The Hardwood Federation Newsletter

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Year of the Farm Bill...or at least we hope so

January 2018

The House and Senate Agriculture Committees are putting pen to paper on the next Farm Bill, which expires this year.  In our communications with staff, it is clear that the House is on a glide path to finish drafting the bill by the end of February.  The Senate is on a slower track, but not that far behind-likely early spring.  The timing of marking up these drafts is a little less certain as Farm Bill authorizers (House and Senate Agriculture Committee Chairmen) will want assurances from leadership that floor time is available for Farm Bill consideration.  They will not want to report out a bill from committee and then have it languish for potential opponents to pick apart. 
 
Your Hardwood Federation team has been working hard with our colleagues on a few key policy areas in the Farm Bill.  Our highest priority is seeing that the Market Access and Foreign Market Development programs are authorized for another 5 years and fully funded.  We are supportive of a group that is lobbying Congress to significantly increase funding for both these programs, but based on our feedback from key Congressional staff, we believe that preserving current funding levels is the best we can expect.  Funding for programs in this round of Farm Bill negotiations will be particularly tight.  
 
We have also been active with the Forests in the Farm Bill Coalition on a couple of policy deliverables.  One is the Timber Innovation Act, which would promote using wood to construct taller buildings.  We believe there is tremendous potential for moving markets for hardwood products as acceptance of mass timber grows and we are lending our advocacy help to enact this legislation as part of the Farm Bill.    
 
Finally, we are working on a biomass energy proposal for inclusion in the Farm Bill which we think will help with our challenges dealing with sawmill residuals.  The program is called the Community Wood Energy Program (CWEP) which would provide grants for installing advanced wood heating systems in public institutions across the country.  The proposal we are advocating, again as part of the Forests in the Farm Bill Coalition, is to expand the program's scope to include private institutions and to give the program the funding it needs to deliver on its goals.  Feedback from committee staff and leadership has been generally positive.  We should know definitively in the coming weeks about the progress on all three efforts as details about the drafts become available.

ISSUES

Tax Reform
In our last newsletter of 2017 HF was able to report that the "Tax Cuts and Jobs Act of 2017" had indeed passed the House and Senate, working its way out of the Senate on a 51-49 party-line vote via the reconciliation process.  We can now report that the president did indeed sign the $1.5 trillion bill into law on Dec. 22nd.  Also as previously noted the bill contains:

  • Corporate tax rate:  The conference report settled on a 21 percent tax rate for C Corporations, a notch higher than the 20 percent rate in both the House and Senate-passed versions.   The corporate alternative minimum tax or AMT is also repealed.  Inclusion of AMT at a 20 percent rate in the Senate version threatened to undermine any benefits of a newly lowered 20 percent rate for C Corporations. 
  • S Corporations and Pass Throughs:  Creates a 20 percent deduction for the non-wage portion of pass-through income.  Senators Daines and Johnson had negotiated a 23 percent deduction, but this was ratcheted back to 20 percent, coupled with a lowering of the top individual rate to 37 percent.  This blended approach creates an effective tax rate for these entities of 29.6 percent.  The 20 percent deduction is limited to the greater of 50% of a business's W-2 wages or 25% of a business's W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property held in the qualified business for taxpayers with income over $315,000 (married) or $157,500 (individuals). The limitation is phased in over the next $100,000 (married) of taxable income and $50,000(individuals).
  • Estate Tax:  Current exemption limits are doubled to $11.2 million per person. 
  • Net Operating Losses:  NOLs are limited to 80 percent of income with indefinite carry forward.   Carry backs are disallowed.
  • Expensing/cost recovery:  100 percent full expensing for investments in new and used property made after Sept. 27, 2017 and before January 1, 2023.  A five-year phase down of full expensing begins in 2023.
  • Sec. 179 Expensing Limits:  Increased to $1 million, with phase-out beginning at $20 million in total qualified property placed in service.  The provision is expanded to include property used to furnish lodging and improvements to nonresidential real property including roofs, heating, ventilation and air-conditioning property, fire protection and alarm systems, and security systems.
  • State and Local Property Tax Deductions:   Repealed except for property and sales taxes incurred in operating a trade or business, and for up to $10,000 in other property taxes (not indexed) prior to 12/31/2025. 
Farm Bill
In addition to the Farm Bill summary above, USDA Secretary Sonny Perdue has been on a tour rolling out the Administration's priorities for the next farm bill.  Unveiled Wed. Jan. 24th the more than 40 principles for the next farm bill highlight a "fiscally responsible" farm bill, with an emphasis on work, self-sufficiency in nutrition assistance, no increase in "shallow loss payments" to farmers, and investing in ag exports - though not specifically mentioning MAP and FMD.  The press release and principles can be found below:
 
