Farm groups are bracing for a possible effort in Congress to impose new taxes on inherited land and other assets as a way of addressing wealth inequality while raising revenue Democrats will need to fund new infrastructure or social spending.
President Joe Biden has proposed to fund his $2.7 trillion infrastructure package, the American Jobs Plan, solely with corporate tax increases, but in coming days, he is expected to release a second massive proposal, the American Families Plan, with far-reaching spending plans for health care, education and child care.
The White House hasn’t tipped how he wants to pay for the second package, but Biden’s campaign included a number of proposals to increase taxes on high earners and on inherited wealth, including eliminating the step up in basis that has long been provided for inherited assets.
Because of the step-up, someone who sells an inherited asset only pays capital gains tax on the appreciation that occurred after the death of the parent or other person that bequeathed the property. Without the step up in basis, the sale would be taxed based on the increase in value since the asset was originally acquired.
Several Senate Democrats led by Chris Van Hollen of Maryland are going farther than just eliminating the step-up by proposing to also tax assets over $1 million that someone inherits. The proposed “transfer tax" would be deducted from any estate tax that would also be owed.
To prevent wealthy individuals from bypassing the tax by funneling property into trusts, trust-held assets would be taxed every 21 years.
"We have a fundamental issue in this country about people inheriting great wealth," Van Hollen told Agri-Pulse on Tuesday. He said the exemption for the first $1 million in assets would limit the impact on farms.
In announcing his Sensible Taxation and Equity Promotion (STEP) Act in March, he called stepped-up basis a “loophole” that provides “an unfair advantage to the wealthy heirs.”
Here’s one example of how the transfer tax could work for farms: A son or daughter inherits 500 acres of cropland in Illinois worth $7,400 an acre that had been purchased in 1980 for about $2,000 acre, an increase in value of about $2.7 million, $1.7 million of which would be taxable under the STEP Act.
The transfer tax, which would be reported on the decedent’s final income tax return, would total about $457,000, assuming Congress also goes along with a Biden campaign proposal to raise the top capital gains tax rate to 39.6%, says Paul Neiffer, an agricultural tax specialist with CliftonLarsonAllen.
The federal capital gains tax would be calculated this way: About $400,000 would be taxed at 15%, the next $600,000 at 20%, and the remaining $700,000 at 39.6%, Neiffer said. There also would be an Illinois tax of about $85,000 due.
The good news for the heirs is that Van Hollen’s transfer tax could be paid off over 15 years like an installment loan, said Neiffer.
Democrats are highly unlikely to get any GOP support for ending stepped-up basis or imposing a transfer tax; the question is whether they could keep all 50 Senate Democrats in line if they try to pass the spending package via the budget reconciliation process, which wouldn’t require Republican votes.
Democrats are looking for revenue “anywhere they can,” a senior Republican on the Senate Finance Committee, Texas Sen. John Cornyn, told Agri-Pulse. “They don't seem to understand that our farmers and ranchers are small businesses that this will disproportionately harm.”
Another Finance Committee member, Sen. Chuck Grassley, R-Iowa, told reporters Tuesday that stepped-up basis was one of the issues raised frequently during town meetings that he held during the recent two-week congressional break. Taxes on inherited assets “would particularly hit the high investments that people have to have for raising pigs,” he said.
But some advocates for small-scale farms and beginning producers say that ending stepped-up basis would discourage farm consolidation and make it easier for new farmers to acquire land.
Ferd Hoefner, a farm policy consultant and former policy director for the National Sustainable Agriculture Coalition, said the Van Hollen proposal is "well crafted" because of the $1 million exemption and the 15-year installment plan for taxes that would be owed.
“At a time when less than two-tenths of one percent of all farm estates pay any estate tax whatsoever and when stepped up basis is locking in farmland and keeping it off the market, reform is clearly necessary, if agriculture is serious about creating new farming opportunities, slowing consolidation, and addressing inflated land prices driven in part by current tax subsidies,” Hoefner said.
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Estate tax rules also could be in play this year as Democrats search for revenue sources and seek to redistribute wealth. The estate tax exemption was doubled in the 2017 tax law and indexed to inflation — it is $11.7 million this year — but it is scheduled to be cut in half starting in 2026. Democrats may try to cut the exemption earlier.
In March, Sen. Bernie Sanders, I-Vt., and several Democratic colleagues, including Van Hollen, Kirsten Gillibrand of New York and Sheldon Whitehouse of Rhode Island, proposed the For the 99.5% Act, which would increase estate tax rates and cut the exemption on most assets to $3.5 million. There would be an additional $3 million exemption for farmland.
The Sanders bill would also raise the maximum exclusion for conservation easements to $2 million.
The gift tax exemption would be cut from $11.7 million to $1 million under the Sanders proposal.
The bill would raise $430 billion in revenue over 10 years, according to an analysis by the Joint Committee on Taxation.
A spokeswoman for Van Hollen said he is still gathering comments on the discussion draft for the STEP Act and will formally introduce the bill later. There is no JCT estimate on how much revenue it would raise.
The top Republican on the House Ways and Means subcommittee that handles tax policy, Nebraska Rep. Adrian Smith, said large numbers of farmers and ranchers have been raising concerns about the possibility of inheritance tax increases.
Increasing inheritance taxes "has become a social justice issue" for Democrats, Smith said. "I would hope that we would take the full view of what the impacts are on a family small business, whether it’s agriculture, manufacturing or otherwise."
Download a summary of the STEP Act here.
Download a summary of the For the 99.5% Act here.
Ben Nuelle contributed to this report.
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