October 30, 2007

Dear Colleague:

Our current farm policies, sold to the American public as a safety-net, actually hurt the family farmer.  In the name of maintaining the family farm and preserving rural communities, today’s farm programs have benefited a select few while leaving the majority of farmers without support or a safety-net.  To illustrate, consider some of these facts:

• In the years 2000-05, the farm sector received $112 billion in taxpayer subsidies, but only 43 percent of all farms received payments. The largest 8 percent of all farms received 58 percent of the payments.  In fact, the top 1 percent of the highest earning farmers claimed 17 percent of the crop subsidy benefits between 2003 and 2005.

• Smaller farms that qualify in the current system and that could benefit from additional support did not do as well.  Two-thirds of recipient farms received less than $10,000, accounting for only 7 percent of their gross cash farm income. Minority farmers fared even worse with only 8 percent of farmers even receiving federal farm subsidies.

• Our farm policies also hurt rural development.  Ironically, the counties that receive the most federal subsidies have little job growth and population is actually declining.  Furthermore, half of the federal crop subsidies paid between 2003 and 2005 went to only 19 congressional districts (out of 435).

• Less than 10 percent of rural Americans live on a farm and only 14 percent of the rural workforce is employed in farming.

• With 57 percent of farms operating without a safety-net and rural development declining, the system is clearly not fair and there is a growing demand for equity among farmers and rural communities. 

• Our current farm policies violate WTO commitments and soon Brazil will have the authority to retaliate in kind against U.S. products, whether they be agricultural products or intellectual property.

The genesis of our current farm policies began during the Great Depression as an effort to help alleviate poverty among farmers and rural communities.  Farm programs were instituted that stifled agricultural productivity in order to raise commodity prices through a federally administered supply and demand program.  Supply control programs cost U.S. taxpayers handsomely in higher food costs and job loss and about half of the nation’s farmers are essentially prevented from growing other crops such as healthy fruits and vegetables.  To date, this same antiquated idea is promoted even though farm income is higher on average than other industries. 

In 1996, Congress finally recognized that farmers, not the government, could best ascertain what crops are profitable, and granted roughly half of our farmers flexibility in planting choices and began to transition away from federally controlled agriculture programs. 

But in 2002, Congress and the Bush Administration rejected these reforms.  They adopted a program that continued “transition” or direct payments and subsidies to farmers.  These policies are particularly irresponsible because the direct subsidies go out to farmers regardless of whether cash is flowing in or out of their farms, whether they farm at all, or, as the Government Accounting Office has reported, whether those farmers are even alive.  Congress also reinstituted the old program of “countercyclical payments,” or having the taxpayer pay farmers when prices fall below a congressionally set price, and allowed farmers to not repay loans from the government if crop prices fall below a set price.  This so-called “three legged stool,” in addition to other farm programs, has helped to place us in violation of our WTO commitments and could cost the United States billions in revenue, intellectual property and lost trade opportunities. 

Unfortunately, the House of Representatives and the Senate Agriculture Committee passed up the opportunity to provide true reform and an appropriate safety- net.  Instead they are poised to extend and increase these market distorting subsidies. 

In fact, the most contentious reform debate to date in the Agriculture Committee has been whether farmers with income of over $1 million, after farm expenses have been paid, should continue to receive subsidies.  The median household income for Americans for 2006 was $48,200. 

In addition, the Senate Finance Committee has created a new permanent disaster trust fund at the Department of Treasury to provide an additional $5 billion in spending for commodity crop farmers. 

Aside from the questionable utility of such an expensive and exclusive program, the appropriateness of what has been done here is further called into question by one of the largest offsets included by the Finance Committee: codification of the so-called “economic substance doctrine.”  As you may know, the economic substance doctrine is a judicially-created principle that has allowed the IRS to deny tax benefits of otherwise legal transactions in cases where federal courts have found that the transaction is a “sham in substance,” meaning that is it has no economic substance or business purpose beyond the sheltering of income from taxation.  Reports indicate that it has become an effective tool in fighting abusive tax shelters.

