By Janell Thomas
A federal policy think-tank this week released a new document detailing the impacts of tax uncertainty on the ag sector, including the "will they or won't they" nature of Section 179 reinstatement.
The group, Institute for Policy Innovation, is based in Irving, Texas, and comments on trade, energy, budget and taxes. In commentary on Section 179 and ag tax issues, IPI President Tom Giovanetti says Congress' latest move on the 2014 expensing provision was essentially too little too late.
"If Congress wants to encourage businesses to invest based on tax incentives, Congress must make those policies clear at the beginning of the tax year, not the very end," Giovanetti writes. "While retroactive, last-minute tax reductions are better than no reductions at all, they won’t achieve their desired aim."
Congress spent the better part of 2014kicking around plans for reinstatementof higher Section 179 expensing levels, ultimately arriving on a tax extenders bill that was signed into law on Dec. 19. It allows farm businesses to take the full depreciation deduction of items such as machinery in the current tax year, with a maximum deduction of $500,000 and a phase-out threshold of $2 million.
Without the extenders bill, Section 179 for 2014 would have fallen to $25,000 with a $200,000 phase-out. And without action this year, it will fall to that level for the 2015 tax year.
While the House already has been moving on the issue through approval of bill to approvehigher Section 179 expensing levels for 2015 and make higher levels permanent, it hasn't been considered by the Senate, and is reminiscent of previous, similar bills' paths. It's also under veto threat from President Barack Obama.
Giovanetti says this annual renewal process means uncertainty – and is thus "of limited value to the small and medium-sized businesses it is intended to help."
He writes that the Section 179 provision is particularly valuable to the agriculture sector as it encourages investment in mechanization and technology, allowing farmers to remain globally competitive. Because Section 179 expensing was raised to $500,000 at the end of 2013 for the 2013 tax year, and again in late 2014 for the 2014 tax year, most of the year was spent under the assumption that lower Section 179 expensing would be in effect at tax time.
Giovanetti and IPI suggest that this uncertainty affected sales of tractors and equipment in the United States, quoting a portion of a Kansas City Federal Reserve ag finance document:
"2014 combine and four-wheel drive tractor sales in the U.S. began on par with 2013 levels but slowed steadily and ended the year down 26%.
"Although the existing Section 179 tax incentives for the purchase of machinery and equipment were reinstated the last week of December, the reinstatement seemed too late to significantly boost 2014 sales."
This sales decline resulted first in farmers not being able to invest in productive capacity. A second-level effect is seen in the layoff of 800 Iowa plant workers by equipment manufacturer John Deere, Giovanetti says.
"It is reasonable to link the drop in agricultural investment and the resultant job cuts to the failure of Congress to renew the higher Section 179 allowance early enough in 2014 to have its intended incentive effect," he writes.
While suggestions about the best way forward with 2015 Section 179 expensing levels and several other tax breaks that are frequently renewed has been discussed – from more temporary measures to complete revamp of the tax code – no final decision has emerged.
Giovanetti notes that full tax reform to lower the corporate tax rate below 25%, and eliminates the need for many of these tax preferences, is "long overdue."
He further suggests Congress should push tax discussions closer to the start of the year by passing any temporary measures within the first quarter.
"Agriculture is just one example of the harms to economic growth and employment that result from the combination of high tax rates and tax uncertainty," he notes.
Read the entire Section 179 and tax reform commentary on the IPI website.