The perils of haste in tax reform

by Gordon Jones

The Tax Cuts and Jobs Act of 2017 was needed and timely. Combined with President Trump’s deregulation campaign, it has sparked business confidence, hiring, and wage growth. These were all badly needed after the stagnation of the Obama years.

That said, the passage of a major piece of legislation of this kind is a messy process, and important details get left on the cutting room floor. In the case of the tax reform bill, one of those forgotten details was Section 199A.

Most people have never heard of Section 199A, but it has serious impacts on America’s agriculture sector, in which Utah is vitally interested. Section 199A penalizes growers who do not sell to cooperatives, resulting in preferential treatment that distorts the market in favor of co-ops, which already have a competitive advantage because they do not need to make a profit.

For example, if a Utah grain farmer sells wheat to a private or independent business, instead of to a cooperative, he cannot take advantage of provisions of the tax reform legislation passed late last year. Specifically, selling to a cooperative nets the grower a 20 percent deduction from the gross amount of all sales. But sales to private buyers get the 20 percent deduction on after-cost net profit only.

Paul Neiffer, a CPA who specializes in agricultural taxation, determined that in an extreme example in which a farmer sold $2 million of grain to his local cooperative, his deduction could be as much as $400,000. If, however, the same farmer sold the same $2 million to a small private business, his deduction may be as little as $80,000.

Overall, lost tax savings could total hundreds of thousands of dollars. As a result, farmers are encouraged to sell to co-ops and discouraged from selling to private buyers. This is what the oft-used phrase “government picking winners and losers” looks like in practice – even though in this case, the favoritism appears to have been unintentional, and some in Congress appear ready to address the inequity.

Department of Agriculture Undersecretary Greg Ibach is working to solve the Section 199A problem. As he recently stated, “The aim of the Tax Cuts and Jobs Act was to spur economic growth across the entire American economy, including in the agricultural sector. While the goal was to preserve benefits in Section 199A for cooperatives and their patrons, the unintended consequences of the current language disadvantage the independent operators in the same industry. The federal tax code should not pick winners and losers in the marketplace. We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming.”

Ibach has the right idea here: get the fix done quickly so the market can recover and business owners can get on with their livelihoods.

Utah’s Senator Orrin Hatch was one of the architects of the historic tax reform bill, and we should thank him for his work. Farmers and lawmakers alike are now looking to him to fix the Section 199A glitch as part of the omnibus spending bill expected to pass in the next few days.

Overhauling America’s burdensome tax code and reforming the stifling corporate tax environment is cause for celebration, but the legislation wasn’t perfect. Now Sen. Hatch and others in Congress must step up to clean up the Section 199A mess so that farmers are no longer punished for selling to private and independent businesses instead of cooperatives.

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