Taxes, farm bill, budget cuts make this Congress a spruce goose
The fate of farm policy, tax policy, federal program cuts and trade hang in the balance over the next month as Congress tries to find some common ground on a myriad of expensive challenges.
As Congress returns to work after an election that maintained the status quo, lawmakers have to decide just how far they want to push tax policy and budget cuts. If nothing is done, the outcome would immediately cut the federal government’s budget deficit by more than half. All the major tax cuts would expire, adding $550 billion to federal coffers. The sequestration cuts negotiated last year would also kick in, legitimately reducing spending by $91 billion in 2013.
Cutting the deficit in half sounds good, but it would cause an immediate economic freefall. The country would be right back where it was in 2009 with a recession, and unemployment would jump back over 9 percent, according to the Congressional Budget Office (CBO), which spelled out the “fiscal cliff” scenario in August.
CBO warned against the rationale of letting all of the Bush-era tax cuts expire. Yet, CBO also cautioned about the idea of extending all of the tax cuts. To do so ensures a continuation of $1 trillion budget deficits for the immediate future. The best option is some moderate middle ground, but that requires some agreement between President Barack Obama and Congress.
Then there are as many as 60 tax provisions affecting businesses and investors, such as capital gains, bonus depreciation on equipment sales, and the corporate tax rates.
“You have got probably every trade association in town—you pick the business sector—coming to this wanting to attach their provision to such and such bill in order to get it done in the lame duck,” said Bob Young, chief economist for the American Farm Bureau Federation (Farm Bureau), in an interview last month with DTN.
Almost proving Young’s point, the Governors’ Wind Energy Coalition planned a presser advocating for the extension of the wind-energy production tax credit.
The governors and windenergy backers say more than 37,000 jobs and $10 billion in private investment are at stake if Congress fails to extend the tax credit. “This credit is crucial to seeing the wind industry succeed and mature,” said Sen. Charles Grassley, R-IA, on a teleconference call with reporters.
While Congress is tinkering with the Tax Code, lawmakers might as well adopt some additions. Farm Bureau, for instance, wants Congress to reduce the capital-gains tax for farmers who sell farmland, as well as simply eliminating capital gains outright sometime in the future. Farm Bureau said the current capital gains tax of 15 percent already makes farmers reluctant to sell their operations.
The rate is set to go to 20 percent in January.
Farm bill on deck
The House Agriculture Committee’s farm bill has been waiting for floor action and a vote since July. But House leaders punted in early fall despite an outcry from the farm community. House Speaker John Boehner, R-OH, and Majority Leader Eric Cantor, R- VA, have indicated some action will be taken on the bill, but not exactly what that might be.
Grassley said if he were a betting man, he would put money down on a one-year extension. Conservatives in his party simply don’t want to pass a $1 trillion piece of legislation.
House Ag Ranking Member Collin Peterson, D-MN, told DTN last week that Congress should move ahead on the farm bill. Quick action—bringing up the bill before Thanksgiving—would give the House and Senate time to resolve their differences. Yet Ag Committee Chairman Frank Lucas, R-OK, has thus far remained quiet on the farm bill and its chances in the lame duck.
While high commodity prices generally diffuse interest in the farm bill, the legislation makes major shifts in the farm safety net. Both the House and Senate versions eliminate direct payments and the much-maligned Average Crop Revenue Election program. In their stead would be smaller programs that would only kick in if a farmer shows a revenue loss. To appease southern producers, the House bill recreates a target-price program that analysis shows would be more likely to pay out.
Regardless, farmers of most commodities would rely more heavily on crop insurance under either the House or Senate versions.
Roger Johnson, president of the National Farmers Union, said he has doubts about Congress getting a farm bill done in the lame duck. Tax policy and averting cuts in the Defense Department through the “sequestration” will dominate everyone’s time.
“It’s easy to get lost in that big an ocean when you are talking about rewriting tax code,” Johnson said. “That’s going to be high-stakes situation that is going to dominate the lame duck.”
Agriculture Secretary Tom Vilsack had suggested before the election that farm programs and funds for rural communities could be at risk for steeper cuts as lawmakers look for ways to offset tax breaks or avoid cuts in defense.
“You are talking about a significant reduction in rural America and that’s what’s at stake here,” Vilsack said in September.
Nutrition advocates already are staring at anywhere from $16 billion in cuts over 10 years to programs, on up to a possible $134 billion and possibly turning the food-stamp program over to states to run.
The House bill, projected to cost about $957 billion over 10 years, reduces projected spending by $35 billion over a decade from the status quo, meaning if all programs continued as is, without the cuts. Out of that $35 billion, about $23 billion comes from commodity programs, which is somewhat partially offset by $9 billion more in spending from crop insurance.
The House could vote early on the bill, push for more cuts to certain programs or extend the 2008 legislation and demand a tighter, less expensive bill early next year.
“It’s certainly not a done deal that it gets done in the lame-duck session,” Johnson said. “It could just as easily get kicked down the road and into next year. We could be in the same spot a year from now.”
Yet, no matter the elevation of the cliff or prospect of a freefall, never underestimate the ability of Congress to delay everything.
“If recent history is a guide, we shouldn’t overlook the possibility that what they will do is a three- or four- or six-month deal that just puts everything on hold for the new Congress to come up with something,” Johnson said.
Death tax debate
Another tax change on the must-do list that sparks passion among agricultural groups is the estate tax. Estates now have a $5 million exemption for individuals ($10 million for married couples) and a 35 percent rate. Without action, the tax goes back to a $1 million exemption for individuals and a 55 percent rate. President Obama has proposed a middle ground of $3.5 million with a 45 percent rate, the same level as 2009. Many farmers want to eliminate the tax altogether, even if that means pampered children of billionaires collect their inheritances tax-free. One thing is clear— going back to $1 million is a non-starter, especially given the rise of land values in recent years.
“Estate taxes have always been very high on our list and I think the challenges of going back to a $1 million exemption and 55 percent rate, you would end up in a substantial increase in the number of operations that would be caught, obviously,” Young said. “There would be lots of reasons you don’t want to do that.” — Chris Clayton, DTN