U.S. Farm Program Eligibility and Payment Limits
Released: 2017-01-17T00:00:00

Introduction

Program eligibility requirements and payment limits are central to how various U.S. farm programs operate. These requirements fundamentally address various equity concerns and reflect the goals of government intervention in agriculture. They determine who receives federal farm program payments and how much they receive.

Eligibility requirements and payment limits are controversial because they strongly influence what size farms are supported. Policymakers have debated what limit is optimal for annual payments, whether payments should be proportional to production or limited per individual or per farm operation, and whether the limit should be specific to each program or cumulative across all programs. Furthermore, program eligibility requirements and payment limits generate considerable congressional interest because their effects differ across regions and by type of commodities produced, and because a substantial amount of annual U.S. farm program payments are at stake—direct federal outlays have averaged $13.9 billion per year from 1996 through 2015. When federal crop insurance premium subsidies are included, annual farm payments have averaged $17.5 billion over the same period.

Background

Farm program payment limits and eligibility requirements may differ by both type of program and type of participating legal entity (e.g., an individual, a partnership, or a corporation). Eligibility and payment limit determinations for farm programs are under the jurisdiction of the U.S. Department of Agriculture's (USDA's) Farm Service Agency (FSA).

Congress first added payment limits as part of farm commodity programs in the 1970 farm bill (P.L. 91-524); however, such limits have evolved over time in both scope and amount ( Table A-1 ) as the structure of U.S. agriculture, farm policies, and commodity support programs has changed. With each succeeding farm bill, Congress has addressed anew who is eligible for farm payments and how much an individual recipient should be permitted to receive in a single year.

In recent years, congressional debate has focused on

attributing payments directly to individual recipients; ensuring that payments go to persons or entities currently engaged in farming; capping the amount of payments that a qualifying recipient may receive in any one year; and excluding farmers or farming entities with incomes above a certain level as measured by their adjusted gross income (AGI) from payment eligibility.

Each of these policy measures—depending on how they are designed and implemented—can have consequences, both intended and unintended, for U.S. agriculture including, but not limited to, farm management structure, crop choices, and farm size. Because U.S. farm program eligibility requirements and annual payment limit policy have such broad potential consequences for U.S. agriculture, a review of both current policies and related issues is of potential interest to Congress.

Report Overview

This report discusses various eligibility factors and their interaction under current law. It describes current restrictions that limit or preclude payments to farmers based on a number of factors. This report also highlights areas where few, if any, restrictions limit farmers' access to or amount of benefits. This report is not a legal brief, nor does it represent a CRS legal analysis. Furthermore, this report is not intended to discuss the merits, or lack thereof, of federal farm program payments and their current distribution.

This report begins by discussing farm program eligibility including the primary types of legal entities participating in farm programs. Other limiting requirements are discussed, such as participant identification, citizenship, the current interpretation of what constitutes "actively engaged in farming" (AEF), adjusted gross income (AGI) limits, and conservation compliance. This is followed by a discussion of the direct attribution of payments to individual recipients for assessing whether a person's payment limit has been exceeded. Next, annual payment limits for the major categories of farm programs are examined. Much of this information is summarized in Table 1 .

This report also discusses several issues related to farm program payment limits, including policy design issues, that may be of interest to Congress. Finally, an Appendix contains a history of the evolution of annual payment limits for major commodity programs ( Table A-1 ) and a glossary of acronyms ( Table A-2 ) as an aid to readers.

This is the second of two reports on the subject of program eligibility and payment limits. While this report focuses on farm program payment limits, an earlier report (CRS Report R44656, USDA's Actively Engaged in Farming (AEF) Requirement ) focuses on program eligibility requirements—in particular, criteria underpinning the "actively engaged in farming" (AEF) requirements.

Program Eligibility

Not all farm businesses are eligible to participate in federal farm programs. A number of statutory and regulatory requirements govern federal farm program eligibility for benefits under various programs. Some farm businesses, although eligible to participate, are restricted from receiving certain benefits or may be limited in the extent of program payments that they may receive.

Over time, program eligibility rules have evolved, expanding to more programs and including more limitations. Cross-cutting methods of determining program eligibility—such as Adjusted Gross Income (AGI) thresholds—are relatively new. Discussed below are cross-cutting eligibility requirements that affect multiple programs, including participant identification, foreign ownership, nature and extent of participation (i.e., actively engaged in farming criteria), means tests, and conservation requirements.

