GAO-11-318SP: Agriculture: Reducing some farm program payments could result in savings from $800 million over 10 years to up to $5 billion annually

Agriculture

Reducing some farm program payments could result in savings from $800 million over 10 years to up to $5 billion annually

Why Area Is Important

Between 2005 and 2009, the U.S. Department of Agriculture (USDA) spent an average of about $15 billion annually on programs to support farm income, assist farmers after disasters, and conserve natural resources. Under one of these federal farm programs, USDA provides fixed annual payments—called direct payments—to farmers based on a farm's history of crop production. Direct payments were most recently reauthorized in the Food, Conservation, and Energy Act of 2008, which will expire in 2012 without future action.

GAO has shown that taxpayer dollars can be saved with strengthened oversight of farm program payments, including direct payments. For example, GAO reported in October 2008 that USDA provided farm program payments to thousands of individuals with incomes exceeding income eligibility caps. GAO has also shown that USDA's oversight and enforcement of program rules is not always effective. For example, in July 2007, GAO reported that USDA paid $1.1 billion in such payments to more than 170,000 deceased individuals, and in April 2004 GAO reported that USDA provided such payments to people who may have had only limited involvement in farming because the agency lacks sufficient management controls. Since then, USDA has taken some actions in response to GAO's recommendations.

What GAO Found

Reducing or eliminating direct payments to farmers—particularly those to large farming operations—could achieve cost savings of as much as $5 billion annually. In contrast to other major farm programs, which compensate farmers for declines in price or lost crops, direct payments go to farmers regardless of risk factors. Direct payments are calculated using a formula that considers the crop and production history and the number of acres planted during certain years in the past on a farm. Generally, a percentage of the acres that were planted is multiplied by a set payment rate for the crop that was planted.[1] For 2009 through 2011, this percentage is 83.3 percent, and for 2012, it will be 85 percent. Although a farmer's direct payments are based on the historical production of a particular crop, the farmer has almost complete flexibility in deciding which crops to plant and whether to plant any crops at all. To be eligible for such a payment, a farmer's average nonfarm income (over the preceding 3 tax years) can be no more than $500,000, or average farm income no more than $750,000. Direct payments are limited to $40,000 per person per year; however, a farm can receive multiple payments depending on its ownership structure. For example, a husband and wife operating a farm together can collect up to $80,000 annually, and a partnership with 10 partners can collect up to $400,000 annually.

In light of the following observations made by GAO and others, the need for direct payments should be reconsidered:

  • Farmers receive direct payments even in years of record farm income. Although direct payments were established after a period of relatively lower farm income in the early 1990s, USDA reported that the top 5 earnings years since the payments began have occurred after 2004, attesting to the profitability of farming in this decade. Furthermore, USDA estimated farm income was about $82 billion in 2010—up by $19 billion, or 31 percent, from 2009—which would be the third-highest level ever recorded for U.S. farming.
  • Direct payments are concentrated among the largest recipients because they are tied to land and paid on a per-acre basis. About 62 percent of farm program payments—including direct payments—went to the largest 12 percent of farms in 2008, according to USDA. Similarly, GAO found that in 2009, 305 farm operations each received $200,000 or more in direct payments, in part because they were structured so that five or more partners or members of a farm business were eligible to receive the payments. Noting this concentration of payments, the Office of Management and Budget (OMB) and others have cited direct payments for failing to target the payments to those who need them the most, including small farmers.
  • Recipients of farm program payments have higher incomes, on average, than other tax filers. When farm programs were first established, farmers had lower incomes on average than other Americans, but now the opposite may be true—particularly for those receiving program payments. In 2008, GAO reported that individuals who receive program payments, including direct payments, are more than twice as likely to have higher incomes as other tax filers. For example, in examining the more than 138 million federal tax returns filed for 2006, GAO found that 4.6 percent of individuals receiving program payments reported adjusted gross income of between $200,000 and $500,000, whereas 2.3 percent of other tax filers reported income at this level.
  • Direct payments may compound challenges for beginning farmers.GAO reported in September 2007 that beginning farmers face multiple challenges, including a need for funds to purchase farmland. With an aging farmer population in the United States, USDA set a goal of increasing assistance to beginning farmers, but direct payments may instead compound the challenges beginning farmers face. According to USDA studies, these payments result in higher prices to buy or rent land because in some cases the payments go directly to landowners—resulting in increased land value—and in other cases the payments go to tenants, prompting landlords to increase rental rates. Furthermore, because direct payments are linked to a farm's number of acres, large farms can use these payments to expand their operations, but higher land values make it difficult for beginning farmers to do so, as OMB and others have noted.
  • Direct payments were expected to be transitional. According to the Conference Report to the 1996 farm bill, direct payments were established to help farmers make a transition to planting decisions on the basis of market signals rather than government programs. Accordingly, the payments were scheduled to decrease over time and expire in 2002. However, subsequent farm bills have continued these payments.
  • Direct payments may no longer be needed to comply with trade agreements.Proponents of direct payments say they help the United States meet its commitments under international trade agreements, which set ceilings on government payments classified as trade-distorting. Unlike other farm program payments, direct payments do not depend on current market prices, so the World Trade Organization generally considers them to be non-trade distorting and the United States does not count them against the international restrictions. As a result, other farm program payments can be provided with a reduced risk of exceeding the ceilings. However, according to economists, this advantage has become less relevant recently because high crop prices, which are expected to continue through the foreseeable future, have kept farm program payments well below the ceiling on trade-distorting payments.

