What's The Section 199 Tax Deduction?

As Republicans look to overhaul the tax code, we look at the story of a single corporate tax deduction that tells us a lot about how the tax code works.

MARY LOUISE KELLY, HOST:

President Trump and congressional Republicans say they have two main goals as they work to overhaul the tax code. One, lower tax rates. And two, get rid of special deductions and exemptions, things that if you don't like them, you call loopholes. Jacob Goldstein from our Planet Money podcast has the story of one deduction that's set to be eliminated.

JACOB GOLDSTEIN, BYLINE: One of the few deductions that is actually mentioned by name in the Republican's official tax framework is called Section 199. It was created by Congress in 2004 largely as a break for manufacturers - you know, companies where American workers make real stuff. A few years after Section 199 became law, a tax lawyer named Ken Silverberg got a call from a company.

KEN SILVERBERG: They would buy crackers, cookies, candies and arrange them in an artistic and beautiful way and wrap them with attractive bows.

GOLDSTEIN: The company made gift baskets.

SILVERBERG: The CFO went to a tax conference, and he heard some speaker talking about this Section 199 deduction that was available for companies that did manufacturing. And he says, why can't we use that?

GOLDSTEIN: And Silverberg says you can. After some back and forth between the company and the IRS, the case winds up in court. The lawyers for the IRS said, come on. These guys are literally just putting cookies and crackers and wine into a basket. That's not manufacturing. And Silverberg and his colleagues argued, yes it is.

SILVERBERG: It looks just like the assembly line in any factory. There's forklift trucks driving across the floor, bringing stuff to the beginning of the assembly line, lines of workers sitting there, putting things together.

GOLDSTEIN: The judge agrees with the gift basket company. The company gets the manufacturing deduction. Lots of other companies claim this as well. Starbucks claims it for roasting coffee beans. Dentists claim it for making crowns. This is what happens with deductions. Congress opens a little door in the tax code for some specific group, and then everybody calls their tax lawyer and says, hey, get me in that door. So that tax framework the Republicans released this fall says the Section 199 deduction, quote, "will no longer be necessary."

Eliminating Section 199 would raise just under $200 billion in tax revenues over 10 years. That is not nearly enough on its own to make up for the deep cut in tax rates that Republicans are also proposing. But the Republican framework also says, quote, "numerous other special exclusions and deductions will be repealed or restricted." Michael Mundaca worked on taxes in the Obama administration. He now works for the accounting firm EY. I asked him about getting rid of those other deductions.

MICHAEL MUNDACA: This is going to be tough. Whenever the House comes out with more specifics around this - and it could be as soon as later this month - then you'll see the high-gear drive to get those special provisions maintained in whatever new tax system we wind up with.

GOLDSTEIN: I mean, that is, like - if you're a company and you employ a lobbyist, that is the moment when you want the lobbyist to do everything.

MUNDACA: This is their Super Bowl.

GOLDSTEIN: This is their Super Bowl (laughter).

Bottom line, Mundaca says, he does expect Congress to cut tax rates and to get rid of Section 199, but a lot of other deductions and exemptions are likely to stick around. Jacob Goldstein NPR News.

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