Update on Senate Reconciliation Package

Two major additions to ag language in revised reconciliation package

Washington Focus

The policy focus in Washington for this weekend and the week ahead is debate, a vote-a-rama and votes on the revised Senate reconciliation package, which includes two major additions regarding agriculture: (1) $3.1 billion for farm loan immediate relief for borrowers with at-risk agricultural operations. (2) $2.2 billion for a program to provide financial assistance, including the cost of any financial assistance, to farmers, ranchers, or forest landowners determined to have experienced discrimination prior to January 1, 2021, in Department of Agriculture farm lending programs, under which the amount of financial assistance provided to a recipient may be not more than $500,000.

Link to revised reconciliation text. 

Note: We will provide updates on the reconciliation package as warranted.

The Senate is expected to vote on a motion to proceed to the entire package sometime Saturday.

Sen. Patrick Leahy (D-Vt.) returned for votes after two rounds of hip surgery. Seated in a wheelchair, Leahy was greeted by multiple rounds of fist bumps from colleagues.

Senate leader predicts victory. Senate Majority Leader Chuck Schumer (D-N.Y.) predicted Senate Democrats’ version of the bill, dubbed the Inflation Reduction Act, “will receive the support of the entire Senate Democratic Conference.”

The Senate bill raises roughly $750 billion in taxes and spends about $430 billion on healthcare and energy provisions.

House vote. House Majority Leader Steny Hoyer (D-Md.) said that the House would reconvene to consider the legislation on Friday, Aug. 12. If the bill passes Congress, it will go to President Biden’s desk for his signature.

Sen. Kyrsten Sinema (D-Ariz.) nixed tax changes on carried interest that would have hit private-equity investors (and generated $14 billion in revenue over 10 years). She also moderated the damage of the 15% minimum tax on book earnings by allowing for accelerated depreciation of business investment for at least some manufacturers. Business officials note this is an improvement and offers a reprieve for U.S. manufacturers in particular. Sen. Mark Warner (D-Va.) said preserving the accelerated depreciation tax benefit will help manufacturers that Congress is already trying to encourage to build production capacity in the U.S.

What’s new? A levy on share buybacks. This new tax would apply at 1% on the market value of shares that companies buy back from their shareholders, with limited exceptions such as buybacks intended to prevent dilution of existing owners when employees exercise stock options. Schumer said Friday the buyback tax would raise $74 billion, more than making up for the loss of a $14 billion tax on carried interest and a $55 billion tax on depreciation costs that Democrats are now foregoing by allowing accelerated depreciation and other tweaks. Sinema insisted that the 15% minimum tax exclude companies that take advantage of accelerated depreciation — deductions that allow firms to pay a low tax rate when they make large capital investments, such as buying new equipment. Sinema’s 1% levy represents a climbdown from the 2% rate Senate Democrats tried to include in the Build Back Better plan last year. Companies use buybacks to return cash to shareholders for which they don’t have a better use. Shareholders who sell shares back to the company can invest the proceeds elsewhere.

The revised corporate minimum tax will bring in $258 billion over a decade after the changes, Schumer said, down from the $313 billion it had earlier been estimated to generate in revenue.

Drought aid funding. A group of Democratic senators from Western states said Friday that the deal would also include $4 billion in funding to combat drought, another Sinema demand that was also backed by Mark Kelly (D-Ariz.), Catherine Cortez Masto (D-Nev.), and Michael Bennet (D-Colo.). The funding would be used to buy private water rights and help municipalities with conservation projects to increase the level of water in the Colorado River system.

Energy and environmental provisions. The bill includes several tax incentives for companies and individuals to take steps to reduce carbon emissions, and even support for fossil-fuel energy production. The bill would establish a “green bank” with a $27-billion budget, force oil and gas companies to pay fees as high as $1,500 a ton on methane leaks and pay farmers to change their practices. It also includes incentives to buy new and used electric vehicles. Link to a summary of the environmental provisions. Link to a summary of the energy provisions.

