Barn-and-farm-3.06.tif

Democrats and Republicans are offering starkly different plans that could affect the number of farmers subject to the estate tax.

Under existing rules, relatively few farmers are wealthy enough that they will owe federal estate tax when they die. And it’s not clear that any of the current proposals will go anywhere.

Still, farmers have a lot riding on the rules for this particular tax.

Much of farmers’ net worth is tied up in assets that are needed to run the business, most notably land and equipment. And according to Texas A&M, cropland values have more than tripled since 1997.

As a result, if farmers don’t organize their estate plans carefully, hefty tax bills at an owner’s death could make it hard for the next generation to keep the farm.

The rules for the estate tax have changed over the years. Current parameters were set by the 2017 Tax Cuts and Jobs Act, and they’re pretty generous.

An individual’s first $11.7 million in assets ($23.4 million per couple) is exempt from the estate tax.

These numbers are indexed to inflation, but they are set to expire in 2025. They will reset to lower levels unless Congress takes action before then.

And indeed, liberals including Sens. Bernie Sanders and Rep. Alexandria Ocasio-Cortez are backing bills to change the estate tax.

But those plans would expose more farmers to the estate tax, not fewer.

The Democrats’ proposed exemptions, $3.5 million per individual and $7 million per couple, would be even lower than the cutoffs in the years leading up to the 2017 tax cut.

This plan is not about soaking farmers, though. It’s about making progress on a longtime priority of the Left.

“We need a tax system which demands the billionaire class to pay its fair share of taxes and which reduces the obscene level of wealth inequality in America,” Sanders said.

For similar reasons, Democrats are proposing to eliminate stepped-up basis, a tax policy that is particularly affected by the rapid rise in farmland value.

Under stepped-up basis, when someone dies holding an asset that has increased in value over the person’s life, taxes are not collected on that increase.

In other words, farmers don’t have to pay capital gains tax on the (often substantial) appreciation of their family’s land.

Democrats say stepped-up basis treats inherited wealth more favorably than other capital gains, effectively giving a tax break to super-rich families.

To ease the cost of losing stepped-up basis, Maryland Sen. Chris Van Hollen has proposed an exemption for small farms and businesses of up to $1 million.

Still, the top farm organizations have much different visions for the estate tax than Sanders or Van Hollen do.

National Farmers Union supports something close to the status quo — keeping stepped-up basis and making the current estate tax exemption permanent, with an additional $5 million exemption if the estate continues to be operated by a family member or transfers to a beginning farmer.

The American Farm Bureau Federation is supporting a Republican-led plan to get rid of the estate tax altogether.

Who Will Be Affected?

The big question, of course, is how many farmers are subject to the estate tax now — and how that number would shift under the Democratic plan.

Farm Bureau says the existing estate tax could apply to 4% of the nation’s farms. This analysis assumes all landholders are individuals, not couples, so the figure is likely an overestimate.

The USDA Economic Research Service offers an even lower estimate, figuring that less than 0.2% of farmer estates would pay estate taxes for 2020. That’s about 50 farms nationwide.

At the request of the top Republicans on the House and Senate Agriculture committees, Texas A&M researchers analyzed how the Democratic plans would affect the number of farms subject to the estate tax.

The researchers ran calculations based on a database they maintain of 94 representative farms across the country.

Only two of the 94 would have to pay estate tax under current law. If the exemption amount were cut, as Democrats propose, 41 farms would likely have to pay, and it wouldn’t be cheap — $2.2 million on average.

The elimination of stepped-up basis would affect 92 of the farms, increasing their average tax liability by more than $700,000 per farm, the researchers said.

The study mostly included operations with thousands of acres, so modest-sized Northeastern farms might not face such large tax bills. But that doesn’t mean they would be immune.

The researchers estimated that a 160-cow dairy in Vermont would not be affected by a reduced estate tax exemption but would owe $49,000 if stepped-up basis were eliminated.

An 800-cow New York dairy could pay up to $2.6 million if both the estate tax exemption and stepped-up basis went Democrats’ way, the researchers said.

So far, the Republican House bill to kill the estate tax has more co-sponsors than the Democrats’ plan to expand it — 147 versus 36.

But Democrats hold narrow majorities in Congress, and none of the bills have much bipartisan support. The bills have been in committee since the spring.

Lancaster Farming

Newsletter

What To Read Next