Participant Identification

Generally, program eligibility begins with identification of participants. Identifying who or what is participating and therefore how payments may be attributed is the cornerstone to most farm program eligibility. To be eligible to receive any farm program payment, every person or legal entity—including both U.S. and non-U.S. citizens—must provide a name and address, and have either a social security number (SSN) in the case of a person, or a Taxpayer Identification Number (TIN) or Employee Identification Number (EIN) in the case of a legal entity with multiple persons having ownership interests. In this latter situation, each person with an interest must have a TIN or EIN and must declare their interest share in the joint entity using the requisite USDA forms.

All participants in programs subject to payment eligibility and payment limitation requirements must submit to USDA two completed forms. The first, CCC-901 (Members' Information), identifies the participating persons and/or entities (through four levels of attribution if needed) and their interest share in the operation. The second form, CCC-902 (Farm Operating Plan), identifies the nature of each person's or entity's stake—that is, capital, land, equipment, active personal labor, or active personal management—in the operation. These forms only need to be submitted once (not annually), but must be kept current in regard to any change in the farming operation. Critical changes to a farming operation might include expanding the number of limitations for payment, such as by adding a new family member; changing the land rental status from cash to share basis; purchasing additional base acres equivalent to at least 20% of the previous base; or substantially altering the interest share of capital or equipment contributed to the farm operation. This information is critical in determining the extent to which each person is actively engaged in the farming operation as described below.

Three Principal Farm Business Categories

Many types of farm business entities own operations engaged in agricultural production. For purposes of determining the extent to which the participants of a farm operation qualify as potential farm program participants, three major categories are considered ( Table 2 ).

Sole Proprietorship or Family Farm. The farm business is run by a single operator or multiple adult family members—the linkage being common family lineage—whereby each qualifying member is subject to an individual payment limit. Thus, a family farm potentially qualifies for an additional payment limit for each family member associated with the principal operator. Family farms or sole proprietorships comprised nearly 87% of U.S. farm operations in 2012. Joint Operation . Each member of a joint operation—where members need not have a common family relation or lineage—is treated separately and individually for purposes of determining eligibility and payment limits. Thus, a partnership's potential payment limit is equal to the number of qualifying members (plus any special designees such as spouses), times the individual payment limit. C orporat ion . A legally defined association of joint owners or shareholders that is treated as a single person for purposes of determining eligibility and payment limits. This includes corporations, limited liability companies, and similar entities. Most incorporated farm operations are family held.

These three categories represent over 98% of U.S. farm operations ( Table 2 ). In addition, federal regulations exist for evaluating both the eligibility of and relevant payment limits for other exceptional types of potential recipients including a spouse, minor children, and other family members as well as marketing cooperatives, trusts and estates, cash-rent tenants, sharecroppers, landowners, federal agencies, and state and local governments. These institutional arrangements represent a small share (< 2%) of U.S. farm operations according to USDA's 2012 Census of Agriculture. Special rules also describe eligibility and payment limits in the event of the death of a previously eligible person.

Actively Engaged In Farming (AEF) Requirement

To be eligible for certain Title I commodity program benefits, participants—individuals as well as other types of legal entities—must meet specific requirements concerning their "active participation" in the farming operation. The active participation requirements are referred to as the "actively engaged in farming" or AEF requirements. The AEF requirements apply equally to U.S. citizens, resident aliens, and foreign entities. This section briefly reviews the specific requirements for each type of legal entity—person, partnership, or corporation—to qualify as "actively engaged in farming."

Individual AEF Requirements

An individual producer must meet three AEF criteria.

First, the person, independently and separately, makes a significant contribution to the farming operation of (a) capital, equipment, or land; and (b) active personal labor, active personal management, or a combination of active personal labor and management. Second, the person's share of profits or losses is commensurate with his/her contribution to the farming operation. Third, the person shares in the risk of loss from the farming operation.

Current law allows for special treatment of a spouse—if one spouse is determined to be actively engaged in farming, then the other spouse shall also be determined to have met the requirement. In addition, an exception is made for landowners who may be deemed in compliance with all AEF requirements if they receive income based on the farm's operating results, without providing labor or management.

Partnership AEF Requirements

In a general partnership each member is treated separately for purposes of meeting the AEF criteria and determining eligibility. In particular, each partner with an ownership interest must contribute active personal labor and/or active personal management to the farming operation on a regular basis. The contribution must be identifiable and documentable, and separate and distinct from the contributions made by any other partner. Each partner that fails to meet the AEF criteria is ineligible to participate in the relevant farm program.

