Most Farms Don’t Feel The Pinch of Estate Tax
Rep. Earl Pomeroy
If the estate tax gets repealed this year, it will be due to the smoke and mirrors. Supporters have used faulty numbers and misinformation to spread a myth of family farms and small businesses going under due to this tax. The American Farm Bureau, however, recently acknowledged they were unable to identify even one family farm lost due to the estate tax at its present levels.
This revelation shines a bright light on the most emotional appeals
being advanced as reasons to repeal the estate tax. The reality is that repealing the estate tax provides tax relief to the wealthiest estates in this country at staggering cost to the federal budget which is already hopelessly running huge and unsustainable deficits.
The budget consequences of total repeal instead of reform are truly staggering. When fully implemented, there will be a budget hit in the amount of more than $70 billion per year — nearly a trillion dollars when the cost of servicing additional debt is added. In our current budget situation, where the federal government is spending nearly $1 billion a day more than it takes in, the cost of full repeal is especially irresponsible.
And at this steep cost, what does estate tax repeal buy us? Ironically enough, the Republican plan for estate tax repeal would hurt the very people proponents claim it will help. Most family farmers and small businesspeople will actually see the amount of taxes they owe the government increase, not decrease, if outright repeal becomes law. The reason for this is a flawed provision contained in the Republican plan to eliminate the estate tax that would change the tax treatment of inherited property.
Under current law, inherited property is passed on according to “stepped-up basis.” Stepped-up basis allows heirs to value inherited property at the value of the asset at the time death rather than the original cost. This allows decedents to pass along property with significant capital gains tax relief for heirs.
However, if estate tax repeal as passed in the House were to become a reality, stepped-up basis would be scrapped in favor of a tax treatment known as “carry-over basis.” Under carry-over basis, when heirs sell assets that they inherit, they would be responsible for capital gains taxes based on the appreciation of the property over time.
This would mean that tens of thousands of families who currently do not pay taxes on inherited property would face an increased tax burden. In fact, for every estate that sees relief under estate tax repeal instead of reform, nine will be burdened with new capital gains tax filings.
Farm and ranch families, like the ones I represent in North Dakota, are hit particularly hard by carry-over basis. In a hearing before the Ways and Means Committee on carry-over basis in 1979, Grace Ellen Rice of the American Farm Bureau Federation stated that, “carry-over basis fosters an insidious bias against farmers and ranchers.” She also explained that “carry-over basis calculations for land, buildings, machinery, livestock and timber have been described as, at best potential nightmares.”
Clearly, there is a better way to deal with this issue. I sponsored the Certain and Immediate Estate Tax Relief Act, legislation that would provide an estate tax exclusion of $3.5 million per person and $7 million per couple. This would permanently end the estate tax for more than 99.7 percent of all Americans and would do so without creating a new capital gains tax burden on thousands of individuals across the country.
Moreover, my plan specifically addresses the needs of family farmers and ranchers by eliminating the estate tax for nearly all agricultural operations in the country.
The Congressional Budget Office found recently that 95 percent of the estates left by farmers were worth $3.2 million or less. Among farming estates nationwide, only 65 would face an estate tax bill under my legislation.
For example, a person inheriting a family farm originally purchased for $200,000 that appreciated to $3 million at time of death would pay no estate tax under my legislation. And because this legislation maintains the step-up in basis, heirs would face no capital gains taxes. In other words, an heir inherits the estate free and clear without having to give a dime to Uncle Sam.
In addition to this increased tax burden, full estate tax repeal would also be a big blow to efforts to strengthen Social Security for future generations. For example, the cost of repeal is nearly $220 billion more than my immediate estate tax relief bill. According to the AARP, this is enough revenue to bring Social Security 27 percent of the way towards long-term solvency. Eliminating the estate tax while Social Security is facing long-term challenges is a classic case of misplaced priorities.
The trade off is clear: Estate tax repeal vs. reform blows the budget at a time when Social Security faces long-term challenges all to provide tax relief to the richest three-tenths of one percent of estates.
We can be responsible and still eliminate the state tax for 99.7 percent of all Americans, and that is exactly where our focus should be.
Rep. Earl Pomeroy (D-N.D.) is a member of the Ways and Means Committee.