NAFTA 2.0 talks continue | Japan, U.S. talk trade policy | 199A proposed rule released
— Later rather than sooner for U.S./China trade solutions. That is the consensus of trade policy observers and officials both in and outside of the Trump administration. No official talks have been scheduled to discuss the lingering issues. Some observers say Chinese leader Xi Jinping thinks President Trump will alter his current stance if, as they expect, he loses one or both chambers of Congress following November elections. But Trump watchers say China will have to recalibrate because Trump and his top trade officials will not alter their current positions even if November elections go well for Democrats.
— Treasury proposes pass-through (199A) rules with implications for ag industry. Noncorporate businesses made up of more than one entity will be able to band together to claim a new 20% reduction on their income, according to proposed rules issued Wednesday by the Treasury Department and IRS. Known as pass-throughs, the rule is meant to keep single businesses that operate through multiple legal entities from reorganizing themselves for tax purposes, a senior Treasury official said. The IRS is soliciting comments on the assumptions and the methodology used to calculate the compliance costs imposed by the proposed regulations. The agency also said it will hold an Oct. 16 public hearing on the proposed rules.
The rule avoids restructuring by streamlining the process for aggregating business income from multiple streams and claiming it as a single business.
The aggregation allowance should also ensure that pass-throughs generally face as low an effective tax rate as possible, nearly that of corporate businesses, whose statutory tax rate was cut to 21% in the Tax Cuts and Jobs Act.
Regarding the U.S. ag sector, the regulations proposed come with favorable terms for the many farms and ranches structured as pass-throughs — partnerships, limited liability companies or sole proprietorships — according to several tax consultants and accountants. However, it appears cash rent or crop-share landlords will not qualify for the new deduction, known as Section 199A, said Veronica Nigh, an economist at the American Farm Bureau Federation. “We do have a lot of absentee landowners out there. They hold on to family farmland, even though they’re not living there, and rent it to someone else,” she said. “In that case, the income wouldn’t rise to the level of trades or business. That’s the threshold.”
Dairy farmers who sell cows may not be able to count that source of income toward the new deduction, as cows are treated as an asset subject to capital gains taxation, which tends to be a more favorable rate.
Ag accountant Paul Neiffer of CliftonLarsonAllen says farmers who put their farmland into one pass-through business and then farm that land in another entity will be allowed to treat those entities as a single business for purposes of the deduction, meaning income and wages from the entities can be combined. Link to Neiffer’s comments.
Taxpayers could end up paying $1.3 billion to comply with proposed regulations implementing the provision, according to estimates from the Internal Revenue Service. The regulations could add 25 million hours in new annual reporting requirements for 10 million corporations and partnerships, the IRS said in proposed rules. An annualized cost valuation of those hours reaches a price tag of $1.317 billion over 10 years, the agency estimates.
The IRS calculated its estimate using the following assumptions:
Certain pass-throughs — businesses for which income flows directly to the owners, who are taxed as individuals — will spend 2.75 hours annually to report Section 199A information to approximately 8.8 million owners.
About 1.2 million pass-through owners will spend an additional two-thirds of an hour annually to voluntarily aggregate trade or business reporting.
Valuing the burden hours of aggregation decisions at $39 per hour and the burden hours of pass-through reporting 199A information at $53 per hour, the IRS totals the estimated gross costs of the proposed regulations at $1.317 billion over the next decade.
The agency didn’t provide a dollar estimate of the compliance savings of the new regulations or a net estimate of the compliance costs but said the regulations will “substantially” reduce costs in several areas.
— NAFTA 2.0 talks continue between U.S. and Mexico. Mexico's delegation includes Mexican Foreign Minister Luis Videgaray, Economy Minister Ildefonso Guajardo and Jesus Seade, who is the lead negotiator for Mexico's President-elect Andrés Manuel López Obrador. The U.S. side is led by Trade Representative Robert Lighthizer. The two sides reviewed the progress made by technical-level negotiators since the ministers met last week.
"Nothing is agreed until everything is agreed," Guajardo said in brief comments to reporters outside the Office of the U.S. Trade Representative. "So we'll know if we have a package."
— U.S., Japan trade talks begin today and go into Friday. Japanese Economic Revitalization Minister Toshimitsu Motegi is in Washington today for talks with U.S. Trade Representative Robert Lighthizer. The session comes after President Donald Trump and Japanese Prime Minister Shinzo Abe agreeing earlier this year to begin talks on a set of “free, fair and reciprocal” trade agreements.
