Posted by: Phillip Fraas
October 15, 2007
Topic: REPORTS ON FARM BILL STATUS--Second Half of 2007

[This posting is just a small modification of the posting I issued earlier today, to correct several typographical errors.]

Since my last posting in late September, the Senate took a big step forward toward passing the 2007 farm bill when its Finance Commitee, on October 4, approved legislation to provide funding for parts of the farm bill package. The Senate is poised to advance the bill even further next week when the Committee on Agriculture meets to debate the main parts of the farm legislation.

I'll have more to say later this week about the upcoming Agriculture Committee session, expected to convene on October 23. Right now, let's look at the Finance Committee bill.

BACKGROUND: As was the case in the House of Representatives when it worked on the farm bill this summer, the Senate would like to add funds for farm bill programs beyond the current budget "base line" (which limits farm bill spending to the amount that it would take to fund the current farm bill, passed in 2002 and set to expire at the end of this year, if it were just extended).

The House leadership dealt with the problem by prevailing on the Ways and Means Commitee to make changes in the tax laws to add around $7 billion (I haven't seen the final budget numbers) to allow the Agriculture Committee to add new funding for nutrition and alternative energy programs.

The Senate Committee on Finance has the same jurisdiction over tax and other revenue-raising laws as House Ways and Means, and Sen. Tom Harkin (Dem.-Iowa), Chairman of the Agriculture Committee, has been looking to Finance to take similar action to provide him additional funds for farm bill add-ons or program redesigns.

On October 4, Senate Finance did propose changes in tax laws to raise close to $15 billion over a 10-year period, but unlike in the House, it also earmarked the savings for the farm bill programs it wanted, rather than just make the funds available to the Agriculture Committee. Still, it also proposed tax credits for certain existing rural land conservation mesures that are expected to free upwards to $3 billion for the Agriculture Committee to spend on its own new priorities.

SUMMARY OF MAJOR FINANCE COMMITTEE PROVISIONS: The Finance Committee bill, entitled the "Heartland, Habitat, Harvest, and Horticulture Act" (the "4-H Act"), is a major piece of farm legislation in its own right. Anyone interested in disaster payments, alternative energy programs, conservation, farm tax planning, or rural development is encouraged to review the details of the 4-H Act by going to the Finance Commitee website, www.Finance.Senate.gov and clicking on the button in the far left column labeled "Legislation."

Among the major provisions of the 4-H Act are the following:

--Establishment of an Agricultural Disaster Relief Trust Fund of $5 billion, to be used to cover "shallow" crop losses not large enough for crop insurance to provide assistance.

--Allow participants in the Conservation Reserve Program (CRP), a farm bill program, to take a tax credit in lieu of the cash payment under the program they now are entitled to. It is estimated that enough CRP participants will take the tax credit that outlays for CRP cash payments will be reduced by $3 billion or more, with the savings available for other farm bill spending.

--The Finance Committee summary of the bill lists 16 different major alternative energy provisions. The two largest, by amount of money involved, are (1) creation of a new production tax credit of 67 cents per gallon for cellulosic alcohol (this would be in addition to the existing ethanol tax credit), which would cost $1.08 billion over ten years; and (2) reduction of the existing ethanol tax credit (which is now 51 cents a gallon) by 5 cents beginning in the first year in which 7.5 billion gallons of ethanol are produced, which would increase tax revenues by $854 million over five years.

--Expansion of beginning farmer eligibility for low-interest loans funded with so-called "Aggie Bonds," which are tax-exempt bonds issued by state and local governments. The maximum loan amount will be increased from $250,000 to $450,000.

--The big revenue-raiser will be the provision writing into the Internal Revenue Code the current case law on the "economic substance" doctrine that holds that tax deductions are only permitted on transactions that change the taxpayer's economic position in a meaningful way and that are entered into for a substantial non-federal tax purpose. It is estimated that this provision will increase tax revenue by $10 billion over ten years.

WHY THE HOUSE AND SENATE DIFFER ON THE FINANCE/WAYS AND MEANS PART OF THE LEGISLATION: The Senate Finance Committee not only developed tax proposals to provide more money for the farm bill, but it effectively wrote some of the farm bill with its provisions on disaster payments, conservation, alternative energy, and rural development--in a way that House Ways and Means didn't attempt.

Why this is so reflects both the differing natures of the two bodies and the backgrounds of the Finance and Ways and Means chairmen. The House, a large and some times fractious group, tends to operate from the top down, and there is little legislative overlap among the committees. This year, the House leadership allocated the drafting of farm bill policy to the Agriculture Committee and raising needed additional funds for the bill to Ways and Means and expected the the committees to stick to their assignments, which is what happened. And, no doubt making it easier for Ways and Means to avoid the temptation of drafting its own farm bill policy provisions is the fact that the district of its chairman, Rep. Charles Rangel (Dem.-NY), is smack in the middle of New York City where farm policy is not of great interest to constituents.

On the Senate side, there is a lot of overlap among committees. Eight of the 20 members of the Agriculture Committee also serve on the Finance Committee. And, the Senate operates more by consensus than does the House. While the House adheres to many rigid rules in its operation, allowing the leadership that controls the rules to call the shots, it is said that the only rule in the Senate is that it has no rules. Thus, Chairman of the Finance Committee, Sen. Max Baucus (Dem.-Mont.), who has a deep interest in farm policy because his state is entirely rural in nature, felt empowered to draft the 4-H Act with its wide-ranging farm policy provisions.

SOME THOUGHTS ON WHAT HAPPENS TO THE FINANCE COMMITTEE PROVISIONS LATER ON: For the time being, Chairman Harkin of the Agriculture Committee can do little but accept the Finance Committee proposals on disaster payments, conservation, and other farm bill policy provisions.

However, during the Senate floor debate, it is likely that the Agriculture Committee's farm bill proposals will be linked together with the Finance Committee's 4-H Act, and the two will pass as a single farm bill. That means that when the Senate and House meet in conference to resolve differences between their two versions of the farm bill, there will be one chairman representing the Senate interests on both the Agriculture and Finance provisions, and that will be Agriculture Committee Chairman Harkin. While no doubt Finance Chairman Baucus will also sit on the conference committee, Harkin will hold the gavel. Thus, Harkin will finally will have an opportunity to reshape the Finance Committee provisions to more closely conform to his vision of what the farm bill should look like.

Of course, much of what is in the 4-H Act likely is both totally acceptable to Harkin and other members of the Agriculture Committee and non-controversial to the wider Senate as a whole. One major provision, however, that might come under scrutiny during the Senate floor debate and conference is the disaster assistance trust fund. This measure best fits the needs of farmers and ranchers in the high plains who are especially vulnerable to climate extremes like severe droughts and freezes. Because of the trust fund's cost--$5 billion--it could be that members of Congress with different farm bill priorities will push hard to shift some of that spending to programs that benefit a wider cross-section of the country.

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