Following an outcry from farm groups and rural lawmakers, House Democrats proposed a tax package Monday that omits President Joe Biden’s proposal to tax capital gains at death.
Biden’s proposal would defer the tax liability on family farms for as long as they stay in operation, but ag groups said the tax would create a number of problems for farms, including making it harder for farmers to get loans on inherited land.
Under current law, heirs pay taxes only on the gain since the prior owner died, a benefit known as stepped-up basis. That policy would not change under the Democratic tax package.
A number of rural Democrats had raised objections to the Biden proposal, including House Agriculture Committee Chairman David Scott, D-Ga., and Sen. Jon Tester, D-Mont. Nearly 330 ag groups signed a recent letter urging the Democratic chairmen of the House Ways and Means and Senate Finance committees to preserve existing tax rules for inherited assets.
"The writing was on the wall because a bunch of rural Democrats said they didn’t want to see this change happen," said Brian Kuehl, a principal with the accounting and consulting firm KCoe Isom.
However, the legislation would reduce the estate tax exemption, now $11.7 million, to its 2010 level of $5 million, indexed for inflation. The impact of that reduction could be softened by another provision in the measure.
The tax package released by the Ways and Means Committee Monday morning is needed to fund the $3.5 trillion Build Back Better spending plan that Democrats want to enact this fall, and they are working with razor-thin margins in both the House as well as the 50-50 Senate.
Chuck Marr, senior director of tax policy with the Center for Budget Policy and Priorities, a progressive advocacy group, lamented Democrats' failure to include Biden’s proposed transfer tax.
"The most glaring omission in the House package is that it does not tax capital gains at death – i.e. people like Jeff Bezos and Elon Musk will continue to go through life and death without paying our main tax – individual income – on much of their income. Senate needs to fix,” Marr tweeted.
The tax provisions largely target corporations and high-income individuals. The corporate tax rate would rise from 21% to 26.5% for companies with income over $5 million, while the capital gains tax rate would be increased to 25% for high-income individuals and there would be a 3% surcharge on incomes over $5 million a year.
The corporate tax rate would remain 21% for income between $400,000 and $5 million and drop to 18% for earnings below $400,000, under the legislation. Some farms are structured as C-corps and pay the corporate rate.
The package also includes a change to a deduction related to estate taxation that could benefit agriculture, especially if the estate tax exemption is lowered.
The limit on the Section 2032A valuation reduction for real property that is used in a family farm or family-owned business would be increased from $750,000 to $11.7 million. The provision is limited to property that will be remain in the operation after the owner dies, and the reduction is restricted to transfers to certain relatives, according to Beth Swanson, a tax analyst with KCoe Isom.
The provision is seldom used by farms now, but the increase, combined with a lower personal estate tax exemption, could make it more valuable to farms.
The increase in the Section 2032A limit "means a farm couple could easily be worth up to $35 million and the heirs would owe no estate tax," wrote Paul Neiffer, a principal with the accounting firm CliftonLarsonAllen.
Under the 2017 tax law, the estate tax exemption is scheduled to drop to $5.5 million in 2026.
The draft legislation also would “curb syndicated conservation easement tax shelters” by denying charitable deductions “for contributions of conservation easements by partnerships and other pass-through entities if the amount of the contribution (and therefore the deduction) exceeds 2.5 times the sum of each partner’s adjusted basis in the partnership that relates to the donated property, " according to a summary of the package.
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The House Ways and Means Committee will be debating the revenue provisions this week along with a number of other proposals, including a group of clean energy tax incentives. Those include a new subsidy for renewable jet fuel while also extending the existing tax credit for biodiesel and renewable diesel through 2031.
Some farm and biofuel groups are seeking a change in the tax credit for sustainable aviation fuel out of concern that SAF made from many ag commodities wouldn’t qualify for the subsidy.
The groups say the legislation would “exclude SAF derived from agricultural feedstocks from incentive programs and ensure that the administration’s vision for reducing aviation emissions and the cited opportunities for American agriculture are not realized. Instead, SAF blend stock from Brazil, Singapore and elsewhere will be subsidized by U.S. taxpayers, while U.S. producers and farmers are shut out.”
The groups that signed the letter to Democratic congressional leaders are the Advanced Biofuels Business Council, American Farm Bureau Federation, American Soybean Association, Growth Energy, National Biodiesel Board, National Corn Growers Association, National Farmers Union, National Sorghum Producers, and Renewable Fuels Association
The SAF credit would vary from from $1.25 to $1.75 a gallon depending on the fuel’s carbon footprint. The problem, according to these groups, stems from a requirement that the carbon impact be measured according to a methodology adopted by the International Civil Aviation Organization.
Also Monday, the House Agriculture Committee voted 27-24 along party lines to advance $66 billion in Build Back Better funding for agricultural research, renewable energy, biofuel infrastructure, rural development and forestry. Those provisions will be added to the Democrats' massive budget reconciliation measure along with $28 billion in conservation spending that hasn't been finalized.
Download the section by section summary of the Ways and Means revenue section here.
Steve Davies contributed to this report.
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