MAY-JUNE 1997
Supreme Court Declares Promotion
Programs ConstitutionalReverses Ninth Circuit in Glickman v. Wileman
by Richard T. Rossier
In a 5-4 decision announced in late June, the United States Supreme Court upheld the constitutionality of the mandatory funding of generic commodity promotion programs. In doing so, it reversed the Ninth Circuit’s 1995 decision that had held such programs violate the First Amendment rights of the producers that fund them.
Justice Paul Stevens, writing for the majority in Glickman v. Wileman Brothers, stated that the requirement that producers finance generic advertising is not a law “abridging the freedom of speech” within the meaning of the First Amendment. Justice Stevens was joined in the majority by Justices Sandra Day O’Connor, Anthony Kennedy, Ruth Bader Ginsburg, and Stephen Breyer. Justice David Souter dissented, joined by Chief Justice William Rehnquist, and Justices Antonin Scalia and Clarence Thomas.
Justice Stevens’ Majority Opinion
Writing for the five justice majority, Justice Stevens noted that under a 1954 modification of the Agricultural Marketing Agreement Act, business entities were required to fund generic advertising as part of a broader statutory program that already limited the freedom of individuals to act independently.
Recognizing that collective promotion activities “are intended to serve the producers’ common interest in disposing of their output on favorable terms,” Justice Stevens stated that the legal question for the court was “whether being compelled to fund this advertising raises a First Amendment issue for us to resolve, or rather is simply a question of economic policy for Congress and the Executive to resolve.”
Justice Stevens, for the Court, held that the law should be reviewed under the less strict standard generally applied to judicial review of Congress’s economic regulations.
Justice Stevens noted that there were three characteristics of the generic commodity promotion law that distinguish it from laws that have been found to violate the First Amendment.
First, marketing orders do not prohibit or restrain anyone from speaking to anyone. Producers remain free to say whatever they want to whomever they want. Second, marketing orders do not force producers to speak or to engage in “symbolic” speech. Third, marketing orders do not require producers to endorse or finance any political or ideological views.
He also rejected the argument that First Amendment rights were violated because assessments for generic promotion limit the funds producers have available to engage in their own advertising. He stated that the First Amendment never has been read to require that a law be declared unconstitutional simply because it had the incidental effect of limiting the size of one’s advertising budget.
Justice Stevens also noted that the First Amendment was not violated since the use of producer assessments to pay for generic advertising did not require producers to repeat the generic messages themselves and did not require them to be publicly identified with the generic messages of the commodity boards. The advertising at issue did not attribute the message to any individual producer -- rather the messages were attributed to “the California Tree Fruit Agreement” or to “California Summer Fruits.”
The majority opinion also noted that requiring producers to pay assessments for advertising cannot be seen as creating any crisis of conscience for those assessed, since the advertising is of a commodity that they have chosen to produce and to bring to market. Simply because a group of producers may think that their money is not being well spent does not mean that they have a First Amendment complaint.
Thus, the majority stated, the proper constitutional test to apply is the one set forth in Abood v. Detroit Board of Education. That test merely requires that (1) the compelled funding be limited to activities that are germane to statutory goals, and (2) the compelled funds not be used to support ideological activities.
The Court then held that the Abood test was “clearly satisfied” in this case because (1) the generic advertising of California peaches and nectarines was unquestionably germane to the purposes of the marketing orders, and (2) in any event, the assessments were not used to fund ideological activities.
Speaking for the Court, Justice Stevens went on to criticize the Ninth Circuit’s test requiring the comparison of the efficacy of the generic promotion program with the promotion efforts of individual producers.
He said, “We find this an odd burden of proof to assign to the administrator of marketing orders that reflect a policy of displacing unrestrained competition with government supervised cooperative marketing efforts. . . . [P]otential benefits of individual advertising do not bear on the question of whether generic advertising directly advances the statute’s collectivist goals.”
The Supreme Court majority noted that it is “illogical” to criticize any cooperative program authorized by this statute on the ground that competition would provide greater benefits than joint action. The statute reflects Congress’s policy judgment that volatile agriculture markets will be best served by compelling cooperative action. Judges should not strike down laws simply because they disagree with policy decisions made by Congress. That one or more producers would prefer not to fund generic advertising is not a sufficient reason for overriding the “judgment of the majority of market participants, bureaucrats, and legislators who have concluded that such programs are beneficial.”
Justice Souter’s Dissent
In a lengthy dissent, Justice Souter argued that the First Amendment should be read to include a right to be free from coerced subsidization of commercial speech.
