The United States is expected to spend $23.9 billion on farm subsidies in 2017, the most since 2005. This spending represents the failure of promised savings from the big-ticket spending reforms included in the 2014 farm bill.
In 2014 Congress shifted the focus of farm subsidies from direct payments to crop insurance premium subsidies. Lawmakers claimed this move would reduce spending on farm subsidies by more than $23 billion over a 10-year period. Not only has that savings failed to materialize, but spending actually grew.
Spending growth is primarily due to expansion of the federal crop insurance program, which is now expected to cost taxpayers a total of $88 billion between 2017 and 2026.
Now the principal source of income support for farmers, the federal crop insurance program provides subsidies for purchase of crop insurance through pre-approved private insurers. The federal government is responsible for 62 percent of the cost of premiums, on average. The farmer covers the rest.
However, program spending doesn’t end there. The private companies that provide crop insurance are guaranteed a 14 percent return. When those companies suffer a loss, the government covers that too.
There are many reasons why spending on premium support has increased. As prices change, so do premiums and payouts. When inclement weather is more common, farmers have an incentive to increase coverage levels. Over time more producers have enrolled in the program.
But the most important reason may be the complete lack of restraint in subsidy payments.
Most farm programs restrict payments to farmers with an adjusted gross income above $900,000 over three years. This restriction acknowledges that some farms are large or successful enough to do just fine on their own. In these other farm programs, we recognize those farmers no longer need taxpayer support.
No such limits exist for crop insurance.
That means the largest 1 percent of farms, which already receive 26 percent of all subsidy payments, receive the same crop insurance premium assistance as the beginner just trying to break even. It means the two dozen large-scale farm operations that each collect more than $1 million in farm subsidy payments can count on taxpayers to cover the same 62 percent of their crop insurance premiums as the wheat grower working a second job just to hold onto the family farm.
There is no question that farmers need an effective safety net. That we do not dispute. The stakes are high, and there is just too much on the line to leave farmers hanging out to dry.
But the crop insurance program should not be a source of unfettered spending. Instead, there should be caps on premium subsidies and limits on the amount of support the largest and most well-off farms receive.
A reasonable approach would be to cap premium subsidies at $50,000 for each individual actively engaged in farming. Such a policy would offer premium subsidies up to that cap and require farmers to pay their full crop insurance premiums for anything more. It is estimated that this modest limitation would affect only 2.5 percent of farmers but save more than $2.2 billion over 10 years.
A second option is to reduce premium subsidies slightly for those that do not need the assistance. One proposal reduces subsidies by 15 percent for those farmers with an adjusted gross income in excess of $750,000. This limit would affect only 1 percent of all farmers, while saving more than $1 billion over 10 years.
Even the Congressional Budget Office has considered changes to the crop insurance program as a way to reduce the deficit. It proposes reducing the subsidy from on average 62 percent to 40 percent of premium costs and lowering the return to private insurance companies from 14 percent to 9.25. This would save $27 billion over a nine-year period beginning in 2017.
When Congress chose crop insurance as the primary subsidy vehicle in the 2014 farm bill, it created a significant loophole that is now being fully exploited. The year 2018 offers an opportunity for real reform. We call on members of Congress to cap total subsidies and require a means-test to determine eligibility.
Gaining control over subsidy spending is a win-win situation for farmers and taxpayers alike. Doing so ensures that our farm safety net provides the support for which it was intended. Investing those savings in rural infrastructure and economic development ensures our communities have what they need to succeed.
