Farm Bill: Commentary

June 2, 2008 | Roger McEowen

November 2007

The Senate began debating the Farm Bill during the week of Nov. 4, but floor debate on the bill got derailed shortly after it was brought up for consideration.  It soon became apparent that the Democrats had not reached an agreement with the Republicans on the ground rules for the amendment process.  In the Senate, those rules are very flexible, so the leadership usually seeks a unanimous consent agreement limiting debate.  The Senate has a long history of open debate, but Majority Leader Harry Reid (D-NV) sought an agreement that non-germane amendments (that is, amendments that go beyond the specific topics covered in the farm bill, as drafted by the Agriculture Committee) would not be allowed during the floor debate, as well as an accord on a specific list of amendments that could be offered.  Republicans, however, wanted to stick with the Senate's traditional style of open debate.  Consequently, as of the end of the week, the stalemate had not been broken. While there was some further discussion of the farm bill on the floor, no amendments were allowed to be debated and the legislative process effectively ended. 

Also the Administration announced that it would veto the Senate’s version of the Farm Bill unless it is changed substantially.  On Nov. 6, the Administration sent a letter to Chairman Harkin (D-IA) detailing the Administration’s objections.  The Administration’s basic objections are that the bill represents a massive spending increase paid for by changes in tax law and questionable accounting techniques, and that the bill does not go far enough in reforming current programs…

The week of November 11 did not result in any further progress.  The week culminated with the Senate Democratic leadership trying to break their deadlock with Republicans over the procedure for Senate floor consideration of the 2007 farm bill by scheduling a cloture vote on the matter.  In the Senate, a minority of Senators can prevent action on a matter by launching into extended debate on the floor. Cloture, if approved, cuts off that debate and allows the Senate to move forward.  The Democrats needed 60 votes to invoke cloture on the farm bill debate, but the vote was only 55-42 in favor of cloture.  The Congress then recessed until the week of December 2.

December 2007

The week of Dec. 2 was highlighted by a deal that was brokered on Dec. 6. Under the agreement, both parties are allowed 20 amendments. Several amendments had been introduced as of Dec. 10, and the Senate was able to pass its version of the Farm Bill late in the week of Dec. 9.  The bill has some similarities with the House version, but differs in some significant respects.  Here is a short summary of the similarities and differences of the respective versions:

Common features:

  • Both bills expand subsidy programs for several crops, including wheat, barley, oats and soybeans.Both bills add funds for fruits and vegetables and increase loan rates for sugar producers.
  • Both bills increase funding for food stamps and other nutrition programs, conservation programs that protect environmentally sensitive farm land, and incentives for the production of "renewable" fuels.
  • Both bills require meats and other fresh foods to be labeled with their country of origin, beginning in 2008.
  • Neither bill reduces direct payments, which many farmers receive regardless of crop yield.

Different features:

  • The Senate bill bans subsidies by 2010 to farmers whose AGI exceeds $750,000 unless two-thirds or more of AGI is from farming.  The bill also prohibits the receipt of farm subsidies for multiple farm businesses in certain situations.  The House version bans subsidies from being paid to farmers whose AGI exceeds $1 million, as well as those persons whose AGI exceeds $500,000 if more than one-third of the AGI is from non-farming sources (effective upon enactment).

  • The Senate bill increases spending by $5.3 billion for nutrition programs, $4.4 billion for conservation programs involving environmentally sensitive land, and $1 billion for "renewable" energy programs.  The House bill increases spending on such programs by $4.2 billion, $2.8 billion and
    $2.4 billion, respectively.

  • The Senate version includes $5 billion for farmers who have suffered weather-related disasters, but the House version does not include any such provision.

  • The Senate bill provides that for a company to claim a tax deduction for a transaction, the transaction must yield a profit or have some clear economic benefit separate from the tax effect (the so-call "economic substance" doctrine).  The House bill doesn't include such a provision, but does impose new taxes on certain multinational corporations with U.S.
    subsidiaries.
  • Tax provisions - Give CRP participants the option to choose tax credits in lieu of cash payments; creates tax credits to encourage the protection of endangered species; reduce the MACRS depreciation classification of farm equipment and machinery from 7 to 5 years; and allows a $1.25/gallon small-producer tax credit for cellulosic biofuels until April 2015; and creates or modifies several other tax credits promoting conservation, "renewable" energy, and agriculture.

The Congressional Research Service has prepared a report for the Congress that compares in detail the House and Senate versions of the Farm Bill...

