Tax Reforms Will Require Attention

Proposed tax reforms in the new Congress and administration will require close attention from the ethanol industry. This Business Matters column appears in the January, 2017, print edition of Ethanol producer Magazine.
By Donna Funk | December 20, 2016

The recent elections are likely to have dramatic impacts on U.S. agriculture and on the ethanol industry. With the White House and Congress controlled by one political party, there is a high likelihood that we will see rapid action on a range of administration and congressional priorities including tax reform, modifications to environmental policy and adjustments to U.S. trade. While many of these policies may be beneficial, there is also the potential that policies could be adopted that would negatively affect agriculture and renewable fuels. For the ethanol industry, the stakes could not be much higher.

During the Iowa caucuses, Donald Trump spoke broadly of his support for ethanol and for the renewable fuels standard. However, President-elect Trump selected Myron Ebell, director of the Competitive Enterprise Institute, to lead his EPA transition team. Ebell, who in November was speculated to be in consideration for administrator of the U.S. EPA, is a long-standing opponent of the renewable fuels standard. In addition to working to make sure the administration supports renewable fuels, the ethanol industry will undoubtedly have its hands full fighting to protect the renewable fuels standard in Congress.

Another topic that will be critically important to the ethanol industry in the coming years will be tax reform. House Speaker Paul Ryan has indicated that comprehensive tax reform will be one of his highest priorities when Congress reconvenes in January. Depending on which proposals are finally enacted, tax reform could positively or negatively impact the profitability of ethanol plants and corn farmers for years to come. 

Congress last tackled comprehensive tax reform 30 years ago in 1986. The changes to the U.S. tax code this go-round are likely to be every bit as significant as the 1986 reforms and will have wide-ranging effects on businesses and individuals alike. The overall goals of tax reform articulated by Speaker Ryan are laudable and include tax simplification, a lowering of corporate and individual tax rates and an emphasis on economic growth. Like everything, of course, the devil will be in the details.

To know whether tax reform will help or hinder the ethanol industry and corn farmers in general, we’ll want to take a holistic look at the tax reform proposals as they are released. While eliminating a particular deduction may be something that many agricultural producers wouldn’t like, if tax rates are lowered as a result of a tax reform package, the package as a whole may be beneficial.

The calculus becomes even more complex when one considers concepts such as “border adjustability” as referenced in the House Republican Tax Blueprint. Under border adjustability, sales of products outside of the U.S. would likely not count as revenue for U.S. income tax purposes while imported products may be subject to taxation. In order to properly evaluate such proposals, we must first see the proposed legislative language and then run the numbers against past tax returns for actual plants and actual farms. It’s only by going through this process that we’ll learn whether the benefits will offset potential negative effects on the ethanol industry and its producers. With any change this significant, there are bound to be winners and losers. The ethanol industry must be proactive and engage in the tax reform discussion to ensure that its interests are taken into consideration as bills are drafted and moved through Congress.

At K·Coe Isom, we’re helping our clients look at these types of issues to understand how tax reform will affect specific businesses as well as entire industries and market sectors. We’re also working closely with key members of Congress to make sure they understand how their proposals could affect U.S. agriculture. As we track these legislative proposals, we’re also helping our clients implement proactive tax planning strategies so that their businesses can achieve the maximum benefits when tax reform is signed into law.

The coming years will present both challenges and opportunities for corn farmers and for the ethanol industry. We need to work together to make sure that Washington encourages growth and supports U.S. ethanol.

Author: Donna Funk
Principal, K·Coe Ison

Co-author: Brian Kuehl,
Director of Federal Affairs, K·Coe Isom