Press Release
 
Principles
 
Once-In-Always-In Policy Withdrawal
On Thursday Jan. 25th EPA air chief Bill Wehrum withdrew Clinton-era guidance that was designed to prevent major emitters from getting out of strict requirements to limit their toxic air emissions. "This guidance is based on a plain language reading of the statute that is in line with EPA's guidance for other provisions of the Clean Air Act," Wehrum said.  Under the previous policy, any emitter that qualified as a "major" source of hazardous air pollutants, like power plants and factories, would forever be subject to that tougher standard to comply with MACT rules, even if its emissions dropped low enough to be considered an "area" source subject to fewer or no requirements.
 
If a source's potential to emit (PTE) is less than 25 tons of HAPs (or 10 tons of a single HAP) and it takes an enforceable limit, then it can be reclassified as an area source facing much lower burdens. EPA believes that this is a plain reading of the Clean Air Act and will encourage facilities to reduce emissions to avoid the burdens of MACT compliance.
 
Trade
NAFTA talks continue with the most recent round concluding in Montreal, Canada.  There continues to be concern that the US will withdraw from talks and agreements, but the most recent statements from the President and Administration appear to moving forward and have seen some progress in negotiations.  On January 30th a group of 36 GOP Senators including Mitch McConnell, Lindsey Graham, John Cornyn, John Thune, Rob Portman, Chuck Grassley, Ben Sasse, Ted Cruz, and Bob Corker sent a letter to President Trump asking that he preserve NAFTA and "support the 14 million jobs, representing thousands of jobs in each of the 50 states... [and] the next step to advance the economy requires that we keep NAFTA in place, but modernize it to better reflect our 21st century economy."
 
There is still a long way to go, especially on some of the thornier issues, but any sign that things are progressing and that Members of Congress can, and are, supporting the efforts to stay in the agreement is viewed as advancement.
 
To support efforts to preserve U.S. participation in NAFTA, new trade coalition has formed in Washington.   Called Trade for America, the coalition includes the National Association of Manufacturers, the U.S. Chamber of Commerce, Business Roundtable and the American Farm Bureau Federation.  While numerous industry sector specific coalitions have sprung up, including Agriculture focused groups, this is the first one being driven by the large business umbrella organizations.   Bill Lane, the Executive Director of the new group had this to say:  "There's a recognition that the economy is growing, jobs are being created and the stock markets are at record highs but there's enormous anxiety, particularly outside of Washington, regarding trade.  While all of these groups have their own independent trade education efforts that they've been pursuing for an extended period of time we felt it was just absolutely critical that we amplify our voice."

The focus out of the gate will be to build support for updating the North American Free Trade Agreement (NAFTA) and the U.S.-Korea Free Trade Agreement (KORUS).  The coalition's plan is to look outside Washington to businesses, farmers and manufacturers on the ground to gauge where they need the Trump administration to steer trade policy.  Lane continued:  "We need a more open discussion on trade, and more than anything, a more civil discussion on trade so that folks can make informed decisions.  There's just way too much rhetoric going on."  Chamber President Tom Donohue offered his thoughts in a statement:  "Now that America's economy is back on the upswing, we should recommit to the policies that got us here, including smart trade policy. That means strengthening our trading partnerships - not weakening them - so we keep pace in the global competition to sell to the 95 percent of the world's population that lives outside the U.S."

The Hardwood Federation will be monitoring activities of this coalition and will keep you regularly apprised of developments. 

Northern Long Eared Bat/White Nose Syndrome
White-nose syndrome has killed over 6 million bats in the US and Canada over the past decade, killing 90-100% of bats with the disease. The Northern Research Station announced this past weekend that the fungus, Pseudogymnoascus destructans, that causes white-nose syndrome (WNS) in bats may have a weakness. Research conducted by the U.S. Forest Service, the U.S. Department of Agriculture and the University of New Hampshire shows that the fungus is negatively impacted by UV light. The study found that small doses of UV light destroyed about 85% of the fungus exposed to the light and that only 1% of exposed areas survived against modest exposure. In this case a small hand-held UV light device was used for only a few seconds.  
 
