A fix for a fix? Hoeven studies co-op tax benefit impact
WASHINGTON, D.C. — U.S. Sen. John Hoeven, R-N.D., is weighing whether and how to correct problems that have come up in the wake of a fix designed to restore a tax break for farmer co-op members.
The first fix was a provision for the tax relief measure and was designed for beet cooperative shareholders and others. But some private grain elevators say the fix went too far and could be a fatal blow to their businesses if not repaired within weeks.
Rick Tronson, an owner of Tronson Grain LCC at Doyon, N.D., says farmers are already telling him they won't deliver grain on advice from their accountants. One competitor co-op is already promoting the provision as an advantage.
Ryan Bernstein, Hoeven's chief of staff in Washington, D.C., tells Agweek that the senator met on Jan. 8 in Washington with "stakeholders," including non-cooperative elevators and companies including Cargill and CHS Inc., to discuss the issue. Bernstein says Hoeven will push for a technical corrections measure, if necessary. Some say that would need 60 votes in the Senate. "There's almost always a technical correction bill," he said, adding there are options on what legislative vehicle it could be attached to.
"We'll work for that. This isn't done," he said. He said it's important to understand that the tax reform offers benefits for everyone, regardless of whether corrections are needed.
The IRS tax code for several years has included Section 199 (also called DEPAP, or Domestic Production Activities Deduction), which allowed co-ops to take a deduction at the co-op level, but gave them the ability to pass whatever they didn't use to members for deductions. The co-ops were limited to 9 percent of gross revenue or 50 percent of wages paid.
Farmers and co-ops were surprised in November when the provision wasn't retained in the House tax reform package being promoted by Republicans and President Donald Trump. Companies like American Crystal Sugar Co. of Moorhead, Minn., and Minn-Dak Farmers Cooperative of Wahpeton, N.D., said the change could cost the average-sized beet grower $15,000.
Hoeven — a staunch ally of the sugar industry — and 10 Senate colleagues tried in vain to push a provision in the Senate version that would "make sure there was no tax increase on co-ops and the farmers who sell to co-ops." While Hoeven's amendment failed, another by Sen. John Thune, R-S.D., addressed the issue for the cooperative level, but "didn't do quite enough for members of co-ops that were farmers," Bernstein said.
"Upon looking at it further, both House and Senate members thought we needed to take the next step and do something that helped farmers in addition," Bernstein said.
They called it "199A." The ink was still wet while Hoeven was hearing from elevator operators about their "individual circumstances," Bernstein said.
"Basically I come back from Christmas vacation and a friend (another private elevator owner) called me," Tronson said. "He said, 'Did you see the new tax law and what it's doing to us?' We had some farmers stop in and say, 'I can't haul you any grain. If I do, I'll have to pay tax.' This whole thing got slanted in favor of the co-op."
Tronson doesn't think Hoeven knew it would have that wrong effect. He wonders if co-op lobbyists knew about it. The Osnabrock Farmers Elevator on Jan. 4 sent out a customer e-mail to alert them to the "new provision allowed on payments on COOPS," pertaining to grain sales and dividends received. The note indicated the provision is in place until 2025.
Tronson says he can't wait a month for a fix. He says now is a busy time for farmers hauling and shipping grain.
"They have to make a change or make a statement in the next two weeks," Tronson says. "They've got to make a statement that this isn't what we intended; we're going to make a change. Can't they just take the politics out of this thing?"
Stuart Letcher, executive vice president of the North Dakota Grain Dealers Association, estimated that about 65 percent of the state's grain elevators are co-ops. He couldn't immediately estimate volume percentages for the two categories. He says the NDGDA board of directors will likely decide a policy recommendation before their state annual meeting next week in Fargo.
Tronson predicts that if the co-op advantage isn't corrected, grain would migrate to the co-ops, who won't have the capacity to handle all of it.
Some agriculture stakeholders have raised questions about potential market effects on cooperatives and independent grain-related businesses.The U.S. Department of Agriculture’s Under Secretary for Marketing and Regulatory Programs Greg Ibach issued a statement regarding efforts to address concerns with recent changes to Section 199A.
“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. USDA stands ready to assist in any way necessary,” he said.
Chuck Conner, president and CEO of the National Council of Farmer Cooperatives and Randy Gordon, president and CEO of the National Grain and Feed Association, also issued a statement on the Section 199A Tax Provisions, saying they are aware of the potential effects of the new section 199A.
“We are working intensively with stakeholders, including cooperatives, non-cooperative-owned agribusinesses and Senate offices, including Senators Hoeven, Thune and Roberts. The goal of these discussions is to arrive at an equitable solution that preserves the benefits that cooperatives and their farmer patrons previously enjoyed under Section 199 of the tax code, while addressing any unforeseen impacts on producers’ marketing decisions. NCFC, NGFA and our stakeholders are committed to reaching a solution in a thoughtful and expeditious manner, and to working with Congress to address this issue promptly,” their statement said.