January 2008

So, where do we go from here?  It is expected that Farm Bill conferees will be named and the conference committee will begin its work during the week of January 21. The Senate will probably name a small number of conferees – most likely the seven to nine most senior members of the Agriculture Committee. It is also likely that several members of the Senate Finance Committee will also be named to the conference committee.  That’s because the Senate version of the Farm Bill includes substantial revenue-raising provisions and many other sections that the Senate Finance Committee developed.  On the House side, however, the naming of conferees is done differently.  Expect to see about 13 to 15 of the more senior House members named to the conference committee.  Those conferees will probably represent , every committee with jurisdiction over a substantive portion of the farm bill. 

The conference committee has alot of work to complete to hammer-out the differences between the two versions.  There are literally hundreds of technical differences between the two bills.  Also, the Administration is strongly opposed to codification of the "economic substance" doctrine as well as the additional taxes on multinational corporations, and has threatened a veto if those provisions are not removed.  In addition, the bills spend far more on farm programs than the Administration has proposed, and have no meaningful cap on payments, or eliminate the so-called "pick-your price" technique.  Neither the House or the Senate appear to have the votes to override a Presidential veto. So even if the conference committee completes its work, the President could veto the conference report and send the legislation back to the Congress.

As for a projected timeline, right now it looks like the ag leadership in both the House and the Senate would like to get the farm bill done in less than a couple of weeks after the conferees are named.  So, that puts a target date around mid-February.  However, there are major differences between what the Administration wants to see in the final version of the bill, what the Administration does not want in the final bill and what is presently in both the House and Senate versions.  So that mid-February date could easily become early March. Overall, there is somewhat of a "drop dead" completion date of March 15.  That’s when the Congressional Budget Office (CBO) will adjust its estimate of the budget baseline for the farm bill programs. The baseline is the projected cost of the programs in the farm bill over the next five or ten years assuming current programs are extended without change.  That amount (about $50-60 billion annually), is the amount that Congress has to work with in crafting this new farm bill without running afoul of rules designed to prevent an increase in the federal deficit.  If the Farm Bill exceeds the baseline, offsetting reductions or revenue-raising provisions must be included in the bill.  With that in mind, because farm commodity prices have substantially strengthened since the 2007 CBO cost estimate, the new mid-March baseline for the farm bill will go down.  That will put a damper on the Congress's ability to craft new programs. 

February 2008

Farm Bill developments have been fairly quiet for the past month.  The negotiations have seemed to be at a stalemate.  What is clear is that the Administration has put its foot down in strong opposition to the Congress’ attempt to increase Farm Bill spending coupled with a tax increase to pay for the increased spending.  The Administration also wants a lower cap on eligibility for farm program payments set at $200,000 of adjusted gross income (AGI) (down from the current limit of $2.5 million).  But, the Congress doesn’t seem interested on budging on those points.

In early February, the Senate appointed Farm Bill conferees for the conference committee.   The House did not appoint conferees. Shortly thereafter, the House sent a proposal to the Senate conferees for their consideration.  That led to talks which could ultimately lead to a Farm Bill that the Administration could approve. The proposal is to make the Farm Bill a ten-year bill instead of a five year bill, limit the increase in Farm Bill spending to an amount that would be only $6 billion above the amount that would be spent if the current farm bill were extended without change, and not include any tax increases in the bill.  The proposal would establish an AGI cap of $900,000 for persons who earn two-thirds or more of their income from farming, and $500,000 for all others, phasing down to $300,000 in 2013.  To reach the spending target, the proposal would extend current farm price and income support programs and reduce the increases in spending for nutrition and fruit and vegetable farmers proposed in the earlier Senate and House measures.  The proposal would provide conservation spending and authorize a permanent disaster program.

The Administration publicly announced its approval of the proposal, and urged the House Ag Committee and Senate conferees to use it as the basis of negotiations.  But, reaction from farm and commodity groups has been generally negative because it would cut spending on farm programs and would lower the AGI limit.  The proposal caught Senate Ag Committee Chair Harkin (D-IA) off guard, and he reacted by offering a counterproposal that would increase spending over the baseline of $12.3 billion.  While further details of the Senate counteroffer have not yet been public, the Administration made it clear that it didn’t approve of Senator Harkin’s counteroffer.  But, it appeared that the House did at least examine the proposal. 

