The Biden administration has come under fire over tax proposals that farmers groups argue will sabotage the handover of family farms to the next generation.
Their concerns center on a proposal to repeal ‘stepped-up basis’, whereby assets passed from the deceased to their heirs are effectively exempt from capital gains tax.
The White House also wants to raise the top capital gains tax rate from 23.8% to 28.8% as part of its $3.5 trillion budget reconciliation bill, which is currently stalled in Congress.
“If stepped-up basis is removed and forced recognition of gain at death is implemented, along with a lower inheritance tax exemption, farm assets like land and equipment would have to be liquidated to pay the tax bill,” Aaron Popelka, VP of legal and government affairs at the Kansas Livestock Association, told conservative publication The Center Square.
“Agriculture tends to be asset rich, but cash poor, and the effects of such policy changes would be devastating.”
The impact of the proposals would be felt keenly by small farms as well as large operators, added Popelka.
Status quo plea
The American Farm Bureau Federation, together with 46 state farm bureaus and 280 organizations representing family-owned agribusinesses, has weighed in on the issue too.
In a letter sent to Congress on September 8, they urged lawmakers to leave stepped-up basis intact, along with estate taxes, the 199A small business deduction and like-kind exchanges.
“The policies Congress enacts now will determine agricultural producers’ ability to secure affordable land to start or expand their operations,” said the letter. “Regardless of whether a business has already been passed down through multiple generations or is just starting out, the key to their longevity is a continued ability to transition when a family member or business partner dies.
“For this reason, we firmly believe the current federal estate tax code provisions must be maintained.”
That farmers are an ageing demographic served to underline the issue’s importance, said the federation.
“The number of farmers and ranchers 65 and older outnumber those 35 and under by a four-to-one margin,” it said, adding that “more than 370 million acres are expected to change hands in the next two decades”.
Conservation budget fears
The insurance company and lobbying group also referenced the critical role played by farmers and ranchers “in terms of natural resource and land conservation”, an area President Biden has earmarked for substantial investment in the budget reconciliation bill.
However, centrist Democrats are trying to slash the overall budget from $3.5 trillion to $2 trillion or less, raising concerns that conservation funding could be among the areas to suffer.
In a blog post published on September 23, The National Sustainable Agriculture Coalition urged Congress to spare conservation programs that are “oversubscribed and already forced to turn away eligible producers”.
It added: “Further cuts to conservation through sequestration, as included in the CARES act and the proposed bipartisan infrastructure package, come at the expense of water quality, soil health, climate change mitigation, and agricultural productivity.”
The Democrats want to give the Department of Agriculture $135 billion to spend over the next decade – a 9% increase on pre-pandemic levels – on initiatives that protect natural resources, promote biodiversity, and tackle and mitigate climate change.
Implications for farm buyers and sellers
Shrewd farmers and ranchers will keep a watchful eye on how the current wrangling in Congress plays out, and consider the implications for their future.
The tax proposals, if enacted, may well prompt some farmers approaching retirement to consult tax advisors, and perhaps eventually sell their assets rather than keep them within the family.
And prospective buyers of farms may well factor in the subsidies, grants and tax exemptions on offer when evaluating the kind of agricultural assets they want to acquire.