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Issue Brief #4193 on Agriculture

April 7, 2014

The “Heat and Eat” Food Stamp Loophole and the Outdated Cost Projections for Farm Programs

By and

In February, Congress passed a new farm bill that lacked meaningful and necessary reform. Making matters worse, Congress made critical mistakes that will have a major impact on both food stamps and farm programs. The most significant attempt at food stamp reform was to close the “heat and eat” loophole, which allows states to artificially boost the amount of food stamps that households receive. It is becoming clear, however, that the bill failed to achieve even this miniscule objective.

Two major new commodity programs were created in the farm bill. The projected cost of these programs is likely to be far greater than projected by the Congressional Budget Office (CBO). By not using updated commodity price data, Congress failed to use the best projections to assess the financial impact of these costly new programs.

However, there are simple and straightforward ways to fix these mistakes that do not require major substantive policy changes.

The Mistake of Not Closing the Heat-and-Eat Loophole

Under the heat-and-eat loophole,[1] food stamp households that also receive assistance from the Low-Income Home Energy Assistance Program (LIHEAP) in nominal amounts[2] can be eligible for a higher amount of food stamp benefits.

Thus, some states and jurisdictions had been issuing LIHEAP checks to food stamp households for amounts as small as $0.10 per year simply to trigger the increase in a household’s food stamp benefit.[3] The LIHEAP checks are often funded in part or fully with federal dollars. States were using federal dollars to bring in more federal dollars. Both liberals and conservatives have criticized this loophole.[4]

After passage of the farm bill, Members of Congress, including House Agriculture Committee Chairman Frank Lucas (R–OK), declared that the farm bill “closed” the loophole.[5] But instead of ending the loophole entirely, the bill actually only narrowed it. The new law requires that a household’s LIHEAP benefit must be greater than $20 per year to qualify for the increased food stamp benefits.

This change in the law has not stopped many states from continuing to exploit this loophole. Seven of the 17 states or jurisdictions that use the loophole have already announced that they will continue to do so, and five others are either planning to do so or considering doing so. For example, New York will pay $6 million of LIHEAP to receive $457 million of extra food stamp dollars from the federal coffers in return.[6]

The CBO estimated that the farm bill’s reform of this loophole would result in a savings of $8.6 billion over 10 years.[7] However, the continued use of this loophole threatens the amount of savings that could actually be achieved.

The Mistake of Using Outdated Projections

While Congress eliminated direct payments—subsidies that went to farmers regardless of need—it created two major new commodity programs. Farmers can participate in either the Price Loss Coverage (PLC) program or the Agriculture Risk Coverage (ARC) program.[8]

PLC provides payments to farmers when commodity prices fall below a fixed reference price set in statute.[9] ARC protects farmers from even shallow losses (i.e., minor losses), providing payments when revenue falls below 86 percent of expected revenue.[10]

Even before Congress passed the farm bill, corn and wheat prices had been dropping significantly. However, Congress used[11] the CBO’s outdated commodity projections[12] for PLC and ARC, which assumed that commodity prices would stay at or near record highs. Congress also did not wait for the U.S. Department of Agriculture (USDA) to release its annual long-term price projections[13] that could have provided a better picture of future commodity prices: The report was released less than 10 days after Congress passed the farm bill.

The USDA report projects much lower commodity prices than the CBO’s old projections. Based on the USDA data, the prices for corn, soybeans, and wheat would all be significantly lower. Rice, which is by far the smallest crop of the four, is the one exception.[14] These lower price projections mean that taxpayers would be on the hook for much greater costs than the CBO projected.

In March, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri released a report analyzing the impact of the new farm bill. Based on their analysis, the PLC would cost about $13.2 billion more than projected by the CBO. On the other hand, the ARC would cost about $2.4 billion less than CBO projections, for a net cost of around $10.8 billion more than the CBO projections.[15] Further, the FAPRI’s price assumptions, which were significantly lower than the CBO’s estimates, were actually higher than the USDA’s most recent estimates (except for rice, which was lower than both CBO and USDA estimates).

Simple Solutions

Congress should:

