“Grain Glitch” Fix a Signal of Tax Corrections to Come

Democrats extracted an expansion of a low-income-housing credit in exchange for fixing an error in the new tax law. That could be a model for fixing other problems in the legislation.

House Ways and Means Committee Chair Kevin Brady and ranking member Richard Neal
AP Photo/Jose Luis Magana
March 22, 2018, 8 p.m.

The so-called “grain glitch” was one of the final wrinkles lawmakers needed to smooth out before releasing their omnibus spending package late Wednesday, and the negotiating process surrounding the tax provision could serve as a blueprint for fixing other errors in last year’s sweeping code overhaul.

Included in the $1.3 trillion spending package—passed by the House and on its way to the Senate for a vote expected Friday—is a fix to a drafting error in the tax bill. Dubbed the grain glitch, the language would have allowed members of agricultural grain cooperatives to nearly wipe away their tax liability, which tax writers said was not their intention.

Negotiations over a fix were down to the wire as Republican and Democratic leadership, already behind schedule on the omnibus, hashed out a solution, but not before both sides dug in on their position. Ultimately, leadership settled on a deal: Democrats would back the grain-glitch fix in exchange for an expansion of the low-income-housing tax credit.

The grain deal represents a script lawmakers may follow as Congress works through other errors in last year’s tax bill. Senate Democrats—who note that they never got a technical corrections bill for the Affordable Care Act—want concessions if they’re to go along with any fixes. Republicans balk, but ultimately come to the table in search of Democratic votes in the Senate.

Several Republican tax writers say that they’re anticipating more Democratic asks.

“Yeah, I’m concerned, because they use every advantage they can; I can’t blame them,” Senate Finance Committee Chairman Orrin Hatch said.

“They could well hold hostage any fine-tuning, because at the end of the day they want to raise taxes on American families and see our jobs keep going overseas,” said House Ways and Means Committee Chairman Kevin Brady, adding that he hasn’t heard from Democrats on future demands.

The grain glitch would have allowed farmers who are members of agricultural cooperatives to get larger tax deductions than if they sold their grain to a private company. Co-op farmers would deduct 20 percent of their gross income, compared to 20 percent of their net income.

Critics said the language amounted to an unfair advantage, and tax writers said they never intended the provision to work in that manner. It could have sparked a massive shift in how the grain industry is structured, with farmers flocking to cooperatives and some independent purchasers going out of business or seeing higher costs.

The omnibus language, which would limit a farmer’s deduction at 20 percent of net income, marks the first major effort to alter drafting errors or unintended consequences of the tax bill, which Congress passed on party-line votes in December.

In a way, the grain glitch was one of the more politically straightforward corrections. The fix had the support of both Republicans and farm-state Democrats, who all felt pressure from agriculture interests to correct the language.

“This was a big issue and it hit a lot of constituencies, and it was not sustainable for it to maintain without doing very significant damage in the ag community, and people recognize that,” said Republican Rep. Peter Roskam of Illinois, a member of the Ways and Means Committee.

And yet the dealmaking surrounding the grain provision was heated, with the fate of a fix in question until the end.

“It’s been dead, revived, dead, revived,” GOP Sen. John Thune, who helped author the original provision in the tax bill, said Tuesday.

Neither side wanted to back off their position. House Speaker Paul Ryan rejected a proposal to include the glitch fix in exchange for the billions in additional low-income-housing tax credits, and he had the backing of House Agriculture Committee Chairman Mike Conaway, who called the proposal a “strong-arm tactic typical of the Senate.”

Senate Minority Whip Dick Durbin was equally dug in, saying it was “naive” to expect that Democrats would agree to the correction without asking Republicans to address other tax issues.

But Republicans came to the table, and after some negotiating and smoothing out language with House Minority Leader Nancy Pelosi, they arrived at a deal to include the housing-credit expansion.

“In the negotiations, it was the best path forward to move that farm co-op fix to the president’s desk,” Brady said.

The Treasury Department can help clarify vague language in the tax bill by issuing guidance, but small, typographical errors remain in the text, and more major drafting errors lurk as well. Those will need to be fixed legislatively.

Restaurants and retailers are pushing for a fix to language that limits the tax breaks they receive for renovating property. An error in the tax bill means that they must deduct those expenses over a 39-year period.

“The bipartisan intent of the law was a 15-year depreciation period, and we are confident members of Congress will work with their colleagues on the other side of the aisle to resolve this quickly in order to provide the necessary support to America’s restaurants,” Cicely Simpson, executive vice president of public affairs at the National Restaurant Association, wrote in an emailed statement.

As for what changes Democrats will seek in exchange for the renovation fix or other errors, one guidepost could be tax provisions they’ve advocated in the past. Democrats could ask for an expansion of the New Markets Tax Credit, which incentivizes private investment in distressed communities, or an expansion of the Earned Income Tax Credit, a refundable credit for low- and moderate-income households.

Both of those efforts have been spearheaded by Ways and Means ranking member Richard Neal, who would likely take the panel’s gavel if Democrats gain control of the House in the midterm elections.

“We want a hearing on every technical correction, every proposed technical correction, and that’s what didn’t happen the last time around,” Neal said, referring to the legislative process that produced the tax bill.

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