The majority, he says, has misread the Abood decision. First, he stated, Abood does not permit any mandatory assessment to be upheld just because it is germane to a permissible economic regulation and does not require funding of ideological speech. Rather, he argued, Abood stands for the proposition that being compelled to fund protected commercial speech infringes the First Amendment just as much as being prohibited from funding commercial speech.
The four justice minority would have affirmed the Ninth Circuit’s decision striking down the mandatory generic advertising program on First Amendment grounds.
The Post-Wileman Future
The Supreme Court’s decisive Wileman decision is now the Law of the Land. First Amendment challenges to promotion programs under the AMAA, or under commodity-specific promotion statutes, are now likely to be uniformly rejected by the courts. But it is doubtful that commodity promotion opponents will simply pack up their bags and go home.
The challengers do not have any chance of success unless they can show that the promotions involve clear ideological advocacy. However, because these programs are closely supervised by the USDA, a successful First Amendment challenge to a commodity promotion program is highly unlikely.
Richard Rossier is a partner in the law firm of McLeod, Watkinson & Miller which represents various commodity promotion entities created by federal law. The firm filed an amici curiae brief with the Supreme Court in Glickman v. Wileman Brothers seeking reversal of the Ninth Circuit’s decision and in support of the government’s position in the case.
How the NAFTA Panel on Canadian Tariff-Rate Quotas for Various U.S. Agricultural Products Misunderstood the GATT Tariff Regime
by Dale McNiel
Last December, a dispute settlement panel for the North American Free Trade Agreement (NAFTA) made a surprising decision in favor of Canada’s application of tariff-rate quotas on imports of U.S. dairy, poultry, eggs, margarine and barley based on a pure fabrication.
In the U.S.-Canada Free-Trade Agreement (FTA) and in the NAFTA, Canada had agreed to progressively eliminate all tariffs; and during the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), Canada also agreed to eliminate all non-tariff barriers (such as quota and permits) on imports of agricultural products.
At the close of the Uruguay Round, Canada used a process known as “tariffication” to replace its non-tariff measures (quotas on imports of dairy products, poultry and eggs; permits for imports of barley; and a prohibition on imports of margarine) with tariff-rate quotas.
When Canada applied the tariff-rate quotas to U.S. products, the U.S. demanded that the case be reviewed by a dispute settlement panel since the over-quota tariff rates exceeded Canada’s NAFTA commitments. The panel could have simply applied the legal provisions of the NAFTA literally, but instead it based its decision on a conjured up state of mind of hypothetical Uruguay Round negotiators which ignored the events of the negotiations.
The Basis of The Panel’s Conclusion
The panel completely based its conclusion on Article 710 of the FTA, which had been incorporated into the NAFTA. This article provides that the parties had retained their rights and obligations under the GATT and agreements negotiated under the GATT, including Article XI. FTA Article 710 was intended to permit the use of import quotas or other non-tariff import barriers if they were consistent with provisions of paragraph 2(c)(i) of GATT Article XI.
This provision of GATT Article XI permitted certain import restrictions that were necessary to maintain: 1) domestic production controls, or 2) restrictions that were covered by the “grandfather” provisions of the GATT Protocol of Provisional Application — the waiver granted to the United States by the GATT for section 22 import quotas, or the sugar quota reflected in the U.S. Schedule of Concessions under the GATT. Neither test was met in this case.
Notwithstanding the purpose of FTA Article 710, the panel used the provision to create an implied right to increase tariffs pursuant to Uruguay Round tariffication, and it also used the provision to create an exception to NAFTA mandates for tariff elimination. The panel made a number of serious mistakes in reaching this conclusion.
The Negotiating History of FTA Article 710
During negotiations of FTA Article 710, the panel noted absolutely nothing to indicate that it was intended to apply to tariffs or to tariffication in the Uruguay Round.
If the provision incorporated all GATT rights regarding tariffs, then the tariff reductions and elimination mandated by the FTA and the NAFTA would be meaningless for bilateral trade of agricultural commodities, food, and beverages, because each party would retain a GATT right to apply most-favored-nation (MFN) tariff rates.
There also was no tariffication proposal in the Uruguay Round until almost a year after the FTA negotiations had ended. The parties’ agreement to eliminate all tariffs contradicts any notion that they considered Article 710 to preserve the right to increase tariffs.