The Congress recessed for the week of February 24 without the conferees having reached an agreement on the Farm Bill.  On February 25, Senator Harkin stated that a new Farm Bill may not be forthcoming this year after-all.  Instead, an extension of the existing Farm Bill looks more likely.  Senator Harkin appears unwilling to abandon pet projects such as a permanent $5 billion disaster relief fund and heavy subsidies for the ethanol industry.    

On February 29, however, the Administration stated in a letter to lawmakers that it is willing to consider spending of up to $10 billion above baseline.  But, the Administration noted, the Farm Bill must not include revenue increases.  Instead, the Administration set forth a list of non-tax offsets, mostly spending cuts totaling nearly $22 billion over 10 years.  The letter also listed several limits for Farm Bill reforms the Administration requires for the additional spending above the existing baseline for Farm Bill spending.  Here are the reforms the Administration is requiring be included in the Farm Bill:

  • The payment limitation AGI cap must be lowered and include a hard cap not to exceed $500,000.
  • Loan rates, target prices and MILC payment rates should not be increased above current law.
  • New subsidy programs must be eliminated and commodity storage payments must be excluded.
  • The marketing loan program must be reformed by eliminating provisions that allow producers to lock-in subsidy levels only to hold and later sell the crop at higher prices (the so-called "pick your own price" technique).
  • The present counter-cyclical program must be replaced with a revenue- based program that better targets farm support, includes a revenue guarantee cap and does not duplicate crop insurance assistance.
  • The USDA must have the authority to adjust dairy component prices to limit build-up of CCC dairy stocks.
  • The sugar-to-ethanol program must be eliminated (i.e., excess sugar must be allowed to be used for uses other than ethanol).
  • Crop insurance companies should not be permitted to collude during the renegotiation of the standard reinsurance agreement.
  • Fruit and vegetable planting restrictions should be lifted to eliminate any question that direct payments are "green box" in the light of recent WTO rulings.
  • Up to 25 percent of P.L. 480 Title II food aid assistance must be authorized for local purchase, and any restriction on emergency food aid must be eliminated.
  • There must be no expansion of the Davis-Bacon Act, no restriction on states' ability to competitively source Food Stamp Program functions, and no changes to the current sanctions and restrictions related to Cuba.

March 2008

During the week of March 9, the Congress approved a one-month extension of the 2002 Farm Bill.  The President signed the extension into law. As noted above, House and Senate negotiators have agreed to an outline of a compromise with at least $10 billion in spending that is in addition to the 2002 Farm Bill’s 10-year baseline.  The Democratic-led Congress is proposing the increased spending at a time of record high crop prices for farmers, with the notion of hiking taxes to pay for their spending spree.  It’s the classic tax-and-spend politics.  But, also as noted above, the Administration has indicated that it will veto any Farm Bill that increases taxes, including tax compliance measures that have the effect of raising taxes. But, the Democratic leadership is opposed to shrinking the size of government.  So, there is still a lot of work remaining on Farm Bill legislation to meet the April 18 deadline.  Substantive policy issues haven’t even been addressed yet, and the House still must name conferees.  

For it's part, the Administration has laid out a clear road path for the Congress to follow in getting a Farm Bill passed.  The Administration has indicated that it can live with a spending increase of $10 billion (over
baseline) if there are no tax increases and cuts are made elsewhere in the legislation.  The Administration has been adamant that the Bill must prohibit participation to anyone with AGI in excess of $200,000 annually, but has indicated more recently that it may accept $500,000 as an acceptable participation cut-off.

April 2008

As of April 10, the entire Farm Bill process appeared to be "stuck in the mud."  While the House did, on April 9, finally name conferees, and they started meeting on April 10, there hasn’t been much progress made.

Since late March, the primary Senate and House negotiators, along with the Administration, have been waiting for Charlie Rangel's House Ways and Means Committee and the Senate Finance Committee to come up with the funds needed to cover the increased spending that is proposed in the Farm Bill. 

But, the Chairman of each of those committees have not been able to agree on how to get the money raised.  So, until that impasses is figured out, the leaders in the Congress won't move forward with the Farm Bill.

