Gimme a Break! IRS Tax Loophole Can Reward Excessive Water Use in Drought-stricken West

By Abrahm Lustgarten (Reprinted with permission from ProPublica)

ProPublica’s reporting on the water crisis in the American West has highlighted any number of confounding contradictions worsening the problem: Farmers are encouraged to waste water so as to protect their legal rights to its dwindling supply in the years ahead; Las Vegas sought to impose restrictions on water use while placing no checks on its explosive population growth; the federal government has encouraged farmers to improve efficiency in watering crops, but continues to subsidize the growing of thirsty crops such as cotton in desert states like Arizona.

Today, we offer another installment in the contradictions amid a crisis.

In parts of the western U.S., wracked by historic drought, you can get a tax break for using an abundance of water.

That’s a typo, right? A joke?

Ah, no. But we understand your bafflement. The Colorado River has been trickling, its largest reservoirs less than half full. As recently as 2014 parts of Texas literally almost dried up. The National Academy of Sciences predicts the Southwest may be on the cusp of its worst dry spell in 1,000 years. Scientists are warning that the backup plan — groundwater aquifers from California to Nebraska — are all being sucked dry.

But, yes, the tax break exists — in parts of eight High Plains states.

Here’s how it works: Farmers — or anyone who uses water in a business — can ask the Internal Revenue Service for a tax write-off for what’s called a “depleted asset.” In certain places, water counts as an asset, just like oil, or minerals like copper. The more water gets used, the more cash credit farmers can claim against their income tax. And that’s just what almost 3,000 Texas landowners in just one water district appear to have done last year — a year in which nearly half of Texas was in a state of “severe” or “extreme” drought.”

Yikes. How much can they write off?

A bunch it seems, especially if you’re a big farm and own a lot of land. We talked to an accountant in Levelland, Texas. He had a client who wrote off $10,000. “Whenever you buy land, you’re getting the dirt … and of course you are getting the water,” said Sham Myatt, the accountant. And the idea is that that water is part of what you paid for in the land deal. If the aquifer was 50 feet deep at the time of the land sale, and it drops 10 feet in a dry year, then the farmer can deduct one-fifth of the value, and so on, until all the water is gone.

That’s not going to do much to conserve water, is it?

No. It’s not. In fact it’s an incentive to do the exact opposite. A farmer who tries to use less water because of the drought, say, by switching to really efficient irrigation techniques, could actually make less money. His water might last longer, but producing his crop would get a lot more expensive.

We called Nicholas Brozovic, an associate professor of agricultural economics and director of policy at the University of Nebraska’s Robert B. Daugherty Water for Food Institute. He’d actually never heard of the water deduction; it’s that obscure. But he laid out some textbook economics: If you’re overusing your water, then you are depreciating it, he said. And if the government pays for that, they are subsidizing that depreciation. “The more you deplete your groundwater, the higher your tax exemption and that must create an incentive not to conserve,” he said.

Hasn’t the federal government spent billions subsidizing conservation and the protection of the West’s groundwater, in part by building dams and encouraging people to use the water in rivers instead? Why would they forfeit federal tax dollars to do the opposite?

We called the IRS, and they initially shared our doubts. Not because they cared much about groundwater (it’s a tax agency!) but because they said they were pretty sure no such deduction was legal. They pointed us to section 613 of the tax code, and it couldn’t be more explicit: For the purposes of deducting the depreciating value of minerals, the definition “does not include soil, sod, dirt, turf, water, or mosses.” Ok, who would ever have thought of deducting mosses or sod? But anyway. That left us really confused.

Right, there were, after all, those farmers in Texas who seemed to have benefited from what the IRS said was not possible.

We encouraged the IRS to check again. They did. And then they found the provision they thought didn’t exist — right there in the text for Revenue Rule 65–296. An IRS spokesperson laid out for us the specifics: “Taxpayers are entitled to a cost depletion deduction for the exhaustion of their capital investment in the ground water extracted and disposed of by them in their business of irrigation farming specifically from the Ogallala Formation.”

Seems like some follow-up questions were in order.

For sure. We asked for clarification. The IRS said it would try to explain. Most importantly, they wanted to say it wasn’t quite as crazy as it sounded. The deduction is only available for one small part of the country — an area that includes parts of Texas, New Mexico, Oklahoma, Nebraska, Kansas, South Dakota, Wyoming and Colorado. And it should only apply if people are using water from a source that is running dry anyway.