  • Close the food stamp loopholes and reform food stamps to include a work requirement. The link between the receipt of LIHEAP and the amount of food stamp benefits should be eliminated. To be clear, even closing this loophole is minor. There are much bigger issues in food stamps. Another loophole in the program, broad-based categorical eligibility, should also be ended. This loophole allows states to overlook the amount of a household’s assets when determining food stamp eligibility, allowing those with even high amounts of savings to qualify for food stamps. Most important, to truly reform the food stamp program, states should be required to implement work requirements for able-bodied adults, requiring them to work, prepare for work, or at least look for work in exchange for receiving assistance.
  • Create a cost cap for PLC and ARC. The costly PLC and ARC programs should be eliminated. At a minimum, there should be a cost cap to limit the liability that taxpayers could face. Taxpayers bear an incredible risk with the PLC and ARC, being faced with a blank check to cover whatever costs arise from these programs. If prices plummet, taxpayers bear the costs. The House recognized this problem and included a cap in its farm bill that would have limited the costs that taxpayers would have to incur to 110 percent of CBO’s projected costs[16] for the PLC and ARC programs.[17] This common-sense provision was removed in the final farm bill. The mistake of using outdated CBO projections that will likely underestimate the costs makes such a cap even more critical. There needs to be a cap that limits spending to no more than legislators expected when they passed the farm bill.[18]
  • Adjust programs to reflect new price projections. To ensure that the cost cap is not reached right away or at all, the PLC and ARC programs need to be adjusted so that they are in line with the new projected commodity prices that Congress should have been using in the first place. For example, reference prices in the PLC need to be lowered to better reflect these projected commodity prices.
  • Separate food stamps and agriculture programs into two different bills. Finally, these issues would likely not have occurred if food stamps and farm programs were separated into two bills. Congress would have focused on these issues on their own merits instead of using logrolling to shove these programs through the process, as is typical with farm bills. In the future, food stamps should be separated from agriculture programs in the farm bill, and the authorization periods for the two programs should be staggered. Food stamps should be reauthorized for less than five years in order to increase opportunities to reform the program.

Ensuring Congressional Intent

After passage of the farm bill, Members of Congress claimed to have closed the heat-and-eat loophole. They passed the PLC and ARC programs based on a certain set of CBO price projections. The loophole has not been closed, and the price projections were outdated even at the time of passage. The solutions identified above would fix these mistakes to ensure that congressional intent is realized.

Congress should not sit back and wait as these mistakes further undermine the food stamp program and also force taxpayers to be on the hook for farm program costs that could be far greater than projected.

—Daren Bakst is a Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies and Rachel Sheffield is a Policy Analyst in Domestic Policy Studies at The Heritage Foundation.

Show references in this report

[1] The amount of food stamp benefits a household receives is based on its “countable income”: gross income minus certain deductions. The lower a household’s income, the greater its food stamp benefit. A household’s utility expenses can count as one such income deduction. Rather than having to compile every food stamp applicant’s utility costs, some states use what they call a “standard utility allowance.” Food stamp households that receive assistance from LIHEAP—no matter how much and regardless of whether they even pay a utility bill separate from their rent—can be automatically eligible for a “standard utility allowance,” which lowers the amount of their countable income, making them eligible for higher food stamp benefits. Households that pay utilities as part of rent get to deduct utilities from their income twice, once as part of the rental cost and a second time as a fictional utility deduction.

[2] Randy Alison Aussenberg and Libby Perl, “The Next Farm Bill: Changing the Treatment of LIHEAP Receipt in the Calculation of SNAP Benefits,” Congressional Research Service Report for Congress, May 13, 2013, http://frac.org/pdf/snap_liheap_conressvc_may2013.pdf (accessed March 25, 2014).

[3] California Senate, Office of Research, “The Agricultural Act of 2014: Highlights of Impacts to California,” February 2014, http://www.sor.govoffice3.com/vertical/Sites/%7B3BDD1595-792B-4D20-8D44-626EF05648C7%7D/uploads/Federal_Update--The_Farm_Bill.pdf (accessed March 25, 2014).

[4] See Greg Kaufman, “While Obama Talks Poverty, Stabenow Agrees to Another $8 billion in Food Stamp Cuts,” The Nation, December 6, 2013, http://www.thenation.com/blog/177495/while-obama-talks-poverty-stabenow-agrees-8-billion-more-snap-cuts# (accessed March 27, 2014).

[5] News release, “Lucas Praises House Passage of Farm Bill Conference Report,” Committee on Agriculture, U.S. House of Representatives, January 29, 2014, https://agriculture.house.gov/press-release/lucas-praises-house-passage-farm-bill-conference-report (accessed March 25, 2014).

[6] News release, “Governor Cuomo Announces New York State Will Preserve $457 Million in Snap Benefits for 300,000 Households,” Office of Governor Andrew M. Cuomo, http://www.governor.ny.gov/press/02252014-snap-benefits (accessed March 25, 2013).

[7] Douglas W. Elmendorf, director, Congressional Budget Office, letter to the Honorable Frank D. Lucas, chairman, Committee on Agriculture, U.S. House of Representatives, January 28, 2014, http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr2642LucasLtr.pdf (accessed April 1, 2014).

[8] For a good discussion, see Ralph Chite, “The 2014 Farm Bill (P.L 113-79): Summary and Side-by-Side,” Congressional Research Service Report for Congress, February 12, 2014, http://www.farmland.org/programs/federal/documents/2014_0213_CRS_FarmBillSummary.pdf (accessed April 1, 2014).

