Farmers worry about impact of tax-reform bills


Issue Date: December 6, 2017
By Christine Souza

As federal tax-reform bills head to a House-Senate conference committee, California farmers and ranchers say they may not gain as much as they had hoped from the package of tax cuts and other changes to tax law.

California Farm Bureau Federation President Paul Wenger said although many provisions in the House and Senate tax measures would help farmers and ranchers—such as across-the-board income tax reductions for all individuals in the Senate bill and for low- and middle-class individuals in the House bill—many others "cause undue burdens for California farm and ranch families."

"There are small problems such as losing some of the deductions we have used, but there are also big problems that would cause our taxes to go up," said Wenger, who farms almonds and walnuts in Modesto. "It's really disappointing to see California farmers hit so hard by this proposal."

Voting primarily along party lines, the Senate passed the tax-reform package last week. The House passed its version of the bill in mid-November.

Josh Rolph, CFBF federal policy manager, said farmers support the bills' reduced corporate tax rate, increased expensing, accelerated depreciation and the doubled estate tax exemption level. But, he said, "to offset the costs of these tax benefits, the bill would repeal or modify dozens of existing items in the tax law."

"House and Senate Republicans want to streamline the tax code, and under this plan they will reach their objective," Rolph said. "But unfortunately, California farmers and ranchers don't benefit from the same kinds of tax cuts other sectors will receive."

The tax legislation would implement a new tax rate on business income earned by "pass-through" businesses, such as partnerships, S-corporations, LLCs and sole proprietorships. The bills also propose several rules that define and limit the income that is eligible for this lower rate, Rolph said.

Topping the list of provisions that would impact many California agricultural operations is the elimination of state and local tax deductions, referred to as SALT.

"For most of my clients' returns and for my personal return, we're going to pay more, so I have a hard time calling this a tax cut," said Ted Stephens, a tax and investment advisor in Santa Rosa who owns timber property with his family. "Globally, is it a tax cut? Yes. But will it be a benefit for small farmers and most of the clients I work with? I'm not a believer."

San Joaquin County walnut grower Joe Ferrari, who is a certified public accountant, also expressed concern about losing the deduction for state and local taxes, adding that it puts California at a disadvantage compared to other states.

"California tax law does not recognize more than $25,000 in business expensing or bonus depreciation, but the IRS does," Ferrari said. "I'm worried that if SALT is taken away, the large amount of state tax imposed by this nonconformity would not be offset on my federal tax return any longer."

Because of higher equipment costs in California due to state air-quality rules, Ferrari said, "I would be taxed a second time at the federal level, and this would penalize my farm for operating or expanding."

The Senate tax bill would have repealed a provision called IC-DISC that has promoted exports, but was ultimately amended to restore it.

Ferrari said he knows many farmers who benefit from IC-DISC, especially given the importance of agricultural exports in California.

"We want to continue to use the IC-DISC to have the benefit of converting ordinary income into qualified dividend income," he said. 

The bills would also change Section 199 of the Internal Revenue Code, also known as DPAD, which offers tax breaks to businesses that manufacture products domestically, such as California-based agricultural cooperatives and pass-through entities.

Rolph said CFBF opposes the elimination of DPAD in the House-passed bill and its modification in the Senate, noting that the benefits of the provision are passed along to individual farmers and ranchers who belong to cooperatives or pass-through farms.

Ferrari said elimination of DPAD would prevent farmers from deducting a percentage of net income from domestic production activities, and "would cumulatively affect a large part of California's agriculture sector."

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.