September 3, 2013
In light of record high farm incomes, increased scrutiny of federal spending, and the ongoing farm bill reauthorization process, the Government Accountability Office (GAO) released a report last week on the USDA process for assessing whether a farmer is eligible, based on their adjusted gross income (AGI) level, to receive commodity or conservation program payments.
The Farm Bill sets various eligibility criteria that farmers must satisfy in order to receive payments for participation in certain farm and conservation programs. One of those is a means test, based on the recipient’s AGI. As a threshold matter, a farmer’s income cannot exceed a certain income limit specified in statute and remain eligible for benefits. The AGI limit is based on average adjusted income over the three most recent tax years. The AGI test is separate from the per farm payment limitation and the rules restricting payments to working farmers; click here for more information on commodity payment limitations.
The new GAO report observes that USDA’s Farm Service Agency (FSA) has improved its eligibility review process since an earlier GAO report that found FSA had overpaid by nearly $50 million to farmers whose AGI may have disqualified them from receiving such payments. Following the 2008 GAO report, FSA began to work with the IRS to screen applicants for income eligibility. The IRS initially screens out candidates that may exceed the income limit, and FSA then makes the final eligibility determination for payments.
The new GAO report concludes that FSA has improved in its oversight since 2008, but that inconsistencies remain. Since 2008, FSA has identified $143 million in overpayment and, as of 2012, has started to collect those overpayments. However, the GAO report notes that the confusion that exists in classifying farm income versus nonfarm income leads to errors and can result in more overpayments. Moreover, “without monitoring of reviews and verification of statements, errors in FSA’s reviews of tax returns and statements are likely to persist, and payments to some ineligible participants are also likely to continue.”
GAO notes that USDA’s Natural Resources Conservation Service (NRCS) has not yet identified the amount of its potential conservation program overpayments and has not yet begun the process of trying to collect on them, but will begin to do so this month.
The GAO found considerable discrepancies between state FSA offices in performance and thus recommends that the Secretary of Agriculture direct the FSA to monitor state office review of tax returns and accountant and attorney statements to ensure stricter adherence to FSA guidance.
The GAO also recommends that Congress consider simplifying the statutory limits by eliminating the distinction between farm and nonfarm income, which is generally the approach taken in both the House and Senate farm bills currently being debated in Congress. The Senate bill sets a $750,000 limit on the total income of any farmer applying for commodity programs, though it retains a $1 million total income for conservation programs. The current and Senate bill conservation program limit is voided if two-thirds of total income is farm income. The House bill sets the AGI limit at $950,000 for both commodity and conservation programs, with no distinctions between farm and nonfarm income. There were several amendments offered during floor debate to further tighten income eligibility requirements by lowering this limit further, however, none was successful in making it into the final farm bill.
How effectively USDA is able to implement and enforce AGI income limitations and other eligibility requirements will be an issue of continued importance as the Farm Bill debate continues over the coming months.
The AGI test itself is a very imperfect policy instrument. Depending on their tax filing status, many married farm and conservation program participants can double the AGI threshold, such that a $750,000 limit becomes in reality a $1.5 million limit for example. By maximizing expenses in a particular year by, for instance, purchasing additional farmland, livestock, and farm buildings and equipment, it is possible to lower one’s AGI to below the threshold while expanding the farming operation and increasing future earning potential. While that is not possible to do in perpetuity, it does nonetheless encourage farm consolidation in the near term.
In our view, the payment limitation rules are far more important than the AGI requirements. Farm subsidies should be capped at a modest level on an annual per farm basis and should be restricted to working farmers and crop share landlords. We therefore support the identical provisions included in both the House and Senate-passed farm bills that cap commodity payments at $50,000 and restrict eligibility to working farmers plus not more than one manager per farm.
We nonetheless also support the concept that there should be some form of means testing in addition to the payment limit, and we also endorse the proposal to combine farm and nonfarm income into a single means-testing threshold. We prefer the Senate’s $750,000 level to the higher House level, but believe even that Senate level could be lowered further, especially in light of the ability of most participants to double the limit. We also support the equalization of the commodity and conservation AGI thresholds. A single test for all programs that combines all forms of income will greatly ease the administrative burden of ensuring compliance.
Crop Insurance Subsidies
The AGI debate will continue to be especially relevant as it relates to other federal payments made to farmers, including crop insurance subsidies. The Senate Farm Bill proposes to apply income limitations as a consideration when determining what portion of a farmer’s crop insurance premium should be subsidized by the federal government. Currently, every producer and farm investor is eligible for the same premium subsidy rate, regardless of the size of their operation, years in production, or total farm or non-farm income level. The Senate bill, but not the House bill, would reduce the subsidy rate by 15 percentage points for farmers and investors with an average AGI greater than $750,000. The subsidy rate would still be 50 percent or more for most program participants. We support the Senate provision as a modest down payment on more fundamental reform and support its inclusion in the final farm bill that emerges from the House-Senate negotiations over the final text.
With renewed focused on the accountability of all federal programs, Congress has begun to seriously engage in the debate regarding how much the federal taxpayer should be asked to pay to subsidize a farmer’s crop insurance policy, and what limitations should be in place to cap those payments. NSAC will continue to advocate for payment limitation and AGI reform for commodity, crop insurance, and conservation programs.
Click here to read the recent GAO report, Farm Programs: Additional Steps Needed to Help Prevent Payments to Participants Whose Incomes Exceed Limits, August 2013.