While Japan continues to be negative toward a U.S./Japan Free Trade Agreement (FTA), Japan is one of the few countries not announcing countermeasures against U.S. applied tariffs on steel and aluminum. Motegi will try to avert steep tariffs on car exports and stress the significance of multilateral free trade, with an eye on persuading the U.S. to return to the Trans-Pacific Partnership (TPP). Japan will face demands from Lighthizer, including a trade deficit reduction and the further opening of Japan's automobile and agriculture markets.
— Update on U.S./EU trade talks. EU Ambassador to the U.S. David O’Sullivan said in a podcast that he expected the Executive Working Group led by USTR Robert Lighthizer and EU Trade Commissioner Cecilia Malmström to begin its work after the August break. “There is no actual time frame set out, but I think both sides agreed in the meeting that we want to go quickly,” O’Sullivan said. “I hope by the end of the year, the beginning of next year, we’re able to see some concrete results. We will then see whether that involves taking forward a more formal negotiation of a new trade deal for which we, of course, on the European sides will need a clear mandate from our member states, which we don’t have at this point.”
— Other items of note:
ICE holds raids on ag operations in Nebraska, Minnesota. U.S. Immigration and Customs Enforcement (ICE) on Wednesday raided agricultural businesses in six communities in Nebraska and two in Minnesota. The operations included a tomato greenhouse facility, a potato processor, a cattle company, a grain company, a pork plant, restaurants and other farms and ranches. ICE arrested 133 workers suspected of being in the country illegally and issued criminal arrest warrants to 17 individuals connected to an alleged conspiracy to exploit illegal labor for profit, fraud and money laundering. Tracy Cormier, special agent in charge of Homeland Security’s St. Paul, Minn., office, told the Omaha World-Herald that the operation was one of the largest in Homeland Security Investigations' 15-year history. Link to article.
White House continues to mull ‘public charge’ proposal. The Trump administration continues its work on a proposal that would discourage legal immigrants and their U.S. citizen family members from accessing public benefits like SNAP and Medicaid. The proposal is reportedly several weeks from release, the New York Times reports (link).
Acting EPA Administrator Andrew Wheeler will attend the Iowa State Fair next week, the office of GOP Gov. Kim Reynolds told the Des Moines Register (link). The Iowa congressional delegation will likely want to discuss year-round sales of E15.
The Department of Homeland Security said migration dipped this summer, although families are crossing the border at a higher rate than one year ago, according to data released on Wednesday. Overall, migrant crossings at the southern border fell 7% in July, the government reported.
President Donald Trump's administration will punish Russia with sanctions for allegedly poisoning an ex-spy living in Britain with a chemical weapon. A spokeswoman said the sanctions will go into effect later this month. The Russian ruble slid to its lowest level since late 2016.
Push continues to revive COOL via NAFTA talks. Bringing Country of Origin Labeling (COOL) back into force via the current NAFTA 2.0 negotiations is being called for by the Coalition for a Prosperous America (CPA). The group contends reinstatement of COOL labeling will help U.S. consumers to find safer food alternatives and will also help to boost domestic agriculture. "If the president wants to extend his ‘Buy American, Hire American’ agenda to the nation’s agricultural sector, then we need to revise our food labeling policies,” said CPA Chair Dan DiMicco. “Americans undoubtedly want to buy safe, domestically farmed beef and pork. They should have the option to choose where their food is raised.” CPA believes the U.S. Trade Representative should negotiate with Canada and Mexico to reinstate COOL labeling for both beef and pork. However, Canada and Mexico still retain the right to retaliate against the U.S. if mandatory COOL is brought back, a factor most observers believe will keep that from happening.
— Markets. The Dow on Wednesday lost 45.16 points, 0.18%, at 25,583.75. The Nasdaq edged up 4.66 points, 0.06%, at 7,888.33. The S&P 500 was down 0.75 point, 0.03%, at 2,857.70.
The GOP tax cuts enacted last year coupled with this year’s spending decisions resulted in a jump of 20% in the deficit in the first 10 months of this fiscal year, the Congressional Budget Office (CBO) reported (link). The long-term budget outlook from the CBO outlined different budget scenarios found the federal debt would equal 148% of gross domestic product in 2038 compared with 118% in an earlier CBO projection. By 2048, debt would equal more than 200% of GDP.
Richmond Fed President Thomas Barkin said it's difficult to justify keeping interest rates low when the economy is strong, unemployment is low and inflation is at the central bank's target.
Turkey’s lira fell to a new record low of 5.449 to the dollar, taking losses for the currency this year to close to 30% as investors fret about the outlook for the country’s economy and worsening relations with the U.S.