     A study (link) found that solar and wind farms typically are built in rural areas with low-income populations — and those projects can be either a benefit or a burden to those communities, depending on local factors. Construction jobs and tax revenue can be a boon, while loss of agricultural land can be a big loss.

     The bill includes a new fee on methane emissions from oil and gas projects, aimed at controlling what the EPA says is the second-most abundant greenhouse gas after carbon dioxide. Methane is 25 times more effective as carbon at trapping heat in the atmosphere, according to the EPA. The fee would cost methane emitters nearly $6.4 billion through fiscal 2031, the Congressional Budget Office estimated. Starting in 2024, a fee would be charged on oil and natural gas systems that exceed industry-specific thresholds for methane emissions. Emissions that result from delays in gathering line and transmission infrastructure environmental permitting would be exempt. To help businesses comply, the measure would provide $1.55 billion for the EPA to provide financial aid.

     The measure would also provide the EPA with $3 billion for awarding environmental justice block grants benefiting disadvantaged communities. The grants would be awarded for activities like pollution monitoring, environmental remediation, investments in low- and zero-emission and resilient technologies, mitigating climate and health risks from extreme heat and wildfires and reducing indoor air pollution.

     Senate Parliamentarian Elizabeth MacDonough ruled that clean energy tax provisions that would tie more generous tax credits to wage, apprenticeship and content requirements were allowable under reconciliation rules.

     A possible glitch: measures to tie tax credits for electric vehicles to the place of manufacture and the origin of its components awaits a decision by the Senate parliamentarian.

Health care provisions. The measure empowers the government to allow Medicare to begin negotiating a lower price for some prescription drugs. Ten drugs would qualify for negotiation in 2026, with more added in subsequent years. The bill outlines criteria by which the drugs would be chosen, but the ultimate decision would rest with the health secretary.

     The package extends subsidies for health insurance premiums under the Affordable Care Act (ObamaCare). The bill includes around $64 billion for extending the Affordable Care Act healthcare premium subsidies. The legislation would extend, for three years, the larger premium subsidies that low- and middle-income people have received during the coronavirus pandemic to get health coverage under the Affordable Care Act and allow those with higher incomes who became eligible for such subsidies during the pandemic to keep them.

     Democrats survived vetting of the Medicare portions of their prescription drug reform plan but lost ground on a separate pillar that penalizes drug companies for raising prices on individuals with private health insurance. “Democrats have received extremely good news: for the first time, Medicare will finally be allowed to negotiate prescription drug prices, seniors will have free vaccines and their costs capped, and much more," Schumer said in a statement.

     Senate Democrats will scale back a penalty for drugmakers that raise Medicare prices faster than inflation after the chamber's parliamentarian decided the provision was ineligible under budget reconciliation rules as currently written.

     The plan would limit how much Medicare recipients have to pay out of pocket for drugs at the pharmacy to $2,000 annually — a huge benefit for the 1.4 million beneficiaries who spend more than that each year, often on medicines for serious diseases like cancer and multiple sclerosis.

     Opponents argue that the measure would discourage innovation and cite a new analysis from the budget office that projects that it would actually lead to higher prices when drugs first come on the market. Senate Minority Leader Mitch McConnell (R-Ky.) criticized drug pricing provisions in Democrats' reconciliation bill, saying "the government can't actually make something cost less by making it illegal to raise its price." He argued the bill would "take a buzz saw" to research and development for new medical treatments.

     The parliamentarian is still analyzing a separate measure that would require Medicare to negotiate certain insulin prices, and that would cap consumer copays in Medicare and commercial plans at $35 per month. The commercial insulin caps are still an open question. The measure was added last minute after Schumer opted to nix discussions around a separate bipartisan draft bill from Sens. Jeanne Shaheen (D-N.H.) and Susan Collins (R-Maine).