Corporate AEF Requirements

A corporation—as an association of joint owners—is treated as a single person for purposes of meeting the AEF criteria and determining eligibility. In addition to the AEF criteria cited for a person—of sharing commensurate profits or losses, and bearing commensurate risk—each member with an ownership interest in the corporation must make a significant contribution of personal labor or active personal management—whether compensated or not—to the operation that is (a) performed on a regular basis; (b) identifiable and documentable; and (c) separate and distinct from such contributions of other stockholders or members. Furthermore, the collective contribution of corporate members must be significant and commensurate with contributions to the farming operation.

If any member of the legal entity fails to meet the labor or management contribution requirements, then any program payment or benefit to the corporation will be reduced by an amount commensurate with the ownership share of that member. An exception applies if (a) at least 50% of the entity's stock is held by members that are "actively engaged in providing labor or management" and (b) the total annual farm program payments received collectively by the stockholders or members of the entity are less than one payment limitation.

Special Nonfamily AEF Requirements

Prior to the 2014 farm bill ( P.L. 113-79 ), the definition of active personal labor or management was broad and could be satisfied by undertaking passive activities without visiting the operation, thus enabling individuals who lived significant distances from an operation to claim such labor or management contributions. This was seen as potentially problematic, as passive investors were receiving farm program payments without actively contributing to the farming operation.

Recent farm bills have amended the AEF criteria in an attempt to tighten the requirements; however, the issue remains controversial. In particular, the 2014 farm bill (§1604) required USDA, in new regulations, to add more specificity to the role that a nonfamily producer must play to qualify for farm program benefits. As a result of the rule, a limit is placed on the number of nonfamily members of a farming operation that can qualify as a farm manager—depending on the size and complexity of the farm operation. Also, additional record-keeping requirements now apply for each nonfamily member of a farming operation claiming active personal management status. No such limit applies to the potential number of qualifying family members.

Foreign Person or Legal Entity

Generally, if a foreign person or legal entity meets a particular farm program's eligibility requirements, then they are eligible to participate. One exception is the four permanent disaster assistance programs—Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish Program (ELAP); Livestock Forage Disaster Program (LFP); Livestock Indemnity Program (LIP); and Tree Assistance Program (TAP)—and the noninsured crop disaster assistance program (NAP), which explicitly prohibit payments to foreign entities, other than resident aliens.

As of the end of 2013, foreign persons held an interest in 26.2 million acres of U.S. agricultural land (including forest land). This accounts for 2% of all privately held agricultural land in the United States and approximately 1% of total U.S. land.

Foreign persons or entities can become eligible for most farm program benefits if they have the requisite U.S. taxpayer ID as described in the preceding section, and meet the "actively engaged in farming" (AEF) criteria discussed below. In the case where a foreign corporation or similar entity fails to meet the AEF criteria, but has shareholders or partners with U.S. residency status, then the foreign entity may—upon written request to USDA—receive payments representative of the percentage ownership interest by those U.S. citizens or U.S. resident aliens that do meet the AEF criteria.

In addition, current law imposes no specific restrictions on foreign persons or entities with respect to eligibility for crop and livestock insurance premium subsidies. Also, the dairy margin protection program (MPP) makes no distinction about producer or owner citizenship. Instead, the law states that all dairy operations in the United States shall be eligible to participate in the margin protection program to receive margin protection payments. Similarly, no citizenship requirement exists for a sugar processor, or a cane or beet producer, operating under the U.S. sugar program price guarantees; however, the sugar cane and sugar beets being processed must be of U.S. origin.

Adjusted Gross Income (AGI) Limit

Means testing prohibits a person or legal entity from being eligible to receive any benefit under certain commodity and conservation programs during a crop, fiscal, or program year, as appropriate, if their income is above an established level. The first means test for farm programs was established by the 2002 farm bill (Farm Security Act of 2002, P.L. 107-171 ) ( Table 3 ). Income is measured by an individual's or entity's average adjusted gross income (AGI) from the previous three-year period, but excluding the most recent complete taxable year.

Recent farm bills have preserved the three-year average AGI as the relevant measure of income. Now that an AGI limit appears acceptable, the debate has shifted to which programs are covered by the means test and what income level is an appropriate threshold.

AGI Defined

Since most U.S. farms are operated as sole proprietorships or partnerships ( Table 2 ), most farm households are taxed under the individual income tax rather than the corporate income tax. For an individual, AGI is the Internal Revenue Service (IRS) reported adjusted gross income. AGI measures net income, that is, income after expenses. Farm income is reported on the IRS Schedule F where AGI is net of farm operating expenses. For an incorporated business, a comparable measure to AGI—as determined by USDA—is used to measure income.