But wait, what? You get a break when you use resources that are already in danger of vanishing?

Yes, that’s why it is what’s called a depleted asset. It’s of less and less value with every day. Your car is worth less the moment you drive it off the lot. Or, more similarly, oil companies track the falling value of their reserves the more they pump out from underground. In fact, energy companies have been taking oil depletion breaks for decades. Texas landowners would say their property is getting less valuable the less water there is to use on it.

Okay, okay, but water isn’t oil. It’s not a commodity. Access to it is a basic right. Yes? Please say that’s right.

Wrong. Ouch. I know, it hurts. But ProPublica last year wrote about all the ways water is coveted and controlled — and then often wasted — by just a few powerful groups. In most of the West, only some people and businesses have rights to it, depending on who showed up to claim it first. One big trend is that water is increasingly being bought and sold — including by hedge funds and big Wall Street investors, and the less water there is, the more the price is going up.

That’s a little scary. Let’s get back to depleted assets. So when did this tax break start?

About 50 years ago. A farmer in the Texas panhandle — along with his local water district — successfully sued the IRS, arguing that the roughly 200 million gallons he drew from his groundwater each year was no different than the depletion of the state’s other great natural resource, oil. He won, and the IRS was obliged to create rule 65–296 — the special allowance for tax credits that the IRS almost forgot about.

Again, it was supposed to be limited — just to a slice of Texas and eastern New Mexico. The court even went so far as to warn that the case shouldn’t become a precedent for groundwater tax claims elsewhere, saying the conditions in that area of the country were unique. But it didn’t take long for the rule to be expanded, albeit just a little bit. By the mid 1980’s any landowner overlying the sprawling Ogallala aquifer — a giant underground vault of precious but dwindling water — was eligible to file for the deductions, not just in North Texas and New Mexico.

That still doesn’t sound like much of a big deal … why does it matter?

Well, the Ogallala, which spans from central Texas north to Nebraska and South Dakota is the nation’s largest groundwater reserve and is one of the most important, and (famously) threatened water supplies in the country. Its heavy overuse and plummeting water levels rang alarms among policymakers more than half a century ago. So this is no insignificant place to be even indirectly encouraging overuse. Texas’ High Plains are one of the most intensely irrigated and productive farming regions in the country. Hundreds of thousands of acres of cotton and corn, among other staple commodities, are grown there using this Ogallala water.

So, do we know what’s happening to the Ogallala where all this farming is taking place?

We looked at recent water level changes in just one district — the one with thousands of tax credit claims — and found a disturbing trend. Underground water levels in the 16 counties of the High Plains Underground Water Conservation District have dropped nearly 10 feet over the last 10 years. Some parts of Castro County saw water levels drop more than five feet over the course of 2015 alone. The federal government estimates nearly 100 cubic miles of water have been withdrawn from the Ogallala in that part of Texas. That doesn’t automatically mean the tax credits are responsible — water levels are dropping in most places thanks to overuse and it would take a lot more research to link up the cause and effect. But it certainly isn’t a portrait of sustainability.

Aquifers are at risk across Arizona, California and other states as well, right? At least people can’t claim tax breaks there?

Not yet. But that could change, as water supplies worsen and word of the tax break circulates more widely. Almost no one we spoke with had heard of it — not water lawyers in Arizona or groundwater conservation scientists in California. Armed with the knowledge, there’s a pretty good chance farmers and businesses across the West could seek tax relief.

Because there is precedent?

Exactly.

What does the IRS say to that?

They say it’s very unlikely, mostly because they think the conditions in the Ogallala are rare, and that the agency’s policy is to reject water allowance claims anywhere outside of the places covered in the original lawsuit. But if more landowners, in more places, were to file suits challenging the IRS to allow them to deduct for their water, or if they were to petition the IRS directly, the agency says it would undertake a review to consider it on a case by case basis. Landowners would have to present extensive scientific evidence that showed their situation was more or less the same as in North Texas.

Is the IRS equipped to make such judgments?