The package includes $80 billion for the Internal Revenue Service, money that will go toward tax collection efforts at the agency that will add 87,000 IRS workers and provide an estimated $124 billion from IRS tax enforcement via a massive increase in audits of businesses, pass-through entities and upper-income individuals, and for other purposes.

Agriculture provisions. Link to revised language that includes two major additions:

1. SEC. 22006. FARM LOAN IMMEDIATE RELIEF FOR BORROWERS WITH AT-RISK AGRICULTURAL OPERATIONS. In addition to amounts otherwise available, there is appropriated to the Secretary for fiscal year 2022, out of amounts in the Treasury not otherwise appropriated, $3,100,000,000, to remain available until September 30, 2031, to provide payments to, for the cost of loans or loan modifications for, or to carry out section 331(b)(4) of the Consolidated Farm and Rural Development Act (7 U.S.C. 1981(b)(4)) with respect to distressed borrowers of direct or guaranteed loans administered by the Farm Service Agency under subtitle A, B, or C of that Act (7 U.S.C. 1922 through 1970). In carrying out this section, the Secretary shall provide relief to those borrowers whose agricultural operations are at financial risk as expeditiously as possible, as determined by the Secretary.
    
2. Sec. 22007
   (e) Discrimination Financial Assistance.—In addition to amounts otherwise available, there is appropriated to the Secretary of Agriculture for fiscal year 2022, to remain available until September 30, 2031, out of any money in the Treasury not otherwise appropriated, $2,200,000,000 for a program to provide financial assistance, including the cost of any financial assistance, to farmers, ranchers, or forest landowners determined to have experienced discrimination prior to January 1, 2021, in Department of Agriculture farm lending programs, under which the amount of financial assistance provided to a recipient may be not more than $500,000, as determined to be appropriate based on any consequences experienced from the discrimination, which program shall be administered through 1 or more qualified nongovernmental entities selected by the Secretary subject to standards set and enforced by the Secretary.

    
     Regarding the ag conservation provisions, Combest, Sell & Associates notes that “CBO indicates that although the agriculture conservation provisions provide $19.9 billion to incentivize the sequestration and reduction of greenhouse gas emissions, USDA is expected to only be able to spend $15.3 billion before the new funding stream dries up under Byrd Rule requirements that limit any new spending to the 10-year budget window. Hence, the increased funding is provided for each of fiscal years (FY) 2023 through 2026, with the Secretary prohibited from expending any of the dollars past September 30, 2031. The media reports on this have been confused. The bottom line is that $20 billion in new funding will be available in each of FY 2023, 2024, 2025, and 2026, though CBO projects that the money will not all be used because NRCS is not able to fully utilize its current budget. The new funding does not establish a higher budget baseline for the farm bill although the Budget Committees could allow this next year in a budget resolution passed by Congress. If the Budget Committees do allow this, the new funding could be restructured in the 2023 Farm Bill to arrive at more achievable spending targets. This would take some real skill from lawmakers and, if done right, could be parlayed into other needed investments in the Commodity Title and crop insurance.”

Revenue generators. Democrats want to raise $124 billion from IRS tax enforcement, $288 billion from prescription drug pricing reform (in part by forcing the pharmaceutical industry to accept lower prices from Medicare for some of its big sellers), $313 billion through a modified 15% minimum corporate tax rate, and $73 billion from a 1% tax on stock buybacks. The bill includes a new 16.4-cent-per-barrel tax on crude oil.

Democrats are waiting for updated estimates from the Congressional Budget Office.

Economic Reports for the Week

Inflation updates are the major economic focus in the week ahead, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. CPI was up 9.1% in June, and economists expect the year-over-year headline number to decline by several tenths in July, when it is reported Wednesday. But core inflation, excluding energy and food, could be slightly higher than last month’s pace. On Thursday, the BLS will report the PPI for July.

