February 22, 2023
The Government Accountability Office (GAO) released a new report last week which encourages Congress to consider reducing crop insurance subsidies for the highest-income participants and private insurance companies. The report – which comes at the outset of the 2023 farm bill reauthorization – offers evidence-based justifications that support longtime National Sustainable Agriculture Coalition (NSAC) priorities to level the playing field for the diversity of American farmers and ranchers, while saving billions of taxpayer dollars.
The GAO report, titled Farm Bill: Reducing Crop Insurance Costs Could Fund Other Priorities, proposes two opportunities that members of Congress may consider to reduce program costs. The GAO is the federal government’s oversight watchdog responsible for conducting investigations into and rooting out inefficiencies and waste in federal programs. GAO’s independent work is highly regarded and Congress has often acted on its conclusions.
The first recommendation is to reduce subsidies for high-income participants by introducing an adjusted gross income (AGI) means test, a standard which is applied to Title I commodity programs to prevent farmers with an annual income above $900,000 from remaining eligible for payments funded by taxpayers.
“Not having an AGI limit for the crop insurance program sometimes results in relatively large subsidies for high-income participants,” the report states. This claim is supported by a recent American Enterprise Institute study, which found that the largest 20 percent of farms receive more than 75 percent of subsidies, and that on average these large farmers possess between $3.1 million and $15.7 million in total household wealth.
The GAO also encourages Congress to consider reforming the mandatory minimum compensation for private insurance companies. Presently, Congress grants private insurance companies a guaranteed annual rate of return of 14.5 percent at the expense of taxpayers – regardless of market conditions. The report notes that in some years, “USDA’s compensation to insurance companies greatly exceeded payments to farmers.”
USDA is unable to negotiate any savings for the American people due to a statutory provision passed in the 2014 Farm Bill that requires any reinsurance agreement between USDA and insurance companies be “budget neutral.” The recommendations suggested by GAO, and recommended by NSAC in our 2023 Farm Bill Platform, would help ensure public dollars benefit farmers who need it rather than millionaires and private insurance companies.
The GAO report closes by noting “savings from these changes could be available for other farm bill priorities, such as funding different agricultural programs.”
The GAO has issued several reports over the past decade reviewing premium subsidies to farmers and compensation to insurance companies for selling and servicing policies. The conclusions offered in the newest report are aligned with those which have been made previously. What follows is a non-exhaustive summary of past GAO recommendations:
In 2012, GAO suggested that Congress consider limiting the subsidy for premiums that an individual farmer can receive each year or reducing the subsidy for all farmers participating in the program, or both limiting and reducing these subsidies. An annual ceiling of $40,000 would have saved up to $1 billion in crop insurance costs in 2011 and impacted just 3.9 percent of participating farms.
In 2015, GAO found that reducing subsidies for the highest income participants would save federal dollars with minimal effect on the program. Specifically, GAO found that an AGI means test reducing subsidies by 15 percent would impact only about one percent of farmers with an income above $750,000. Contrary to popular arguments against this proposal, GAO found “their decisions to stay in or leave the program would likely not affect the crop insurance program’s actuarial soundness at the national level.”
In 2017, GAO determined that the guaranteed profit rate for private insurance companies exceeds what may be considered a reasonable amount based on market necessities and encouraged Congress to address the bloated guaranteed rate of return.
There have been numerous attempts by members of Congress in the past fifteen years to act on consistent recommendations from the Government Accountability Office. What follows is a non-exhaustive synopsis of recent farm bill amendments or proposals aimed at reducing federal crop insurance program costs.
In 2008, Senator Sherrod Brown (D-OH) along with Senators Sununu (R-NH), McCaskill (D-MO), McCain (R-AZ), Durbin (D-IL), and Schumer (D-NY) introduced an amendment to reduce the guaranteed profit rate for private insurance companies. “Our amendment… reduces the excessive taxpayer-funded fees that crop insurers receive for servicing their customers,” said Senator Brown in a floor speech. The amendment failed 32-63, but it was the foundation for USDA to win significant savings when next negotiating with private insurers. (This was before the budget neutrality provision introduced in the 2014 Farm Bill disallowed USDA to exercise such flexibility.)