The year after the FTA went into force, the United States converted its sugar quota into a tariff-rate quota and exempted imports of Canadian sugar from the over-quota tariff rates, thereby graphically demonstrating its belief that Article 710 did not exempt tariff-rate quotas from FTA tariff reduction and elimination obligations.
By the time the NAFTA was negotiated in 1992, mandatory and comprehensive tariffication of all non-tariff measures was being called for in the draft Text on Agriculture in the Uruguay Round, including non-tariff measures consistent with GATT Article XI, the Protocol of Provisional Application, waivers, and various other derogations.
Canada’s struggle to retain a “strengthened and clarified” Article XI:2(c)(i) had been firmly rejected. Although the U.S. and Mexico agreed on tariffication and progressive elimination of all tariffs under the NAFTA, Canada negotiated a deal with Mexico to exempt dairy, poultry and eggs from tariff elimination. However, the U.S. refused to agree to modify the FTA tariff elimination requirements for exports to Canada.
The most relevant event in negotiating the FTA Article 710 occurred during the process of incorporating it into the NAFTA. The U.S. and Canada drafted a note declaring the mutually intended purpose of the provision and stated that FTA Article 710 was intended to cover measures consistent with the GATT Protocol of Provisional Application and waivers granted by the GATT.
The fact that no mention was made of tariffication pursuant to an Uruguay Round agriculture agreement, presents overwhelming evidence that the parties did not interpret the provision to encompass tariffication or at least that there was no meeting of the minds on this issue. Clearly, the panel’s ruling was not carrying out an actual bargain between the parties.
The GATT Tariff Regime and The Legality of Tariffication
The panel ignored the GATT provisions on tariffs and utterly failed to find any provision of an agreement negotiated under the GATT which authorized Canada to increase tariffs — particularly on imports from a partner to a free trade agreement contrary to the GATT provisions for free trade agreements.
In various rounds of trade negotiations under the GATT, starting in 1947, Canada made tariff concessions or “bindings” on virtually all of the tariff subheadings for the products at issue. Under Article II:1(a) of the GATT, Canada has a legal obligation not to apply any rate of duty on imports from a WTO Member at a rate exceeding these MFN bindings. However, Canada’s over-quota rates of duty for imports of dairy, poultry, eggs, margarine and barley exceed its bindings under Article II:1(a).
Article XXVIII provides that if Canada desires to modify or withdraw any tariff bindings, it must negotiate with the Member with whom the concession was initially negotiated and the Member which is the principal supplier of the specific product. It must also consult with every other substantial supplier of the products.
The negotiations must aim at maintaining Canada’s overall level of concessions, and Canada must offer equivalent compensation for every binding that is modified or withdrawn. Such Article XXVIII re-negotiations have never occurred. In addition, it is very unclear how an Article XXVIII re-negotiation would proceed given that the U.S. has the negotiating rights on most products and is entitled to duty-free treatment on all other products by January 1, 1998. In addition, Article XXIV of the GATT permits the formation of customs unions and free trade areas as an exception to GATT obligations on the condition that tariffs and other trade restrictions are eliminated on substantially all of the trade.
The FTA and NAFTA tariff schedules submitted to the GATT for review and approval showed all U.S. and Canadian tariffs being eliminated, without exception. Increasing tariffs after the fact breeches Canada’s commitments under Article XXIV.
At the conclusion of the Uruguay Round, the Trade Negotiations Committee (TNC) was required to decide on the legal status of tariffication in the context of a proposal to amend paragraph 7 of the document which became the Marrakesh Protocol.
The proposal made on Dec. 9, 1993 provided that if any tariff resulting from tariffication of agricultural non-tariff barriers exceeded a previous tariff binding, the Member would be deemed to have satisfied the requirements of Article XXVIII in modifying or withdrawing the binding. The proposal was defeated in the TNC. As a result, the legal status of Canada’s over-quota tariff rates is very dubious even under the GATT.
In sum, instead of acting pursuant to a right under the GATT retained by FTA Article 710, Canada violated Articles II, XXVIII and XXIV of the GATT in the course of violating its NAFTA tariff obligations.
Tariff Rights Under WTO Agreement on Ag.
The panel recognized that the “right” to apply tariffs resulting from tariffication was not explicitly provided in the GATT and, therefore, sought the legal basis of such a right in an agreement negotiated under the GATT in the Uruguay Round — specifically Article 4 of the Agreement on Agriculture. The panel completely missed the point here as well.
