December 12, 2012
Estate Tax Deadlock Could Hit Hard On Family Farms
With Republicans pushing to all but eliminate the current estate tax, and the President fighting to return to 2009 rates, a lack of bipartisan consensus in Congress could result in something neither side wants: A massive rate hike on some of America’s traditional family-owned farms.
Senate Finance committee chair Max Baucus (D-Mont.), though he has called for a post-election compromise on the fiscal cliff, is working to protect the Bush-era estate tax rate from the effects of any collective deal made to forestall going over its edge.
Baucus, the Senate’s top tax-writer, aims to preserve the reductions in estate taxes and provide an economic cushion to family-owned farms and ranches that plan to pass down property from generation to generation.
An increase in the estate tax rate, which now rests at 35 percent on estates remaining over the $5.12 million individual exemption, may hinder the children of farmers and ranchers inheriting acreage, according to Baucus. Without Congress stepping in, the rate will rise to 55 percent, and only an estate’s first $1 million will be tax-exempt.
One in 10 families are projected to pay the estate tax in 2013 as exemption levels go untouched by Congress. Many of these estates will involve asset-rich, cash-poor farms.
“It doesn’t take that much of a nest egg to get you into that area,” said Vick Patten, chairman of Patten and Associates and former president of The American Family Institute
The estate tax has long been the quarry of farm groups, who charge the law pushes heirs into liquidating land inherited from their deceased guardians. A lack of reliability in the tax code corners owners into preemptively forgoing the expansion of their business and instead promotes setting aside valuable assets.
More than 30 California agriculture groups have appealed to the 113th Congress in a letter, imploring members to extend the existing estate tax law until the time comes for permanent tax reform. Signers include the American Farm Bureau Federation, the National Cattlemen’s Beef Association, the Idaho Dairymen’s Association, and the Western Growers Association.
“The 2013 change to the estate tax does a disservice to agriculture because we are a land-based, capital-intensive industry with few options for paying estate taxes when they come due,” wrote the groups signed to the letter. “The current state of our economy, coupled with the uncertain nature of estate tax liabilities, makes it difficult for family-owned farms and ranches to make sound business decisions.”
Though 96 percent of American farms and ranches are family-owned and operated, a small number of these actually endure the financial burden of the estate tax. The Tax Policy Center calculates less than 50 farms and family-run businesses were required to pay the estate tax in 2011, and only 40 will owe any estate tax in 2012.
The impact of the federal estate tax is determined by the United States Department of Agriculture Economic Research Service’s classification of farm: Rural residence farms occupied as a place of independent residence or retirement, intermediate family farms with annual sales below $250,000, and commercial farms with annual sales beyond $250,000.
Subject to 2009 rules under President Barack Obama’s proposal, 60 family operations nationwide may face the tax in 2013, touching at most 20 new farms and businesses. Should policymakers reinstate the 2009 estate tax rules, the Center approximates no tax will be owed by 99.7 percent of surviving heirs, leaving estates of the wealthiest 0.29 percent with the responsibility to pay in 2013.
For those included in the affected minority classification, 2008 findings by the Joint Committee on Taxation “suggest that many estates that are comprised largely of farms or other closely held businesses have enough liquid assets to satisfy estate tax liabilities.”
The Heritage Foundation’s senior tax policy analyst Curtis Dubay cites some confusion over Baucus’s drive to keep rates in line with those of the Bush Administration. In 2009, the rate rested at 45 percent with a $3.5 million exemption. In 2010, there was no tax until the Congress in session worked with Obama to bring back the estate tax at a rate of 35 percent.
A lack of congressional action this term would decrease the exemption level while simultaneously increasing the tax rate. President Obama is in favor of reinstating the estate tax at 2009 levels, meeting in the middle of liberals and conservatives. Should that proposal be adopted, 7,500 estates would be subject to the tax. At current levels, the Tax Policy Center estimates 3,600 estates would be affected.
In embracing the levels favored by the President, a possible $22 billion could be raised, and more than $40 billion could come in through taxation of the Center’s estimated 53,000 estates at a $1 million exemption level. However, Patten determines that either policy would still be too harsh for family-run agribusinesses.
“America’s family businesses and family farms and family ranches produce 63 percent of all of the jobs in America,” said Patten. “When they are forced into a situation where, at the end of each generation, the government confiscates half of or — in terms of what they propose on Jan. 1, more than half of all their capital — this has very, very, very detrimental effects on the survival of the business.”
The Congressional Budget Office’s recent “Economic Effects of Policies Contributing to Fiscal Tightening in 2013″ report warned if tax changes and budget cuts occur as directed by sequestration and the Budget Control Act, GDP will drop 0.5 percent and unemployment will increase to 9.1 percent from 7.9 percent, where it lingered until dropping to 7.7 percent in November.
Estates falling under the header of corporate farms feed into misconceptions about the wealth of American farmers.
These large farms, as reported by the USDA, account for only 5.3 percent of total farms but make up 73.5 percent of all farms’ gross revenue. U.S. Census Bureau data from 2009 found the net earnings of 90.5 percent of intermediate farms averaged $2,615. Options for heirs to reduce the estate tax impact include easement donations, installment payments, and valuation of estates at farm-use rather than at fair-market value.
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