Very little incites more controversy about US farm programs than the issue of limitations on farm program payments. Critics hold up the issue like foreign radicals burning the American flag in front of television cameras. And needless to say, the issue has polarized many farm groups, as well as farmers. With the House Farm Bill lowering payment caps, and an influential Senator wanting it reduced further, what will be impact of lower ceilings?

In the 2002 Farm Bill, a $360,000 limit was set on direct payments, counter-cyclical payments, and gains on marketing loans or loan deficiency payments. But that was multiplied if a person engaged in other faming entities, and eligibility was retained even if adjusted gross income approached $2.5 million. The House-passed version of the Farm Bill reduced the means-test of adjusted gross income to $1 million and eliminates the three entity rule, but does raise the maximums on direct payments to $60,000 and counter-cyclical payments to $65,000, with the opportunity to receive a maximum $250,000 for a household if a spouse is fully engaged in the operational ownership.

When the USDA made its Farm Bill proposal, it wanted a $200,000 maximum for adjusted gross income before ineligibility for payments. While that ceiling appears to be moot, the Senate could take a harder line on payment limits than the House, which will be seen in the next week to 10 days when Chairman Tom Harkin of the Senate Agriculture Committee proposes his version of the Farm Bill.

When the USDA proposal was made, its study of 2004 tax data found that only 1.2% of sole proprietors and 2% of land owners would be impacted by the $200,000 AGI limit. In a recent report on the economic study, USDA economists said farm income averaged $271,749 and net worth averaged over $1.86 million for farm household with an AGI exceeding $200,000.

Before we go too far, let’s define Adjusted Gross Income:
1. AGI is taxable income from all sources, including farm income or losses after all expenses, including depreciation and capital expensing, associated with this income are totaled.
2. AGI can be impacted by Net Operating Losses, which arise when allowed deductions exceed gross income for the year.
3. The most significant deductions allowed include those for individual retirement arrangements, medical savings accounts, one-half of self-employment tax paid, self-employed health insurance costs, and deductions for contributions to self-employed retirement plans.

For the 2004 tax year studied by USDA, 40.2% of farms received payments, with the average payment being $12,034, representing 11.2% of gross cash farm income on those farms. USDA says only 3,084 farmers had an AGI over $2.5 million and only a few hundred would be affected by the cap. Texas A&M concluded more farms would be affected than the IRS data suggested by the Congressional Research Service said the Texas A&M study did not address farm accounting peculiarities.
The 2004 IRS data indicated 4.2% of farm operators and 4.6% of landlords had an AGI over $200,000, but a much smaller percent would be impacted by the payment limit since not all of them received farm program payments. When the latter group was taken into account, they only received 5-6% of total payments disbursed by USDA.

Cornbelt farmers will be more immune to any payment limits, because of fewer farmers having larger AGIs. The bulk of the affected farmers are in CA and FL, with NV, CN, & NJ also affected. Eastern Cornbelt farmers have a greater chance of being clipped by the limits than do western Cornbelt farmers.

Organizational structure of farms also had an impact on financial affairs and resulted in a greater chance of ineligibility. While farm corporations involved 10% of farmers impacted by the $200,000 ceiling, their average individual payment was about two-thirds of the payment of farmers involved with farm partnerships. Similarly, more crop farms had a higher AGI than did livestock farms, however, high –AGI livestock farms were larger with more household income and net worth. By commodity, rice and cotton farms were more subject to the payment limit ceiling than other commodities, and hog farms were more likely to hit the ceiling than beef operations.

While the USDA study looked only at the impact of the USDA proposal for a cap at $200,000 of adjusted gross income, and the Congress may set a different limit, numbers of affected farms and farmers will change, but the types, locations, and nature of impacted farms will likely change very little. The USDA study looked only at the 2004 tax year, which probably will have little comparison to the 2007 tax year. With farm incomes, particularly Cornbelt grain farms expected to experience record income, the impact of a farm payment ceiling will be felt by a greater number of operations.

Summary:
Controversy surrounds the issue of farm payment limitations. The USDA’s proposed ceiling of $200,000 of adjusted gross income has been set to $1 million by the House version of the Farm Bill, the Senate’s version may be in between those points. Farm operators and landlords may experience wide variations in impact, depending upon geography, commodity produced, farm structure, and size of operation. However, the ceilings may have a greater impact in coming years with higher commodity prices, than in the past with lower prices than what exist at this time.