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DTN Ag Policy Blog: Concerns Persist Over Capital Gains and Stepped-up Basis Plans

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Farm groups are pushing back on a Biden administration proposal to raise capital gains taxes and eliminate stepped-up basis on inherited assets. The Biden administration states only about 2% of farms would be affected, and farmers would not be affected if heirs continue to operate the farm. A photo from a farm auction in 2016. (DTN file photo by Elaine Shein)

Agricultural groups and Republican members of the U.S. Senate Agriculture Committee are continuing to challenge the Biden administration proposal to increase capital-gains taxes and eliminate stepped-up basis for inherited assets.

A coalition, the Family Business Estate Tax Coalition, with 115 of its member groups signed onto a letter this week to the chairs and ranking members of the Senate Finance Committee and House Ways & Means Committee.

The letter explains that stepping up the basis when a member of family owned business dies "is critical to that business surviving the loss of a loved one and a business partner." Increasing capital-gains taxes and eliminating stepped-up basis "would force many family-owned businesses to liquidate assets or lay off employees to cover the tax burden."

An analysis for the coalition provided by Ernst & Young Global Limited, cites that the capital-gains tax increase on estates and repeal of stepped-up basis would decrease U.S. GDP by $10 billion annually. The tax plan would also cost 80,000 jobs a year and it would lower $32 for every $100 in revenue collected, the analysis stated.

Biden last month proposed offsetting the costs of his infrastructure package -- now estimated at $1.7 trillion -- with $1.5 trillion in tax increases on wealthier Americans. That includes raising the capital-gains tax rated from 20% to 39.6% for people who earn more than $1 million. When tacking on the Medicare surtax, the highest rate would to 43.4% on capital gains.

For estates, the capital-gains plan would tax unrealized capital gains at death above a $2 million exemption per couple. It would also eliminate stepped-up basis for those inherited assets above $2 million in value per couple. When Biden proposed the plan, USDA stated the plan "won't affect family farms that stay in the family." USDA also added that under Biden's plan, about 2% of farm estates would owe taxes "on their-non-farm assets" and 98% of farms would not owe any taxes "provided the farm stays in the family."

In an analysis last month by the American Farm Bureau Federation and American Soybean Association, they highlighted that the average value of farm ground has increased 223% since 1997. In some northern Midwest states, the value increase averages more than 300%. These higher land values would have a major impact on basis and capital-gains taxes.

On Tuesday, eight Republicans on the Senate Agriculture Committee wrote a letter to Agriculture Secretary Tom Vilsack, asking the secretary "to make public a detailed explanation and any supporting economic analyses that clarifies how the Biden administration's tax increases will affect farm estates."

The letter asks Vilsack to explain how USDA arrived at the conclusion that 98% of farm estates will not be affected by the proposed tax changes. "The proposed tax impacts are dependent on a number of factors, including but not limited to appreciation in farmland assets prior to a property owner's death, size of the farm operation and associated assets, income of the heirs, and the farm's ownership structure. Given these factors, we are writing to seek a detailed explanation and supporting economic analysis clarifying how these tax provisions will affect farm estates, including specifically how USDA arrived at the conclusion that fewer than 2% of farm estates will be impacted by the proposed tax changes," the senators wrote.

Republicans on the committee have made this a frequent talking point with multiple senators during a forestry hearing last week asking witnesses about how they would see the capital gains and stepped-up basis affecting their woodlands. Sen. John Boozman, R-Ark., ranking member of the Agriculture Committee, said at the hearing he is concerned about the Biden administration's "tax proposal on capital gains and stepped-up basis, which may have significant implications for the agriculture and forestry industries by frustrating, rather than facilitating, market opportunities for land owners, timber harvests and the wood product industries."

Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., speaking to reporters after last week's hearing, noted that there is a lot of support from Democrats to keep the elimination of stepped up basis from affecting farmers and family-owned businesses. Stabenow added, "Everyone should be paying their fair share" in taxes and that includes "wealthy people and corporations" that use the roads.

DTN Political Correspondent Jerry Hagstrom contributed to this report.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytoDTN

Chris Clayton