Article 4 has two paragraphs. The first paragraph states in plain English that the “market access commitments contained in Schedules relate to bindings and reductions of tariffs....” This provision was intended to make tariff concessions on agricultural products fully integrated into the GATT and subject to Articles II, XXVIII, and XXIV. Moreover, it says nothing at all about tariff increases.
The panel focused on the second paragraph of Article 4, which prohibits any Member from maintaining, resorting to, or reverting to any non-tariff border measures “of the kind which have been required to be converted into ordinary customs duties....” Canada argued that this provision created an “obligation” to engage in tariffication that was incorporated into the NAFTA by FTA Article 710. The panel rejected this argument because the provision literally simply prohibited the use of non-tariff barriers.
The panel then proceeded to fabricate a legal right out of the supposed mental state of anonymous Uruguay Round negotiators. The draft Text on Agriculture tabled by Arthur Dunkel in December, 1991, had provisions (referred to as tariffication “modalities” or guidelines) that specifically required comprehensive tariffication and set out the methodology for calculating over-quota tariff rates and the within-quota quantities of agricultural tariff-rate quotas. However, the Uruguay Round negotiators deliberately removed these modalities from the text as the Agreement on Agriculture was concluded.
Some negotiators proposed that all existing copies of the modalities be confiscated and either locked up or destroyed. After the conclusion of the negotiations, while the parties were preparing their final schedules of concessions, Germain Denis, the Chairman of the Market Access Group issued a note with the tariffication modalities attached to guide the final preparations and restrain “dirty” tariffication (where a party does not follow tariffication modalities.) The note had a caveat that it could not be used as the basis of a claim in dispute settlement to emphasize that the tariffication modalities had no legal status and did not create legal rights or obligations.
Canada was in a curious position with respect to these modalities. In 1989 a GATT panel had ruled that Canadian import quotas on ice cream and yogurt violated GATT Article XI and refused to find that Canada’s supply management system for dairy qualified under the Article XI exception. This raised a cloud over the GATT legality of all Canadian import quotas for dairy, poultry and eggs.
The issue of tariffying GATT-illegal quotas had been strenuously contested during the negotiations, and no consensus had emerged to permit the practice. Thus, Canadian tariffication may not have qualified under the modalities, especially with respect to ice cream and yogurt.
By the time that Canada accepted tariffication on Dec. 15, 1993, the Dunkel tariffication modalities had been rejected and stripped from the text and Chairman Denis’ note had not yet been issued.
Nonetheless, the panel took these negotiating documents, one deliberately rejected and the other issued 5 days after the close of the negotiations with a clear caveat, as part of the travaux preparatoires, or negotiating history, of Article 4.2 that could be considered pursuant to Article 32 of the Vienna Convention on the Law of Treaties as an aid to interpretation.
On this basis, the panel found that “the entitlement to establish and apply tariff equivalents was, in the minds of the participants, inextricably linked with the obligation to remove non-tariff barriers.”
The panel did not discuss whether this imaginary “right” existed in the minds of the U.S. and Canadian negotiators. The intense, high-level bilateral negotiations at the conclusion of the Uruguay Round on the products subject to tariffication should have persuaded the panel that the issue had not been resolved in the FTA negotiations in 1987.
The panel practically ignored what was really in the minds of the negotiators and it elevated a right, existing only in an imaginary state of mind, into a NAFTA right to apply increased tariffs to U.S. products as a permanent exception to the NAFTA tariff freeze and elimination provisions.
The Bigger Picture
By 1992, Canada fully understood that the price of its admission into the NAFTA was the elimination of all tariffs including the tariffs on dairy, poultry, eggs, barley and margarine. Canada wanted to be included in the NAFTA, and to do so, it reaffirmed its commitment to eliminate all tariffs on the goods at issue, even though it had good reason to believe that it could be prevented from maintaining non-tariff barriers in the Uruguay Round.
In 1993, Canada wanted to be included in the WTO and knew that the price of inclusion was the elimination of all quotas and other non-tariff barriers. At the same time, the U.S. clearly and repeatedly insisted that tariff equivalents resulting from tariffication could not be applied bilaterally because of the NAFTA tariff freeze and elimination rules.
Canada could have demanded to renegotiate the NAFTA but it did not. Canada could have negotiated an exception to tariffication, such as the “special treatment” exceptions negotiated by Japan and Korea, but it did not. Ultimately, Canada took a big gamble, signed on to the WTO and flaunted its NAFTA tariff obligations.
