Tax Reform Bill Section 199A Needs Fixing

by Natalia Castro: Within the last month, more than 160 million Americans opened their bank accounts to find that the recently passed Republican tax plan provided them with a more substantial paycheck and more economic mobility.

But one area of the tax code appears to have had unintentional consequence of picking winners and losers in agriculture.

Despite the overwhelming benefits for families and small businesses a provision within the tax plan could have far-reaching negative consequences on agricultural products sold to private buyers. This provision, seemingly entered as a last-minute mistake, must be rectified during the March funding debate in order to provide equal competition to the market.

Section 199A of the tax reform law provides additional tax incentives to farmers who sell agricultural products to co-ops rather than independent private buyers. When selling to co-ops, farmers can now deduct up to 20 percent of their total sales made; however, when selling to privately held or investor-owned companies, the farms can now only deduct 20 percent of income.

Jacob Bunge and Richard Rubin of the Wall Street Journal put this into context, “Consider a simplified example of a wheat farmer with $500,000 in annual grain sales and $80,000 in profit. A farmer selling grain to a cooperative could deduct 20 percent of sales, wiping out the entire income-tax liability. By contrast, if the farmer sells grain to an independent grain operator, the farmer’s deduction would be limited to 20 percent of the profit, or $16,000, leaving that farmer with up to $64,000 in taxable income.”

This provision removes natural competition from the market by financially coercing farmers to sell to co-ops rather than private entities.

David Fiebiger, general manager of the private grain elevator on the western edge of Aberdeen, South Dakota, told Ag News in January, “Unintended consequences of Section 199A give the farmer incentive to sell to a co-op versus a nonco-op… Over the past couple weeks, a lot of the people that sit at the table have realized the unintended consequences and have been in agreement that something needs to happen to change that to get the playing field back to even.”

Several news agencies and politicians have begun calling this the “grain glitch” for its far-reaching negative consequences on the US grain industry. Scott Greenburg of the Tax Foundation has noted that this glitch could create a hole in the tax system, allowing some household and business to shield their income entirely from taxes through the use of co-ops.

The worst part is that this provision has no reason to be included in the tax reform legislation. After revisions to the bill did away with deductions on domestic grain production that was available to both manufacturers and farm co-ops, Senate Agriculture Committee member John Thune (R-S.D.) added Section 199A to offset the removed deductions.

Negative feedback from farmers has caused Senator Thune and other agriculture state Senators, such as Senator John Hoeven (R-N.D.), to rethink the provision. Ryan Wrasse, a spokesman for Thune, told the aforementioned Ag News that the senator is working on tweaking the law to better even the playing field.

“Ultimately, Sen. Thune believes that producers should make decisions about where and how to sell their products without the tax code unfairly tipping the scales in favor of marketing to one type of business entity or another,” Wrasse wrote in an email.

Additionally, 86 members of the House of Representatives sent a letter to Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell urging Congress to address the provision. The letter reads, “Unfortunately, Section 199A goes too far and has created a tax advantage for producers who sell to cooperatives instead of private and independent businesses… We’re concerned this provision unfairly distorts the marketplace with the potential to reduce competition, directly harm small and independent businesses, and increase consolidation in the agriculture industry.”

With government funding set to expire on March 23, the next government funding bill could be a vital opportunity to solve this mistake.

As Americans for Limited Government President Rick Manning noted in a March 2018 press release, “Congress needs to take action immediately in the next funding bill to restore fair competition between farm co-ops and private and independent businesses… Government should not be picking winners and losers like this in the tax code.”

The tax cuts are and will continue to be a win for most Americans, but for it to truly allow for fair competition in the agricultural sector and to stop distorting markets, Section 199A must be altered. With funding discussions coming this month, Congressional members must listen to the numerous House representatives and members of the agricultural community urging change and rectify this harmful provision.
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Natalia Castro is a contributing editor at Americans for Limited Government.

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