Effects of Reducing the Income Cap on Eligibility for Farm Program Payments
by Ron Durst
Economic Information Bulletin No. (EIB-27) 22 pp, September 2007
Farm commodity program payment limits have been in effect since
the Agricultural Act of 1970. However, these payment limits have
not had much effect on the distribution of farm program payments.
Only a small percentage of producers reach the current payment
limit ($360,000 per person) because of various legal and regulatory
provisions available for avoiding the limits.
The Farm Security and Rural Investment Act of 2002 supplemented
program payment limits with a cap on the income farmers can earn
and still receive farm program payments. An individual or taxable
entity with average AGI over $2.5 million for the previous 3 tax
years is ineligible for farm program payments. An exception applies
to those with 75 percent or more of their average AGI from farming,
ranching, or forestry operations. Thus, the cap only affects farm
program participants with very high off-farm earnings both in
absolute terms and relative to farm income. As a result, a
substantial portion of program payments continue to go to large
farms and high-income farm households.
What Is the Issue?
To increase the effectiveness of farm program payment limits and
reduce payments going to farmers with high incomes, the
Administration's 2007 farm bill proposal would reduce the current
$2.5 million AGI eligibility cap to $200,000 and eliminate the
exception for those with 75 percent or more of their income from
farming, ranching, or forestry. The proposed cap would apply only
to farm commodity payments. This report investigates the share of
payment recipients and program payments likely to be affected by
the lowering of the AGI income cap.
What Did the Study Find?
The current $2.5-million cap on eligibility for farm program
payments affects only a small number of farm program payment
recipients each year. A reduction in the cap to $200,000 and the
elimination of the farm income exception would affect a larger
number of farm households but still only a small share of
government payment recipients. Based on Internal Revenue Service
(IRS) tax data for 2004, about 1.2 percent of all farm sole
proprietors and about 2 percent of crop share landlords would be
potentially subject to the proposed lower AGI cap. Total government
payments to these proprietors and landlords totaled $399 million,
or about 5 percent of farm program payments to all proprietors and
share-rent landlords in 2004.
ARMS data suggest that a similar share of farm sole proprietors
(1.1 percent) could be affected. When partnerships and farm
corporations are included, about 1.5 percent of all farm operator
households could be affected since a larger share of farm
partnerships (2.5 percent) and farm corporations (9.7 percent)
could be subject to the proposed cap. ARMS data indicate that $807
million in payments were received in 2004 by farm operators
organized as proprietors, partner-ships, and corporations with
incomes exceeding $200,000. However, not all of these payments
would be affected by a $200,000 income cap on eligibility for
payments due to differences in IRS and ARMS data and changes by
producers in how they manage their incomes and expenses. The study
also found that farm income averaged $271,749 and net worth
averaged over $1.86 million for farm households with AGI estimated
to be over $200,000 based on the ARMS data.
The share of farm households potentially affected by the
proposed lower cap would vary considerably by State. The share
ranges from 1.5 percent for North Dakota to 13.4 percent for New
Jersey. The Northeast and West report the highest share of farm
returns with AGI over $200,000, while the Corn Belt and Plains
States report the lowest share.
How Was the Study Conducted?
This report uses both published and special tabulation data
obtained from the IRS to evaluate the proposed lower AGI cap on
farm sole proprietors and crop-share landlords. It also uses ARMS
farm-level data to estimate an AGI measure of income. The effects
of the proposed lower cap on eligibility was evaluated by farm
typology, farm commodity type, and organizational structure. The
share of all government payments subject to the proposed limit was
also estimated based on detailed government payment data from the