Since the household is the typical unit of taxation, farm and nonfarm income are combined when computing federal income taxes for farm households. In fact, most federal income tax paid by farm households can be attributed to nonfarm income.

Farm operations overwhelmingly report operating losses for tax purposes (because of cash accounting, capital expensing via depreciation, and other practices). For example, in 2004, an estimated 1.4 million, or about 70%, of farm sole proprietors reported a net farm loss for tax purposes. In 2006, nearly three of every four farm sole proprietors reported a farm loss. The substantial portion of capital investment that can be expensed in the first year is an important determinant of the large loss reporting.

Program participants are required annually to give their consent to the IRS to verify to USDA that a participant is in compliance with their AGI limit provisions using a specific USDA form (CCC-941). Failure to provide the consent and subsequent certification of compliance will result in ineligibility for program payments, and a required refund of any payments already received for the relevant year.

Historical Development of the AGI Limit

The initial AGI threshold established by the 2002 farm bill was for a total AGI of $2.5 million and covered most farm programs (listed in Table 3 ). However, the 2002 farm bill included an exemption if at least 75% of AGI was from farming.

The 2008 farm bill replaced the single AGI limit of the 2002 farm bill with three separate AGI limits that distinguished between farm and non-farm AGI. First, a non-farm AGI limit of $500,000 applied to eligibility for selected farm commodity program benefits including the milk income loss contract (MILC) program, noninsured crop disaster assistance (NAP), and the disaster assistance programs. A second farm-specific AGI limit of $750,000 applied to eligibility for direct payments. A third non-farm AGI limit of $1 million—but subject to an exclusion if 66.6% of total AGI was farm-related income—applied to eligibility for benefits under conservation programs.

Also, the 2008 farm bill added a provision for married individuals filing a joint tax return, whereby the joint AGI could be allocated as if a separate return had been filed by each spouse. This would potentially allow the farmer to exclude any earned income from a spouse as well as a share of any unearned income from jointly held assets for purposes of the eligibility cap. This provision had the potential to significantly reduce the share of farms affected by the AGI cap.

The 2014 farm bill returned to a single total AGI limit, but at a level of $900,000 for individuals and incorporated businesses. It also retained the provision for married individuals filing a joint tax return to allocate the AGI as if a separate return had been filed by each spouse. In the case of a payment to a general partnership or joint venture comprising multiple individuals, the payment shall be reduced by an amount that is commensurate with the share of ownership interest of each person who has an average AGI in excess of $900,000.

Conservation Compliance

Two provisions—highly erodible land conservation (sodbuster) and wetland conservation (swampbuster)—are collectively referred to as conservation compliance. To be eligible for certain USDA program benefits, a producer agrees to conservation compliance—that is, to maintain a minimum level of conservation on highly erodible land and not to convert or make production possible on wetlands.

Conservation compliance has been in effect since the Food Security Act of 1985 (1985 farm bill, P.L. 99-198 ). The majority of farm program payments, loans, disaster assistance, and conservation programs are benefits that may be lost if a participant is out of compliance with the conservation requirements. Most recently, the 2014 farm bill extended conservation compliance to federal crop insurance premium subsidies. Within U.S. farm policy, conservation compliance continues to be one of the only environmentally related requirements for program participation.

Direct Attribution of Payments

The process of tracking payments to an individual through various levels of ownership in single and multi-person legal entities is referred to as "direct attribution." Several types of legal entities may qualify for farm program payments. However, ultimately every legal entity represents some combination of individuals. For example, a joint operation can be made up of a combination of individuals, partnerships, and/or corporate entities. A particular individual may be part of each of these three component entities, as well as additional sub-entities within each of these components. Farm payments flow down through these arrangements to individual recipients.

Congress defines a legal entity as an entity created under federal or state law that (1) owns land or an agricultural commodity, or (2) produces an agricultural commodity. This broad definition of legal entity encompasses the multi-person legal entities discussed earlier such as family-farm operations, joint ventures, corporations, and institutional arrangements. Ownership shares in a multi-person legal entity are tracked via a person's social security number or Employee Identification Number, as reported in the USDA forms mentioned earlier, CCC-901 and CCC-902. Identification at the individual payment-recipient level is critical for assessing the cumulative payments of each individual against their annual payment limit.

