Reacting to a Government Accountability Office (GAO) report that found that the U.S. Department of Agriculture (USDA) paid $49 million in farm subsides to wealthy people who were ineligible because they were making more than $2.5 million, President-elect Obama said, "If this is true, it is a prime example of the kind of waste I intend to end as president."
The President-elect and his team have the right idea in trying to cut wasteful spending. However, as this particular case shows, there may be less waste to cut than first meets the eye.
The GAO study looked at tax records of people who received farm payments over the period 2003-2006. Over that time, the farm subsidy programs paid $16 billion per year ($64 billion over the four years of the study) to some 1.8 million households. From the 2002 Farm Bill, payments were supposed to be limited to people and entities whose incomes over the preceding three years averaged less than $2.5 million.
The GAO found that $49 million in payments went to 2,702 individuals whose taxable incomes exceeded $2.5 million. The potential waste here is large in an absolute sense at a little over $12 million a year; however, it is puny when compared to the size of the program. The individuals who were identified represent just 0.15 percent of subsidy recipients, and the possible overpayments represent just below 0.08 percent of program costs. Yes, USDA should be more careful, and yes, it might be able to save money, but such small fractions of program costs are going to be hard to root out.
The use of the words "potential" and "possible" in the preceding paragraph is purposeful because the report may be overstating the amounts of overpayments. Eligibility for the payments is sometimes determined on the basis of entity (business) income rather than individual income. Some of the 2,702 individuals may have been partners in eligible businesses; if so, the business's subsidy would have been reduced by that partner's share, though the business would still get a subsidy. Also, there are some subsidies that were not subject to the $2.5 million limit.
Finally, the period of the study was covered by the 2002 Farm Bill. The new 2008 Farm Bill, which took effect in October, sets lower income eligibility limits and requires USDA to use additional verification tools may well reduce the identified expenditures.
In addition to the potential overpayments, the GAO also found that a very high proportion of subsidy payments went to people making more than $500,000 per year. For instance, while only 0.4 percent of tax filers had adjusted incomes between $500,000 and $1 million, 1.2 percent of farm subsidy recipients had incomes in this range. Again, though, the 2008 Farm Bill is supposed to address some of this.
Farm subsidies must be reined in, and payments to ineligible millionaires should be the first to go. However, we shouldn't overstate the possible savings, especially in a program that is slated to change. Bringing the budget into balance will require much harder choices.