Individuals, family partnerships and family corporations own over 97 percent of our nation’s over two million farms and ranches. America values these family-owned farms and ranches because of the food, fiber, and fuel they produce, the contribution that agriculture makes to job creation and the economy, and the open space that farming and ranching protects. Yet, our nation’s estate tax policy can be in direct conflict with the desire to preserve and protect our nation’s family-owned farms and ranches.
Farm Bureau believes that tax laws must protect, not harm the family farms that grow America’s food and fiber, often for rates of return that are already miniscule compared to almost any other investment they could make. What is needed are tax policies that do not punish capital-intensive businesses like farms and ranches, and that do not hinder sons and daughters from following the agricultural legacy of their parents.
Many farmers and ranchers have benefited greatly from congressional action that increased the estate tax exemption to $5 million indexed for inflation, provided portability between spouses, and continued the stepped-up basis. Instead of spending money on life insurance and estate planning, farmers are able to upgrade buildings and purchase equipment and livestock. And more importantly, they have been able to continue farming when a family member dies without having to sell land, livestock or equipment to pay the tax.
But in spite of this much-appreciated relief, estate taxes are still a pressing problem for some agricultural producers. One reason is that the indexed estate tax exemption, now $5.45 million, is still working to catch up with the increase in farmland values over the past several years. The value of family-owned farms and ranches is usually tied to illiquid assets, such as land, buildings and equipment. With 90 percent of farm and ranch assets illiquid, producers have few options when it comes to generating cash to pay the estate tax. Recent increases in agriculture cropland values, on average 7.6 percent from 2013 to 2014, have greatly expanded the number of farms and ranches that now top the estate tax exemption. When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners may be forced to sell land, buildings or equipment needed to keep their businesses running. This not only can cripple a farm or ranch operation, but also hurts the rural communities and businesses that agriculture supports.
Another reason that farmers and ranchers support estate tax repeal is that farmers know that their ability to transfer the family business to their sons and daughters is constantly challenged. The administration’s proposal to create a new 28 percent capital gains tax that would be imposed at death on carry-over basis is the most recent example. The impact of capital gains taxes on farming and ranching is significant because production agriculture requires large investments in land and buildings that are held for long periods of time during which land values can more than triple. Under current law, capital gains taxes are owed only when inherited farm or ranch land, buildings, breeding livestock and timber are sold and only on the stepped-up value. The imposition of a new capital gains tax at death, combined with the loss of stepped-up basis, would have the same chilling effect on the intergenerational transfer of family farms and ranches as estate taxes.
Reps. Kristi Noem (R-S.D.) and Sanford Bishop (D-Ga.) have introduced legislation, H.R.631, the Death Tax Repeal Act of 2017, to repeal estate taxes while continuing the stepped-up basis. Farm Bureau supports.
Sen. John Thune (R-S.D.) has introduced companion legislation in the Senate as S. 205. Farm Bureau supports.
- Farm Bureau believes that estate taxes should be permanently eliminated.
- Farm Bureau opposes any roll back of the American Taxpayer Relief Act of 2012 and its $5 million exemption and 40 percent top rate.
- Farm Bureau opposes the collection of capital gains taxes at death and supports the continuation of unlimited stepped-up basis.
- Farm Bureau supports removing the limitation on the amount that property values can be reduced under Special Use Valuation Section 2032A. Timber harvesting or the sale of a conservation easement should not trigger a recapture of estate taxes.