Direct attribution was originally authorized in the 2008 farm bill (§1603(b)(3)). All farm program payments made directly or indirectly to an individual associated with a specific farming operation are combined with any other payments received by that same person from any other farming operation—based on that person's pro rata interest in those other operations. It is this accumulation of an individual's payments—tracked through four levels of ownership in multi-person legal entities—that is subject to the annual payment limit.

The first level of attribution is an individual's personal farming operation. Subsequent levels of attribution are related to those legal entities in which an individual has an ownership share. If a person meets his or her payment limit at the first level of attribution (i.e., on his or her own personal farming operation), then any payments to legal entities at lower levels of attribution are reduced by that person's pro rata share.

Payment Limits

When the eligibility criteria—including AEF, AGI, and others—are met, the cumulative benefits across certain farm programs are subject to specific annual payment limits (detailed in Table 1 ) that can be received by an individual or legal entity.

Explicit payment limits date back to the 1970s. Despite their longevity, payment limits are not universal among programs. Payment limits are enforced differently for different types of legal entities (as mentioned earlier and summarized below). For example, certain program limits may be expanded depending on the number of participants, or they may be subject to exceptions, or may not exist. The major categories of farm program support and the applicability of annual payment limits, if any, are briefly discussed below.

Farm Support Programs Subject to Annual Payment Limits

Traditionally, much attention focuses on the annual payment limits for the Title I commodity programs, largely because this has been the conduit for the majority of farm program expenditures. Title I commodity program payment limits were first included in a farm bill in 1970, but have evolved substantially since that initial effort ( Table A-1 ).

Several major farm support programs—as defined by specific titles of the 2014 farm bill—are currently subject to annual payment limits.

Title I c ommodity programs : ARC and PLC . These include the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) Programs of Subtitle A. Title I c ommodity programs : Marketing Assistance Loan . This refers to certain benefits under the Marketing Assistance Loan Program (Subtitle B)—that is, loan deficiency payments (LDP) and marketing loan gains (MLG), but not benefits under forfeiture or commodity certificate exchanges. Title I d isaster assistance programs . These include the Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish Program (ELAP), Livestock Forage Disaster Program (LFP), Tree Assistance Program (TAP), and Livestock Indemnity Program (LIP) of Subtitle E. Title XII (Subtitle C , §12305 ) Noninsured Crop Disaster Assistance Program (NAP) . Available for crops not currently eligible for crop insurance.

When the farm program benefits for a qualifying recipient exceed the annual limits (as listed in Table 1 ) for a given year, then that individual is no longer eligible for further benefits under that particular program during that year, and is required to refund of any payments already received under that program that are in excess of the relevant payment limit for that year.

Multiple Payment Limits for a Partnership

A partnership's payment limit is equal to the limit for a single person times the number of persons or legal entities that comprise the ownership of the joint operation plus any additional exemptions or exceptions. Adding a new member can provide one or two (with qualifying spouse) additional payment limits.

Each member of a partnership or joint venture must meet the AEF criteria and must be within the AGI limit. Furthermore, the payment limit is reduced by the share of any single member that has already met his/her payment limit on another farm operation outside of the partnership.

Single Payment Limit for a Corporation

A corporation is treated as a single person for purposes of determining eligibility and payment limits, provided that the entity meets the AEF criteria. Adding a new member to the corporation generally does not affect the payment limit, it only increases the number of members that can share a single payment limit.

Exceptions that Avoid Payment Limits

Three types of commodity program benefits are not subject to annual payment limits. Two are benefits obtainable under the marketing assistance loan program: (1) benefits derived from forfeiting to the CCC the quantity of a commodity pledged as collateral for a marketing assistance loan; and (2) marketing loan gain (MLG) benefits that result from use of commodity certificates to repay a marketing assistance loan. In addition, a general exception to annual payment limits under any program benefits (including Title I and most other payments) could result when the principal operator or a major partner dies during the course of a program year. These three exceptions are briefly described here.

Forfeiture of a Pledged Crop

Forfeiture of a pledged crop in lieu of loan repayment is an option that is available for all marketing loan crops that have been pledged as collateral under a USDA marketing assistance loan. Generally, a farmer repays the loan at the value of the loan rate plus interest. But rather than repaying the loan with cash, farmers can fulfill their loan obligation by forfeiting the pledged crop. By forfeiting the crop, the farmer keeps the value of the loan (equal to the loan rate times the volume of pledged crop) and forgoes paying any interest on the loan. This feature is meaningful only when the current market price for the pledged crop—that is, the posted county price (PCP) for grains and oilseeds, or effective adjusted world price (AWP) for rice and upland cotton—is less than the marketing loan rate. The gain associated with the forfeiture, which is the difference between the higher loan rate and the PCP or AWP, is equivalent to an MLG or LDP.

