Witnesses decline to take position on border tax in rural America, defend current ag tax breaks
April 6, 2017
Witnesses at a House Agriculture Committee hearing on opportunities for tax reform in rural America declined today to take a position on the proposed border adjustability tax while saying that a range of current farm and ranch tax breaks should remain in place.
Patricia Wolff, senior director for congressional relations at the American Farm Bureau Federation, said that the Farm Bureau has not taken a position on the border adjustability tax because it has positives and negatives and it has not been put on paper yet.
"Until we know what the proposal is, it is hard to say the impact it will have on our industry. We need to see how it is structured, how it is written before taking a position," Wolff said under questioning.
Wolff noted that the border adjustability tax would tax a product when it is consumed rather than when it is produced. That would mean products being exported would not be taxed, but imports – including fertilizer and fuel – would be taxed.
Doug Claussen, a certified public accountant with KCoe Isom, LLP, a firm that serves farmers in the Great Plains and California, said that the tax benefit of not taxing the exported product would go directly to the exporter, and it would be hard for people in agriculture to determine the benefit unless they farm near the border and export directly. A producer in Kansas whose wheat goes to the elevator and from there to the Gulf of Mexico would have a hard time seeing the benefit, Claussen told Rep. Roger Marshall, R-Kan.
Commodities are mixed with the production of others, and it is hard to know whose production is exported, but all farmers have to buy the imported inputs that would be subject to additional taxation, Claussen noted.
Wolff said that farmers would benefit from lower tax rates and the Farm Bureau favors eliminating the estate tax, which it calls the death tax, but that farmers want to keep the stepped-up basis under which property is reappraised at the time of death so that valuation rather than the original purchase price can be used in calculating capital gains taxes if property is sold.
Claussen also noted that, at current levels, very few farmers and ranchers have to pay estate taxes, but that the stepped-up basis is used by all farmers and ranchers.
If repeal of the estate tax means "removing the stepped-up basis, we have to give some consideration to its effect on American agriculture," he said.
Claussen also noted that the House Ways and Means Committee's goal of simplifying and streamlining the tax code means that the committee's blueprint contains provisions that could be onerous for farming, such as limiting the deduction of interest payments except as an offset to interest income.
Claussen also noted that the blueprint does not propose the elimination of cash accounting, which means that tax obligations occur only after cash has been received, rather than accrual accounting, which results in tax obligations occurring when the right to payment occurs. But Claussen said the committee has discussed a shift from cash to accrual accounting, which would result in increased tax revenues, as recently as 2013.
Cash accounting, the deductibility of interest expenses, and provisions known as loss carryback and carryforward that allow farmers to address the volatility in prices and expenses are important for farmers, he said.
Christopher Hesse, a certified public accountant with CliftonLarsonAllen LLP in Minneapolis, included a long list of current farm tax breaks that farmers rarely discuss in public and that could be subject to discussion in tax reform.
One of those provisions is like-kind exchanges that allow people to sell and buy property while deferring taxes. But House Agriculture Committee ranking member Collin Peterson, D-Minn., said that because people can sell one type of property, such as an apartment building, and buy farmland, the like-kind exchanges have brought more buyers into the farm property market and made it more expensive for beginning farmers to buy land.
From the exchanges between committee members and witnesses over this issue, it was clear that the practice has a different impact for retiring farmers and beginning farmers. One witness said that a farmer who is retiring may wish to sell farmland and buy an apartment house using the exchange.
Guido van der Hoeven, an extension specialist and senior lecturer in the Department of Agricultural and Resource Economics at North Carolina State University, said that "many exiting farm operators want to see the business that they have worked to create be kept together and passed to a new generation of farm operators. Current law impacts this transfer and often creates impediments to both parties, and therefore these transfers do not occur. Tax reform can facilitate transfers prior to death of the exiting farmer."
At the conclusion of the hearing, House Agriculture Committee Chairman Michael Conaway, R-Texas, told the witnesses that they had "had clearly demonstrated why tax reform is hard." Conaway, a certified public accountant, asked his committee "to keep your powder dry" until the Ways and Means proposal is complete.
Wanting lower tax rates, he said, is like "going to heaven. Everyone wants to go there but no one wants to die to get there."