By Zack Clark, NFU Director of Government Relations
Over the summer and into the fall, National Farmers Union has, as part of coalitions and on its own, lobbied Congress regarding tax reform. In the early stages, we advocated for what should be included in the bill. When details emerged, we voiced concern and advocated for change. And when bills hit the House and Senate floors, we voiced opposition.
Like other issues of national significance, NFU looks at tax reform in a holistic fashion. Changes to the tax treatment of farms and ranches are central, but considerations as to how families would fare—as well as the larger implications for our entire country—are also considered. Taken together, NFU views the current tax bills as a net negative for most farmers, ranchers, and rural residents.
As the Senate considers passage of the Tax Cut and Jobs Act today, here are some thoughts around the package in its current form. There are several problematic provisions for producers. These include reducing the 5-year carry-back treatment of net operating losses to 2 years; elimination of Sec. 199, which is a critical deduction for cooperatives; and the narrowing of like-kind exchanges to real property. Bonus depreciation also expires in 2023. The Senate bill continues Sec. 179 deprecation for new equipment, increasing the limit from $500,000 to $5 million. There is also a special exemption for agriculture for interest deduction.
The full effects surrounding active (wages) and passive income related to pass-through businesses (LLCs, partnerships, and s-corps) is unknown. Regardless of income treatment, farmers and ranchers are not likely to benefit from these proposed changes. This is because lowering the top tax rate benefits very few. In fact, the nonpartisan Tax Policy Center (TPC) estimates that 86 percent of pass-through entities are already subject to tax rates at 25 percent or lower. In the same vein, it is important to remember 70 percent of pass-through income flows to the top 1 percent of American earners.
On the personal side of the tax equation, NFU is concerned about the removal of the individual healthcare mandate and what that would do for stabilizing healthcare costs going forward. The Congressional Budget Office (CBO) estimates this change would increase premiums by 10%. Repeal of the mortgage interest deduction, the deduction for state and local taxes (still allowed for businesses), and the student interest deduction are also causes for concern. There are equity issues related to tax brackets; the Senate bill not only lowers the top tax rate, but it also greatly increases the amount of income not subject to the top rate. Current law taxes all income over $470,000 at 39.6 percent. Under the Senate plan, only income over $1 million would be subject to the top rate of 38.5 percent. More than a half million dollars will be taxed at the lower rate of 35%.
Given the expedited fashion which the legislation is being considered, we do not have a full picture by even a single source of the bill’s impact. But stringing together reports from the Joint Committee on Taxation (JCT), CBO and TPC, we have an idea of what could come. Enacted in its current form, reforms would add at least $1 trillion, $1.41 trillion, or up to $2 trillion to the national debt over the next ten years. This could trigger deep spending cuts either automatic in nature (PAYGO) or planned (budget) to farm programs of critical importance. We expect that U.S. national debt will climb to at least $21.5 trillion because of this legislation.
Congress has required all CBO scores (these are essentially cost estimates) to factor in economic growth when projecting the cost of proposed legislation. Dynamic scoring, something NFU opposes, is quite controversial because of the extensive uncertainties inherent in the calculations. Just the same, CBO, using this more generous calculation, estimates that this bill will only generate 0.8% economic growth. This is far short of what is being promised. TPC estimates that 87 million families making less than $200,000 a year would see a tax increase by 2027. Those that benefit the most from tax cuts are mainly high-income earners.
So, with tax increases for millions, higher debt, and very modest economic growth, we have been asking: who will benefit from all these changes? Considering that tax changes are permanent for businesses and temporary for individuals and families, we begin to derive an answer. When combined with the current economic dogma that tax cuts for companies unleashes economic growth and thereby raises wages, we should derive even more motivation for the proposed changes (here’s a fun rebuttal by the guy who originally started this mantra). Companies, not families, are the largest beneficiaries of this tax plan. Rather than giving meaningful tax benefits to individuals to further jumpstart the economy, companies, particularly corporations, will receive the vast majority of benefits. The theory goes, companies will have more money, hire more people, wages will increase, and we will all be better off.
Will this really happen? Lucky for us, we have some recent history to pull from and even more recent company surveys to help answer this question. A 2017 Bank of America Merrill Lynch Corporate Risk Management Survey found the following:
- Sixty-five percent of companies say they would use the windfall to buy back debt.
- After paying down debt, the next most likely use at 46 percent of companies would use the money for share repurchases.
- The third use of capital would be for mergers and acquisitions.
But that is all looking forward, and I suppose one could argue that it’s speculative. So let’s look to the past to see if these projections have merit. In 2004, Congress allowed a repatriation holiday on overseas earnings. The money was taxed at 5.25 percent instead of the top rate of 35 percent. $312 billion came back through 843 companies. The benefits skewed to a select few companies in a few select industries. (Surprise – not farming!) The Congressional Research Service estimated that roughly $0.91 of every dollar that came back went to stock buy backs. At the same time, the companies benefiting from this repatriation slashed jobs by the tens of thousands in 2005-2006.
With more changes to come in this debate, provisions could be added to benefit farm businesses and farm families. But the underlying assumptions built into this bill run contrary to NFU Policy. So, make sure to call your member of Congress to voice your opinion, and do remember that if this all goes sideways, hold them accountable in 2018. Perhaps they could call in a favor to get a job with one of the corporations that stand to make billions from “tax reform.”