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Faking Takings

Faking Takings

Farm Subsidies and Private Property in Perspective
Thursday, February 2, 1995

It is well established in the economic literature that Federal farm assistance programs enhance the value of all U.S. farmland. According to USDA, farm subsidies have enhanced farmland values on average between 15 and 20 percent. The windfall benefits to farmland property owners would therefore be in the range of $83 billion to $111 billion, based on 1993 farmland prices. For the larger landowners in major farm states, enhancements of that magnitude would add between $120,000 and $440,000 to the value of the average farmland holding. Enhancement of farmland properties is even higher in areas where subsidized crops predominate. Because farmland ownership is highly concentrated--just 124,000 owners (.048 percent of the U.S. population) hold about half of all farmland--the windfall benefit of farm subsidy enhancements is also concentrated.

Legislative proposals to compensate land owners when federal regulations reduce property values, such as the "takings" provisions in H.R. 925 (a "Contract with America" bill approved by the House Judiciary Committee), would result in taxpayers paying twice in cases where farmland property owners are compensated for so-called regulatory takings. First, taxpayers would pay to boost the value of farmland through an array of Federal farm subsidies; then taxpayers would pay again, at that artificially inflated land price, whenever compensation is awarded for regulatory takings of farmland properties.

Policymakers have several options to protect taxpayers from paying excessive compensation to farmland property owners under proposed "takings" compensation proposals. Policymakers could reject takings proposals in favor of the constitutional protection and longstanding legal remedies that now protect property owners against government takings. Congress could also support sharp reductions in agricultural assistance in order to reduce farmland values and the subsidy windfall that accrues to farmland property owners. Finally, policymakers could insist on a balancing requirement that would subtract the amount of Federal farm subsidy enhancements before any payment is awarded to farmland property owners under compensatory takings claims.

 

Farm Subsidies Greatly Enhance Farmland Property Values

As with all land, the value of farmland is predicated on future expected income. One of the largest sources of farm income has been the federal government. It has long been established in the economics literature that farm program payments are capitalized into land prices, inflating the value of farmland. (Herdt and Cochrane 1966, Floyd 1965, USDA 1988, USDA 1990b).

USDA estimates that over the years, government farm programs have added between 15 and 20 percent to land values through capitalization (USDA 1990b). At 1993 farmland prices, this percentage translates into what economists call a "windfall" of between $83 billion and $111 billion in land values for the current 2.9 million farmland owners. The American Farm Bureau Federation has estimated that long-term capitalization of farm subsidies has increased the total value of U.S. farmland by $250 billion (Thompson 1994), contributing up to 45 percent of current land values, which totaled $554.6 billion in 1993.

For illustrative purposes, Table 1 presents the magnitude of farm subsidy enhancement of farmland properties, assuming a 15 to 20 percent increase in land prices across all states. (See Note 1.) Texas benefits the most in absolute terms, with a windfall of up to $10.5 billion in farmland property values attributable to farm program payments. Farm program payments enhance the value of Iowa and Illinois farmland by $7 billion, and California farmland is worth $8 billion more as a result of farm program benefits.

Numerous studies have attributed increases in farmland values to federal assistance programs for specific crops. Government-granted tobacco allotments, for example, were found to add as much as 38.9 percent of land value per acre in 1976, dropping to 12.7 percent in 1982 (Vantreese et al. 1989). A 1992 study showed that the value of corn "base" acreage, a primary factor driving the level of subsidies, was worth $200 per acre, or about 19% of contemporary Iowa farmland prices (Herriges et al. 1992). A "program base" for cotton was found to be worth $60 to $108 more per acre than land without a subsidy base (Duffy et al. 1993). Analysis of six major wheat producing areas found that land prices would increase by 38 percent if federal assistance were doubled (Goodwin and Ortalo-Magne 1992).

The impact of farm programs on farmland value is most pronounced in regions or in years in which production of subsidized crops is predominant. In 1994, for instance, 83 percent of the total 210 million acres of wheat, feed grain, cotton and rice base acreage were enrolled in Federal commodity subsidy programs (Top Producer 1995).

The Conservation Reserve Program (CRP) has also boosted land values. Established in the 1985 Farm Bill, the CRP pays farmers to take highly erodible land out of production and blanket it with plantings of grass and trees. The CRP also controlled commodity supply to increase prices and supplement the farm economy during the worst farm financial crisis in the last-half century. By the time the 370,000 existing CRP contracts lapse, taxpayers will have spent nearly $20 billion on the Reserve (Cook 1994).