[9] U.S. Department of Agriculture, Economic Research Service, Agricultural Act of 2014: Highlights and Implications, “Crop Commodity Programs,” March 19, 2014, http://www.ers.usda.gov/agricultural-act-of-2014-highlights-and-implications/crop-commodity-programs.aspx (accessed April 1, 2014).

[10] Farmers can choose between county ARC and individual ARC. To learn more about these options and how payments are calculated, see ibid.The Congressional Research Service explains the ARC revenue guarantee in this way: “Under ARC, the revenue guarantee is set at 86% of historical revenue (i.e., the producer absorbs the first 14% of the shortfall) at either the county or farm level (to cover more localized losses). The government then pays for the next 10% of the loss. Any remaining losses are backstopped by crop insurance if purchased by the producer.” See Chite, “The 2014 Farm Bill (P.L 113-79),” note 11.

[11] Elmendorf, letter to the Honorable Frank D. Lucas.

[12] Congressional Budget Office, CBO’s May 2013 Baseline for Farm Programs, May 14, 2013, http://cbo.gov/sites/default/files/cbofiles/attachments/44202_USDAMandator%20FarmPrograms.pdf (accessed March 31, 2014).

[13] U.S. Department of Agriculture, Economic Research Service, USDA Agricultural Projections to 2023, “U.S. Crops,” February 2014, http://www.ers.usda.gov/publications/oce-usda-agricultural-projections/oce141.aspx (accessed April 1, 2014).

[14] Rice is the smallest field crop of the four by far in terms of acreage, be it planted or harvested acres. Wheat, which is the third-largest field crop of the four (and overall) in terms of harvested and planted acres, has a projected harvested acreage of 48.5 million acres and a projected planted acreage of 57 million acres for 2014. In contrast, rice has a projected harvested acreage of 2.874 million acres and a projected planted acreage of 2.9 million acres. See ibid. The four commodities that are used in this analysis were selected because both the CBO and the USDA have 10-year projections for each of them, and they are all covered commodities under the PLC and ARC. See U.S. Department of Agriculture, Farm Service Agency, “2014 Farm Bill Fact Sheet: What’s in the 2014 Farm Bill for Farm Service Agency Customers?” March 2014, http://www.fsa.usda.gov/FSA/newsReleases?area=newsroom&subject=landing&topic=pfs&newstype=prfactsheet&type=detail&item=pf_20140311_insup_en_fbil.html (accessed April 1, 2014).

[15] The government payments in the FAPRI report are presented in terms of their costs by marketing year, which is inconsistent with CBO’s fiscal year approach. The most recent marketing year included from the FAPRI report was 2021–2022, which would equate to costs incurred for fiscal year 2023. The FAPRI recommended this approach to align the years through phone and e-mail communications with The Heritage Foundation in March 2014. See University of Missouri, Food and Agricultural Policy Research Institute, U.S. Baseline Briefing Book: Projections for Agricultural and Biofuel Markets, March 2014, p. 50, http://www.fapri.missouri.edu/outreach/publications/2014/FAPRI_MU_Report_02_14.pdf (accessed April 1, 2014).

[16] See Agriculture Reform, Food, and Jobs Act of 2013, http://www.gpo.gov/fdsys/pkg/BILLS-113hr2642eh/pdf/BILLS-113hr2642eh.pdf (accessed April 1, 2014), and Elmendorf, letter to the Honorable Frank D. Lucas. Representative Virginia Foxx (R–NC) introduced an amendment to create a cap as part of H.R. 1947. The amendment passed, but the House voted down the bill. See Congressional Record, June 19, 2013, p. H3788, http://www.gpo.gov/fdsys/pkg/CREC-2013-06-19/pdf/CREC-2013-06-19-pt1-PgH3787.pdf#page=2 (accessed April 1, 2014).The total cap of $16,956,500,000 is explained to be 110 percent of the CBO projections (through 2020). The language using the same cap amount was included in H.R. 2642, the farm bill that passed the House, as 1107(e). There should also be a cap through 2018, which would be the fifth and final year of the new farm bill. If it is based on 110 percent of the CBO’s cost projections for the programs under the new farm bill, it would be about $12,807,300,000.

[17] See Agriculture Reform, Food, and Jobs Act of 2013. In the House-passed farm bill (H.R. 2642), the shallow-loss program is called Revenue Loss Coverage (RLC), not ARC. The PLC and RLC programs would have worked slightly differently from what was passed with the final farm bill’s PLC and ARC programs.

[18] The cost cap should be made known to farmers before they participate in the PLC or ARCprograms. If the USDA determines that in an upcoming year the costs of the programs will exceed this cap, then the agency should communicate this to participating farmers as soon as is feasible. The remaining money should be allocated in a manner in which all recipients receive an equal prorated share of what they otherwise would have received.

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