Fair question. John Leshy, professor emeritus at the University of California Hastings College of the Law, and a former solicitor for the U.S. Department of Interior, isn’t persuaded. “The IRS has really created a can of worms for itself,” he said. “It doesn’t have any hydrological expertise.”

Hmmm. Not ideal. But what’s the bottom line? Are these tax breaks going to make any real difference in how quickly we use up the water supply?

It’s hard to tell, partly because no one appears to have examined that question. We asked the IRS for data on the number of claims and it hasn’t responded. Folks in Texas dismiss the suggestion that the tax benefits are incentivizing water use as ludicrous. Myatt, the accountant, points out that only about one-third of the deducted value translates to cash in hand, and says for many smaller farmers that amounts to just a few hundred dollars. Jason Coleman, manager of the High Plains Underground Water Conservation District, says his members are as concerned about conserving their water for the future as anyone. “Its already a declining resource,” he said. “I just can’t imagine someone saying I’m going to depreciate our resource any more because of a tax claim.”

But the academic consensus is that incentives encourage use, even overuse. And if the effect of depletion allowances on oil production are any guide — Leshy says they have spurred overproduction and led to artificially cheap, subsidized fuel prices — any significant expansion of the groundwater tax credit to other states could have lasting impacts on the way groundwater is used across the country.

So is anyone trying to do anything about this?

Not really, which is why people like Brent Blackwelder, president emeritus of the environmental group Friends of the Earth, which has long been involved in rooting out tax policy disincentives to conservation, are fuming. “It’s a pretty major outrage that we would so stupidly reward the over extraction and non-sustainable use of groundwater,” he told me. Blackwelder helped push to purge the tax code of perverse anti-conservation incentives like this one way back in the Reagan administration, with the 1986 Tax Reform Act. They were largely successful, weeding out several other odd loopholes. But the groundwater depletion allowance persisted. And since then, apparently, it’s been forgotten about by all but the farmers who rely on it.


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New Book Reveals Trump Is Actually Sleazier and Slimier Than We Ever Thought

“There is no moral core inside Donald Trump.”

By Steven Rosenfeld

Reprinted with permission from AlterNet

David Cay Johnston has been one of the nation’s premier investigative reporters for decades, specializing in the ways government works for the wealthy at the expense of everyday Americans. He first met and covered Donald Trump in the 1980s. In his latest book, The Making of Donald Trump, he profiles the many ways the Republican presidential nominee has gotten wealthy by bilking others, colluding with criminals, evading prosecution, and romancing the press. I spoke with Johnston recently about his new book.

Steven Rosenfeld: What are you trying to show readers about Donald Trump that they might not know?

David Cay Johnston: As you know, I’ve been trying to show people how government is creating inequality though all of these rules and laws that nobody knows about. The political donor class—a phrase that I coined by the way—are doing what economists call rent seeking. So I understand people who are terrified—they should be—and who think the government has worked against them. What’s nutty is this belief that Donald Trump is their friend.

This is a man who started his [presidential] campaign by saying wages are too high. This is a man who, when he does construction projects, deals with mob-controlled unions. That’s why Trump Towers [in Manhattan] are concrete, because the steelworkers are an honest union. This is a man who cheats workers out of their pay. Four dollars an hour he paid, and he cheated them out of some of their pay. That’s what a judge found. This is a man who tells vendors, Do this work. They do it and then he says, I am not going to pay you.

I don’t know if you saw the piece the other day where the manager, or whoever was responsible as his witness, at the Doral [Miami], over this guy who didn’t get paid the last $34,000 for his paint—he was a Benjamin Moore paint dealer—testified Mr. Trump felt he had paid enough. Nobody runs their business on that basis. You can think, and with good reason, of all sorts of bad things that corporations do. But they don’t go around saying to vendors or workers, “Uh, we paid enough. We’re not going to pay you.”

He is an enemy of these people. He is an active enemy of the people who have been ruined by this economy. And they’re buying his con job.

SR: Did he get his con artist skills from his dad, the builder Fred Trump?

DCJ: Partly he got it from his dad, whose business partner was a mob front and, as I show in the book, cheated and profiteered on the housing for returning GIs [after WW2]. But Donald also learned a lot from Roy Cohn [New York City mob lawyer and Sen. Joseph McCarthy’s assistant in the 1950s anti-communist witch hunts] about how to create a falsehood. Like when the government went after Trump and his dad for discriminating against blacks and Puerto Ricans, and they said, “This was an effort to put people on welfare in our buildings.” No it wasn’t. The [government’s] housing testers who were sent were black and Hispanic people who were economically qualified and they were turned away and then white people showed up with the exact same economics and they were shown multiple apartments.

