American Farm Bureau Federation : Set for repeal for 2010, the estate tax will return in full force in 2011—unless reform-minded lawmakers such as Sen. Blanche Lincoln (D-Ark.) are able to push through a higher, inflation-adjusted exemption and a lower top rate. Under current law, the maximum estate tax rate is 45 percent, with a $3.5 million exemption. In 2011, following a oneyear estate tax repeal in 2010, the estate tax returns to its 2002 levels with an exemption of $1 million and a top tax rate of 55 percent. With enough lawmakers opposed to the 2010 repeal, action on estate taxes is very likely this fall. A handful of estate tax bills have already been introduced, with proposals ranging from a $2 million exemption and 55 percent top rate to full repeal.
In addition, the 2010 budget passed earlier this year by Congress assumes an extension of the current $3.5 million exemption and 45 percent top rate, which means that lawmakers would not have to raise other taxes or cut spending to maintain the exemption and rate. This is in line with President Barack Obama’s budget proposal and campaign pledges. Although farmers and ranchers support full repeal, acknowledging that it’s a very long shot, they’re aiming for a more politically feasible higher exemption and lower rates.
“Estate taxes can destroy family businesses when the tax forces surviving family members to sell land, buildings or equipment to generate enough money to pay the tax,” explained Pat Wolff, American Farm Bureau Federation tax specialist. “A higher exemption and lower rates will give family farms and ranches a better chance to remain in operation when transferring from one generation to the next.”
The estate tax burden falls heavily on farmers because it takes a lot of capital assets—such as land and equipment—to generate the same dollar in income that another type of business could generate with less. Also, the cost of estate planning to try to reduce what a farmer’s heirs would have to pay, which may or
may not be effective, diverts money that could have been reinvested in the farm.
It’s not only family farms that are penalized by the death tax, as Wolff pointed out. “When agricultural operations disappear, the rural communities and businesses they support are also adversely impacted,” she said. “Farmland located close to urban centers often is lost forever to development when death taxes force farm families out of business.”
Farmers and ranchers are urging lawmakers to provide a $10 million per person exemption indexed for inflation and transferable to a spouse; an increase in the gift tax exemption; and no limit on the amount of farmland that can be valued for farm use rather than at development value. The continuation of “stepped-up” basis, which adjusts the value of property for inflation at death, is also critical.
Without this adjustment farmers could pay high capital gains taxes, canceling out the benefits of estate tax elimination in 2010. Lincoln and Sen. Jon Kyl (RAriz.) have said they are committed to upping the exemption to $5 million. They were successful in including the higher exemption in the Senate budget, but it was cut when lawmakers from both chambers came together to pass one bill. Lincoln’s and Kyl’s $5 million exemption provision required that anything over $3.5 million be offset.
“Although the current budget and recently passed pay-go legislation in the House provide a clear path for the $3.5 million exemption, it’s not a done deal,” cautioned Wolff. “And the Farm Bureau-supported $5 million exemption faces an even steeper uphill.”
Wolff urged farm and ranch families to let their lawmakers know how estate taxes affect how they plan for their futures and how the proposed exemptions would help them.