September 14, 2017

Tax Reform Is About to Get Serious

Washington is abuzz with the prospect of passing comprehensive tax reform legislation later this year. The last time Congress passed a major overhaul of the tax code was in 1986, and while the political climate in D.C. will make enacting tax reform a difficult task, Republican leaders in the House and Senate, along with President Trump and his administration are committed to making this their top priority the remainder of 2017.

Just about five years ago, Western Growers created a member working group to examine the key tax issues facing the produce sector and to develop priority areas for engagement. Any attempts to cut corporate and individual tax rates in a meaningful way will also come with the loss of certain deductions, and one of the key messages we have delivered to policy makers is that if enough deductions are changed or removed, lowering the marginal rates will not necessarily lower the effective rates farmers pay.

Western Growers has engaged on a handful of key priorities including: the importance of cash accounting, maintaining the ability to utilize like-kind (1031) exchanges, the importance of interest deductibility against operating revenue, maintaining stepped-up basis and eliminating the estate tax, and expanding the ability to accelerate depreciation of new capital purchases. Of course, lowering individual, pass through entity, and corporate rates is also a priority, but must be weighed in context of other tax planning tools that may be lost.

As the tax reform debate has unfolded over the past few years, some of these Western Growers priorities have been targeted. One of the more significant concerns in recent tax proposals was the possibility that interest deductibility would be eliminated.

In addition to the priorities Western Growers has worked to develop, we are also an active participant in the agriculture tax reform coalition. We have worked together on letters that highlight tax reform priorities facing agriculture, we have met with key leaders in the House and Senate, and in July, I, along with a handful of other agriculture tax experts, had the opportunity to sit down with Treasury Secretary Steven Mnuchin to explain the unique nature of farming and how tax reform efforts need to recognize this. Market cycles, weather events, capital intensity, and a host of other factors make farming different than other businesses of similar scope and revenue.

We expect that when Congress returns in September, it will have to focus on addressing several must-past items such as raising the debt ceiling and funding the government past the end of the fiscal year on September 30. We expect tax reform efforts to ensue in the fall as well, with committee action starting with Ways and Means in the House in October and possible floor action sometime in November. The Senate Finance Committee could also start its work around the same time, or wait until a product is moving in the House.

With recent statements from key leaders, we do not expect the House Republican blueprint and its border adjustability tax, full and immediate expensing of new equipment purchases, or elimination of interest deductibility to be the starting point for action. Much attention was given earlier this year to the possible impact of a border adjustment tax, including work by Western Growers to understand the impact it might have on our members. Such a change would have been a significant shift in our taxation system, shifting to a more consumption-oriented tax, where products would be taxed where they are consumed, not where they are produced. It was uncertain how such a plan would have played out in the real world with the possible strengthening of the dollar offsetting some export gains, the uncertainty of World Trade Organization compliance and possible trade retaliation. Over the summer, leaders in the Congress and the Trump Administration indicated that border adjustment tax would no longer be under consideration as a component of tax reform.

Instead, it is likely that we will see something more in line with efforts that were launched about three years ago by the House Ways and Means Committee. While border adjustment is off the table, most other deductions—like deductions for state and local taxes—will be up for debate, and we will need to continue making the case for the importance of certain provisions for agriculture.

Whatever the proposals look like as the tax reform debate heats up in Congress, Western Growers will continue to be on the front lines, helping shape the policy in a way that our farmers have the tools to continue being the most productive in the world. If you have any questions or issues that you think we should be aware of, please do not hesitate to reach out.