President Joe Biden has proposed amending the inheritance tax, also known as the “death tax,” but farmers around the country are raising concerns about the plan.
In the American Families Plan introduced earlier this year, Biden proposed repealing the “step-up in basis” in tax law. The stepped-up basis is a tax provision that allows an heir to report the value of an asset at the time of inheriting it, essentially not paying gains taxes on how much the assets increased in value during the lifetime of the deceased. This allows heirs to avoid gains taxes altogether if they sell the inheritance immediately.
Under Biden’s change, heirs would be forced to pay taxes on the appreciation of the assets, potentially over the entire lifetime of the recently deceased relative.
The tax change is targeted at wealthy heirs receiving their parents’ fortunes. Generational farmers, though, say the repeal of this provision will leave them with a hefty tax when their parents pass away and hand down the family farm.
“When it comes to passing down a family farm to a niece or a nephew, the tax liability can result in selling the whole farm or significant pieces of the farm off simply to pay the tax bill,” said Chris Hagenow, vice president of Iowans for Tax Relief. “There is no question that an inheritance tax is a significant burden on families’ farms and their continuity.”
Biden’s proposal applies only to inheritances totaling more than $1 million, but the total value of the large plots of land owned by farmers can put them in that category.
Economic Impact
Aside from the personal impact on farmers, the new rule could have a significant impact on the economy overall.The Family Business Estate Tax Coalition released a study in April that reports taxing gains at death will reduce GDP by $10 billion annually and cost 80,000 jobs each year.
The report said the tax changes would “lower wages given that about 1/3 of the burden of the tax increase is shifted onto labor because the tax-induced reduction in investment makes labor less productive.”
Brady said the plan would cost one million jobs in the next 12 years.
“Democrats’ proposal to repeal stepped-up basis encapsulates everything wrong with their entire tax agenda,” U.S. Rep. Adrian Smith, R-Neb., said. “They have proposed doubling the capital gains rate to nearly 40 percent in the name of so-called ‘fairness,’ rather than prioritizing economic growth or even revenue.”
Biden has defended his plan as a way to raise the revenue needed for infrastructure and other projects.
Republicans’ hard push against the new proposal suggests they still see it as a real threat. The entire Republican caucus in the Senate sent a letter to the Biden administration in July warning him not to hit farmers with this tax.
“These [proposed] changes are a significant tax increase that would hit family-owned businesses, farms, and ranches hard, particularly in rural communities,” the senators wrote. “These businesses consist largely of illiquid assets that will in many cases need to be sold or leveraged in order to pay the new tax burden. Making these changes could force business operators to sell property, lay off employees, or close their doors just to cover these new tax obligations. The complexity and administrative difficulty of tracking basis over multiple generations and of valuing assets that are not up for sale will lead to colossal implementation problems and could also lead to huge tax bills that do not accurately reflect any gains that might have accumulated over time.”
Opposition to the tax hike proposal has seen rare bipartisan support. A group of 13 House Democrats sent a letter to Democratic leadership calling on them to exempt farmers from the potential repeal of stepped-up basis.
“Farmers responsibly pay taxes to contribute their fair share to our country,” said U.S. Rep. Jim Costa (D-Calif.), a third-generation family farmer. “They should not have to face tax burdens to pass their land from one generation to the next. This is how we keep generations of families farming. Therefore, we need to maintain protections to ensure the long-term success of family farms. They are the backbone of economic activity in rural areas, and we know the production of food and fiber is a national security issue.”
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