Estate tax laws passed last week by Congress – hailed as a victory by U.S. agriculture lobbying groups – will affect few farmers and ranchers because most don’t have enough assets subject to the tax, economist Neil Harl said.
Only the wealthiest landowners, many of whom don’t actually farm, would meet the tax thresholds, said Harl, professor emeritus of economics at Iowa State University. A repeal of the estate tax, which farm groups are pushing for, would benefit the biggest estates during a time when a billowing budget deficit means the government needs every revenue source it can get, he said.
Moreover, recent clamoring to reduce or eliminate the estate tax perpetuates the “myth” that the tax is destroying family farms, Harl said, reiterating a long-running criticism.
“It’s a rarity for a decedent to have a federal estate tax,” Harl said in a Dec. 20 interview. “They don’t have enough land or the farm assets to meet the threshold.”
“The whole thing has been spun artfully,” he said. “It’s a myth spun by people who have large estates.”
An estate tax, also referred to as a “death” tax, is imposed on property and other taxable assets of a deceased person. The new estate tax laws are part of an $858 billion tax package passed by the House Dec. 16 that extends Bush-era cuts until 2012 (the Senate approved the package earlier in the week).
Next year, the threshold for the estate tax will rise to $5 million from $3.5 million in 2009, while the estate tax rate falls to 35 percent from 45 percent. Couples will be allowed to pass up to $10 million from an estate to their heirs tax-free, with assets above $10 million to be taxed at 35 percent.
Agriculture groups have for years fought to have the tax reduced or eliminated, arguing it unfairly burdens farmers, who rely on numerous capital assets such as land and equipment. Critics say the tax often forces surviving family members to send land and buildings just to keep the operation going.
More recently, some agriculture groups painted pictures of financial doomsday had the estate tax not been lowered.
Many farmers and ranchers would have been forced to sell, further depopulating rural America, if the tax were allowed to revert back to the pre-2001 level of 55 percent on property valued at $1 million, according to a cattle group.
“Today is a great day for cattlemen and women,” Colin Woodall, vice president of government affairs for the National Cattlemen’s Beef Association, said in a Dec. 17 statement.
“Although we believe permanent repeal of this tax is the best answer, two-year relief for family-owned operations is better than the 55-percent tax that would leave many farmers and ranchers in a financial ruin,” said Woodall.
Such claims are exaggerated, Harl said, pointing to data that showed just a fraction of estates in recent years were subject to the tax.
During 2008, 0.7 percent of about 2.4 million U.S. deaths incurred estate tax liability and 0.08 percent, or approximately 1,800 estates, reported some farm property, Harl, citing a Congressional research, said in a report.
Of the 1,800 estates, 120 had farm property at an average value of $6.7 million, making them subject to the tax, according to the report. The remaining estates had average values ranging from less than $1.2 million to $2.5 million.
For the highest-value farm estates, “the benefit of repeal to that group would likely result in a portion of that amount going into farm assets,” Harl wrote.
“Over time, this would be expected to lead to a gradual increase in farm asset ownership by the very wealthy,” he said. “The proportion of land rented would be expected to rise as farmers would have an increasingly difficult time in competing for land ownership.”
The $3.5 million threshold, Harl said this week, is a “reasonable cutoff” for the estate tax, as is the 45-percent rate.
Of Congress’ new tax deal, Harl said he does not view it as good policy, “because the country is in the greatest need for revenue it has been in for 50, 60, 70 years. I don’t think this serves the public interest.”
For farmers such as Maureen Marshall, the estate tax changes came as welcome news. She and her two brothers own Torrey Farms, which grows cabbage, onions, potatoes and other crops on nearly 11,000 acres near Elba, N.Y.
Marshal, 58, says she’s concerned that a large tax hit threatens the ability to pass the farm down to her family’s subsequent generations – she and her brothers have six children between them.
The estate tax “would be a major impact on all three of us,” Marshall said. “We’ve spent the last 40 years building this business. You’re looking at tough decisions.”