Taxpayers subsidizing rich farmers

This week we expect the House will consider legislation to extend agricultural programs, more commonly known as the Farm Bill. We think the Farm Bill needs significantly more reform than the bill that will be brought to the House floor. In some cases, that bill actually moves in the wrong direction.

Here is our Statement of Administration Policy on the bill. I’ll look at one element of that bill: should we subsidize rich farmers, and if so, what do we mean by “rich”?

Q: Should farm operators with annual net income of just under $1 million receive taxpayer-subsidized commodity payments? We think the answer should be no.

There is a provision in current law which says that a farmer gets no (taxpayer-subsidized) commodity farm payments if his annual income is greater than $2.5 million. That is not a misprint – under current law, a farmer with $2.49 million of income can receive federal farm payments. (Throughout this note, when I say “income,” I actually mean net income, also known as Adjusted Gross Income. For farmers, there’s a big difference, because your net income subtracts out your business expenses, which in farming can be quite substantial. So $2.5 M of net income is a lot of money.)

The current rules make it easy for you to restructure the ownership structure of your farm to evade the $2.5 M current law limit. A Commission on the Application of Payment Limitations for Agriculture found that the “limits on marketing loan benefits are not effective, only a small percentage of program crop producers reach the current limits on direct and counter-cyclical payments, and many of the largest farms have either restructured or are likely to do so to lessen the extent to which the limits reduce payments.”

The President’s Farm Bill reform proposal would lower the income limit for all farm commodity payments from $2.5 million annually, to $200,000. (You actually get to average your income over three years, and that amount can’t exceed $200 K.)

The President’s proposal would also tighten several rules in current law, provisions that now allow farmers to work and restructure around the current law limit. Tightening these rules would mean that the $200 K limit would actually be binding.

His proposal would tighten but not lower the overall maximum amount of subsidies a farmer can receive from the government: $360,000 per year. Again, this is not a misprint.

Our best guess is that our proposal would cut off farm payments for roughly 38,000 farm operators with net income greater than $200,000 per year.

The bill that the House will consider this week will be quite similar to the bill reported from the House Agriculture Committee last week, chaired by Rep. Collin Peterson (D-MN).

That bill would lower the income limitation from $2.5 million per year, to $1 million per year. And it eliminates the payment cap on one type of payment, “marketing loan payments,” allowing the largest producers to capture even larger subsidy payments. If the loopholes aren’t too weak, this proposal would cut off farm payments for about 3,200 of the highest-income farm operators (compared to our 38,000).

Now advocates for the Peterson bill point out that their bill also has a lower limit, of $500 K per year. Unfortunately, this limit only applies to farm operators between $500 K and $1 M of income who get more than 2/3 of their income from farming. At most, there are another roughly 4,000 farms in this income range, but most of them don’t meet this 2/3 test.

To summarize:

  • Current law: Farmers with annual net income of $2.49 M can receive government commodity payments. Farmers with incomes >$2.5 M cannot. Loopholes exist to make even this limit largely ineffective. Just under a million (985,000) farm operators receive payments now.
  • House committee bill: Farmers with annual net income of $999 K can receive government commodity payments. Farmers with incomes $1 M cannot, but some married couples can be treated separately making the effective limit $2 M. This provision will cut off farm payments from roughly 3,200 farm operators. In addition, some (but not many) of the roughly 4,000 farm operators with incomes between $500 and $1 M will also be cut off. So the total number of farmers cut off is between about 3,200 and about 7,200, and most likely closer to the lower number.
  • President’s proposal: Farmers with annual net income of $199 K can receive government commodity payments. Farmers with incomes >$200 K cannot. Current law loopholes are eliminated or substantially tightened. This will cut off farm payments for about 38,000 farmers.

This is one of several reasons why we argue that the next Farm Bill needs “more reform” than that soon to be considered in the House.

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