SR: Since we are seeing some of that in other aspects of the campaign, tell me more about the lessons from Roy Cohn, like Trump’s assertion that if he doesn’t win big, the election is rigged.

DCJ: Always go on the attack. Always accuse the other side of dishonesty. And be ruthless. Remember one of the reasons he loved Roy Cohn—I quote him in the book—whom he regarded as not just as a mentor but as a second father, was he said Roy would brutalize for you. That’s the lesson. Listen, for Donald’s entire life he has broken the rules or ignored the rules and it’s done well for him. So why would you behave any other way? If you were raised in the household where your parents told you be immoral, and you got away with it, well, of course you’d be immoral.

SR: Have you seen that impulse change since you started covering him in the ’80s?

DCJ: Donald is 70 years old. I’m almost the same age, I’m 67. He’s not any different than when I met him, when he was in his early 40s. Donald is a guy who has no empathy for other people, who doesn’t see other people as human beings. He sees them as things to be used. That’s why when he was challenged about cutting off health care for his sickly grandnephew, over money, and he was asked, as I report in the book, “Don’t you think that will look cold-hearted?” [He replied] “What else can I do?” There is no moral core inside Donald Trump. There is no moral compass. It doesn’t exist.

SR: These stories in your book remind me of the badly behaving men in my grandfather’s generation. They were born around WW1, grew up in Brooklyn, didn’t have much to do with people outside their ethnicity and religion. They were sexist, bigots, didn’t need or want college education. They felt if they could just bluff and boss their way around and take whatever they could home, that they were big-time successes. Am I imagining something there?

DCJ: That’s a perfectly accurate way to view this… Donald is a product of his family history, of his time and place, and of his belief that he’s a really superior person, therefore all these other things don’t matter. You either worship and recognize Donald’s greatness or he has a word for you: loser! And it has worked for him. You do things that work for you.

His skill at shutting down law enforcement investigations—I cite those four grand juries, etc.—is extraordinary. He knows when to run to the cops and rat out people, or tell them information that will help them. He knows how to use the court system to cover up what he’s done by making a settlement on the condition that the record be sealed. And he’s masterful at this. It’s just astonishing how masterful he is at it. And then he’s masterful at the conventions of journalism.

All journalists who keep their jobs accurately quote what people tell them. Most journalists, even at the best papers, they don’t have a deep understanding of the things that they are reporting on. I can show you people at the New York Times, the L.A. Times, the Wall Street Journal, who really know their stuff. But I can also show you a lot of them who don’t and have pretty superficial knowledge of what they’re doing. Donald avoids group A and he goes for group B.

And his hiring of this guy from Breitbart [Stephen K. Bannon, chairman of Breitbart News site, as his campaign’s new chief executive]. There’s a very good piece I read this morning, how Donald’s lines line up with what’s in Breitbart. Because he clearly reads it. He’s brought this guy over. And so this is Donald’s view of reality, these people who are way off on the fringe crazy.

SR: Tell us how he typically overplays his hand and then reacts and treats others.

DCJ: Donald is not a good negotiator. He’s not a good businessman. And he often overplays his hand because of hubris. What he does when that happens is that he threatens to make terrible trouble for people with litigation, to tie them all up, so what they’ll do is settle with him, because who wants to spend—as one brave guy in the demolition workers did—spend 18 years in litigation with Trump. You just want it to go away. And he knows that. And he uses it. And if you don’t have the money to pursue him for 18 years, you have to have a lawyer who’s really willing to do that, you’re going to be told by the lawyers, there’s no gain here. And he knows that.

SR: The pollster Celinda Lake told me you can’t do much to convince people who believe in Trump to change their minds, but that he can do something to turn them off. Does that sound right to you?

DCJ: I would agree with you, sort of. George Lakoff points out that the people who are drawn to the father figure are very, very loyal, unless something happens that breaks that connection, and then they become fiercely opposed. Where Donald goes too far somewhere, or his statements appear to people to be outside of their acceptable range, some of them will justify it, but some of them will begin pulling away.

