Washington Insider-- Tuesday

By DTN's Washington Insider

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

Falling Oil Prices Produce a Mixed Bag for State Governments

The New York Times recently reported on the effect that falling oil prices may have on the local economies of states that are dependent on oil and gas revenue. Those states are warily watching to see just how much of dent lower oil prices will put in their budgets. And residents in states such as Alaska and Texas also could become more concerned because they now pay no state income tax. Instead, in both states, the state uses revenue collected from energy production to make up for the lack of individual income taxes.

The other side of the coin is that with lower gasoline prices comes increased gasoline use. States that have a per-gallon excise tax in effect can expect a larger-than influx of funds that many of them use for needed road repairs. In fact, some states are taking advantage, or considering taking advantage, of lower-priced gasoline to increase their increase per-gallon tax rates.

There also have been discussions about increasing the federal gasoline excise tax as a way to collect additional revenue needed to take on transportation infrastructure repair, upgrades and maintenance. Earlier this month, however, congressional Republican leaders shot down that idea. Whether they will be able to find another source of transportation funding remains to be seen.

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Congressional Republicans Reportedly Ready to Introduce Immigration Reforms

Republicans in Congress reportedly are preparing a variety of bills that would make substantial changes to the immigration system. It is a goal they have pursued since President George W. Bush called for action on the issue in 2002.

The impetus for GOP action is President Obama's executive order that would shield 4 million illegal immigrants from deportation. At the top of the Republican agenda is to reverse the president's order. After that, the GOP likely will take a number of steps aimed at securing the U.S. border with Mexico to prevent or at least reduce the flow of undocumented immigrants. Republicans also are said to be preparing legislation aimed at making more agricultural and high-tech immigrants available to U.S. employers.

Democrats have argued for a more comprehensive immigration reform effort, but this view is unlikely to carry much weight in the next Congress. The more important fights regarding immigration reform are likely to be carried out between different factions of the Republican party than between the two parties.

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Washington Insider: Farm Bill Debate Continues

The 2014 farm bill debate developed around a special theme: wide agreement that the existing direct payments program was too unpopular to even think of continuing, and that an attractive alternative was available, based on crop insurance. Thus, lawmakers had a golden opportunity to undertake a popular approach that offered protection from budget hawks in the form of a significant savings (in Congressional Budget Office-speak), never mind that the bill proposed spending about $1 trillion over a decade. This led, of course, to an all-out struggle over how to divide the benefits.

Now, that's over. But, maybe not. There are now serious charges being made that the programs moved in the right direction, but contain subsidies that not only are too large, but also unnecessary. And, critics are now offering details that support that case. For example, two well-known and well-regarded economists, Bruce Babcock of Iowa State University and Vincent Smith of Montana State University, recently wrote about their analysis of the programs for the Wall Street Journal. Their conclusions were severely negative.

They noted that for the past three years, the Obama administration and the House Budget Committee have proposed reforms for the federal crop-insurance program that have been defeated by opposition centered in the House and Senate ag committees. Now, they think that Republicans and Democrats in the new Congress who stand for fiscal responsibility have an opportunity to force important reforms.

These include, especially, what Babcock and Smith think are the "sweet deal" farmers now have in crop insurance: Taxpayers cover all the administrative costs associated with marketing and managing the program, along with more than 60% of the premiums, based on data from USDA's Risk Management Agency. They estimate that farmers pay only about one-third of the real costs of their crop-insurance coverage and that these programs cost a lot. For example, they say, from 2003 to 2012, these subsidies cost taxpayers $55.4 billion, 66% of the cost of the program.

The economists note that proponents of federal crop insurance argue that "roughly $6 billion a year in subsidized premiums is a small price to pay to guarantee the financial stability of the nation's food supply." That argument, they say, is "specious," not least because 85% to 90% of all crop-insurance subsidies are channeled to the largest 10% to 15% of farm operations, few of which would be at risk of going out of business because of short-term fluctuations in their revenues.

Babcock and Smith argue that the programs are gimmick-ridden, and focus on the "harvest price option" that they say is an important cost component. "By paying a higher premium — again, largely subsidized by taxpayers — farmers can indemnify their lost crop production at the higher of the market price just before planting or at the time of harvest. Almost all farmers choose the harvest price option because taxpayers pay such a large portion of the extra premium and it creates an opportunity for windfall profits."

They provide details from the drought of 2012 and calculate that standard subsidized-revenue insurance contracts would have returned about $5 billion to cover the effects of the 2012 drought. But because nearly all corn farmers chose the harvest price option, they "received almost $12 billion in insurance indemnities." The Congressional Budget Office agrees, the authors say, and estimated the cost to taxpayers of the harvest price option subsidy at $4 billion a year.

Elimination of harvest-price-option subsidies would not require drastic changes, the economists assert. Farmers wishing to pay the full cost for the harvest-price option would still be able to do so, but most probably would not because of the expense. Revenue declines caused by unexpected drops in prices and yields would be compensated but subsidized windfall gains would not, and program costs would be reduced

In their review, Babcock and Smith argue that bipartisan congressional support should go to programs that serve the public interest and cannot be provided by the private sector. "Subsidies that induce farmers to buy gold-plated harvest-price-option crop insurance fail on both counts," they say. Furthermore they note that eliminating this subsidy would save taxpayers $40 billion over 10 years "while posing no threat to the nation's food supply. Come January, the new Congress should do just that, they urge.

Babcock and Smith are well-enough known that their criticisms will be hard to ignore although their recommendations may be somewhat unwelcome to the new Ag leadership in both chambers. Still, the charge that the harvest price option has a $40 billion price tag and that those funds could better be used elsewhere without damaging ag safety nets seems certain to attract attention even beyond budget hawks.

At least, it seems certain to add more detail to the long, long debate over the 2014 Act, Washington Insider believes.

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