WASHINGTON, Feb. 5, 2015 – Treasury Secretary Jacob Lew defended the administration’s proposal to increase taxes on inherited assets, saying the impact on farms was overblown.

Under questioning by Sen. John Thune, R-S.D. at a Senate Finance Committee hearing, Lew said that giving farms or other businesses 15 years to pay the tax bill meant that the liability “could be managed in the normal conduct of the business.”

President Barack Obama has proposed to eliminate the use of “stepped-up basis” for heirs of capital assets, which means that they would be required to pay capital gains taxes on the increase in value of an inherited asset from when it was purchased, not from when the owner died.  

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The proposal has no chance of passing the Republican Congress but the issue allows both parties to stake out positions on tax policy heading into the 2016 election.

Thune told Lew that ending the use of stepped-up basis and a proposed increase in the capital gains tax rate amounted to ”a very punitive death tax on America’s family farms and America’s small businesses.” Because of the dramatic increase in land values over the past decade, he said a family operation in South Dakota that inherited a section of land, or 640 acres, could be hit with a $1 million tax bill on the owner’s death.

”The only way they would be able to pay Uncle Sam would be to break up the family farm and sell off portions of it,” Thune said.

Lew suggested that the tax would hit far fewer operations than many have claimed, citing an earlier debate over the estate tax. “A lot of the concerns about the imposition of burden have been out of line with the actual impact,” he said.

But he also sought to shift the focus away from its impact on farms.

“The problem with stepped-up basis under current law is that gains go untaxed forever in many cases. I don’t think that’s something we would design the tax law to do,” he said. “If you were talking about stocks and bonds and not a family farm it would be very hard to defend having tens of millions of dollars of gains that effectively go untaxed from generation to generation.”