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Farmer-owned cooperatives in Arkansas like Riceland Foods and Producers Rice Mill got a big boost from the new federal tax law, at the expense of other grain buyers.

Whether Congress intended it or not, a provision in the legislation allows farmers to deduct 20 percent of their gross sales to cooperatives -- enough, in some cases, to wipe out a tax bill entirely. But, if they sell to other companies, the 20 percent deduction is on net income, a considerably smaller tax break.

Observers say the break will drive farmers toward co-ops and away from other companies.

It's an advantage that Riceland and Producers Rice Mill never sought, representatives of the state's two largest farming cooperatives said Friday.

It's also an advantage that likely will be corrected, according to those on both sides of the issue, Arkansas lawmakers in Congress, and the U.S. Department of Agriculture.

"If they can come up with an equitable solution for non co-op members, I don't have any problem with that," said Keith Glover, president and chief executive officer of Producers Rice Mill. Glover said his main concern is that the 2,400 farmers in Arkansas, Missouri, Mississippi and Louisiana who own the 75-year-old cooperative in Stuttgart retain the tax break.

Congress approved the tax bill -- signed into law in December -- in less than two months, including extended breaks for the Thanksgiving and Christmas holidays. Critics described it as a rush job, with little or no debate, that included amendments being handwritten on the margins of the legislation.

Shortly before a final vote, U.S. senators from North and South Dakota inserted a provision to make sure farmers' co-ops would continue to benefit from a "pass-through" tax deduction for certain businesses and corporations. Co-ops, not other private buyers of commodities, were specifically noted in the provision, known as Section 199A in the new tax code. The tax break covers all agriculture commodities and cooperatives.

Glover said the new provision was meant to replace a deduction from the old tax law that was being repealed. "We talked to some of our legislators about somehow preserving that deduction," Glover said. "If that deduction was taken away and not replaced, that in essence would be a tax increase for our farmer members."

The National Council of Farmer Cooperatives estimated the old provision amounted to $2 billion a year in tax breaks for co-ops and their members.

Glover said he wasn't sure in late December that the tax break would be preserved. It wasn't in the version passed by the House in November or in early versions of the Senate bill.

"Then I got word that they did preserve it," he said. "I was a little surprised -- one, that they were able to get it back in, and two, that it was as generous as it turned out to be."

Ask if he believed those who drafted the provision intended to boost the co-ops over other competitors, Glover said, "Gosh, I don't know. We were just trying to preserve that deduction."

Addison Adams, president of England Marketing Service, a grain dealer in Lonoke County, said the provision, if not changed, will push business to co-ops and drive some grain dealers and rice mills out of business.

"There's only so much margin [profit] in the rice business anyway," Adams said. "If a farmer is getting a $5 offer for [a bushel of] rice from a co-op plus the 20 percent tax break, we're not going to be able to counter with $6 rice."

The tax break is already affecting farmers' decisions on where to sell any remaining crops from last season, he said.

Adams said he's hoping a fix is found but was somewhat doubtful.

"From what I've been told, there are some very prominent people working on it, but who knows?" he said. "With the government shutdown and all the problems in Washington today, maybe it won't slip through the cracks again. How it slipped through [into legislation] in the first place, I have no idea, but I guess there were some prominent lobbyists on one side who weren't as prominent as those on the other side."

Kevin McGilton, a spokesman for Riceland Foods, also based in Stuttgart, said Riceland's competitors that were under the old Section 199 tax-cut provision got their corporate taxes reduced under the new legislation. But eliminating the provision left cooperatives, which don't generate taxable income at the corporate level, without a tax break, he said.

Co-op farmers and members instead pay income taxes through their farming entities. "We said, 'look, we don't benefit from the lower corporate rate, so you've got to give cooperatives something,'" McGilton said.

The 20 percent tax deduction off sales, he acknowledged, would encourage farmers to join a co-op. "Is it favorable marketing for us?" McGilton said. "I can't say that it's not. There's no doubt that it is."

Jim Mead, of Delta Grain Marketing in Jonesboro, said he is confident Congress will devise a fix "as soon as [President] Donald Trump hears what's taking place because he's all for competition and we're talking about billions and billions of dollars in sales."

The correction, though, needs to be made within a month because farmers are deciding what crops to plant and where to sell their commodities, Mead said.

Without a fix, "this is really going to turn the farming industry upside down and it will reduce competition," Mead said.

Patrick Creamer, a spokesman for U.S. Sen. John Boozman, said Boozman "has heard from both sides affected by this unintended consequence of the new law" and is working "to find an equitable solution that restores balance and ensures that everyone in the agriculture industry benefits." Boozman, a Republican, sits on the Senate Agriculture, Nutrition and Forestry Committee.

"While I certainly support section 199, we need to make sure it works for everyone," U.S. Rep. Rick Crawford, a Republican representing the state's 1st Congressional District, said Thursday by email.

"Section 199A needs a little work, however," Crawford, a member of the House Agriculture Committee, said. "I urge the Senate, the author of Section 199A, to take steps to solve the problems arising from this potentially problematic -- albeit well-intentioned -- provision."

On Jan. 12, the U.S. Department of Agriculture took notice.

"While the goal was to preserve benefits in Section 199A for cooperatives and their patrons, the unintended consequences of the current language disadvantage the independent operators in the same industry," Greg Ibach, a USDA undersecretary, said in a statement. "The federal tax code should not pick winners and losers in the marketplace."

The National Grain and Feed Association, which represents co-ops as well as independent companies, and the National Council of Farmer Cooperatives also have released a joint statement calling for a solution "addressing any unforeseen impacts on producers' marketing decisions."

A Section on 01/27/2018

Print Headline: New tax law's clause boosts farmer co-ops

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