Iowa Institute for Cooperatives Submits Statement for the Record for House Ways & Means Committee Field Hearing

Statement for the Record by the Iowa Institute for Cooperatives

Submitted to the

House Ways and Means Committee
August 16, 2024
Field Hearing, Des Moines, Iowa
The Success of Pro-Growth, Pro-Worker Tax Policy in the American Midwest

Chairman Smith and members of the Committee, welcome to Iowa and thank you for holding this field hearing to review tax policy impacting the Midwest. This Statement for the Record aims to feature the unique structure of farmer-owned cooperatives and the importance of making the Section 199A deduction permanent.

The Iowa Institute for Cooperatives represents cooperatives of all types including agricultural, utility, finance, and consumer cooperatives. The agricultural cooperatives in Iowa are a vital piece of our rural economy contributing over 7000 jobs generating $625 million in payroll. They also pay $45 million in property taxes to the local economies and serve the needs of over 75,000 Iowa farmer members.

For more than 100 years, farmer-owned co-ops in Iowa and around the country have allowed individual farmers to truly participate in the agricultural and food system—from farm to retail. The simple definition of a farmer cooperative is a business owned by farmers, controlled by farmer-elected boards, and existing for the benefit of its farmer members. But that single sentence does not fully capture how integral a cooperative is to the farming operations of its members—operations that are millions of small businesses across rural America. Farmer co-ops are a proven tool to help individual family farmers and ranchers through the ups and downs of weather, commodity markets, and technological change. Through their local co-ops, farmers and ranchers pool their resources to strengthen their individual bargaining power, better manage risks, and improve their income from the marketplace, allowing farmers to compete globally in a way that would be impossible as an individual producer.

America’s farmer-owned cooperatives provide a comprehensive array of services for their members. These diverse organizations handle, process, and market virtually every agricultural commodity. They also provide farmers with access to the infrastructure necessary to manufacture, distribute and sell a variety of farm inputs. Additionally, they provide credit and related financial services, including export financing.

Cooperatives are formed to extend the business operations of their farmer-owners into areas that would be difficult for individuals to carry out alone — activities like building and operating processing plants, establishing and marketing well-known consumer brands, and purchasing supplies in quantities large enough to obtain significant volume discounts. Farmer cooperatives provide their farmer patrons with economies of scale and value-added services. A marketing cooperative can command a better market price for the bulk sale of all its patrons’ produce than each individual farmer could command alone. They also process their patrons’ commodities into consumer products (milk into butter, corn into ethanol and soybeans into renewable diesel, etc.). A supply cooperative guarantees its members a source of needed agricultural inputs and can reduce the input costs of farm supplies (e.g., seed, fertilizer, and fuel) for its patrons by buying or producing in bulk. On average, farmers who belong to a supply co-op earn approximately $5500 more per year. A farmer may have 40 acres of oranges or 4,000 acres of soybeans, but as a member of a cooperative, they are able to accomplish things that no individual farmer could do on their own.

Profits of the co-op are returned to the farmer members, usually in the form of a patronage dividend, in proportion to the amount that each individual patron transacted with the cooperative. In this way, the cooperative is the alter ego of its farmer patrons, and the farmers and their cooperative should be viewed as an economic unit. This contrasts with other forms of business, in which profits are returned in proportion to equity ownership interests.

A farmer cooperative is a corporation subject to the corporate tax on its income. In computing its taxable income, a cooperative is allowed a deduction for amounts distributed to patrons as dividends. The patrons include such amounts in income as ordinary income subject to the normal tax rates (i.e., the reduced rates applicable to dividends and capital gains do not apply). This system of taxation is contained in subchapter T of the Internal Revenue Code. This tax treatment underscores the relationship of the cooperative and its farmer members as a single economic unit. Patronage income is taxed once. The income is either retained and taxed at the cooperative at regular corporate rates or is distributed to the patrons and taxed at their individual rates.

Section 199A was passed to put co-ops and small businesses on an even footing with big corporations which saw a significant decrease in their tax rate in 2017. It has been a success and was critical in seeing farmer co-ops and their members thrive through a pandemic, unrest around the globe, and the highest inflation in a generation. It provides a replacement for prior-law Section 199 for cooperatives and their members.

Section 199A provides a tax deduction generally equal to 20% of net income for all forms of businesses except C corporations. Because C corporations received a 40% rate cut – from a top rate of 35% to a top rate of 21%, Congress recognized that other forms of business should receive tax relief. The 199A deduction applies to sole proprietorships, partnerships, S corporations, LLCs, etc.

For farmer co-ops in particular, Section 199A(g) uniquely provides a calculation that is the same as it was under prior law Section 199 – it is 9% of the co-op’s qualified production activities income (QPAI). The deduction is limited to 50% of the co-op’s wages for the year and may not exceed the co-op’s taxable income for the year. The co-op may choose to keep all or part of the deduction at the co-op level to offset tax liabilities or it may be passed through to their members.

Co-ops pass 95% of the deduction back to farmers, who reinvest it in their operations. The deduction benefits the economy through job creation, increased spending on ag production, and investment in rural communities. Among NCFC members alone, $2 billion was returned to farmers in 2022.

We have several case studies showing the benefits delivered by the Section 199A deduction. For example, Heartland Co-op headquartered in Clive, Iowa, has fully utilized its deductions by reducing their taxes and redeploying those savings into assets for the co-op to help ensure that they have the assets and resources available to their members to use. They have spent over $300 million in the last 10 years reinvesting in our rural communities by upgrading and adding new facilities to handle the growing needs of their members. This would not have been possible without the tax savings from the Section 199A deduction. Many rural communities would suffer had it not been for these reinvestments.

Luther, IA is an example of one of our communities struggling to survive. Heartland Co-op invested in a major facility expansion in Luther that spurred the development of updated utilities within the town that allowed the development of other businesses.

Section 199A, including provisions related to farmer co-ops, expires with respect to taxable years beginning after 2025. The corporate tax rate reduction was made permanent in 2017. The Section 199A deduction should also be made permanent to keep the competitive balance between corporate and noncorporate businesses.

Since farmers and their co-ops are not taxed like corporations, letting Section 199A expire will raise taxes on farmer co-ops and their member-owners, putting them at a disadvantage to competitors that get to keep their corporate tax rate cut.

Farmers face risks very few industries encounter. Investing in America’s farming families and communities is smart economic policy. Extending these tax provisions will remove an important piece of uncertainty as producers start planning future investments. Congress should stand up for agriculture and extend this important tax provision.

Thank you for the opportunity to submit this statement for the record and we stand ready to work with the Committee to ensure Section 199A is made permanent.