The panel failed to see that it allowed Canada to escape from a solemn bargain and that it now has perpetuated protectionist policies to the detriment of U.S. producers and exporters and Canadian consumers and food processors. The damage is compounded because the United States is politically compelled to provide the same treatment to Canadian exports of dairy products, sugar, sugar-containing products, peanuts and peanut butter.
How Could the Panel Go So Wrong?
The panel appears to have believed, mistakenly, that the GATT legality of tariffication, even “dirty” tariffication, could be taken for granted. Yet, the legality of tariffication was avoided by the Uruguay Round negotiators until the very end of the round, and then they decided against automatically blessing the legality of tariff equivalents.
It is possible that the panel did not address the legality of tariffication because the parties did not demand it, and because those panel members had not participated in the agricultural negotiations, they were not aware of the issues.
Even so, having failed to find any provisions in the GATT or the Agreement on Agriculture that explicitly would justify Canada’s breach of its NAFTA tariff obligations, why did the panel base its decision on a conjured up state of mind of hypothetical negotiators which ignored the events of the negotiations? Why didn’t the panel proceed very cautiously and demand a full explanation of the GATT tariff regime and the relevant events of the Uruguay Round? The answer may lie in part in the failure of the parties, the United States and Canada, to address these issues completely.
In addition, there was an apparent lack of knowledge by the panelists regarding the GATT law on tariff bindings, Canada’s prior tariff concessions, or the events of the Uruguay Round negotiations on agriculture. There are standard reference works on the law of the GATT that would have raised essential questions. Ultimately, in an adversary system of resolving disputes, the opposing parties bear the burden of presenting the law and the facts to the decision makers.
There is nothing in the record to suggest the panelists were biased, although they may have viewed the issue as far more important to Canada because of the separatist movement in Quebec, a leading producer of dairy, poultry and eggs. It is likely that the panel members were uninformed. The laws and workings of the GATT are not widely understood, and many important documents, such as negotiation proposals, are not available to the public. However, the panel should have found that Canada violated its obligations under Article II:1(a) of the GATT by imposing tariff rates in excess of GATT bindings and, therefore, was not justified by FTA Article 710 in departing from its NAFTA tariff obligations. The panel must bear at least a large part of the responsibility for its own decision.
A Cloudy Future, But The U.S. Should Take Action
There is no appeal under the NAFTA regarding the panel’s decision. It cannot be determined with certainty whether a second NAFTA case can be brought that is virtually identical to an earlier decided case. There is no rule of res judicata in the NAFTA, and the concept of stare decisis may not apply, since many of the crucial issues were not raised or decided. It would be possible to initiate a dispute settlement proceeding under the WTO, since Canada’s tariff-rate quotas violate its GATT tariff obligations.
In any event, there probably will be future opportunities to address Canadian market access in the context of enlarging the NAFTA or a new round of multilateral trade negotiations under the WTO.
On Dec. 2, 1996, U.S. Trade Representative Barshefsky and Secretary Glickman pledged to “do everything possible, consistent with our trade laws, to seek the ultimate elimination of these duties.” The affected industries will have to determine if and when there will be future litigation or negotiation on this issue. Given the egregious errors committed by the NAFTA panel and the Administration’s promises to do everything possible, USTR and USDA should look favorably on the approaches decided upon by the affected industries.
For more detailed information on this subject, please see Mr. McNiel’s article which is expected to be published in this month’s issue of the Yale Journal of International Law.
Dale McNiel is a partner in the firm and he specializes in international trade law in agriculture. Mr. McNiel was recently a senior counsel in the office of the General Counsel at the U.S. Department of Agriculture.
Latest Tax Legislation Good For Family Farmers
by Burton Eller
Congress is on its way to creating the most sweeping changes to the tax code since 1986 (for estate taxes since 1981). The vast majority of these tax code revisions will be beneficial to agriculture in general and to family farms in particular. Tax packages were included in the gigantic balanced budget reconciliation legislation passed by both chambers just prior to the July 4 recess. However, there are wide differences between the House and Senate versions on many key tax provisions. These differences must be reconciled by a Senate-House conference committee during July. Several of the most important differences are summarized as follows:
Provisions of the Tax Packages
PROVISIONS
HOUSE
SENATE
Family Tax
Credits
Families that pay taxes could claim a credit for each child as old as 17 of $400 in 1998 and $500 in 1999 and beyond.
Couples with adjusted gross incomes below $110,000 and single filers below $75,000 could claim a $500 tax credit for each child 17 years of age and under. For children ages 13-16, the credit must be deposited into an education savings account or a prepaid tuition program.