Along with its many environmental benefits, the CRP has boosted property values on millions of acres. The CRP raised land values, on average, by $71 per acre during its first two years, when five sign-up periods enrolled some 22 million acres (Table 2) (Shoemaker 1989). Regions that enrolled a greater share of land in the CRP enjoyed proportionally greater property value enhancements. In the southeastern United States, the Reserve increased land values an average of $132 per acre. Overall, the CRP increased land values by nearly $5 billion between 1986 and 1987 (Table 2.)

USDA's estimate of an overall increase of 15 to 20 percent in farmland property value from farm subsidies is probably conservative because it does not include the direct benefits to farmers from higher commodity prices from market quotas (such as peanuts and sugar) and from increased global demand caused by the Export Enhancement Program. (See Note 2.) Both programs increase net returns to land, placing upward pressure on land values. USDA's capitalization estimates also do not reflect income farmers receive from federal crop insurance indemnities ($5.7 billion from 1985-1993) and federal disaster payments (more than $8 billion over the same 9 years), partly because farmers can't bank on the amount of crop insurance and disaster payments they will receive (EWG 1994).

 

Farm Program Payments and Farmland Values Compared

To place the magnitude of farm subsidies and land values into perspective, taxpayer subsidy payments to farmers over the last 10 years could have purchased more than one-quarter of farmland in states represented on the Senate Committee on Agriculture, Nutrition, and Forestry (Figure 1). Direct payments from 1985 to 1994 to farmers in those 19 states exceeded $52.4 billion, or 26 percent of total farmland value (about $200 billion) in those states (EWG 1995). Similar comparisons can be made for the CRP. In four of the five states with the most CRP acres, taxpayers could have purchased more acres outright at 1986 prices--and planted them to grass and trees--than the number of CRP acres the government rented for only 10 years (Cook 1994). According to the University of Minnesota, taxpayers paid more than twice the local cash rent to enroll CRP acres in 40 percent of counties with CRP land (Hertz 1995).

 

Windfalls Go to a Handful of Owners

Because farmland ownership is highly concentrated--just 124,000 owners (.048 percent of the U.S. population) hold about half of all farmland--the windfall benefit of farm subsidy enhancements is also concentrated (USDA 1991). Each of those land owners--one in every 2,000 Americans--has gained an average of $167,726 to $223,634 in wealth through the capitalization of farm program payments into farmland values.

In 15 major farm states, less than 1 percent of residents now own between 18 and 79 percent of farmland value (Table 3). In 9 of those 15 states, members of this tiny minority each own an average of more than $1 million in farmland, reaping between $167,588 and $443,877 in enhanced property value as a result of Federal farm program benefits. About 0.04 percent, or 1 in every 2,500 Oklahomans, own 18 percent of that state's farmland value. Each of those owners has accrued the benefits of farm subsidy capitalization to the tune of $332,908 to $443,877. Less than 1 percent of all Montanans (0.62 percent), own 57 percent of the state's farmland wealth, each receiving between $229,075 and $305,433 from subsidy capitalization. Similarly, less than one-tenth of one percent of residents in Louisiana, Mississippi, and California own 48 percent, 38 percent, and 79 percent, respectively, of each state's farmland value. All have received upwards of $300,000 in enhanced property values from the windfall of long-term capitalization of farm program payments (Table 3).

It is important to note that only those who own farmland benefit from the value-enhancing effect of Federal farm programs. Tenant farmers are in fact harmed by the resulting higher land values and rents (Floyd 1965, USDA 1990a). And in 1993, more than 40 percent of the 978 million acres in farms was operated by non-owners.

 

Loss of Farmland Value from Regulatory Takings?

Federal environmental regulations have placed limits on some uses of some farmland property. While no reliable estimates have been made of the overall impact of Federal environmental regulations on farmland values, for several reasons the impact is likely minimal, especially when compared to the enhancement of farmland values from Federal subsidies. The main reason for the limited impact is that farms and farmland often are treated more leniently than other industries under Federal environmental laws, and in many cases agriculture is virtually exempt from regulation that could lead to a "taking" or reduction of property value.

Perhaps the best example of the limited impact of Federal environmental law on agriculture is wetlands regulation under Section 404 of the Clean Water Act. Under the law, farmers must obtain a permit from the U.S. Army Corps of Engineers in order to destroy a wetland. In all but rare cases, farmers are allowed to use their land without any value-reducing 404 restrictions. The Corps estimates that of the 51,215 requests for 404 permits to drain private wetland in 1992, only 3,448 (6.7 percent) pertained to farmland. Of those agriculture-related permits, only 27 were denied--less than 1 percent of the agriculture-related requests that year and less than five one-hundredths of one percent of all requests (U.S. Army Corps of Engineers 1994).

