WASHINGTON (Feb. 7, 2008)—Although it has been nearly two months since the U.S. Senate approved a farm bill by an overwhelming, bipartisan vote, and over a half-a-year since the House approved its version, efforts to protect tax shelters and loopholes that raise taxes on everyone else continues to threaten successful completion of a farm bill.
A farm bill funding package approved by the Senate Finance Committee shut down numerous tax shelter schemes to pay for conservation, nutrition, and renewable energy initiatives. But some are now arguing that doing so would somehow constitute a tax increase on those who have, to date, been successful in avoiding taxes.
One specific tax avoidance scheme targeted by the Senate to free up more than $4.5 billion is known as sale-in lease-out, or SILO.
This loophole, which involves suspect leasing arrangements with tax-indifferent parties such as foreign governments, was first targeted by the Bush Administration during its Fiscal Year 2005 budget.
During that budget debate, the Public Broadcasting System (PBS) reported, “Treasury Secretary John Snow, while testifying before the Senate Budget Committee, said the leasing deals are unacceptable tax avoidance schemes that ‘need to be stopped’.”
PBS further noted that Assistant Treasury Secretary for Tax Policy Pamela Olson referred to SILOs as “abusive transactions that the administration proposes to limit” because they are “a threat to the viability of the corporate tax base.” To view the PBS report, click here.
Other loopholes targeted in the Senate farm bill financing package also have a track record of bipartisan opposition.
One such scheme involves business transactions that are carried out for no economic purpose other than to avoid taxes.
Independent Connecticut Senator Joe Lieberman first introduced legislation in 2003 to end this practice, noting, “Average American taxpayers have to reach into their own pockets to make up for $85 billion lost because of tax shelter schemes.”
“We should insist that whatever the taxpayer has done to reduce his or her tax liability must be intended to change his or her economic position in a meaningful way and must have a substantial, non-tax, economic purpose for the transaction,” he said. “This economic test must be applied to curtail these tax shelter ‘mills’ otherwise they will continue to soak the vast majority of American taxpayers who have to pay higher taxes because of them.”
Minnesota Republican Senator Norm Coleman also tried to close this loophole in 2004, saying on the Senate floor, “Let me be clear, those who fail to pay their taxes with offshore tax havens and abusive tax shelters increase the amount of taxes for you and me. With this legislation, I intend to see the public trust in our tax laws restored.”
Because these attempts never became law, federal courts have been forced to make a case-by-case determination under what is known as “economic substance doctrine” to sort out tax offenders from legitimate business transactions.
Four federal appeals courts recently asked Congress to step in and codify the economic substance doctrine—as the Finance Committee did in its farm bill funding package—so courts are not forced to legislate from the bench.
Yet some still contend that ending this tax avoidance practice constitutes a tax increase on big corporations that have the money to hire lawyers and accountants to find and exploit loopholes.
Former Finance Committee Chairman and now Ranking Republican on the Senate tax-writing Committee, Senator Chuck Grassley of Iowa disagrees.
He told the National Journal on Jan. 30, “K Street lobbyists, investment firms, accounting firms, law firms…think up all these tax loopholes and sell them to businesses. We are shutting down their factory, their industry of loophole openers. I don’t consider that a tax increase.”
Senator Grassley is in good company. Every current sitting U.S. Senator except one has voted for, cosponsored legislation, or gone on record in support of shutting down the loophole under the economic substance doctrine, which would save taxpayers more than $10 billion.
While the SILO and tax shelter battles rage inside the Beltway, farmers in rural America are left looking at actual silos and wondering whether they will be empty or full in the future. That’s because growers are being forced to make business plans and financing decisions—and soon to head into the fields—without a long-term farm bill in place.
If tax scheme supporters are successful in derailing the pending farm bill, Congress will be left with few options. Congress could temporarily extend current law or let existing farm law expire, which—because of the way farm laws are written—would cause farm laws enacted back in 1938 and 1949 to take effect. Neither solution provides farmers the long-term stability they say they need.
Farmers have expressed appreciation to members of the House Ways & Means and Senate Finance Committees as well as members of both political parties in the House and Senate who are working for a bipartisan solution to the current funding logjam.