For large producers, an important aspect of the forfeiture option is that the gain associated with forfeiting the crop does not count toward the payment limit of $125,000 per person, unlike a gain from repaying the loan with cash (or receiving an MLG or LDP). Producers decide which route to pursue (repay loan with cash at the local PCP or AWP and retain any MLG or LDP subject to payment limits, or forfeit the crop retaining any MLG or LDP but not subject to payment limits) depending on the expected value of each option, their need for loaned funds, and their likelihood of exceeding the payment limit.

If a farmer chooses to forfeit the crop, USDA takes ownership of the crop. Storage costs would then accrue to USDA until it sells or finds an alternate use for the crop. Forfeiture can be a particularly attractive option for peanut producers if the PCP is below or even slightly above the loan rate because USDA, by law, then pays for costs associated with storage, handling, and interest. Otherwise, in the case of a producer who does not forfeit the crop under loan, but instead takes a MLG or LDP payment, the producer assumes all costs associated with storage.

Commodity Certificates

Another option for producers with crops under marketing loan that confront payment limits is the use of commodity certificates. Commodity certificates are payment-in-kind certificates issues by the CCC that can be used to pay off an outstanding marketing assistance loan, accrue any MLG benefits, and avoid having the benefits count against a payment limit.

Commodity certificates can be purchased at the PCP for grains and oilseeds or the effective AWP for rice and upland cotton. Commodity certificates are useful when the relevant PCP or AWP is lower than the market loan rate such that the certificate can be purchased at a discount to the marketing loan rate. A producer purchases the certificate at the PCP or AWP for the volume of crop under marketing assistance loan, then immediately returns the certificate to USDA to pay off the loan. Thus, the producer re-acquires the crop being held as collateral for the loan in exchange for the certificate that he or she has just purchased from USDA. When the PCP or effective AWP is below the loan rate, producers benefit from commodity certificates by obtaining a lower loan repayment rate. Furthermore, such benefits are not counted against a payment limit as ordinary MLG or LDP benefits would be. Thus, certificates allow farmers to repay marketing assistance loans for less than the loan price, but without counting the resulting marketing loan gains against payment limitations for farm subsidies.

The use of commodity certificates was eliminated in 2009 by a provision in the 2008 farm bill ( P.L. 110-246 , §1607). However, the Consolidated Appropriations Act of 2016 ( P.L. 114-113 , §740), enacted in December 2015, authorized the CCC to issue commodity certificates to agricultural producers in exchange for crops pledged under marketing assistance loans beginning with the 2015 crop year.

Death of a Principal Operator

Payments received directly or indirectly by a qualifying person (i.e., someone who meets AEF, AGI, and any other eligibility requirements) may exceed the applicable limitation if all of the following apply: ownership interest in farmland or agricultural commodities was transferred because of death; the new owner is the successor to the previous owner's contract; and the new owner meets all other eligibility requirements. This provision also applies to an ownership interest in a legal entity received by inheritance if the legal entity was the owner of the land enrolled in an annual or multi-year farm program contract or agreement at the time of the shareholder's death.

The new owner cannot exceed the payment amount that the previous owner was entitled to receive under the applicable program contracts at the time of death. However, the new payment limit associated with this transfer would be in addition to the payment limit of the person's own farm operation. If the new owner meets all program and payment eligibility requirements, this provision applies for one program year for ARC and PLC. This reflects the idea that individual resources were committed by both farming operations (the deceased's and the inheritor's) during the growing season with no expectation of death, and that individual payment limits should reflect that resource commitment and not impose an unnecessary and unexpected burden on the inheritor.

