Congress needs to fix the tax plan’s ‘grain glitch’ now

When Congress passes any major piece of legislation, it’s not uncommon that some specific — and perhaps not thoroughly considered — language deep inside the bill will lead to unintended consequences. 

The recently passed Tax Cuts and Jobs Act is a massive piece of legislation that introduced significant changes to individual and entity-level tax rates and deductions. While many in agriculture have championed those changes, serious concerns have arisen over the unintended consequences stemming from a relatively obscure provision in the bill that will lead to a total disruption in the market for agricultural products.

{mosads}The authors of the tax law wisely recognized this unintentional byproduct after the bill was passed and appear to be willing to fix the so-called “grain glitch.’” They should — and they need to hurry.

The provision is the result of a last-minute attempt to keep in place an existing tax break for farmer-owned cooperatives. Instead, Congress created a loophole that threatens the supply chain all sorts of products, from grains to livestock. Sadly, for many independent operators, those changes will have the unintended consequence of reducing competition and promoting even more consolidation in the agriculture industry.

Under the current law, farmers who sell crops to cooperatives can deduct 20 percent of total sales. That means a tax law that is supposed to promote competition and level the playing field is actually picking winners and losers in one of America’s key industries. It leaves thousands of independent operators out in the cold by creating a massive incentive for farmers to sell to their competitors.

How big is that incentive? Until the provision is changed, the current law will allow some farmers to avoid paying taxes entirely if they sell exclusively to cooperatives. Farmers have high operating costs, which means their total profit from the sale of a product could easily be 20 percent or less. But since the allowable deduction is based on total sales, they would be able to write off the entirety of their profits on the sale. A farmer who sells to an independent operator would only be able to deduct 20 percent of profits and pay taxes on the rest.

It’s not hard to see how this would distort the market and destroy competition — selling to anyone other than a cooperative comes with a significant tax penalty. Without a fix, the consequences could spread throughout the agriculture industry, all the way to the biofuel sector. Beyond agriculture, the faulty provision has implications in numerous other industries.

This fiasco in the making appears to be an honest mistake in an effort to preserve a specific tax deduction that existed under previous law. That law allowed farmer cooperatives, among other businesses, to make deductions for specific production activities.  

Lawmakers swung and missed when they inserted last-minute language into the new law that attempted to keep that specific provision in place and instead created a tax system that will end up driving independent operators out of business. They ended up creating a special carve-out deduction in a tax bill that was supposed to eliminate deductions and make the system fair and easy to follow. In that sense, the “grain glitch” is a problem on several levels.

This glitch is bad news for small and large businesses alike and needs to be addressed with urgency. There’s no time to kick the can down the road because farmers, independent operators, and cooperatives all need to know the tax implications when they agree upon this year’s grain contracts. This is exactly the kind of uncertainty that should be avoided as farmers make planting decisions in the upcoming weeks. 

Tax reform should work for everyone. That includes rural Americans and independent operators that compete against farm cooperatives. But unless Congress acts fast to fix the “grain glitch” and restores a level playing field, the new tax law will have the opposite effect on the agriculture industry. Lawmakers should address this problem before it causes real damage.

Joe Glauber is a senior research fellow at the International Food Policy Research Institute and former chief economist at USDA.