Ag Policy Blog

White House Tax Plan Targets Capital Gains, Stepped Up Basis

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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A week ago, Agriculture Secretary Tom Vilsack spoke to reporters about ways to remove the tax disincentive preventing landowners from selling land to farmers.

Vilsack noted at the American Farm Bureau Federation meeting that he and his wife, for instance, would be hit with a high capital-gains tax if they sold their farm in Iowa to someone else. It's more beneficial under the current tax system to hold onto that ground. Then, in his estate, allow his heirs to take over the land and then sell it with the stepped-up basis and avoid tax penalties.

The agriculture secretary said there needs to be a way to help offset those higher capital-gains taxes in such land sales.

Late Saturday evening, the White House issued a fact sheet on a new tax proposal President Barack Obama will roll out Tuesday night at his State of the Union speech. The plan effectively increases taxes on wealthier people while offering some tax breaks for middle-class wage-earners.

The plan centers around a proposal to "close the trust-fund loophole" that allows wealthier Americans to avoid capital-gains taxation through stepped-up basis by letting wealthy people pass on appreciated assets to their heirs tax-free.

The plan would also raise the top capital-gains and dividend rate from 20% to 28% for people earning more than $500,000 a year.

The White House plan is more likely to become a talking point regarding inequality than a tax plan that will gain traction in Congress, considering that anyone would be hard-pressed to find a Republican in Congress interested in raising capital-gains rates. Yet, the plan will create another demarcation line between the president and Congress over any potential tax-reform plan that the GOP may offer in the coming months.

According to the White House, the plan would generate $320 billion in new revenue over 10 years to more than offset $175 billion in middle-income tax-cut proposals.

The proposal targets what the president's tax advisors view as an unfairly low tax on capital income. The fact sheet notes capital-gains rates are lower than tax rates on work "which explains how the highest-income 400 taxpayers in 2012 -- who obtained 68% of their income from capital gains -- paid income tax at an effective rate of 17%, even though the top marginal income tax rate was 35%."

Stepped -basis effectively allows people to hold on to assets until death and are thus never subject to income tax. Gains are computed based on the stepped-up value at the time of the individual's death, "making the capital gain income forever exempt from taxes."

"Each year, hundreds of billions in capital gains avoid tax as a result of stepped-up basis."

The White House argues that the proposal would "almost exclusively impact the top 1%." Those people would still get a preferential rate on their income from investments, but they would no longer be able to accumulate extra wealth by paying no capital gains tax whatsoever."

For businesses, "No tax would be due on inherited small, family-owned and operated businesses - unless and until the business was sold. Any closely-held business would have the option to pay tax on gains over 15 years."

The proposal, however, doesn't necessarily spell out how a landowner would be able to sell land a lower tax rate than now. In fact, it would seem that the capital-gains rate overall would be higher.

Farm groups have largely supported stepped-up basis as a way to transfer the farm within the family without the heirs getting hit with higher capital-gains taxes should they choose to sell the property.

Another piece of the proposal would increase taxes on the nation's largest financial institution. It would charge a fee on "large, highly-leveraged financial institutions to discourage excess borrowing," the White House stated.

In terms of middle-class tax cuts, the proposal would provide a $500 tax credit to any couple that has two wage earners. The White House stated that would benefit 24 million couples.

The plan would "streamline child-care tax incentives" for families, allowing up to $3,000 per child. Currently, the cap is $6,000 for two or more children. Thus, if a couple had three children in day care, they might then be eligible for up to $9,000 under the president's plan.

The president also proposes to consolidate the various education credits into just two, allowing up to $2,500 a year for five years for students.

The president will also propose a retirement tax-reform plan that would make it easier for people to save for retirement.

Follow me on Twitter @ChrisClaytonDTN.

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CRAIG MOORE
1/28/2015 | 1:22 PM CST
I also know that the French, German and British don't want to discuss their ZUS areas and the problem they are having with the Sharia Police squads there. And I spend more time on the BBC, DW, AW and other sites for most of my unbiased world news. Unlike the people here that like watching Crying Williams and the National Barak Company news.
T S
1/22/2015 | 9:18 AM CST
I own land, but I don't farm it and neither will my children. The plan is to keep it till death to get the step up in tax basis, that way my kids can do whatever they want with it without myself or them paying lots of taxes. I know this stepped up tax basis is to benefit passing family business from generation to generation, but I don't feel I have a business just because I collect a rent check and I don't care if my kids continue owning the land once I'm gone. I just hope this loophole remains in place so my plan to avoid taxes works out.
james kuntz
1/21/2015 | 12:58 PM CST
What about the democratic wars of 1941 & 1951 that we are still paying for ? Enough about the "sun & wind" energy that the US govt paid out billions to "developers" who take the $$$$ and run.
Jay Mcginnis
1/21/2015 | 7:34 AM CST
Yes Craig and I want to encourage "smart metering" which will actually charge people more when the demand is higher and less when it is not as high, that is true capitalism. Also I want it to pay generators more when the demand is higher and less when it is lower! You see solar actually puts power on the grid when the demand is the highest. Bet you never figured I was that "type"! If we put solar into the free market it will really shine and my net metering return will be much higher, sadly the power companies don't want that kind of net metering. As for financial institutions, that fiasco was caused from not enough regulation during Bush administration, now there are regulations to prevent them but didn't you hear Elizabeth Warren address the congress last Dec? Seems like the GOP slipped a provision in the government funding bill that will make the government once again responsible for financial institutions derivative playing! Really Craig, you need to get your stories straight, listening to Faux News is not a good source for reality. Didn't you hear the French are suing them?
CRAIG MOORE
1/20/2015 | 4:53 PM CST
Jay We are still occupying Germany after a war that started with a democrat in office. We are still occupying South Korea after a war started with a democrat in office. Somewhere you are going to have to get over Bush and come to terms with what reality is offering up TODAY. Seems your type always misses the $80 billion a month printed just for financial institutions over the last 6 years, how are we going to pay for that? And how about supporting giving a break to the people that really earn the money and not to all those solar companies that soak up billions in government money just to go broke and run with the money. And if you want to cut ties with the Middle East oil, support the development of local energy. Oh, I forgot, you only support energy that is produced when the sun shines and the wind blows. Do you use your lights at night when the wind doesn't blow?
Jay Mcginnis
1/20/2015 | 12:04 PM CST
But Bonnie, how are you paying for all the wars the GOP wants to fund? Iraq was paid on a credit card and was the longest war this country ever fought and nothing was gained. Don't you think that corporations who benefit from oil lanes being protected in the Mid East should pay some taxes?
Bonnie Dukowitz
1/20/2015 | 6:25 AM CST
As long as gov. spending exceeds revenue, taxes are a moot point and a diversion of the problem.
Curt Zingula
1/19/2015 | 8:26 AM CST
How many times must we go down this estate tax road? Death should not be a taxable event!