Key issues to watch in tax reform debate
Last week, GOP lawmakers moved a package aimed at updating and reforming the U.S. tax code through the U.S. House of Representatives, 227-205, with no Democratic support.
House Agriculture Chairman Mike Conaway, R-Texas, says farmers and ranchers have a lot to gain if tax reform makes its way to President Trump's desk for signature, including eventual repeal of the estate tax, an expanded expensing allowance and lower tax rates.
Tax reform "will help the economy, it will help our producers, and I think this is a great step in the right direction," he said.
"These comprehensive reforms will enable nine out of 10 taxpayers to file their taxes on a form the size of a postcard and level the playing field for U.S. businesses to compete in the global economy, which means more jobs and higher wages," noted Rep. Adrian Smith, R-Neb. "Individuals and families will be able to keep more of their own money with across-the-board cuts and simplified compliance."
Now the hard part
But now comes an even tougher challenge: moving legislation through the Senate, where Republicans have struggled to pass any major type of reform or repeal this year.
Republicans control only 52 of the 100 Senate seats and no Democrats are expected to vote for the tax package — even though the White House has been reaching out to Democrats like North Dakota's Sen. Heidi Heitkamp to see if they can find common ground.
But without Democratic support, tax reform efforts will die if Republicans can't hold their own slim majority together for final Senate passage.
The version approved by the Senate Finance Committee last week — which contains quite a few differences from the House version — has already drawn opposition from Sen. Ron Johnson, R- Wisc., an accountant and the founder of a family-owned manufacturing business.
His primary concern is how people who operate businesses as "pass-through entities"— those that pass their business income on to their individual income tax return — should be taxed under this new plan. These "pass-through" businesses pay their taxes through the individual income tax code rather than through the corporate code.
According to the Tax Foundation, these sole proprietorships, S corporations and partnerships make up the vast majority of businesses and more than 60 percent of net business income in America. In addition, pass-through businesses account for more than half of the private sector workforce and 37 percent of total private sector payroll.
If adopted, the Senate's Tax Cuts and Jobs Act would lower the top marginal individual income tax rate to 38.5 percent, and many pass-through businesses would be able to take advantage of a 17.4 percent tax deduction.
The Senate plan, like the House plan, proposes to cut the corporate rate from 35 percent to 20 percent. The tax cuts for individuals and pass-throughs expire in 2022, while the corporate tax cuts would be permanent.
Johnson's primary concern: Many family-owned pass-through businesses will end up paying a far higher rate than corporations.
However, he's also said publicly that he doesn't want to block to bill, so look for potential changes in how pass-through entities are treated when the debate resumes after the Thanksgiving holiday.
While Johnson is the only GOP senator to publicly come out against the bill as we went to press, Sen. Jeff Flake, R-Ariz., expressed concerns about the deficits that could mount as a result of the tax package. It's a familiar criticism being issued by several Democrats.
Republicans "are borrowing $2.3 trillion over 10 years for the purpose of giving a tax cut to the very top of our economic system," said the top Democrat on the House Ways and Means Committee, Richard Neal, referring to the amount that the federal budget deficit would be increased when interest on the debt is included.
Another concern has been raised by the GOP's Sen. Susan Collins of Maine. She's worried about Senate plans to repeal the insurance coverage mandate in the Affordable Care Act as part of the tax plan. But the White House has already signaled that it's OK with taking it out if the language is an impediment to passage.
Farm leaders aren't all satisfied with the tax provisions.
The Senate bill also would kill Section 199 deduction, but the bill would ensure that a new deduction for pass-through members would replace the lost income to co-op members, according to Senate Agriculture Chairman Pat Roberts, a senior member of the Finance Committee.
The National Council of Farmer Cooperatives said the change wouldn't fully replace the Section 199 deduction and was seeking additional changes.
The top Democrat on the House Agriculture Committee, Collin Peterson of Minnesota, criticized a number of provisions, including the bill's pass-through rules, which he said would "create a more complicated system for pass through entities that I believe will be abused and spawn tax shelter businesses."
But here are some of the more popular provisions in farm country:
• The House bill would temporarily increase the Section 179 expensing allowance for both new and used equipment to $5 million with a phase out at $20 million. Those amounts would be indexed for inflation, but the provision would expire at the end of 2022. The Senate bill would permanently increase the allowance to $1 million, with phase out at $2 million, but would continue to limit the provision to new equipment.
• The House bill would allow farms and business with less than $25 million in annual sales to continue to deduct interest expenses. The Senate bill has a lower threshold, $15 million, but would provide an exemption to livestock operations that agree to a longer depreciation schedule.
• The House bill increases the estate tax exemption to $11 million for individuals and $22 million for couples, with full repeal after six years. The Senate version doubles the estate tax exemption, currently at $5.5 million for an individual and $11 million per couple, but doesn't repeal the tax.
• Both bills would restrict the Section 1031 like-kind exchanges to real property. They've also been used in the past for equipment.
Read a detailed comparison of the bills here.