Tuesday, Aug. 9

• National Federation of Independent Business releases its Small Business Optimism Index for July. Consensus estimate is for a 89 reading, slightly less than June’s 89.5, which is the lowest reading since early 2013. Small-business owners expecting better business conditions over the next six months were at a net negative 61% in June, the lowest level recorded in the 48-year history of the survey.
• Bureau of Labor Statistics (BLS) reports preliminary employee compensation and productivity data for the second quarter. Unit labor costs are expected to increase at a seasonally adjusted annual rate of 6.7%, while productivity is seen declining 4.1%. This compares with a 12.6% jump and 7.3% decrease, respectively, in the first quarter. 
   

Wednesday, Aug. 10

• MBA Mortgage Applications
• BLS releases the consumer price index for July. Economists forecast a 8.7% year-over-year rise, compared with a 9.1% jump in June. The core CPI, which excludes volatile food and energy prices, is seen increasing 6.1%, versus a 5.9% gain previously. The 9.1% reading was the highest since 1981, while the core CPI is off slightly from the recent peak of 6.5% in March. The S&P 500 index jumped 9.1% in July, its best month since November 2020, in anticipation of a less hawkish Federal Reserve on the assumption that inflation has peaked.
   

Thursday, Aug. 11

• Jobless Claims
• BLS releases the producer price index for July. Consensus estimate is for a 10.4% year-over-year increase, less than June’s 11.3%. The core PPI, which excludes food and energy prices, is expected to rise 7.7%, down from 8.2%.
• Fed Balance Sheet
• Money Supply  
   

Friday, Aug. 12

• University of Michigan releases its Consumer Sentiment Index for August. The consensus call is for a 53 reading, slightly more than July’s 51.5. The index is near its record low, as inflation remains top of mind for consumers.  
   

Key USDA & international Ag & Energy Reports and Events 

USDA’s initial survey-based corn and soybean estimates will be released on Friday, Aug. 12. Those estimates are based mostly on farmer surveys and satellite imagery. The first cotton crop estimate will include objective yield data. Any changes to the U.S. wheat crop estimate this month are typically minor. Adjustments to U.S. and global balance sheets could be market-moving, say Pro Farmer analysts.

Monday, Aug. 8

     Ag reports and events:

• Export Inspections
• Crop Progress
• Holiday: Pakistan
   

Tuesday, Aug. 9

     Ag reports and events:

• EU weekly grain, oilseed import and export data
   

     Energy reports and events:

• API weekly U.S. oil inventory report
• EIA’s STEO
• Holidays: India; Singapore
   

Wednesday, Aug. 10

     Ag reports and events:

• Broiler Hatchery
• Meat Price Spreads
• Malaysian Palm Oil Board’s data on stockpiles, production and exports
• Malaysia’s Aug 1-10 palm oil export data
• Brazil’s Unica to release cane crush, sugar production data (tentative)
   

     Energy reports and events:

• EIA weekly U.S. oil inventory report
• U.S. weekly ethanol inventories
• Genscape weekly crude inventory report for Europe’s ARA region
• Holiday: Iraq
   

Thursday, Aug. 11

     Ag reports and events:

• Weekly Export Sales
• Brazil’s Conab to publish output and planting data for soybeans and corn
   

     Energy reports and events:

• EIA natural gas storage change
• Insights Global weekly oil product inventories in Europe’s ARA region
• IEA publishes monthly oil market report 10am Paris time
• OPEC publishes monthly oil market report
• Holiday: Japan
   

Friday, Aug. 12

     Ag reports and events:

• CFTC Commitments of Traders report
• Peanut Prices
• WASDE
• Cotton Ginnings
• Crop Production
• Cotton: World Markets and Trade
• Grain: World Markets and Trade
• Oilseeds: World Markets and Trade
• World Agricultural Production
• Vegetable and Pulses Yearbook
• Turkey Hatchery
• China’s agriculture ministry (CASDE) releases monthly report on supply and demand for corn and soybean
• FranceAgriMer weekly update on crop conditions
• Holiday: Thailand
   

     Energy reports and events:

• Baker Hughes weekly U.S. oil/gas rig counts