This new information could lead to big breakthroughs for the disastrous disease, and many government agencies are encouraged by the news. Lead author of the study and research botanist in the Norther Research Station lab, Jon Palmer, is "very hopeful that the fungus' extreme vulnerability to UV light can be exploited to manage the disease and save bats." The US Fish and Wildlife Service believes "investing in defeating WNS must be a priority, and the results from this study and contributing research give us hope that we can develop the tools to more effectively manage the fungus that causes the disease," according to WNS coordinator Jeremy Coleman. Director of the Forest Service's Northern Research Station and the Forest Products Laboratory, Tony Ferguson,  noted "bats play a key role in the health of forests as well as the production of food in the United States, and developing an array of tools with which we can treat bats for white-nose syndrome is important to preserving these very important species."
 
The next steps is to conduct farther research on if a UV light treatment can be used on already diseased bats. The disease has led to the listing of the Northern Long-Eared Bat as a threatened species, with potential impacts on forest management.

A Season and Tradition of Giving

December 2017

This is the time of year for giving and I am constantly reminded how much the U.S. hardwood industry gives to their communities and to the nation.  Jobs and state and federal taxes are, of course, provided by the mills, yards and manufacturing facilities that make up the industry, but the support hardwood companies provide to their local communities in terms of economic development, recreation and charitable endeavors must also be acknowledged. 

Recently, I was privileged to attend the dedication of an adapted smart home for Michael Flamion, a police officer in Ballwin, Missouri paralyzed from the neck down after being shot in the back after a routine traffic stop.  The home was designed, built and dedicated through the work of the Gary Sinise Foundation (GSF).  The beautiful wood floors were donated and installed by members of the National Wood Flooring Association (NWFA), a non-profit partner of the GSF and a founding association member of the Hardwood Federation.  This home will provide a safe space for Officer Flamion and his family as they work to adapt to this new reality, a reality few of us can comprehend.  Members of the NWFA have generously contributed materials and labor to multiple homes around the country and truly exemplify the kindness and generosity of the industry.  It was a truly moving experience to see this family walk through their finished house for the first time…and to know that the hardwood community was an integral part of this family’s now much brighter future.  And the NWFA is not alone. I know other hardwood organizations are just as involved in local, national and international worthy causes.

As always, I thank you for your support of the Hardwood Federation and your engagement in the work we do in Washington.  But in the holiday spirit, I also want to thank you for the support you provide to your employees, their families, and your local communities. 

Warm wishes for a very happy and merry holiday season from the Hardwood Federation!!

ISSUES

Tax Reform
The House and Senate passed comprehensive tax reform legislation this week.  Late Tuesday night Dec. 19th the Senate passed the "Tax Cuts and Jobs Act" on a party-line 51-48 vote.  After a bit of a procedural snafu the House passed the legislation (for a second time in as many days) by a 224-201 vote. The bill has proceeded through Congress via a process known as "reconciliation" which allows the bill to pass with a simple majority in the Senate instead of the 60 vote threshold that would normally be required.  The President is expected to sign the bill.
 
Below is a brief snapshot of key provisions in the final bill:

  • Corporate tax rate:  The conference report settled on a 21 percent tax rate for C Corporations, a notch higher than the 20 percent rate in both the House and Senate-passed versions.   The corporate alternative minimum tax or AMT is also repealed.  Inclusion of AMT at a 20 percent rate in the Senate version threatened to undermine any benefits of a newly lowered 20 percent rate for C Corporations. 

  • S Corporations and Pass Throughs:  Creates a 20 percent deduction for the non-wage portion of pass-through income.  Senators Daines and Johnson had negotiated a 23 percent deduction, but this was ratcheted back to 20 percent, coupled with a lowering of the top individual rate to 37 percent.  This blended approach creates an effective tax rate for these entities of 29.6 percent.  The 20 percent deduction is limited to the greater of 50% of a business's W-2 wages or 25% of a business's W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property held in the qualified business for taxpayers with income over $315,000 (married) or $157,500 (individuals). The limitation is phased in over the next $100,000 (married) of taxable income and $50,000(individuals).

  • Estate Tax:  Current exemption limits are doubled. 

  • Net Operating Losses:  NOLs are limited to 80 percent of income with indefinite carry forward.   Carry backs are disallowed.