Capital Gains
The top rate on individual capital gains would be reduced from 28% to 20%. For depreciable real estate, the portion of the gain that reflects recapture would be taxed at 26%. The first $500,000 in gains on sale of a principle residence would be exempt; this replaces the present-law rollover and one-time exclusion provisions (effective date: May 7, 1997).
Corporations, most of which currently pay a 35% rate, would see a decline to 32% in 1998, 31% in 1999 and 30% in 2000 for property held more than five years.
Capital gains would be "indexed" for inflation starting in 2001.
Same as the House with three key exceptions: no reduction in corporate capital gains rates; capital gains would not be indexed for inflation; for depreciable real estate, the portion of the gain that reflects recapture would be taxed at 24% (Effective date: May 7, 1997).
The Senate would expand an existing provision designed to spur venture capital by allowing individuals a 50% exclusion on profit from the sale of a small business acquired at its initial offering, for an effective rate of 10%. Now, the exclusion applies only to the first $10 million in gains, but the bill would set no limit. Also, the size of the small business that would be eligible for the exclusion would increase from $50 million in assets to $100 million. The Senate would not index gains for inflation.
Alternative
Minimum Tax
(AMT)
This tax, created in 1986 to ensure that everyone, especially companies, paid some income tax annually, would be repealed for corporations with gross receipts less than $5 million a year. Provides accelerated depreciation schedules for machinery and equipment which allow larger corporations to reduce AMT.
No reduction in the corporate alternative minimum tax. For individuals, the Senate uses a different formula than the House to increase the exemptions that individuals could take to reduce their taxable income under the alternative minimum tax.
Individual
Retirement
Accounts
(IRA)
Taxpayers would be allowed to save $2,000 a year after taxes in an IRA and make withdrawals tax-free if the money was in the IRA for five years; the withdrawal was used to buy a first home; or the taxpayer was disabled. The $2,000 contribution limit would be indexed for inflation after 1998.
Backloaded IRAs similar to the House. The Senate expands tax-deferred IRAs by raising the income limits on taxpayers eligible by about $10,000 a year through 2004. Taxpayers could withdraw up to $10,000 penalty-free from an IRA for a first-time home purchase or long-term unemployment.
Ethanol Tax Credit
Phase out tax credit and excise tax exemption by 2000.
Extends the credit through 2007 while gradually reducing levels.
Tobacco Tax
No provision.
Increases the current tax of 24 cents per pack of cigarettes as necessary to offset other changes in the bill, perhaps by 20 cents per pack.
Estate Tax
The portion of an estate exempt from tax would increase from $600,000 to $1 million by 2007 and indexed for inflation beginning in 2008.
Increase in the exemption to $1 million, phased in by 2006, and indexed for inflation in 2007. Family-owned businesses and farms would get an additional $1 million exemption starting in 1998.
There are several special Estate Tax provisions at issue in the Senate-House conference committee which could greatly affect individual farmers. These provisions include:
Indexing for
Inflation
The conference committee could allow several additional provisions to be indexed for inflation including annual exclusion for gifts, generation-skipping exemption tax, and the ceiling on the value of a closely-held business eligible for the special low interest rate (alternative valuation).
Material
Participation
An additional estate tax would be imposed if the material participation requirements are not met with respect to the qualified family owned business interest passed from the decedent.
Conservation Easement
Several provisions could reduce the gross estate value because of land in qualified conservation easements.
Cash Rent
Surviving spouse or lineal descendant may not be treated as failing to meet qualified use solely because of cash rent to a family member.
Modification of Generation-Skipping Transfers
Congress could extend the predeceased parent exception to transfers to collateral heirs, provided the decedent has no lineal decedents at time of transfer.
Effective dates for most estate tax changes is Dec. 31, 1997.
Miscellaneous
Several additional less publicized provisions that are important to farmers and ranchers are up for grabs by the Senate_House Conference. These provisions are income averaging (only for agriculture) and health insurance deductions for the self employed.
If the Senate-House Conference Committee were to choose the most pro-agriculture provisions from each of the House and Senate bills, this would be the most important tax relief for agriculture in a quarter century. We will report on the outcome of the House and Senate Conference in our next issue of The Agricultural Law Letter.
Burton Eller is a government relations professional in the firm of McLeod, Watkinson & Miller. Mr. Eller has extensive prior experience as a lobbyist and CEO, and he currently represents the interests of several trade associations before the Congress and the Administration.