In 2012, Senators Dick Durbin (D-IL) and Coburn (R-OK) introduced an amendment to trim crop insurance premium subsidies by 15 percent for those farmers making over $750,000 a year. “How many farmers would be affected by this nationwide?” asked Senator Durbin in a floor speech. “15,000 farmers out of 1.5 million… [And] it saves us $1 billion.” The amendment passed with a resounding 66-33 bipartisan majority. It is not, however, law; the 2012 Farm Bill failed to pass and this text was not included in the eventual 2014 Farm Bill.
In 2018, Senators Chuck Grassley (R-IA) and Durbin along with Senators Flake (R-AZ), Shaheen (D-NH), and McCain (R-AZ) introduced an amendment to modestly reduce premium subsidies by 15 percent only for farmers with an average adjusted gross income in excess of $700,000. It was widely believed that support existed for this amendment to pass in the Senate, but through procedural means it was never allowed to come to the floor for a vote.
“Today, we have a Farm Bill that is intentionally written to help the largest farmers receive unlimited subsidies from the federal government,” said Grassley upon passage of the 2018 Farm Bill, and in reference to the failed amendment. “For years, the top 10 percent of farmers have received over 70 percent of subsidies from the government. That’s only one of the many reasons it’s so hard for young and beginning farmers to get started.”
Senator Jeanne Shaheen (D-NH) along with retired Senators Flake and Patrick Toomey (R-PA) has introduced the Assisting Family Farmers through Insurance Reform Measures (AFFIRM) Act in the 114th, 115th, and 116th Congress. The Act has been projected to save more than $35 billion over 10 years. It would implement a simple cap of $40,000 per farm per year, make farmers with an adjusted gross income above $250,000 ineligible for insurance subsidies, reduce the guaranteed profit rate for private insurance companies, and introduce data transparency measures about who is receiving crop insurance subsidies.
Most recently, the Republican Study Committee’s (RSC) Blueprint to Save America proposed reducing crop insurance premium subsidies by 30 percent and eliminating the federal reimbursements to private insurance companies. The RSC estimated these measures would save taxpayers more than $32 billion over 10 years. The caucus of Republican members of the House and Senate also proposed eliminating Title I commodity programs, making the case that crop insurance already addresses revenue losses and is a sufficient safety net for commodity farmers.
During last week’s Senate Agriculture Committee hearing on Commodity Programs, Crop Insurance, and Credit, Senator Grassley began his line of questioning by saying, “I hear that [the subject of] payment limitations has not come up yet.” As illustrated above, Grassley has long supported reasonable measures to keep the safety net a tool to help producers recover from unexpected disasters or market shocks rather than an entitlement program for the highest-income farmers.
“Since 2017, more than $60 billion in ad-hoc disaster assistance has been allocated to supplement crop insurance. If you remember, crop insurance was set up so that farmers would have some certainty and did not have to rely on Congress to get disaster assistance. Crop insurance is already the most expensive farm program title outside of the nutrition title. Do you have suggestions for how we can reduce the sheer size of taxpayer dollars that go to supplemental disaster programs?”
There is an opportunity this year for any member of Congress to raise the mantle for sensible, cost-saving reforms that will improve the federal crop insurance program. Placing modest caps on crop insurance premium subsidies is a common-sense reform from any perspective, whether in relation to fiscal responsibility or climate and equity concerns. Read this recent NSAC blog for more on the case for subsidy reform.
As a complement to recommendations from GAO, NSAC commissioned a report last summer which proposes several targeted options to reduce federal crop insurance spending that would save up to $20 billion over 10 years and impact on average less than 3 percent of farmers. You can read the full report here.
Categories: Carousel, Commodity, Crop Insurance & Credit Programs, Farm Bill