[1] Specifically, the formula uses a percentage of the average number of acres planted during 1998 through 2001 and multiplies it by a set payment rate and the historical crop yield for a farm. The percentage and payment rates for each crop are specified in legislation commonly referred to as farm bills passed by Congress roughly every 5 years.

Actions Needed

Recognizing current budget constraints, the National Commission on Fiscal Responsibility and Reform [1] the Debt Reduction Task force[2] the administration, Members of Congress, GAO, and some farming groups have proposed options to reduce or eliminate direct payments. For example, Congress may wish to consider the following three. To reduce direct payments, the administration and others have proposed lowering payment or income eligibility limits. They argue that lower limits leave payments intact for recipients of smaller payments or with smaller incomes and could therefore still help smaller and beginning farmers. On the other hand, critics say, focusing on payment limits may be ineffective because farmers may develop methods to avoid being restricted by the limits. GAO previously reported that many farmers structure their operations to avoid payment limits and that USDA has not consistently enforced eligibility requirements, bringing into question the effectiveness of both types of limits.

Congress may also wish to consider reducing the portion of a farm's acres eligible for direct payments. In 2009, GAO reported that reducing the portion of eligible acres to 80 percent from 83.3 percent might save millions of dollars annually[3] Further reducing the portion of eligible acres to 75 percent could save millions more each year. Such an across-the-board reduction would affect all recipients. Moreover, Congress may wish to consider terminating the payments. Some agriculture organizations, including the National Farmers Union and the Iowa Farm Bureau, have recommended phasing out or terminating the payments altogether and using the savings to bolster other farm programs.

GAO has identified the following potential for cost savings:

  • about $800 million over 10 years by reducing payment and income eligibility limits for a very small portion of recipients, according to the administration's estimate in its budget for fiscal year 2011;
  • about $600 million annually by reducing the portion of acres used to calculate payments to 75 percent, according to GAO's estimate; or
  • about $5 billion annually by terminating or phasing out the payments.

[1] The National Commission on Fiscal Responsibility and Reform was established under Executive Order 13531 (Feb. 18, 2010). It issued The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform (Washington, D.C., December 2010).

[2] Led by former Senate Budget Committee Chairman Pete Domenici and former White House Budget Director Alice Rivlin, the Debt Reduction Task Force issued Restoring America's Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System (Washington, D.C., Nov. 17, 2010).

[3] See http://www.gao.gov/highrisk/opportunities/natural_resources/
strengthening-integrity-and-efficiency-of-federal-farm-programs.php
.

Framework for Analysis

To update information on the number of farms receiving direct payments of $200,000 or more, GAO used data from USDA's Producer Payment Reporting System and determined that the data were sufficiently reliable for its purposes. To estimate the potential savings from reducing the portion of acres used to calculate direct payments and from terminating the payments, GAO used the most recent budget figures from the Congressional Budget Office. Other information in this analysis is primarily based on the related GAO products listed under the "Related GAO Products" tab.

Area Contact

For additional information about this area, contact Anne-Marie Fennell at (202) 512-3841 or fennella@gao.gov.

Related GAO Products

Federal Farm Programs:

USDA Needs to Strengthen Controls to Prevent Payments to Individuals Who Exceed Income Eligibility Limits
GAO-09-67:
Published: Oct 24, 2008. Publicly Released: Nov 24, 2008.

Beginning Farmers:

Additional Steps Needed to Demonstrate the Effectiveness of USDA Assistance
GAO-07-1130:
Published: Sep 18, 2007. Publicly Released: Oct 18, 2007.

Federal Farm Programs:

USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals
GAO-07-818:
Published: Jul 9, 2007. Publicly Released: Jul 23, 2007.

Farm Program Payments: