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Ag Policy Blog: White House: Analysis Shows Family Farms Protected From Tax Plans

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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An analysis highlighted by the White House responds to GOP claims that President Joe Biden's plans for capital-gains taxes would put family farms in the crosshairs. (DTN photo by Chris Clayton)

The White House Press Office on Tuesday sent out an analysis of its plan to tax wealthy Americans released by the liberal think tank, the Center for American Progress, that seeks to counter claims that President Joe Biden's tax plans would harm family farmers and small businesses.

For months Republicans and farm groups have criticized Biden's plan to increase capital-gains taxes and limit stepped-up basis on untaxed assets, citing that the proposals would hurt family farmers passing down the farm to heirs.

As DTN reported, the entire GOP Senate caucus in mid-July spent a day on the Senate floor challenging Biden's tax plans, arguing they would put family farms and ranches in the crosshairs.

(See: Basis Changes, Capital Gains Hit Farms at…)

The president's tax plan for budget reconciliation is that it would tax unrealized capital gains at death at 43.4% -- up from 23.8% after including the Medicare surtax. The plan would exempt $1 million in assets for an individual, $2 million per couple. This would effectively repeal the stepped-up basis carryover that heirs receive from estates. USDA early in this process stated the tax would not be imposed for people who inherit farms, as long as those farms remain in the family operation. At least some rural Democrats have pushed for a full exemption for farms and ranches be written into law.

Biden's proposal also would increase income taxes for people making over $1 million in income annually from 37% to 39.6%. The White House states this would affect 0.3% of all taxpayers.

The major question in the coming weeks is whether Democratic-led committees, especially the House Ways and Means Committee, will integrate Biden's capital-gains plans into the eventual budget reconciliation package.

The White House plan seeks to go after gains on stocks. The Center for American Progress report, citing the Congressional Budget Office, notes that capital gains go overwhelmingly to the top 1% of taxpayers. From 2016-18, the top 1% averaged $485,633 in capital gains on their tax forms. Taxpayers in the 95th to 99th percentile of income generated $21,267 in capital gains. The bottom 80% of taxpayers generated little to no capital-gains income.

The Center for American Progress (CAP) report repeats the White House view. "The president's plan is designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business."

Those who sell the farm or family business would be impacted by those tax changes.

CAP's analysis takes aim at a report by Texas A&M University's Agricultural and Food Policy Center (AFPC) and an analysis released by the accounting firm EY, formerly known as Ernst and Young.

"Both studies dramatically overstate the impact on family farmers and business owners from repealing stepped-up basis, and neither directly examines the Biden plan. Nonetheless, the studies have gained attention because of the novelty of their conclusions, which greatly exceeds the strength of their evidence," the CAP authors state.

CAP points out the Texas A&M AFPC study doesn't actually look at Biden's plan, but instead focuses on a couple of proposed pieces of legislation from Democratic lawmakers. One bill, the STEP Act, doesn't spell out the $1 million individual exemption, nor does it mention carryover that allows heirs to continue operating a business or farm without paying the capital-gains taxes. CAP repeats, "President Biden's plan guarantees that no taxes will be owed on family-operated farms and businesses until those farms or businesses are ultimately sold; this deferral of tax liability was not included in the STEP Act discussion draft studied by the AFPC."

The CAP study also cites that the 94 farms included in the AFPC study are "commercial farms" and wealthier than 91.8% of noncommercial farmers. The median net worth in the AFPC farms for 2019 was $5.1 million, compared to the median net worth of all farms at $1 million. USDA cites the median net worth of commercial farms -- about 8.2% of all farms -- is about $2.7 million.

Looking at land ownership, CAP notes at least 31% of the country's farmland is owned by nonoperating landlords, citing Bill and Melinda Gates, prior to their divorce, "owned more farmland than any other couple in the country. Because the Gateses do not operate their own farmland, they would not qualify for a tax deferral under the Biden plan."

While nonoperating landlords own at least 283 million acres, CAP cites as much as 53.8% of that land owned by nonoperating landlords was either inherited or gifted. "Had the Biden plan been in place when these nonfarmers inherited their land, they would have paid taxes on unrealized capital gains above the $2 million threshold."

The White House pointed out a conclusion from the CAP report: "Those affected by the Biden proposal will not be family farmers or family business owners, but rather the heirs of stockholders, bondholders, and landlords. The working class will be protected, even as the passive rich will not."

It's safe to say there will be a lot more to come regarding just how much farmers and ranchers will be affected by any changes in capital gains and stepped-up basis.

CAP report:…

Texas A&M AFPC report:…

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Chris Clayton