The Agricultural Retailers Association (ARA) and more than 180 other agricultural organizations and regional cooperatives sent a letter on Nov. 13 to House Speaker Paul Ryan (R-Wisc.) and House Minority Leader Nancy Pelosi (D-Calif.) opposing the repeal of the Domestic Production Activities Deduction, which is eliminated in the House’s tax reform legislation.
H.R. 1, the Tax Cuts and Jobs Act, was passed by the House on Nov. 16. The 440-page legislation reduces the corporate tax rate from 35 percent to 20 percent, reduces the number of tax brackets from seven to four, and doubles the standard deduction, while eliminating many other deductions and credits.
Among those being eliminated is the Domestic Product Activities Deduction, also known as Section 199, which was passed as part of the American Jobs Creation Act of 2004. Section 199 allows cooperatives to deduct the proceeds earned from products that are manufactured, produced, grown, or extracted, and in turn pass those deductions back to their farmer members.
The Nov. 13 letter to Ryan and Pelosi states that Section 199 is critical for the country’s cooperative system and should be preserved to “incentivize domestic production and job creation.” The letter claims that farmer cooperatives pass 95 percent of the deduction benefit, or nearly $2 billion nationally, directly back to farmers, who can then deduct their share of the Section 199 benefit from their taxes.
“In its current form, H.R. 1 repeals Section 199 with the assumption that cooperatives and their members would benefit from the proposed reduced corporate and individual tax rates,” the letter states. “However, the math does not add up for the farm sector. Farmer-owned cooperatives are not taxed like traditional corporations, so they cannot benefit from lower corporate rates like most other industries. Even more troubling is that for many farmers, changes to the individual tax code would not be enough to offset the loss of the Section 199 agriculture deductions.”
The letter claims that ending the Section 199 deduction for agriculture would result in many individual farmers paying more in taxes. “Across virtually every commodity, we are facing the fourth consecutive year of stagnant prices,” the letter states. “We encourage you to preserve Section 199 for agriculture as part of any tax reform efforts. As a matter of basic fairness, we need you to consider tax reform that will lower rates on businesses broadly but does not raise taxes on farmers.”
The Senate Finance Committee is now expected to vote its version of the tax reform bill out of committee on Nov. 17, with a full Senate vote expected after Thanksgiving.