WASHINGTON – Senator Chuck Grassley today poked holes in the farm payment reforms included in the House and Senate versions of the farm bill. In a letter to the leadership of the House and Senate Agriculture Committees, Grassley laid out an analysis of Adjusted Gross Income (AGI) data provided to him by the Internal Revenue Service which demonstrates loopholes in the law should an AGI limit become enacted.
“The House and Senate farm bills left loopholes that a 9630 John Deere tractor could drive through. It was reform in name only,” Grassley said. “Now I hope we can move to legislation that includes real reform.”
Grassley said he reached several conclusions after analyzing the data. The first, he said, was that high income landlords might shift from share rents to cash rents. Somewhere around 36-37 percent of those who would lose farm payments under the Senate and House AGI limits are share rent landlords who will in all likelihood keep the payments flowing by changing to cash rents, thereby shifting risk and capital requirements to farmers.
Second, in 2005, the Department of Agriculture made more than $230 million in payments to landlords and farm operators who exceeded the income limits in the House farm bill and more than $137 million to those exceeding the Senate bill limits. However, projections by the Congressional Budget Office suggest that most of those recipients will continue to receive payments. The modest savings projected by the Congressional Budget Office suggest that 83 percent of the funds paid to recipients exceeding the House AGI and 95 percent of the funds paid to recipients exceeding the Senate limits would continue to be paid
Grassley also said that high income farmers might reinvest their income to expand their operations thereby generating deductions to keep their taxable incomes below the limits and converting taxable income to untaxed wealth. And, high income farms might divide income between spouses and where applicable, the farm corporation, to stay below the limits.
Ensuring that farm payments be directed to those who need it most, as the law was intended, has been a long-standing priority of Grassley’s. Grassley, along with Senator Byron Dorgan, was the author of an amendment to the farm bill that would have capped farm payments at $250,000 per farmer. The amendment was defeated by a vote of 56-43 (60 votes were required for passage). A similar amendment was adopted during the 2002 farm bill debate, but it was stripped during negotiations between the House and Senate. Grassley and Dorgan have since introduced stand alone legislation to address closing loopholes that allow 10 percent of the farmers to receive 73 percent of the benefits.
Here is a copy of the text of Grassley’s letter.
February 4, 2008
Senator Tom Harkin, Chairman Senator Saxby Chambliss
Senate Committee on Agriculture, Senate Committee on Agriculture,
Nutrition, and Forestry Nutrition, and Forestry
Russell 328-A Russell 328-A
Washington, DC20510 Washington, DC20510
Congressman Colin Peterson Congressman Bob Goodlatte
House Committee on Agriculture House Committee on Agriculture
1301 Longworth HOB 1301 Longworth HOB
Washington, DC20515 Washington, DC20515
Dear Chairmen and Ranking Members;
I recently requested data from the Internal Revenue Service (IRS) related to Adjusted Gross Income (AGI) and farm program payments for tax year 2005. In particular, I asked:
1. How many returns reported adjusted gross income in excess of $750,000 with less than two thirds being farm income, and what was the total amount of federal farm payments reported on those returns? Among those returns, how many were landlords and what was the total amount of federal farm payments landlords received?
2. How many returns reported adjusted gross income in excess of $500,000 with less than two thirds being farm income, and what was the total amount of federal farm payments reported on those returns? Among those returns, how many were landlords and what was the total amount of federal farm payments landlords received?
3. How many returns reported adjusted gross income in excess of $1 million with more than two thirds being farm income, and what was the total amount of federal farm payments reported on those returns? Among those returns, how many were landlords and what was the total amount of federal farm payments landlords received?
4. How many returns reported adjusted gross income in excess of $200,000 with any farm income and what was the total amount of federal farm payments reported on those returns? Among those returns, how many were landlords and what was the total amount of federal farm payments landlords received?
5. How many returns reported adjusted gross income in excess of $2.5 million with less than a quarter of which was farm income, and what was the total amount of federal farm payments reported on those returns. Among those returns, how many were landlords and what was the total amount of federal farm payments landlords received?
In 2005, the U.S. Department of Agriculture made over $230 million in payments to landlords and farm operators who exceeded the income limits in the House farm bill and over $137 million to those exceeding the Senate bill limits. However, projections by the Congressional Budget Office (CBO) suggest that most of those recipients will continue to receive payments. The modest savings projected by the CBO suggest that 83 percent of the funds paid to recipients exceeding the House limits would continue to be paid and 95 percent of the funds paid to recipients exceeding the Senate limits would continue to be paid.
I had the opportunity to analyze this data and would like to share what I believe this data indicates. I am attaching the data that IRS provided to my office. Recipients of farm commodity payments with high incomes will use 3 loopholes and legal means to avoid the AGI limits.
First, 36 percent of those who would lose farm payments under the Senate AGI limit, 37 percent who would lose farm payments under the House limit, and 41 percent under the Administration limit, are share rent landlords. Those landlords will want to keep farm program payments flowing and will change to cash rents, thereby shifting risk and capital requirements to farmers. Commodity payments not made to the landlord will then be made to their tenants, but in most instances captured by the landlord by raising cash rents. If a landowner share rents then they should be reporting on the Form 4835 as either the owner (or sub-lessor) and did not materially participate (for self-employment tax purposes) in the operation or management of the farm. Of note, of the 338,544 returns that filed only Form 4835 and received farm program payments, 260,502 had farm income less than ¼ of AGI.
Secondly, high income farmers will reinvest income into expanding their operations. This will generate deductions to keep their taxable incomes below the limits and converting taxable income to untaxed wealth. The AGI limits are based on three year rolling average income, which provides high income payment recipients the time to use these opportunities to get their taxable income below the limit.
Current law allows immediate expensing (versus depreciation) on up to $125,000 in equipment with a phase out of $500,000 (adjusted for inflation). However the stimulus package being currently considered by the Senate proposes to increase that number to $250,000 with a phase out to $800,000 for 2008. Or in the alternative, a producer could take an additional 25 percent of the cost of an asset acquired and placed into service in 2008 in that year and another 25 percent in the next year bonus depreciation; or modify their Net Operating Loss carry back period from 2 to 5 years. Any one of these provisions could manipulate the 3 year rolling average income rules.
Finally, I believe that high income farms will divide income between spouses and where applicable, the farm corporation, to stay below the limits.
As a result, most payments will continue to be made to high income recipients in spite of the proposed limits under both the Senate and House versions of the farm bill.
Sincerely,
Charles E. Grassley
U.S Senator