Some farmers are pushing back against a proposal by the Biden administration that would raise taxes on some inherited assets, saying it could hurt multigenerational businesses.
A group of Republicans, led by House Ways and Means Committee ranking member Kevin Brady of Texas and Rep. Adrian Smith of Nebraska, hosted a virtual event on Tuesday where they brought on three different owners of farms and businesses. The landowners expressed fear about the future of their enterprises if the Biden administration eliminated a provision of the tax code known as the step-up in basis.
The step-up in basis allows inherited assets to be taxed at the basis value of when they were inherited rather than the basis value of when they were first purchased. It can allow the appreciation of an asset over the course of a decedent's life to go untaxed, although the estate tax may apply. Democrats argue that it affords the wealthy a loophole to keep assets without paying taxes, but Republicans say that the policy doesn’t just affect the wealthiest people but also farmers and small businesses.
President Joe Biden’s American Families Plan would end the stepped-up basis for gains above $1 million or $2.5 million per couple when combined with existing real estate exemptions. The White House has also said it will be “designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business,” although specifics about how that would work have not been proposed.
Brady said on Tuesday that rolling back the stepped-up basis, what he branded as a “supercharged second death tax,” would destroy the country’s family-owned farms, ranches, and small businesses. One of the ranchers opposing the change is Pat McDowell of Shamrock, Texas.
“Our estate plan has been centered on using stepped-up basis. The Biden administration proposal totally undermines our estate plan. This plan punishes our family just because we want the next generation to be able to make a living in agriculture,” he told GOP lawmakers on Tuesday.
McDowell said that land he and his family had been gifted three decades ago, plus other purchased and paid-off parcels, are now valued at three to four times what they paid for it. He said that while it isn’t his family’s plan to sell any of the land, if sometime down the line the agriculture economy ends up in dire straits and hurts the ranch, he wants his relatives to be able to sell portions of the land in order to cover losses.
“That’s kind of our safety net. If they do not get the stepped-up basis in the land, they’ll have to sell much more land to pay this new tax,” he said. “If very much land has to be sold, the entire ranch is not economically viable, and then we’d be out of business.”
McDowell said that Biden’s tax proposals would be “death” for his family’s ranch and that their cows, tractors, and property would be up for a fire sale just in order to pay taxes. “No one can make an estate plan that bypasses capital gains at death,” he said.
Similarly, Don Batie, who owns Batie Cattle Co. with his wife Barb on a family farm northeast of Lexington, Nebraska, said that he and his wife own 75% of the stock, with his siblings and daughters owning the rest. He is the fourth generation to operate the farm since his great-grandparents immigrated in 1873 and homesteaded there and said that changes to the tax code could threaten the farm’s future.
Batie said that elimination of the stepped-up basis would make it difficult for a family-owned business such as his to continue another generation, adding that his daughters are hoping to continue their farming legacy when he retires in a few years. He said that he and his wife can’t afford to sell them the land with the capital gains taxes that they would face right now.
“They will have to wait until we die to have that opportunity, and then they still face a capital gains tax if stepped-up basis is lost,” Batie said. He emphasized that he thinks that multigenerational family businesses give communities like his stability.
“In my community, we now have many new minority-owned businesses, and we would like them to be able to continue as they are becoming the new bedrock of our town,” he said. “If we lose that stepped-up basis and assess capital gains taxes at time of death, they will not survive.”
Mike Gilmartin, president and CEO of Washington state-based Commercial Creamery Company, which was founded in 1908, said that it has been his job to protect the family business and pass it along to the next generation. Gilmartin said that if the stepped-up basis is altered to make his death a taxable event, there would be no way his children could pay that tax.
“It’s already extremely difficult to carry a family business into the third and fourth generations,” he said. He pointed out that he found it ironic that a proposal to change the stepped-up basis is part of the American Families Plan because, he said, it could cause family businesses across the country to fall apart.
While Biden’s plan to alter the stepped-up basis is still only in broad strokes, some Democrats have expressed apprehension about the notion. House Agriculture Committee Chairman David Scott, a Georgia Democrat, said earlier this month that he was “very concerned” that some of the proposals to raise revenue could hurt farmers.
During a Tuesday afternoon call with reporters, Brady said that, by his count, more than a dozen Democrats “have expressed real concern” to House leadership about the possibility of changes to stepped-up basis.
“Right now though, President Biden and Speaker Pelosi have it positioned to be jammed through the House on a party-line vote in reconciliation,” he said in response to a question by the Washington Examiner, adding that he thinks several centrist Democrats might not be reelected in 2022 should they vote in favor of some of Biden’s tax proposals such as the stepped-up basis.
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