Tax reform and relief was the most important legislative victory for the business community and pro-growth conservatives in at least a decade. Therefore, it’s absolutely imperative that Congress move quickly to fix a drafting error in the law that threatens to undermine its positive perception and the effectiveness of reform.
That error is being called the “Grain Glitch,” identified as such because it predominantly affects the agricultural industry, where economic cooperatives are a common business vehicle.
Lawmakers mistakenly included a 20 percent deduction on gross, rather than net, income for cooperatives. Net income is profit, gross income is revenue. A deduction on revenue means that many farmers will be able to deduct their entire tax liability.
The Tax Foundation’s Scott Greenberg did the math: A business that sold $2 million in goods to a co-op and incurred $1.6 million in expenses (eminently plausible numbers) would be able to deduct 20 percent of $2 million, or $400,000 — the same amount as its tax liability.
Compare that to the 20 percent deduction on profit that is granted in other situations: The same business would be able to deduct 20 percent of $400,000, or $80,000, leaving a tax liability on $320,000 in remaining profit.
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This is not just a lottery-style windfall to co-ops because businesses structured in any other way aren’t eligible for the same treatment. The difference has already plunged the private crop-handling business into uncertainty.
Some firms have opted to reorganize as co-ops, at a cost of hundreds of thousands of dollars in legal fees. Others are hoping to wait out a legislative fix. But the situation is complicated because lobbyists for the cooperatives, after initially acknowledging the change was unintentional, have decided they really like the new state of affairs and are now fighting to keep it.
In terms of the political ramifications for tax reform, it’s dangerous enough for a single industry to be upended by a provision that lawmakers have conceded was included by accident amidst a flurry of last-minute changes to the bill.
But there’s additional risk if those outside the agricultural sector begin to seize on cooperatives as a potential tax shelter. In this worst-case scenario, widespread use of a deduction on gross income becomes the Ice-Nine of tax reform’s standing as a sensible reform initiative.
Surely a Congress that can pass a historic tax reform bill can also move quickly to fix errors included within the law, correct? That should be the case as we have seen these “technical correction” fixes before.
However, the situation is complicated because Democrats see errors like the “Grain Glitch” as leverage.
“We’re not going to say to Republicans, ‘Oh tell us what you want to do,” Sen. Sherrod Brown (D-Ohio) told Politico, in discussing plans to seize on the error as leverage.
This is shameful: People’s livelihoods are in the balance. It’s all the more reason for Republicans to urgently address the issues before Brown’s attitude spreads to the relatively moderate Senate Democrats as well — and before the midterm election season is in full swing.
We all make mistakes, although, honestly, most of us don’t upend American industries with a typo. Congress needs to fix this problem before anyone else is harmed by this error.
Karen Kerrigan is president and chief executive officer of the Small Business & Entrepreneurship Council.
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