Other Farm Support Programs Not Subject to Payment Limitations

Three other major types of federal farm support programs that are not currently subject to annual payment limits include the following:

Title I (Subtitle C) sugar program . This refers to the indirect price support provided to producers of sugar beets and sugarcane, and to the direct price guarantees provided to the processors of both crops in the form of a marketing assistance loan at statutorily fixed prices. USDA administers the U.S. sugar program at no budgetary cost to the federal government by limiting the amount of sugar supplied for food use in the U.S. market, thus indirectly supporting market prices. This indirect subsidy is implicit and not subject to budgetary restrictions. Furthermore, there is no citizenship requirement for a sugar processor; however, the sugar cane and sugar beets being processed under the U.S. sugar program price guarantees must be of U.S. origin. Title I (Subtitle D) dairy program . This refers to the margin protection program (MPP) for dairy producers created under the 2014 farm bill (§1401-§1431). Participants may benefit from two potential types of support: an implicit premium subsidy, and an indemnity-like payment made when MPP price triggers are met. The fees or premiums charged for participating in the MPP are set in statute rather than being set annually by an actuary based on historical data and market conditions. Thus, the subsidy is implicit to the premium paid with no limit on the level of participation. Similarly, any payments made under the MPP are not subject to payment limits. Title XI c rop - and livestock-related insurance premium subsidies and indemnity payments . These refer to federal premium subsidies for both catastrophic and buy-up insurance coverage, and to any indemnity payments made under either of these coverage levels. To be eligible to purchase catastrophic risk protection coverage, the producer must be a "person" as defined by USDA; and for eligibility to purchase any other plan of insurance, the producer must be at least 18 years of age and have a bona fide insurable interest in a crop as an owner-operator, landlord, tenant, or sharecropper. Premium subsidies are not subject to any limit on the level of participation or underlying value. Similarly, indemnity payments made under crop insurance are not subject to payment limits.

Issues for Congress

Theoretically, market prices—based on relative supply and demand conditions and assuming competitive market conditions hold —provide the most useful signals for allocating scarce resources. In other words, in a situation where no policy support is available, most producers would make production decisions based primarily on market conditions. If these conditions hold, then tighter payment limits (i.e., a smaller role for government support policies) would imply that more land would be farmed based on market conditions, and less land would be farmed based on policy choices.

Supporters of payment limits use both economic and political arguments to justify tighter limits. Economically, they contend that large payments facilitate consolidation of farms into larger units, raise the price of land, and put smaller, family-sized farming operations and beginning farmers at a disadvantage. Even though tighter limits would not redistribute benefits to smaller farms, they say that tighter limits could help indirectly by reducing incentives to expand, thus potentially reducing upward price pressure on land markets. This could help small and beginning farmers buy and rent land. Politically, they believe that large payments undermine public support for farm subsidies and are costly. In the past, newspapers have published stories critical of farm payments and how they are distributed to large farms, non-farmers, or landowners. Limits increasingly appeal to urban lawmakers, and have advocates among smaller farms and social interest groups.

Critics of payment limits (and thus supporters of higher limits or no limits) counter that all farms are in need of support, especially when market prices decline, and that larger farms should not be penalized for the economies of size and efficiencies they have achieved. They say that farm payments help U.S. agriculture compete in global markets, and that income testing is at odds with federal farm policies directed toward improving U.S. agriculture and its competitiveness.

In addition to these concerns, this section briefly reviews other selected payment-limit issues and eligibility requirements.

Distributional Impacts on Farm Size

A large amount of money is involved in farm payments—much of it goes to a small share of large operators. According to USDA's 2012 Agricultural Census, farms with market revenue equal to or greater than $250,000 accounted for 12% of farm households, but received 60% of federal farm program payments.

Selecting a particular dollar value as a limit on annual government support payments involves a fundamental choice about who should benefit from farm program payments. This has important, but complex, policy implications. For example, numerous academic studies have shown that government payments are usually capitalized into cropland values, thus raising rental rates and land prices. Higher land values disfavor beginning and small farmers who generally have limited access to capital. As a result, critics contend that there is a lack of equity and fairness under the current system of farm program payments that appears to favor large operations over small, and that payment limits are really about farm size.

In contrast, supporters of the current system argue that larger farms tend to be more efficient operators, and that altering the system in favor of smaller operators may create inefficiencies and reduce U.S. competitiveness in international markets. Furthermore, they contend that tightening payment limits will have different effects across crops, thus resulting in potentially harmful regional effects.

Potential Crop and Regional Effects of Tighter Payment Limits

Tighter payment limits do not affect all crops and regions equally. As limits are tightened, they will likely first impact those crops with higher per-unit and per-acre production value. Among the major U.S. program crops, higher valued crops include rice, peanuts, and cotton, all of which tend to be produced in the Southeast, Mississippi Delta, and Western states.

Furthermore, payment limits may influence local economic activity. In particular, payment limits are likely to have a greater economic impact in regions where agricultural production accounts for a larger share of economic output—that is in rural, agriculture-based counties—and where there may be fewer opportunities for diversification to offset any payment-limit-induced reduction in agricultural incomes.