On the other side of this, however, is that a lot of the people supporting him—not all of them, but a lot of them—they believe all of this stuff that’s been planted for years about Hillary. I have had grown men with college degrees or advanced degrees who I know personally, because they are in my social circle, who are successful, tell me they can’t vote for Hillary. Well, why, I ask? “Well, because of all the people she’s had killed.” You mean Benghazi, I say? They go, “No. No. No. All the people that she’s had killed and murdered.” You look at them and say this is crazy. But they believe that. And if you believe that Hillary Clinton is really this evil person, then now you are faced with this choice between two evils and you’d rather take the guy who says he’s your champion as you understand the world.

People don’t know that Hillary Clinton, when she graduated from Yale and could have gotten an extraordinarily well-paying job at a top law firm—she would have been in complete demand—she went to work for the Children’s Defense Fund building a case for disabled children, kids in wheelchairs and things, who were denied a public education because of their disability.

SR: I hear this all the time too.

DCJ: I’ll you one thing I do tell people. Without a question, Hillary Clinton said she was under sniper fire—I think it was Bosnia. And it wasn’t true. What was true was they were warned about that. But here’s where she’s different from some other people. As soon as it was pointed out to her that that’s not right, she didn’t repeat it. She didn’t expand the story. She didn’t double down or triple down. She didn’t do what [former NBC anchor] Brian Williams did, where he enhanced the story and it got bigger and bigger. She immediately stopped.

All of us remember things that were wrong. When I was writing The Making of Donald Trump, I did half of a chapter and thought, that’s really good. And then I took a nap. I woke up and took a look and said, Okay, now I have to back and check my clips. I had it wrong. I misremembered what was there. And then I had to rewrite the chapter. Our memories are not computer records. Our memories change with time. We conflate things. We get them wrong. But the difference is Donald just makes things up. And he does it all the time.

SR: I wonder if the people reading your book or hearing about it will finally get that. He’s masterful at knowing that if you throw the first punch in the press, it will be quoted and nine times out of 10 no one will come around to question what’s behind it.

DCJ: That’s right. But to people who are in economic terror—that’s about half the population—Donald Trump poses as a savior. “I will save you.” “Only I can save you.” And to people who have been abandoned by both parties, they’ve been actively worked against by both parties, that’s a powerful message.

And basically it’s the same people who Bernie had, except they don’t have all the baggage with racism and hatred. I hear some of these young Bernie folks being interviewed on TV, and I am sure it’s a relatively small number of them and it’s misleading, but to see them on TV, saying, “I’m going to vote for Trump.” It’s like, how politically ignorant are you?

And I don’t believe the polls are reliable here at all. The polls have been all over the place this year. We have cell phones that have changed the nature of things, and I think lots of people do not want to sit next to a black person on an airplane, or in a restaurant, or work with them, but know if they say that it’s very bad for their work life. I think there are lot of people who will vote for Donald who will never tell a pollster that.

SR: He’s still dominating the news every day.

DCJ: Let me tell you one more thing that I think your audience would cotton to. Last week I did 19 hours on TV and radio one day, and then 12 hours, and 12, and 11. It’s all I’ve been doing since the book came out. It’s TV and radio to the point where it’s all a big blur. I have been on national television in Australia, multiple channels; Japan, Canada, multiple channels; England, multiple channels; France, multiple channels; Germany, national news programs.

None of the three U.S. networks have had a word bout my book. And they have not had me on the Sunday morning talk shows.

I had a producer for a cable show, who I know and bitched about some of this with, and who said to me, “David, they would never have you on a Sunday morning talk show for the most obvious reason. You should know that.” I said, “What’s the obvious reason?” She said, “Well, you would talk actual facts and substance. Watch these shows, they’re all superficial nonsense.” That’s my word—superficial nonsense. It would show up to audiences—the paucity of this. PBS had me on. Everything I said that dealt with Donald and crooks and mobsters, they cut out.

When the election is over, I am going to write some big pieces. One of them is about the press.


Steven Rosenfeld covers national political issues for AlterNet, including America’s retirement crisis, democracy and voting rights, and campaigns and elections. He is the author of “Count My Vote: A Citizen’s Guide to Voting” (AlterNet Books, 2008).

 

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