An Opportunity For Tobacco Program Reform
by Mike McLeod
Tobacco farmers are determined not to be left out in the cold when Congress considers the historic $368.5 billion agreement worked out in June between tobacco companies and anti-smoking forces.
During the 81 days of negotiations on the $368.5 billion tobacco settlement, little if any attention was given to what might happen to farmers under the proposed agreement. New taxes and higher prices could increase the price of a package of cigarettes from the national average of $1.85 to as much as $3 or more. That worries growers and their congressional representatives and senators. Those prices could force a further and significant reduction in domestic consumption.
While there is nothing in the agreement to protect farmers, tobacco area members of Congress will insist on some substantial benefits for their farmers as a price of supporting the agreement. Congress may find that the proposed agreement is a chance to be fair to farmers and at the same time remove the federal government once and for all from supporting a crop that is considered injurious to public health.
The settlement, announced June 20, brought this response from Sen. Wendell H. Ford (D-KY) that reflected the views of other members from tobacco growing regions: “My concern has been and continues to be protecting the interests of our farmers...I think the agreement falls woefully short in addressing the interests of our farmers.”
Ford’s statement continued, “I refuse to support any agreement that does not provide protection for tobacco farmers and those who are out there trying to make a decent living...This is round one of what promises to be a lengthy battle in Congress. Even though the negotiators have reached an agreement, it will be near or at the end of this session before it is considered by Congress. The opening bell has just rung, and there’s a long way to go before this fight for the farmer is over.”
South Carolina Attorney General Charlie Condon, the only tobacco-state attorney general involved in the settlement talks, stated, “The point is, farmers have done nothing wrong.”
Rep. Bob Etheridge (D-NC), has been quoted as saying any deal is “dead on arrival” in Congress unless farmers are protected. Tobacco “is more than a livelihood; it’s part of the culture of the region,” he said. And Larry Wooten, vice president of the North Carolina Farm Bureau said flatly, “There’s nothing in this settlement that speaks for farmers.”
Congressional action is needed, for several reasons, including the fact that the agreement would change the statutory authority for the Food and Drug Administration. But it is certain that any legislation approved will have to have the support of President Clinton and will range far beyond simply reconciling FDA authority.
But Congress is not expected to go out on a limb with such an agreement without White House support, and with considerable influence in Congress, tobacco farmers may find a receptive audience for their requests.
It will not be the first time, by far, that Congress has been given the opportunity to “reform” the tobacco program: for several years, the program has been under attack in Congress. In recent years, agricultural appropriations bills have provided an annual opportunity to include an amendment that would eliminate the program or reduce federal involvement in the program. Recent amendments have tried to deny tobacco farmers the benefits of the federal Cooperative Extension Service and crop insurance.
How The Tobacco Price Support Program Works
More than 93% of U.S. tobacco production is flue-cured and burley. Both of these types of tobacco plus some other minor types of tobacco operate under one of the most restrictive price support programs ever administered by the U.S. Department of Agriculture.
Production is strictly controlled by farm marketing quotas on a poundage basis for burley and by farm marketing quotas on an acreage-basis for flue-cured tobacco. The government establishes a national price support level for burley and flue-cured tobacco and imposes an assessment on producers and buyers to pay for the cost of operating the program. These assessments vary from year to year, but they have been quite substantial. For the 1996 crop marketing, the assessment on growers is 1 cent per pound and for the buyer it is 1.8 cents per pound.
However, some tobacco producers have opted to rely on the free market and grow and market their product without government controls. The producers of Maryland (type 32) Pennsylvania cigar-filler (type 41) and Connecticut Valley cigar-binder (type 51-52) have voted in referendum to disapprove marketing quotas.
The U.S. Tobacco-Growing Industry
The value of U.S. tobacco production in 1996 was $2.94 billion, comparable to spring wheat ($2.9 billion), grain sorghum ($2 billion) and potatoes ($2.5 billion). A total of 1.6 billion pounds of tobacco were harvested in 1996 compared with 1.3 billion in 1995 and 1.6 billion in 1994. The average price to growers in 1995 (the most recent year official figures are available) was about $1.80 per pound for flue-cured and $1.85 per pound for burley, the two dominant types of tobacco grown in the United States.
