have been negotiating with private agricultural firms, cooperatives and other lawmakers to dial back the Section 199A language. Randy Gordon, the CEO of the National Grain and Feed Association, has been hosting meetings in an attempt to find a solution that can bring all sides to agreement. His association represents both farmer-owned cooperative and independent/privately organized companies.
“I’m very optimistic that an equitable solution can be arrived at in the near-term that replicates the Section 199 tax treatment accorded to cooperatives and their farmer-patrons prior to enactment of Section 199A, while restoring the competitive landscape of the marketplace and eliminating the unintended consequences of that tax code provision influencing producers’ marketing decisions,” Gordon told Agri-Pulse.
At the center of the fight is Sen. John Hoeven, R-N.D., who, along with Sen. John Thune, R-S.D., and others, supported an amendment to carry over a long-time provision in the current law that provided a 9 percent deduction against cooperative sales. That 9 percent deduction was integrated within the cooperative tax structure so the co-op could pass to its members any portion of the write off that the co-op did not itself expend.
Ryan Bernstein, Hoeven’s chief of staff, says Hoeven tried to amend the Senate bill to ensure that farmer members would reap some of the pass-through deduction, rather than just a write off for the cooperative. But he says the conference committee created a problem by separating the cooperative’s write off from that of its members, leaving no dollar limit on the member’s 20 percent deduction.
“Now we’re trying to fix what came out of the conference committee and get back to the amendment that we offered back in December,” Bernstein said. “That’s the concept that we’re working on,” and he says lawmakers and principals in the issue “are rallying around” a return to, essentially, the previous law.
“I wouldn’t say it’s an easy path to go down,” Justin Darisse, vice president of communications at the National Council of Farmer Cooperatives, said of abandoning the new tax write-off and reverting to 2017 law, “but it may be the easiest path for resolving this issue.”
But he pointed out that “we urged retention of old Section 199 for agriculture” during the drafting of the tax bill last fall, “and we were very, very supportive of Senator Hoeven’s amendment.” At this point, he says, “I think our members are sensitive to the fact that the sponsors . . . are saying this (deduction) is having unintended consequences.”
Kevin Brinkley, president and CEO of the Texas-based Plains Cotton Cooperative Association, told Agri-Pulse that the benefit to co-ops from the deduction was probably more than intended. “We’re dedicated at this point to getting a solution that works for everybody," he said.
A remedy can’t come quickly enough, an industry observer with private dairy companies told Agri-Pulse. “The last thing intended (with Section 199A) . . . was a provision to encourage proprietary companies to convert to co-ops. Even on the co-ops side, the pain would be a lot less if dealt with sooner rather than later,” he said.
On the other hand, reaching back to amend a completed tax bill can prove difficult, especially to reclaim a benefit granted to taxpayers. Plus, any change must compete with other lawmakers’ priority amendments.
Rep. Peterson tried to put the debate in perspective when recently interviewed by Red River Farm Network: "They're trying to browbeat co-ops into giving this (deduction) up because private companies figure they'll lose business. But what they forget about is those private companies got a tax reduction from 35 to 21 percent."
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