A significant tax loophole in the new laws enacted by Congress has the potential to shake up Big Ag and drastically alter food prices in the United States. Above all that, though, it could provide farmers with a massive influx of cash that they haven't seen in years, providing an accidental but much-needed godsend to areas of the country where farming is predominant. This, not the tax cuts to the uber-rich, is how we can get actual money back into the hands of Americans.
Photo: Sebastian Koppehel//Wikimedia Commons
The Wall Street Journal reports that this tax loophole allows farmers to deduct 20% of their sales to cooperatives. These "co-ops" are businesses formed and jointly run by groups of farmers, who utilize their combined power as a leverage in price and sales negotiations. When selling to other business types, farmers can only deduct 20% of their net income, which is usually a small fraction of sales. Thus, farmers will save a lot more money by selling to just co-ops. It also means that farmers can deduct their reported taxable income to as low as $0, so they can retain even more revenue buy paying less taxes.
The new legislation has farmers more willing to sell to nearby co-ops than they are to major grain firms, which could disrupt the supply chains of big businesses like Cargill and Archer Daniels. These cooperatives allow farmers to combine their productivity to get better prices on crop sales as supply purchases. The tax loophole means there's even more incentive to join co-ops and sell through those rather than working directly with production firms.
Farmers are going to want to only sell through co-ops to save the most money. Cargill and others will have to respond to that by either joining or partnering with an existing co-op, creating their own co-op and bringing in farmers to be members, or risk losing a massive supply of grain. They wouldn't go out of business due to their international markets, but a significant portion of their US business would be lost, opening up opportunities for small-scale and local producers that purchase through these cooperatives.
As a result, Congress has unwittingly given back a ton of power to the local farmer, who now has a stronger position in grain price negotiations through their co-ops and can retain revenue that previously went to paying taxes. This will come at a price to the US Government, who could lose up to $13.5 billion in tax revenue from the loophole, according to the Wall Street Journal.
If left untouched, this tax loophole would be a massive money-maker for farmers, something they desperately need as food costs (and their revenues) have dropped over the years. As a result, it could bring an economic boom to the Midwest, where farming is a major industry. While the average income for farmers is $61,000 per year, they can make as low as $30,000, especially if they grow and harvest wheat. By being able to deduct based on their revenue rather than their income, those numbers should significantly increase now that their taxable incomes could be as low as $0.
It's highly likely, however, that the legislation will change, as lobbyists from ag giants are pushing Congress to close the loophole. Currently, the National Council of Farmer Cooperatives and the National Grain and Feed Association (a co-op representative) are working to create a proposal that keeps farmers' taxes from increasing but doesn't cause a major shift to co-ops. Their goal is to have the framework in place to incorporate changes into the next spending bill, which needs to be passed by March 23rd at the latest.
What was a "mistake" by Congress has the potential to restore economies, disrupt corporate giants, and bring prosperity to a region of the United States that lives too close to the poverty line. And isn't that what we all want for America as a society?