Another set of restrictions applies to wetlands in agriculture under the "swampbuster" provisions of Federal farm law, as authorized in the 1985 and 1990 Farm Bills. Swampbuster was intended to halt taxpayer subsidies for wetlands drainage by requiring Federal farm program recipients to refrain from draining additional wetlands. However, swampbuster does not prohibit farmers from draining wetlands; it simply denies eligibility for farm program payments to producers who do drain wetlands. Farmers who opt out of Federal farm payments are free to drain wetlands (barring the rare Section 404 restrictions cited previously).

The Endangered Species Act (ESA) often is mentioned by farm interests as restricting farmland use and thus reducing its value. As is the case with the Section 404 program, no reliable studies have been conducted on the overall impact of ESA implementation on farmland property values. Using data collected by the Texas and Southwestern Cattle Raisers Association (TSCRA), Massachusetts Institute of Technology professor Steven Meyer concluded that land values in 31 rural counties containing endangered species actually fared better than land values in the state as a whole from 1989 to 1993. Two additional counties studied by TSCRA were more heavily urbanized (Austin is in Travis County and San Antonio is in Bexar County). Those two counties lost a high percentage of total land value when the real estate speculation bubble burst in the late 1980s. However, the price of rural land in the other 31 counties containing endangered species fared nearly 5 percent better than Texas counties overall. Twenty-two of those counties retained more of their property values in a falling market than Texas as a whole (Warren 1994).

As was indicated in the Texas study, the impact of the ESA on all affected activities and land has been modest to date, with a few notable exceptions such as the spotted owl and old-growth forest in the Pacific Northwest. Of the 96,830 formal and informal federal consultations to assess potential violation of the ESA between 1986 and 1992, only 352 were found to jeopardize a listed species, or 0.37 percent. A mere 54 activities, or 0.06 percent, were blocked because of their potential to harm or destroy listed species (World Wildlife Fund 1994). In most cases, the U.S. Fish and Wildlife Service has been able to resolve conflicts through permits and procedures that allow economic development to proceed with little or no diminishment of property values.

Although the Section 404 program and the ESA have had rare and modest impacts on agricultural property values, proposals to compensate farmland owners for regulatory takings could still prove very costly to taxpayers. Any legal presumption that compensation would be available for regulatory action that affects property values, would create not just a remedy for regulatory takings but a market for them. In the case of the Section 404 program, for instance, property owners would have a powerful incentive to file permit requests whether or not they intended to drain wetlands. Because permit denials would be compensable, the applicant would win either way, gaining compensation if the permit is denied or permission to develop if the permit is issued. The more elaborate the development plan put forth, the more potentially expensive the compensation to taxpayers.

 

Taxpayers Pay Twice: Farm Subsidies & Regulatory Compensation

Proposals to compensate land owners when federal regulations reduce property values, such as the "takings" provisions in H.R. 925 (a "Contract with America" bill approved by the House Judiciary Committee), would result in taxpayers paying twice in cases where farmland property owners are compensated for so-called regulatory takings. First, taxpayers would pay to boost the value of farmland through an array of Federal farm subsidies. In cases where production of a commodity would be difficult or impossible without subsidies, most of the value of the farmland producing the commodity is attributable to Federal farm payments. If owners of that farmland were then entitled to compensation for regulatory takings, then taxpayers would pay again, at that artificially inflated land price, whenever compensation is awarded.

 

Policy Options to Protect Taxpayers

Policymakers have several options to protect taxpayers from paying excessive compensation to farmland property owners under proposed "takings" compensation proposals. First, Congress could reject takings proposals in favor of the constitutional protection and longstanding legal remedies the courts have provided to protect property owners against government takings. Second, policymakers could pursue sharp reductions in agricultural assistance. The effect would be to reduce all farmland values and affect all farmland owners, whether or not they ever claimed compensation for a regulatory taking. By reducing subsidies, however, taxpayers would save two ways: Lower outlays for farm programs and reduced compensation payments for regulatory takings on farmland. This approach may also have adverse impacts on many family farmers.

A third option would be to balance subsidy enhancements against takings compensation. Policymakers could insist that before any compensation is made for regulatory takings, USDA should estimate the full value by which Federal farm subsidies have enhanced farmland properties that the claimant owns or has an interest in. The value of that enhancement would then be subtracted from any compensation claim prior to its award.

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