The Finance Committee believes that codifying this doctrine will raise upwards of $3.6 billion over the next five years – and an eye-popping $10 billion over the next ten.  I am strongly skeptical about these numbers.  As I understand it, most of these revenues are expected to flow from the deterrent effect of clarifying this doctrine and attaching new penalties to violations.  But the IRS is already winning most of the cases it files in relation to the economic substance doctrine.  Moreover, it currently has the authority to assess penalties to tax scofflaws.

Complicating matters is the fact that we will never truly know how much revenue this provision will generate.  Any score is based on an estimate of the cost of abusive tax shelters of this particular type and an estimate of the remaining deterrent effect of codification.  The first number is – by the IRS’s own admission – unknown, and the second number is simply unknowable.  Accordingly, I doubt the validity of any firm estimate anyone attaches to this change. 

Further, most of the revenues raised – at least all those based on codification’s deterrent value – will enter the treasury in the form of general revenues.  So while there may be some merit for moving forward in this area, we will never know if it really worked. 

In this light codifying the economic substance doctrine seems like an awfully weak means of complying with Congressional pay-go requirements – especially in contrast to the very big checks we are planning to write under this farm bill to a very select group of individuals.

For all of these reasons, Senator Frank Lautenberg and I, along with a number of bi-partisan co-sponsors, plan to introduce an amendment during consideration of the farm bill that would provide a true safety-net for all farmers, regardless of what they grow or where they live.   For the first time, each farmer would receive – at no cost to the farmer – either expanded county-based crop insurance policies that would cover 85 percent of expected crop revenue or yield, or 80 percent of a farm’s five year average adjusted gross revenue.   These subsidized insurance tools already exist, but our reforms would make them more effective and universally used, while controlling administrative costs.  Farmers would also be able to purchase insurance to cover the remainder of their revenue and yields. 

This proposal is important because savings from these reforms will allow us to provide billions in new investments to assist farmers with conservation practices, develop renewable energy, expand access to healthy foods for children and consumers, and assist more hungry Americans. 

The amendment would provide over $4 billion for hunger relief efforts, including major improvements to the Food Stamp Program, our nation’s primary safety-net for the disadvantaged.  It also expands nutrition programs for disadvantaged children in the summer, when school meals are not available. 

The amendment invests $3 billion into specialty crop programs that improve research and marketing opportunities for the majority of American farmers that currently do not benefit from our farm programs.

This legislation also focuses on important environmental and conservation programs by providing $6 billion.  These programs encourage farmers and other private landowners to protect environmentally sensitive lands and prevent soil erosion, improve water quality, create wildlife habitat, and reduce greenhouse gasses.  Private farm and forestlands receive greater protection from suburban sprawl through increased funding for voluntary land preservation programs. 

The amendment also expands agricultural markets and decreases oil dependency by dramatically increasing research and development efforts for cellulosic ethanol and other renewable fuels, and expanding clean renewable energy opportunities to all of our rural areas.  

Most importantly, our proposal pays for itself from the existing agricultural budget passed by Congress without employing deceptive budgetary maneuvers.  In fact, our bill will save taxpayers $3 billion.  

Historically, there is an inappropriate political assumption that agriculture policy is impenetrable for consumers, taxpayers, the poor, and the vast majority of Americans who are being asked to pay for subsidies, while getting little in return.  Even if only a small number of farmers in a state raise a program crop or one of the protected specialty crops like milk, sugar, or peanuts, their focused advocacy somehow has more political influence than the broader well-being of consumers and taxpayers.  In short, those who benefit from current agriculture programs are virtually the only participants in the debate.

This year’s farm bill debate is a good time to begin changing these dynamics. 

Agriculture policy is too important for rural America and the economic and budgetary health of our country to continue the current misguided path.  Our amendment provides a much more equitable approach, produces higher net farm income for farmers, increases farm exports, avoids stimulating over-production, and gives more emphasis to environmental, nutritional, energy security and research concerns.  More importantly, this proposal will protect the family farmer through a strong safety-net and encourage rural development in a fiscally responsible and trade compliant manner.