Aggregation of Payment Limits

Under the 2008 farm bill, the annual limit on payments for Title I commodity programs attributable to a person was split into two components: a $40,000 limit on direct payments and a $65,000 limit for combined CCP and ACRE payments, while there was no limit on benefits under the marketing assistance loan program ( Table A-1 ). The 2014 farm bill established a single aggregate limit of $125,000 for combined annual payments under the LDP and MLG benefits of the marketing assistance loan program and the PLC and ARC programs (which replaced the previous CCP and ACRE programs). As a result, in those situations where marketing assistance loan benefits are negligible and an individual relies primarily on either PLC or ARC, then his/her individual limit has been significantly expanded.

For example, consider a producer that relied on CCP and direct payments under the 2008 farm bill. Suppose that under the 2014 farm bill that same producer now relies almost exclusively on the PLC program for support (in part since direct payments were eliminated by the 2014 farm bill). In this case, his/her annual payment limit has been nearly doubled from $65,000 for CCP to a new $125,000 limit for PLC payments. Thus, depending on market conditions and a producer's mix of program activities, aggregation of the program limits could result in situations that favor specific crops and programs ( Table A-1 ).

No Payment Limit on MAL Forfeiture or Commodity Certificates

The absence of a limit on benefits received under the marketing assistance loan's (MAL's) commodity certificate exchange and forfeiture options represents the potential for unlimited, fully coupled USDA farm support outlays. As a result, an apparent equity issue emerges when comparing program benefits of a producer facing a hard cap for ARC and PLC payments as compared to a producer with access to MAL forfeiture or commodity certificates.

Furthermore, MAL program outlays count directly against U.S. amber-box spending limits under World Trade Organization (WTO) commitments. To the extent that such program outlays might induce surplus production and depress market prices, they could result in potential challenges under the WTO's dispute settlement mechanism.

Policy Design Considerations

When eligibility requirements or payment limits are changed, rational producers are likely to alter their behavior to mitigate the effect of the policy changes while optimizing net revenue under the new set of policy and market circumstances. For example, new eligibility requirements or tighter payment limits may result in

a reorganization of the farm operation to increase the number of eligible persons, or to lower the income that counts against a new AGI limit or the farm program payments that count against a smaller payment limit; a change in the crop and program choices or marketing practices, for example, to take advantage of the absence of a payment limit on MAL certificate exchange gains and forfeitures benefits; or a change in land use, such as, instead of farming the same acreage, renting out or selling some land to farmers that have not hit their payment limits.

Payment limits applied per unit or per base acre represent an alternative to per-person payment limits that may avoid distortions to producer behavior. An example of such a per-unit payment limit is the 85% payment reduction factor applied to base acres receiving payments under either the PLC or ARC programs. The reduction factor is applied equally across all program payments irrespective of farm size, AGI, or total value of payments. Such a payment reduction factor is generally applied for cost-saving reasons rather than for "fairness" or equity reasons that at least partially motivate per-person payment limits.

AGI Concerns

Analysis by USDA (2016) found that the number of farms affected by the single 2014 farm bill AGI cap ($900,000) is well below the number affected by the multiple farm ($500,000) and non-farm ($750,000) AGI caps of the 2008 farm bill. For example, while federal income tax data are not available for the $900,000 cap level, published data from 2013, a year of record-high farm income, found that only about 0.7% of all farm sole proprietors and share rent landlords reported AGI in excess of $1 million. Thus, it is likely that consolidating the separate AGI farm and non-farm limits into a single AGI limit with a higher bound has restored eligibility for farm program payments to some farm operations that had previously been disqualified. Other major exemptions from the AGI limit include state and local governments and agencies, federally recognized Indian tribes, and CRP contracts entered into prior to October 1, 2008.

Furthermore, the 2014 farm bill shifted the farm safety net focus away from traditional revenue support programs and toward crop insurance programs, which are not subject to the AGI cap. During the five-year period of 2011-2015, federal crop insurance premium subsidies averaged $6.8 billion annually. Extending the AGI cap to crop insurance subsidies was considered during the 2014 farm bill debate, however, concerns were raised that the elimination of subsidies for high-income participants could affect overall participation to the extent that it could damage the soundness of the entire program. In contrast, USDA estimates that in most years, less than 0.5% of farms and less than 1% of premiums would be affected by the $900,000 income cap if it were extended to crop insurance participation as well as to farm programs.

Appendix. Supplementary Tables