Urban C. Lehner Vice President, Editorial
DTN / Progressive Farmer
So they’ve got a deal in Congress on extending the payroll tax cut. Maybe our lawmakers have taken the voters’ unhappiness seriously. Maybe they’ve learned how to overcome paralysis. Maybe there will be fewer hyper-partisan standoffs on future issues.
Then again, maybe not.
This payroll-tax compromise was just a gentle warm-up stretch. The strenuous tax aerobics and heavy budget lifting come later this year, when Congress must make three momentous decisions: whether to raise the debt ceiling yet again; whether to craft a well-timed, powerful set of spending cuts or let the $1.2 trillion in scheduled “sequestered” cuts kick in; and, most importantly, whether to extend the expiring Bush tax cuts. On this latter decision alone hinges $3.9 trillion in revenue over the next 10 years.
Together, these three decisions will put us at America’s most critical fiscal turning point in decades. What Congress decides will affect every American for years to come. It will affect farmers and ranchers in countless ways, large and small.
Let’s look at just three of many possible scenarios.
To understand the first, imagine the Republicans and Democrats in Congress pondering the Bush tax cuts and calculating the risks they face in this year’s elections. Neither can be sure how the elections will go; each has a lot at stake if the other ends up in control of the government. The Democrats fear that if the Republicans prevail, the Bush tax cuts will end up extended permanently. The Republicans risk a Democratic victory undoing the cuts permanently for those making more than $250,000 a year.
Perhaps, both sides think, it would be smarter to avoid these risks by changing the terms of the debate. Forget the Bush tax cuts; do tax reform, and get it done before the elections. Come up with a plan that lowers and simplifies personal and corporate income-tax rates, eliminates a raft of exceptions, deductions and loopholes and somehow in the process raises more revenue.
There’d be something for everybody. For the Republicans, lower rates. For the Democrats, elimination of special favors for the rich. Problem solved.
Is such a deal possible? The odds are against it. Most likely, neither side is that risk averse. And even if they enter into a tax-reform debate, the resistance from those about to lose their favorable treatment would be fierce.
Farmers might be among those who’d lose special tax benefits. For example, the last successful tax reform, in 1986, ended preferential treatment for capital gains, taxing them the same as ordinary income, at a top rate of 28%. By coincidence that’s the top rate some tax-reform proponents are talking about again.
If we ended up with a similar result — ordinary income and capital gains both taxed at 28% — farmland prices could get whipsawed. They might plummet in the short run as older farmers without heirs rushed to cash in before the current 15% capital-gains tax rate expires. Then, after the new higher rate took effect, farmers might be more reluctant to sell and land prices could rise again. The countryside would be full of unhappy people.
To understand the second scenario, imagine Congress acts in the way we’ve all come to know and hate. It deadlocks. The Bush tax cuts expire, not just for the rich but for everyone. The $1.2 trillion in sequestered cuts kick in because Congress can’t agree on a better plan for reining in the deficit in the long term without zapping the economy in the short.
According to the Congressional Budget Office, this one-two punch would reduce economic growth next year to a dangerously slow 1% from an expected 2% or more. Some economists think the blow would be even more severe; they see us collapsing into recession. If Congress also deadlocked on the debt ceiling, shaking markets’ confidence in U.S. debt paper, recession could morph into depression. Neither would be good for farmers.
In the third scenario, Congress works feverishly through November and December. It finally muddles through to some sort of solution. All of this takes time. There’s suspense right up until the 11th hour. The negotiations are all-consuming in their demands on Congress’s limited attention span.
That would have implications for the farm bill. Many farm groups hope one can be passed this year. To wait until 2013, they fear, risks even deeper cuts in farm programs than we now expect. It would also require an extension of current law for several months, which might be difficult to navigate through a minefield of potential amendments once the bill is out of the ag committees’ hands.
If a farm bill is to go through earlier this year a lot of work lies ahead. The ag committees talk about completing work this summer, but history and the current divided state of the agriculture interest groups suggest they’ll need more time. If the bill gets delayed into the lame-duck session, it will be competing with the three big decisions for attention. They could crowd the farm bill out.
With so many consequential scenarios potentially playing out this year, agriculture’s eyes will be on Washington even more than usual.