Then along came Charlie….  At the second meeting of the farm bill conference committee on April 14, Charlie Rangel made an appearance.  You know Charlie well – he’s the House Ways and Means Committee Chair who loves tax increases and managed to so badly mangle the legislative process last fall that the Congress couldn’t get an Alternative Minimum Tax “patch” bill to the President until just before Christmas.  Well, good ‘ol Charlie was up to it again at the farm bill conference committee meeting.  His purpose was to stomp out any fire that existing for tax cuts in the farm bill.  Specifically, the Senate had proposed $1.7 billion in conservation measures (including $600 million in tax incentives to timber companies to improve their competitiveness and lower lumber prices (and new home prices), $800 million tax breaks for the livestock industry and tax-exempt “Aggie bonds – those are financial instruments that help first-time farmers buy land, and tax credits for residential wind power generation, cellulosic ethanol and biofuels.  Charlie’s efforts put the brakes on the conference committee’s work, and after the meeting, committee members were telling the press that it was no longer realistic to expect a finished product to come out of committee by the week’s end.   

On April 24, the House and Senate passed another one-week extension of the 2002 Farm Bill, and the President signed the extension into law.  So, as April ended, it appeared that the conferees had reached an agreement on increasing Farm Bill spending above the current baseline by approximately $10 billion.  The additional tax dollars would be spent on food welfare and disaster programs.  It still remained to be seen, however, whether the President would sign such a Bill if it reached his desk in that form.

May 2008

Well, May started out with more meetings, another extension, and more wheel-spinning.  On May 1, the Congress passed another extension of the Farm Bill.  This time it’s a two-week extension, and the President signed the Bill.  That gives them until May 16 to get the job done…or extend it again.  On April 29, the President criticized the way the Congress was progressing on the Farm Bill and raised the possibility of a veto.  But, the President’s signature on the Bill indicates the Administration’s willingness to give the Congress time to see the light on passing appropriate legislation.  But, there are problem areas that remain.  The Administration has long stated that it wants taxpayer support of farmers to be in the form of direct payments rather than counter cyclical payments.  In addition, the Administration wants the AGI limit set so that anyone with an AGI over $200,000 can’t participate in the farm programs.  The Congress is wanting a limit much higher than that (the current limit is $2.5 million – with loopholes).  Also, the Administration doesn’t want to exceed the current baseline spending on farm and food welfare programs by as much as the Democratic-led Congress wants to spend. 

On May 8, the conference committee announced the completion of the Farm Bill.  Unfortunately, it’s a mess that does little to reform or scale-back government interference with the agricultural marketplace, or make the marketplace more competitive for the nation’s livestock producers.  On May 14, the House voted to approve the conference report (the version of the Bill that will go to the President) by a 318 to 106 vote, and on May 15 the Senate approved the Bill by an 81-15 vote.

Here’s a brief overview of some of the more egregious provisions:

  • $451 million in tax breaks for timber companies ($100 million for Weyerhauser alone);
  • $537 million in tax subsidies for bio-diesel and “renewable” diesel;
  • $20 million for Aggie bonds;
  • A largely immaterial reduction in the payment limit cap – an elimination of some subsidy payments to farmers making more than $750,000 ($1.5 million for couples) (with loopholes);
  • A  “temporary” credit of $1.01/gallon for bio-fuels made from farm waste, switch grass and similar material;
  • A special loss limit for farm losses which limits even non-passive farm losses to the greater of $300,000 or net farm income “if the taxpayer receives Farm Bill commodity payments”;
  • $15 million for asparagus growers in Michigan, Washington and California;
  • $400 million for the Chesapeake Bay;
  • $10 billion (yes, that’s “billion” with a “b”) for food welfare programs – of course that’s necessary because the higher cost of food due largely to the ethanol mandate (see below) has been especially tough on lower income families; and
  • A $20 billion increase in spending skillfully hidden by budget gimmicks
  • A tax provision that accelerates depreciation for racehorses;
  • $500 million in tax-credit bonds to buy forest land for conservation purposes which, by the way, authorizes the purchase of 400,000 acres of land in Montana from a single owner, the Plum Creek Timber Company;
  • $170 million in relief for salmon fishermen, the same group that received $60 million in taxpayer dollars in 2006;
  • $175 million to provide water for desert lakes in Nevada;
  • $1 million for a national sheep and goat industry improvement center; and
  • $10 million per year for five years for rural housing for the poor.