An Expanding Market
One growing market for U.S. tobaccos of all types has been in foreign countries. In 1986, the United States exported a total of 590 million pounds of all varieties. In 1995, that had increased to 958 million pounds; in 1994, slightly more than 1 billion pounds were exported. The U.S. market, of course, has been declining over the same period. In 1986 almost 1.2 billion pounds of tobacco products were sold in the United States. Per capita consumption of all products that year was 6.56 pounds. By 1995 the total consumption had declined to 955 million pounds, and per capita consumption averaged 4.92 pounds. The United States has been importing lesser amounts of total tobacco in recent years; the grand total has slipped from 460,837 metric tons in 1993 to 190,294 metric tons in 1995. However, “scrap” tobacco imports have increased significantly: 1,205 metric tons in 1993, 844 metric tons in 1994 and 4,826 metric tons in 1995. In 1996, tobacco farmers received a price support of $1.60 per pound for flue cured and $1.74 for burley.
What the Growers Want
The recommendations made by growers probably will take two different approaches:
1) More government protection for growers, such as a long-term guarantee for continuation of a price support program and a requirement that tobacco companies use up to 85% of domestic tobacco in their products.
Some tobacco grower leaders want a guarantee that the tobacco growers will continue to be heavily protected. Charles Finch, manager of administrative operations, Flue-Cured Tobacco Cooperative Stabilization Corporation, Raleigh, NC, says that farmers want quotas protected as much as possible to avoid “fence post to fence post” tobacco production. That would cause prices to decline precipitously, he adds, and hurt not only tobacco farmers but rural communities that depend on a tobacco economy.
Growers want some assurance from tobacco companies that they will continue to buy enough U.S. tobacco to maintain “a fairly good quota level,” said Finch. That, he adds, would be a reasonable request even if the agreement resulted in significantly less tobacco products being consumed in the United States. Tobacco companies, says Finch, can be expected to work to expand foreign markets in years to come, and the United States grows a high-quality tobacco that will be in demand in other countries. Companies also should be willing to assure U.S. producers that they will not import a lot of cheaper foreign tobacco, says Finch.
2) Elimination of government involvement in tobacco production and marketing in return for a generous buyout of quota. This would involve setting aside some of the money the tobacco companies agreed to pay under the proposed agreement to pay tobacco farmers a fair price for their quota. The figure of $6 billion has been suggested. The government could make transition payments over a period of years to compensate tobacco farmers for the value of their quota (just as the producers of other commodities are receiving transition payments in return for losing their price and income support programs under the 1996 Freedom to Farm bill). This would leave those tobacco farmers who want to continue planting tobacco the opportunity to do so in a free market. Those who wish to retire or grow other crops would be free to do so. In any event, they would be paid the value of their quota.
In previous years, members of Congress, led by former Rep. Charlie Rose (D-NC) addressed the possibility of buying out tobacco quotas, thereby ending federal involvement in the growing and marketing of tobacco. That would have taken billions of dollars that were not available at the time. With the massive amount of money involved in the proposed agreement, the money now is available.
An article in the July issue of Fortune magazine notes that trial lawyers will get at least $3.5 billion from the settlement. Congress may with to make at least as much available to farmers as would be available to trial lawyers under the settlement.
The Best Alternative
It would appear that the best alternative for tobacco farmers would be to push for a buy-out of quota. As long as there is a federal program controlling the growing and marketing of tobacco, it will continue to be a target. Moreover, even if Congress were to grant some concessions to growers as a part of the tobacco agreement, it would not bind future Congresses.
In the 1980s, tobacco state Congressmen felt that converting the tobacco program to a “no net-cost” program would assure its future. They were wrong. In recent years, there have been annual attacks on the tobacco program. Anti-smoking activists will never be satisfied as long as there is federal involvement in the growing and marketing of tobacco.
Therefore, the best hope for tobacco farmers is to secure a generous buy-out of quotas at the only time that a large sum of money is to be available. Then efficient tobacco farmers would be free to compete and sell their products in the market just as producers of Maryland tobacco and cigar binder now do.
Mr. McLeod is a partner in the firm and practices agricultural and agribusiness law. He is a former General Counsel and Staff Director for the Senate Agriculture Committee.
The Agricultural Law Letter is published to highlight recent changes and developments in the law and public policy. As with any publication of this type, it is essential that before any action is taken based upon this information, competent, individualized, and professional advice should be obtained. Copyright 1997 by McLeod, Watkinson & Miller. Reproduction in part or in whole is permitted with permission from McLeod, Watkinson & Miller. Contact Suzanne Bucciarelli at (202) 842-2345, or write to One Massachusetts Avenue, NW, Suite 800, Washington, D.C. 20001. Subscriptions to the newsletter are $25 per year.
