“This tax doesn’t just hit the big guy. It hits the little guy—like the small business and the family farm. It is both unwise and unfair, and it needs to go.”
–Rep. Paul Ryan (R-Wis.), hearing at the House Ways & Means Committee, March 25, 2015
“I believe that the estate tax is politically misguided, morally unjustified and downright un-American. It undermines the life work and the life savings of farmers and small- and medium-sized businesses in Georgia and across the nation.”
Efforts to repeal the estate tax (a.k.a. “death tax”) occur on an annual basis, usually around tax filing season. One year, in 2010, the estate tax actually was repealed — but then it came back again the next year. (It turned out that the taxes due at death were even more onerous for most people than with the estate tax in place.) In the meantime, Congress has increasingly cut the tax rate and boosted the exemptions, making it less and less likely that Americans would face the tax.
In 2001, for instance, $675,000 ($1.35 million for couples) of an estate was exempted from the tax before a top rate of 55 percent tax rate kicked in. Now, the exemption is $5.43 million (nearly $11 million for couples) and tax rate is 40 percent on any amount after that. So the effective rate for most estates facing a tax is significantly lower than 40 percent.
These exemptions have made a huge difference in terms of who gets affected. In 2000, 2 percent of estates had to pay taxes; in 2013, just 0.18 percent had to pay taxes, according to the Joint Committee on Taxation. Put another way, there were 52,000 taxable estate tax returns filed in 2000 and just 4,687 in 2013. (In 1977, by contrast, 139,000 estates had to pay tax—nearly 8 percent of deaths.)
Ironically, the relatively little revenue raised by the estate tax (about $20 billion a year) has given opponents a new reason to eliminate the tax—because killing it would not make much of an impact on the budget.
So, here we are, with objections still raised about the impact on farms and small businesses. As in the past, the concerns are bipartisan, with some Democrats joining the anti-estate-tax bandwagon. What does the data show?
Brandon Whitt is a seventh generation farmer from Murfeesboro, Tenn., who works with his wife and father-in-law at Batey Farms, which dates back to 1807. The farm is now about 483 acres—after 120 acres had to be sold in 1988 to pay the estate tax when his wife’s grandmother passed away. (The exemption in 1988 was $600,000 and the top rate was 55 percent.) So, he’s very concerned.
“The exemptions we have today are fantastic,” he said. “Don’t misread me. But I’m much more interested in creating a level playing field for all farms and small businesses. Why should one farm/business have to pay and another not just because of superficial caps put on by government?”
He said land in his area is going for $25,000 to $40,000 an acre because land value have soared (from $3,000 to $4,000 an acre in the mid-1990s) ever since a Nissan plant was built nearby, though he has not had an appraisal done of his property.
“Unfortunately we don’t make a lot of money in this business,” Whitt said. “We would have to sell off a big part of the business to pay the taxes.” He said he would like to maintain the farm as an example of modern agriculture within an urbanized area.
Whitt is no doubt sincere. But the problem may be less than he thinks.
There is special use valuation that permits one’s gross estate to be reduced by an additional $1,100,000. (To be eligible for special use valuation, the land must continue to be farmed for 10 years after death and one or more family members must continue to meet two tests — one involves participation in management and the other, in most instances, does not permit cash rent leasing.) There are other possible discounts as well. There is also a provision that allows the tax to be paid off over 15 years, at low interest rates (with only interest due the first five years).
The U.S. Department of Agriculture estimates that with the exemptions, only 0.6 percent of farms would have to pay an estate tax. (Another 2.1 percent would file returns but would owe no taxes.) The nonpartisan Tax Policy Center estimates that only 120 farms and small business, where at least half the assets are in farm or business assets, had to pay the estate tax in 2013.
Neil E. Harl, an Iowa State University professor who has written several volumes on the estate tax, said that Whitt’s concerns make little sense. “The average land value in Iowa as of November of 2014 was $7,943 and that value has dropped since by probably five to eight percent,” Harl said. “Iowa is one of the top states in terms of land values.” (USDA says the average value per farm acre in Tennessee is $3,600, as of August 2014)
“In 2013, the last year IRS data are available, only 660 decedents nationally reported owning any farm property,” Harl said. “However, the 100 decedents with estates valued at $20,000,000 or more had an average of $5,675,730 in farm property. I have been tracking this study for several years and the most striking feature is the increase in farm assets by the super wealthy. In my view, public policy is not served by eliminating the federal estate tax which is the force behind this push to argue that ordinary farmers, bona fide farmers, are likely to pay a huge amount of federal estate tax. It simply is not true.”
Harl added: “My wife and I own 1,000 acres of good Iowa farmland (all but 40 acres of which was acquired the hard way — by purchase) plus other property and if one of us (or both) have to pay a little federal estate tax, which is unlikely, we would die with a smile on our face.”
Thune’s staff conceded that they could not identify a single farm that had been sold because of the estate tax, but they said some farms had to sell acreage in order to pay the tax. Moreover, they said land prices have soared in South Dakota much faster than the estate-tax exemption, which is indexed for inflation. From 2013 to 2014, farm acreage in South Dakota increased in value by 22.5 percent, to $2,070 an acre, more than any other state, according to USDA. Cropland has increased in value by 20.8 percent, to $3,430 per acre. Overall, land values in South Dakota have increased seven-fold since 2000.
Rachel Millard, a spokeswoman for Thune, cited a real estate survey by South Dakota State University and USDA which showed the average farm in the east central part of the state was about 1,400 acres, with land value of $5,763 in 2014. That would make the farm worth more than $8 million, above the exemption for a single person, she noted.
Jodie Anderson, executive director of the South Dakota Cattlemen’s Association, also said she could not name a farm that had to be sold completely because of the estate tax. But she said her family had to sell off a “fairly significant” amount of land to pay the tax when her grandfather died a dozen years ago. Although the estate-tax exemption has climbed in the last decade, so have land values. “We are asset rich but cash poor,” she said. That is another reason why farmers are wary of the estate tax, she said: They do not have the resources to pay for expensive estate planning.
The Pinocchio Test
The raw facts may not entirely support the case against the estate tax, but increasingly this does not seem to matter. It has become a philosophical issue, even if in the end the data shows that that relatively few small farms or businesses appear to be affected. Ryan said the tax “hits the little guy”—and even if it may be only a handful, that’s apparently all that matters.
Certainly, farmers and ranchers believe they will be hit by the estate tax and do not want to be bothered with paying for lawyers to figure out ways around it. Is that enough to justify throwing out a tax that now mainly affects the very wealthy who are passing on stock portfolios that have never been subject to capital gains taxes? Is that better than an alternative that might require immediate payment of estates with capital gains (as what happens in Canada, where there is no estate tax)?
That’s for the pundits to decide. We are not going to issue a Pinocchio ruling on the grounds that the issue of the estate tax has become so unmoored from the facts that it has moved into the realm of opinion. But we would urge foes of the estate tax to acknowledge that this is a problem that affects very few Americans. With land values increasing, some farmers may have a case. But the vast majority of taxpayers never have to worry about the estate tax.
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