  • Expensing/cost recovery:  100 percent full expensing for investments in new and used property made after Sept. 27, 2017 and before January 1, 2023.  A five-year phase down of full expensing begins in 2023.

  • Sec. 179 Expensing Limits:  Increased to $1 million, with phase-out beginning at $20 million in total qualified property placed in service.  The provision is expanded to include property used to furnish lodging and improvements to nonresidential real property including roofs, heating, ventilation and air-conditioning property, fire protection and alarm systems, and security systems.

  • State and Local Property Tax Deductions:   Repealed except for property and sales taxes incurred in operating a trade or business, and for up to $10,000 in other property taxes (not indexed) prior to 12/31/2025. 

Also notable is that existing tax incentives for standing timber and reimbursement for reforestation costs were left alone by tax writers.  Forest landowners were concerned that these incentives would be targeted to pay for comprehensive tax reform.  This was an area that we covered during our fly-in and we are pleased with the fact that Congress recognized the benefits of these incentives to maintain the viability of our nation's working forests

Finally, all of the renewable energy tax credits that made it into the House tax reform bill were stripped out in conference.  Leadership has vowed to pursue a follow-up package of so-called "tax extenders" to address these credits.  One of the proposals in the mix is the Biomass Thermal Utilization or BTU Act, which would provide an investment tax credit for installing residential and commercial biomass heating units that run on chips or pellets.   The Hardwood Federation has been advocating for this proposal as a means of addressing our residuals issues. 

 A PowerPoint from Bloomberg is attached here to give you a full overview of the proposed package.  As always, we will keep you apprised of developments and progress on our advocacy efforts.

MAP-FMD Funding 
There has been concern that passage and formal enactment of Tax Reform in 2017 would trigger the Statutory Pay-As-You-Go Act of 2010 (SPAYGO) that, unless waived by Congressional action, could trigger the elimination of many agriculture based programs, including export promotion funding for the American Hardwood Export Council (AHEC).  SPAYGO requires that funding levels for numerous direct spending programs be eliminated in the event Congress increases the federal deficit through spending increases or tax cuts. As the tax bill would result in a net revenue loss of over $1.5 trillion over ten years SPAYGO would be triggered unless it is waived.  There is a chance that language attached to the 2018 continuing resolution to fund the government through mid-January 2018 which is up for passage over the next few days could address this issue. The more likely scenario is that the President will hold off on signing the tax bill until January 2018, ensuring funding for all direct programs through FY 2018.  The Hardwood Federation is closely watching this situation as it evolves and will keep AHEC and Hardwood Federation members informed.
 
Fire Meeting
On Monday Dec. 11th the Hardwood Federation was invited to participate in a roundtable discussion regarding wildfire and how the Agriculture and Interior departments can better work together to prevent and address forest fires on federal lands.  Along with a broad swath of associations and individuals concerned with the millions of acres burned each year and dedicated to finding ways to prevent the ignition and spread of forest fires, the roundtable was convened by Ryan Zinke, the Secretary of the U.S. Department of the Interior and Sonny Perdue, Secretary of the U.S. Department of Agriculture.  Also attending were U.S. Forest Chief Tony Tooke, Congressman Rob Bishop (R-UT, 1), Chairman of the House Committee on Natural Resources, and Congressman Bruce Westerman (R-AR, 4), the only registered forester in Congress and the primary author of Resilient Federal Forest Act of 2017.
 
The response from the Secretaries and their staffs was encouraging and federal management reform is clearly a priority of both departments.  We will continue to work closely with our allied associations, Congress, and the Administration to enact reform in 2018.

Regulatory Agenda
The Trump Administration issued it's "Current Regulatory Plan and the Unified Agenda of Regulatory and Deregulatory Actions", as well as a "Regulatory Reform:  Two-for-one Status Report and Regulatory Cost Caps" scorecard report from the Office of Management and Budget on Dec. 14th
 
In essence the bi-annual report states that in 2017 the Administration and Agencies removed 22 rules for each new rule issued for a $570 million annual net cost savings.  As with most new administrations 2017 was a bit of a "reset" year with notably slow rulemaking resulting in only 3 new rules, which explains part of the high ratio in the report.  2018 will come with additional high hopes on deregulaton as the Administration is planning 448 deregulatory actions to offset 131 planned actions, or a 3-to-1 ratio.  It will be interesting to see what the next report says on this progress or if it will be a slower pace.

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