Washington Insider - Wednesday

GAO and Crop Insurance Subsidies

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Administration Calls on Congress to Act on Tax Inversion Legislation

With the prospects for congressional action on tax inversions unlikely, the Obama administration will decide "in the very near future" regulatory moves it can take to address the flight of corporations from the United States to lower-tax countries, Treasury Secretary Jacob Lew said earlier this week.

In a speech at the Tax Policy Center, Lew urged Congress to move on the issue. He promised his audience that any action the administration takes unilaterally "will have a strong legal and policy basis, but [it] will not be a substitute for meaningful legislation."

Thirteen inversion deals totaling $178 billion have been announced since the start 2013. The deals allow companies to move their headquarters abroad to take advantage of corporate tax rates lower than the typical 30% rate in the United States.

Republicans do not appear eager to take up legislation that would make it more difficult –– or less attractive –– for companies to move their headquarters for tax reasons. And they are absolutely opposed to proposals by some, including Sen. Chuck Schumer, D-N.Y., that would retroactively penalize companies that already have made such moves, some as long as 20 years ago. Sen. Orrin Hatch of Utah, the top Republican tax writer in the Senate, has said that any inversion legislation "should not be retroactive or punitive," meaning there will be a major fight over any legislation along the lines of the Schumer proposal.

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House Republicans May Seek Short-Term Reauthorization of Ex-Im Bank

An internal battle among House Republicans concerning plans to reauthorize the U.S. Export-Import Bank could be postponed for a few months if both sides agree to attach the proposal to an upcoming continuing resolution. If the more fiscally conservative wing of the GOP can be persuaded to go along with the plan being developed by House Republican leaders, the Ex-Im Bank, whose charter expires on Oct. 1, would be able to continue operations through mid-December, the likely termination date of an expected CR.

Some House Republicans, backed by small government groups like the Club for Growth and Heritage Action, want the bank to go out of business. They are joined by some Democrats who see Ex-Im as a prime example of corporate welfare. On the other side are the U.S. Chamber of Commerce, National Association of Manufacturers and related groups that have been pushing hard to secure a reauthorization of the bank, which provides loan guarantees for buyers of U.S. exports.

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Before the current highly polarized nature of virtually every issue that comes before Congress, reauthorizing the Ex-Im Bank was a routine chore. Even now, its reauthorization through mid-December likely will be approved. However, the prospects for a long-term reauthorization are less clear after that.

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Washington Insider: GAO and Crop Insurance Subsidies

Throughout the recent farm bill debate, budget hawks and others criticized to one degree or other the level of subsidies proposed for USDA's crop insurance programs. Now the subsidies have come under attack from the Government Accountability Office, the congressional auditor and watchdog that thinks Congress should consider reducing crop insurance subsidies.

The report takes a hard look at the programs themselves and the subsidies they include. It notes that the cost of the federal crop insurance program and farm sector income and wealth grew significantly from 2003 through 2012. The cost of crop insurance averaged $3.4 billion a year from fiscal 2003 through 2007 but it increased to $8.4 billion a year for fiscal 2008 through 2012. USDA's Risk Management Agency told GAO that subsidies for crop insurance premiums accounted for $42.1 billion (about 72 percent) of the $58.7 billion total program costs from 2003 through 2012.

Insurance premium subsidy rates — the percentage of premiums paid by the government — are set by Congress and would require congressional action to be changed. For most policies, the rates range from 38% to 80%, depending on the policy type, coverage level chosen, and geographic diversity of crops insured.

A key question, GAO implies, is how closely the premium subsidies align with ag sector need and the agency thinks it is significant that as premium subsidy costs increased, farm sector income and wealth indicators also grew. For example, for each year from 2003 through 2012, median farm household income exceeded median U.S. household income by $7,205, or nearly 14% in constant 2012 dollars. Farm real estate values increased by 72% from 2003 through 2012 in constant 2012 dollars, raising questions about the need for increasing subsidies, GAO implies.

The report also notes that farmers have increased their level of coverage, leading to higher program costs. In 2012, about 28% of revenue policies were insured at levels 80% or greater, compared to roughly 15% in 2003.

How much could subsidy reforms save? GAO estimated that in fiscal year 2012 the U.S. government could have saved more than $400 million by lowering subsidy levels by five percentage points on revenue policies, which protect against crop revenue loss resulting from declines in production, price or both. This would have boosted farmers' average production costs per acre by $1.90 for crops such as corn, soybeans and cotton.

If subsidies were reduced by 20 percentage points, nearly $2 billion would have been saved and farmers would have incurred an increase of $16.90 per acre production cost that year.

GAO also recommends that if Congress decides to reduce the subsidy, whether it should do so in one year or phase decreases over several years. In any case, the report says, Congress should require USDA to monitor and report the effects that reductions are having on the farm sector with particular emphasis on whether farmer participation drops as a consequence. For its part, GAO predicts the number of farmers that would opt out of the crop insurance program as result of its proposed changes would be "limited."

Observers also note that the president has requested that Congress reduce premium subsidies in each of his fiscal budget requests since 2013. For fiscal 2014, he proposed reducing subsidies by three percentage points for both yield-based and revenue-based crop insurance policies that covered 50% or more of a farmer's premium. USDA concluded this would save $4.2 billion over 10 years. It also estimated a reduction of two percentage points would be expected to save $3.2 billion over 10 years.

In the fiscal 2015 request, the president asked for an even greater subsidy rate reduction for revenue policies to 4%. The RMA calculated a total expected savings of $6.3 billion over 10 years.

The report — as the case with most GAO studies — can be expected to be extremely unpopular with producers and their advocates who see the insurance subsidies as deserved replacements for the loss of direct payments and are willing to face at least some criticism as a result. And, they argue that a strong safety net to limit their high risks includes important social benefits across the sector, And, they say, subsidy cuts would destroy the program because producers would pull out. GAO and more than a few other analysts dispute this conclusion.

There is another, more subtle concern regarding the high proportion of producer risk the new programs shift to the government, and that is that it will adversely affect producer decisions and the structure of the sector by supporting increasingly risky investments. This is an argument that also can be expected from U.S. trading partners who see government-underwritten risky U.S. investment as damaging their producers.

So, the new crop insurance programs continue to be controversial even as they move into place. Many producer groups who favor the program and who have defended them for the past several years now believe that they are firmly established. However, the GAO certainly carries a big stick in Congress and. along with other observers continues to suggest that the program's high subsidy levels make it increasingly visible and increasingly vulnerable to pressure from budget hawks and others in future debates, Washington Insider believes.


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