One more week to settle out tax credit differences

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Friday the White House extended an olive branch to House and Senate farm bill negotiators, granting them a one-week extension until April 25 to complete the farm bill. Last week negotiators wrapped up details of the credit, research, trade and forestry bills. Vast differences exist between the Senate and House leadership over whether to include the Senate's $2.5 billion in tax credits. Click here for detailed information about the Senate's proposed tax package.

According to Hill sources, press reports, and Friday's conference meeting, the Senate offered a package to House Leadership on Thursday that would have further increased nutrition funds, at the expense of commodity programs, by an additional $500 million — bringing the total increase in nutrition spending to $10 billion.

"The clock is ticking to complete a new farm bill and with just one week to go before the extension expires, we must reach agreement," said Senate Agriculture Committee Chairman Tom Harkin. "The Senate has now presented two good offers to the House that strengthen farm income and disaster protection and fill in gaps in nutrition assistance, invest in farm-based renewable energy, help farmers and ranchers conserve our natural resources, and devote substantial new funding to initiatives for growers of fruits, vegetables and horticultural crops. We are getting closer, but we still do not have agreement.

For more details on the Senate proposal, click here.

That offer was not enough to satisfy the House Leadership who demanded an increase in offsets for new spending by $3.5 billion over a $6 billion proposal they offered the Senate last week. Those additional funds would pay for at total of $2 billion in standing disaster assistance - a $2 billion cut from a recent Senate proposals - and $1 billion for tax provisions and another $500 million for nutrition. Also, proposed was a $1 billion cut to the Direct Payment. The Senate rejected the House counter-offer.

Senate Finance Committee ranking member Chuck Grassley said House negotiators employed a "double standard" in accounting for the tax package.

"This means that with respect to tax provisions, any temporary tax provision must be scored as if it were permanent. This test is a double standard because none of the five year spending proposals are considered as if they were permanent," a statement from Grassley's office said.

For example, the House conferees are using a permanent change in tax policy, one related to basis reporting for securities, which scores as $6 billion over ten years to offset $6 billion dollars of new agricultural spending. The spending scores over 5 years. "If negotiators applied the same test to the spending that the House is applying to tax policy, then the House offer is short by $6 billion. Likewise, in their analysis, the House negotiators overlooked that the largest agricultural tax revenue raiser, a reduction in the ethanol credit, was temporary. The reduction expires at the end of 2010-roughly the same period as some of the temporary tax relief provisions," the statement said.

"The Senate put together a good-faith compromise that was chock full of incentives for conservation, renewable energy and reform. In fact, our relatively small tax package includes more reform than all of the 'policy package' put together. Our offer includes additional funding for nutrition, which is important to all conferees, including Speaker Pelosi," Grassley said.

"I hope the House negotiators will finally take a look at the actual policy instead of throwing it down the drain without seeing the good things in the package," he added. "But, to make this process work, we all must give and take, and be intellectually honest about the numbers. If the House is going to look at the agricultural tax package over ten years, then the same test has to be applied on the spending side. A dollar of revenue ought to be counted the same way as a dollar of spending."

The Senate states it can not scale back its tax offsets and incentives package, as it's a deal breaker for many votes in the Senate. In a statement from Grassley's office he outlined several of the reform provisions include in the Senate ag tax package.

The schedule F loss limitation provision closes a loophole found in an April 2004 GAO report. At this time, there is no limit on how large a loss a farming operation can take. So, it's simple accounting to artificially create losses in one entity (the farm entity that receives the Department of Agriculture payments) and then to offset the gains that they shift to other related entities.

By doing this, it's possible for these people to game the adjusted gross income limits (AGI) and also take huge tax savings with their losses. The Schedule F provision in the Senate agriculture tax package shuts that down.

Farmers and ranchers not receiving commodity payments or CCC loans are not impacted. Also, farmers and ranchers who only receive conservation program payments or milk program payments will not be impacted by this provision. This only applies to taxpayers receiving benefits under Subtitle A or B of Title 1 of the Food and Energy Security Act of 2007 in such taxable year, or Commodity Credit Corporation Loans in such taxable year.

Another provision in the tax package involves CCC-1099 reports. The Department of Agriculture had taken the positions that CCC loans/generic certificates were actually a "barter" transaction. Because of that, they were outside of the reporting requirements. Treasury and IRS did not agree (much like the ongoing concern over the Conservation Reserve Program, USDA calls it rent, but IRS-Treasury and the courts says that it is a substitution for farming income and then therefore subject to self-employment tax).

The legislative language clarifies that the loans/certificates are subject to 1099 reporting.

In addition there was concern that people were taking the position that if they did not receive a 1099 then they did not have to report the income.

Another reform provision fixes a biodiesel provision. Currently, foreign produced biodiesel can enter the U.S. without either being subject to the diesel fuel excise tax or being tested to ensure that it meets the fuel quality standards required under law to claim the biodiesel tax incentive. Under the Senate agriculture tax package, the fuel excise taxes will be collected on imported biodiesel, and only fuel that meets appropriate quality specifications will receive the biodiesel tax incentive.

This reform will also significantly inhibit abusive re-export schemes that serve no energy or tax policy purpose.

The Senate agriculture tax package changes the point at which biodiesel and diesel fuel blends are subject to the 24.4 cents per gallon diesel fuel excise tax, which will ensure that fuel used in on-road applications is properly taxed, and funds collected are properly credited to the Highway Trust Fund.

In addition, under the Renewable Fuels Standard, once ethanol production is certified to reach the 7.5 billion gallons of the standard, then the tax credit will be adjusted in January of the following year to reflect the maturing of the industry and achieving the goal. Also, the farm bill proposes an additional tax credit for the next generation of cellulosic alcohol fuels.
A special provision for the self-employed, including farmers and ranchers, to help them qualify for Social Security benefits, hasn't been updated in many years. As a result, these workers are sometimes unable to qualify for coverage.

The agriculture tax package updates this special provision to allow the self-employed to pay additional payroll taxes, so they can qualify for Social Security. 

Harkin said negotiators would be meeting over the weekend in hopes of finding a resolution. If not, he said as chairman of the conference, he intends to start calling for formal votes of the conference committee this week.