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The death of the Family Farm Tax Act

By Staff | May 11, 2021

Joe Biden wants to pay for his $2 trillion-plus infrastructure spending by raising taxes to make it as budget neutral as possible. They are throwing out many different possibilities for tax hikes to see what will stick. Their crowd funding tax hike proposed, so to speak, would include an increase in the corporate tax rate to 28%, up from the current 21%. Senator Joe Manchin says that he and other Senators think that is too high relative to the global average corporate tax rate. It will not get 50 votes at 28%. The U.S. corporate tax rate had been 35%, putting U.S. corporations at a large disadvantage relative to other countries. One repercussion is that multi-national companies left their cash overseas to avoid our taxman. We needed that capital invested here. 21% however took our rate lower than others. There is a minimum tax on foreign profits of 10.5%. Biden wants to double that to 21%. Treasury Secretary Janet Yellen wants to coordinate a global tax pact where countries align their corporate tax rate so that it is not used as a competitive advantage. Yellen says that they are gaming the system. Good luck with that. She wants a minimum global corporate tax rate. Some countries, like Ireland, are tax havens with their economies dependent on the attraction of lower corporate tax rates.

As mentioned, some taxes are untouchable under the Senate reconciliation rules. The $15-hour minimum wage hike got pulled from the Biden Covid-aid bill. Biden included a hike in social security takes for high wage earners in his infrastructure proposal. Changes to social security are prohibited under Senate reconciliation rules. This limits where they can go to get more tax revenue. He wants to cap his individual tax hike to those making over $400,000 but there are only so many rich people from which to raise revenue from. I do not believe that they are currently being soaked. They are proposing a moderate tax hike but the wealthy is where the money is when they come up short and need more.

Another pot of potential cash is changing the estate tax law. Current estate tax provisions now governing estates are being executed under a temporary statute that unfortunately, expires/sunsets at the end of 2025. Frankly, I think the current statute should be made permanent but there are not the votes to make that happen. Current law provides for a $11.58 million individual estate tax exemption indexed to inflation and a stepped-up capital gains basis exemption at the of death. Biden wants new permanent law reducing the estate tax exemption to $3.5 million and a mark to market estate capital gains liability. The huge reduction in the size of the exemption is bad enough but the lost stepped-up basis is the real liability going forward for estates. Ag law professor Roger McEowen says that a relatively small $500,000 estate could end up being taxed 20-30% between state and federal capital gains taxation. Biden democrats want the plus-$40 billion annually that the elimination of the stepped-up basis would bring into federal coffers. Someone made the statement that the capital gains tax only applies if the asset is sold. Not the way I understand it as proposed. Property value, including stock, is marked to the market upon time of death for capital gains taxation under the Biden plan. They would also eliminate the 1031 exchange exemption from capital gains. Senate democrats have proposed a $1 million capital gains tax exemption but with a 39.6% tax on capital gains above that. Death triggers the liability. They could call it the “Death of the family farm tax act.”

Losing the stepped-up basis exempting capital gains would put a lot of farms on the market from estates without cash to pay the capital gains taxes. A commodity group ag lobbyist assured me that they will make it very difficult

for the Dems to successfully legislate these changes. I think that the political ability to make any changes to the estate tax is unlikely. What is likely to occur by default is that the current statute will expire at the end of 2025 and the temporary statue will revert to the permanent one that was enacted in 2009. That one is for a $5 million estate tax exemption but keeps the stepped-up basis. That is better than what Biden is proposing.

Acres are probably a poor way to measure the impact of estate taxation on family farms. Top farmland here locally has been firm, bringing $12,600/acre. With the current estate tax exemption of $11.58 million per person indexed for inflation that covers about 919 acres to come in under the exemption. Not very many individuals own that many acres. USDA economists calculated, that out of a projected 31,394 farm estates, that only 50 of them would have incurred an estate tax liability in 2020. As it should be, only the very wealthy would incur an estate tax liability. Most farms are passed on with no estate tax liability. This is as it is under current temporary estate tax law and that law unfortunately sunsets in 2025 to a reduced exemption. At $5 million, more estate tax liabilities are created for family farms. Again, maintaining the stepped-up basis is the most important provision. Who wants to farm to only pay capital gains taxes? That would undermine the value of farmland so there would be less capital gains to tax. That would harm the net worth of the ag sector and rural America. I am not sure that we would have been able to keep the family farm that my grandfather bought for $300 acre in 1932 without the stepped-up basis. I am all for building infrastructure in this country but am not for paying for it by destroying the family farms. They are the foundation of the country’s food production.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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