President's Veto Threat: Agriculture

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The House and Senate have been battling each other, as well as the White House, over how to reauthorize various agricultural programs under what is usually referred to simply as the "Farm Bill." The battle is largely over how much the federal government should or should not support farming, which farmers should be supported and how. Proposals to raise revenue for a disaster trust fund, conservation and nutrition have added to the controversy. During the swearing in ceremony of the new Agriculture Secretary, Ed Schafer, Bush said specifically that he would veto any farm bill that raises taxes. House Agriculture Committee Chairman Collin Peterson (D-MN) is working on a new version of the bill to end the deadlock and it's reported that this version will attempt to raise revenue without tax increases.

One measure that the President considers a tax increase is a provision the House attached to its version of the farm bill passed back in July (H.R. 2419). Initially proposed by Rep. Lloyd Doggett (D-TX) and endorsed by Citizens for Tax Justice, this provision would raise $7.5 billion over ten years by stopping foreign corporations with subsidiaries in the U.S. from manipulating international tax treaties to avoid taxes. U.S. subsidiaries of foreign corporations don't have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed. The Doggett provision would simply apply the withholding that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. The White House has singled this provision out as unacceptable.

The Senate passed a farm bill in December that had its own revenue-raising provisions. The largest is a provision that would reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means taxpayers will not obtain tax benefits from transactions that were entered into for no other purpose than to avoid taxes. In addition to raising $10 billion over ten years, this provision would arguably reduce the economic inefficiency that comes with the exploitation of tax loopholes. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it) but it is unclear whether the White House will see this as a "tax increase."

Another revenue-raising provision in the Senate bill takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier last year tried to include this change in minimum wage and energy legislation.

Now House Agriculture Committee Chairman Peterson is putting together a new version of the farm bill with the help of Republicans on his committee that will not include the Doggett provision. The White House appears to look more favorably on this effort. This bill would still require $6 billion in new revenue, and it's reported that Peterson is working with House Ways and Means Chairman Charles Rangel (D-NY) on provisions that would accomplish that by enhancing tax enforcement. Several members of the Senate, meanwhile, say that the deal would not invest enough in agriculture and are likely to respond with a new bill of their own.

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