Estate Tax Debated to Death

Farm Groups Largely Agree With President Over Burdens of Estate Tax

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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WASHINGTON (DTN) -- When President Donald Trump traveled to North Dakota last week to further his push for tax reform, the president highlighted the need to eliminate the estate tax.

"We'll also protect small businesses and family farmers here in North Dakota and across the country by ending the death tax," Trump said. "Tremendous burden for the family farmer, tremendous burden. We are not going to allow the death tax or the inheritance tax or the whatever-you-want-to-call-it to crush the American Dream."

As Congress moves to debate tax reform this fall, the estate tax is going to be at the center of arguments about the impact of tax reform on small businesses and family farms.

The president's comments came as the National Cattlemen's Beef Association also launched a month-long campaign on tax reform. The group's first media spotlight was put on the estate tax with a video of a California rancher whose family was hit with a $2 million tax after his grandfather died in the early 1990s.

Craig Uden, a Nebraska cattle feeder and president of NCBA, said the estate tax puts more pressure on farm and ranch operations as they grow.

"Eliminating it would go a long way as far as keeping people out on the ranch or the farm and continue to boost the rural economy," Uden said.

While the political focus of the estate tax is on farmers and ranchers, few producers pay the estate tax. USDA's Economic Research Service studied the issue earlier this year and concluded 1.7% of farm estates in 2016 had to file an estate-tax return. Of that group, 0.42% are estimated to owe any taxes. ERS estimated farm estates paid $344 million in taxes for 2016.

Still, U.S. Ag Secretary Sonny Perdue, a farmer, often repeats the need to eliminate the estate tax. When Trump spoke last week, Perdue tweeted, "Old unfunny joke: 'Farmers live poor, die rich,' bc (because) of land value. @POTUS tax reform fixes, would kill Death Tax." The secretary added, "Too many family farms broken up or sold off just to pay tax bill. Complexity & cost of tax compliance hurts farmers."

IRS is a little behind when it comes to releasing data on the estate taxes. The latest numbers are from 2015, which showed taxable farm assets were about $2.36 billion (2.7%) out of a total of $88.25 billion in total taxable assets, or about 2.7% of the total. Roughly half of all assets in estates that paid the tax in 2015 were stocks, bonds and cash. Still, farms had a small amount of the asset base, but nearly 13% of estate tax returns filed in 2015 had some type of farm assets, according to IRS spreadsheets.

The Economic Research Service study did note that, unlike other estates, farm estates were far more likely to have their asset base heavily tied to that farm. "For the few farm estates that have a tax liability, the assets in the estates are overwhelmingly farm-related -- ranging from 84% to 93%," ERS noted. Farm estates estimated to owe federal estate taxes had, on average, a net worth of over $11.5 million and an average tax liability reaching $1.7 million.

That goes directly to a point made by Uden, who notes that farms and ranches can be highly leveraged.

"We're always going to end up being land rich and cash poor, at least a lot of operators," Uden said. "Land is not as liquid as other assets, so a lot of people have to sell off parts of their operation. I know a lot of people who had to get rid of a lot of cows and equipment in order to move forward."

Dean Norton, former president of the New York Farm Bureau, said the estate tax is becoming more important with an older population in agriculture and how the farm is transitioned to the next generation.

"It's harder and harder for the next generation to buy in or anything else," Norton said. "The only way they get it in their own name is generally someone has got to pass away."

Increased land values also play a bigger factor in farm estates. The average cost of land in Iowa last year was $7,183, according to Iowa State University. At that value, 764 acres hits the $5.49 million individual exemption for 2017.

"It doesn't take too many acres and you are well past the $5.4 million exemption, and you have got to figure out the rest," Norton said.

Norton added that farm families also spend a significant amount of time and costs just trying to deal with estate planning and the tax implications.

"That costs thousands and thousands of dollars to do it to make sure you can transition to your son or daughter, so that's one of the things I seem to be dealing with on a daily basis," Norton said.

Yet, estate taxes generated $17 billion in federal revenue in 2015 and are projected to generate higher revenues over the next decade. So is it possible to just eliminate business and farm assets from the estate tax? Norton said New York Sens. Chuck Schumer and Kirsten Gillibrand, both Democrats, have talked about this possibility.

"They would love to do an estate-tax exemption for agriculture, as long as they can find a way or verify a way that the land has got to stay in agriculture and not turned over into land for a developer," Norton said.

Uden said the idea of excluding farm assets often gets batted around, as do higher exemption totals. "I think the best alternative is just to absolutely get rid of the thing and not be consumed with figuring out what different limits are," he said. "The values keep going up, and consequently, it's a moving target. Elimination would still be the best."

National Farmers Union is holding its Washington, D.C., fly-in this week with more than 300 farmers. The group's priorities are the farm-bill safety net, health-care access and further boosting renewable energy. Tax reform isn't on the agenda, and NFU members don't see a need to change the estate tax.

"It impacts hardly any farmer, and in fact it impacts hardly any people across the U.S., far less than 1%," said Roger Johnson, president of NFU. "They are the wealthiest among us. If you have got $11 million in net assets, you can move them free and clear to the next generation. It's only beyond that do you have any sort of issues."

The exemption is $10.98 million for a farm couple. Farms can also take advantage of special valuations as well when determining the fair market value of estates.

If Congress were to eliminate the estate tax, then there's $17 billion to $20 billion from the income side of the ledger of the federal government, Johnson added. "Now they (Congress) will have to find somebody else to pay those taxes, so they will transfer the costs from the wealthiest individuals onto everyone else."

While there's a big emphasis on the estate tax, farm groups also have a broader lists of tax issues. They also want to protect stepped-up basis for inherited assets, business interest deductions, net operating loss carryover and cash accounting for farmers instead of accrual accounting -- just to name a few major issues on the table.

"I think we're always going to ask for everything we can get," Uden said. "It's going to be a very interesting debate once we get this thing started."

ERS study on estate taxes:…

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Chris Clayton