As for farm tax provisions, here’s what’s in the Bill:

  • An exclusion of CRP payments from self-employment tax paid to retired or disabled farmers;
  • A temporary $1.01 per gallon tax credit for cellulosic ethanol (through 2012);
  • A 15 percent cap on the tax rate for timber sales by C corporations, and relaxed restrictions on timber real estate investment trusts;
  • A reduction in the ethanol blenders tax credit from $.51 to $.45 per gallon, provided that U.S. ethanol production and imports total at least 7.5 billion gallons per year;
  • An annual limit on the amount of farm losses that can be used to offset nonfarm taxable earnings, the limit being the greater of $300,000 or the taxpayer’s net farm earnings for the last five years; and
  • A modification of the payment threshold for farm and nonfarm optional self-employment taxes, which gives farmers and other self-employed persons the option to earn Social Security benefits.

While the Bill does cut the ethanol tax credit from 51 cents/gallon to 45 cents/gallon, that’s not showing that the Congress has learned much from the ethanol debacle that it created under recent bills mandating ethanol production and use.  On that point, for 2007, a Purdue University (a Land Grant University) study placed the annual food cost increases for 2007 at $22 billion, and estimated that $15 billion of the increase was associated with the increase in demand to use crops as fuel (i.e., ethanol). That amounted to an additional $130 per household in 2007 – and it’s likely more in 2008. The Purdue report can be found at http://www.ces.purdue.edu/extmedia/ID/ID-346-W.pdf. But, in early May, Elmer Fudd (Ag Secretary Schafer) went to the Hill and claimed that ethanol’s impact on food prices was less than 5 percent – sure…wink, wink.  At least he knows where campaign contributions come from – the stock of Archer Daniels Midland, the largest producer of ethanol in the United States and a major contributor to numerous Congressional campaigns, has quadrupled over the last five years. 

If that weren’t enough, it gets worse.  Current law requires that other countries needing food aid purchase the food in the United States and have it transported to them on U.S.-flagged ships.  That results in the food aid taking months to deliver and ends up costing much more.  Simply shifting at least some of the food aid budget to cash for purchase from regional sources would mean that more people get fed.  The Administration proposed that 25 percent of the food aid budget be handled in such a manner.  That would have meant that about $300 million would have been available for local purchase every year.  But, the Congress didn’t do much to deal with the problem – just a meager $60 million for a small pilot project to be administered over several years.

So, what does all of this mean?  Well, the Congress was given a clear road-map over a year ago for crafting meaningful legislation.  But, they chose to go a different route, continue the mistakes of the past, and not enact meaningful reform.  Sen. Ag Chair Harkin said he was “happy” about the Bill.  …Uh, well, o.k.  The President said he would veto the Bill and did so on May 21.  That makes the legislation the first Farm Bill (as stand-alone, comprehensive legislation) to be vetoed since the Eisenhower Administration vetoed a Farm Bill in April of 1956.  The Farm Bill then went back to the Congress to see if they could override the President’s veto.

Later in the day on May 21, the House voted to override the President’s veto by a 316-108 margin.  The Senate was scheduled to make its override vote later that same evening.   That’s when the wheels came off.  It was discovered that the Bill the President vetoed was missing Title III – the Trade Title.  34 pages were missing -just a slight clerical error, in the Washington, D.C., sense of the term.  So, the President actually vetoed a Bill that neither the House nor the Senate had approved.   That meant that if the Congress overrode the President’s veto, the resulting legislation would have been unconstitutional.  As a result, the Congress will have to vote again on the Farm Bill (under a different bill number) and send the full and correct version to the President.  The President will then veto the Bill again and the House and Senate will have to conduct override votes.  This entire process may not be able to be completed by end of day on May 23 (the date the current Farm Bill expires), so the Congress will have to pass (and the President sign, another extension of the Farm Bill – this one until June 6 (the Congress is on a one-week recess for Decoration Day).

However, the Senate, on May 22, went ahead and voted 82-13 to override the President's veto. Just in case the whole process turns out to be unconstitutional , the House (also on May 22) passed a new Farm Bill - H.R. 6124 - which has identical text of the farm conference report.

June 2008

The soap opera continues.  On June 5, the Senate approved H.R. 6124 by a vote of 77-15 (the House vote on May 22 was 306-110). On June 18, the President vetoed H.R. 6124 and both the House and Senate voted to override the veto the same day. So, the Farm Bill is repealed and replaced with...the Farm Bill. That raises a question of to the effective date. Is it May 22 or June 18? Here's betting that IRS gets its oar in the water on that one. 

Great job Congress! 

In a larger sense, does the Farm Bill really matter anymore?  In recent years, various energy bills have actually been more important in terms of the largesse doled out to agriculture.  And, the World Trade Organization hasn’t caught onto that game yet.