ERS: Stepped-up basis tax proposal impacts 20% of farms

New tax liability hits farms representing 65% of total U.S. agricultural production.

Jacqui Fatka, Policy editor

September 30, 2021

4 Min Read

For months farmers have been concerned about proposed tax changes, including the elimination of stepped-up basis. New research from USDA’s Economic Research Service confirms those concerns are warranted as nearly 20% of farms could have an increased tax liability, including 65% of the value of U.S. farm production.

Although farmers breathed a sigh of relief when the initial tax changes out of the House Ways and Means Committee did not include a change in stepped-up basis, Democrat leaders may again reinsert some form of the stepped-up basis changes as it finalizes the second major partisan bill this Congress as part of the administration’s Build Back Better agenda.

John Newton, chief economist for the Senate Agriculture Committee Republicans, says as recently as last week Secretary of Agriculture Tom Vilsack was still defending these proposals on stepped-up basis to use capital gains tax changes to pay for the $3.5 trillion package, despite his own economist saying that it would impact a larger number of farms.

“Farmers and ranchers have been pretty vocal throughout this whole process that the elimination of stepped-up basis would be detrimental to farm operations,” Newton says. “And I think it’s important to continue that effort because we don’t know what we’ll see on the Senate package in terms of tax increases.”

Following the release of President Joe Biden’s American Families Plan released earlier this year which was the starting point for many of the legislative proposals now under consideration in the $3.5 trillion reconciliation package, USDA issued a statement indicating that 98% of farm estates will not owe any tax at transfer, provided the farm stays in the family.

Republican members of the Senate Agriculture Committee called on USDA to make public a detailed explanation and any supporting economic analyses that clarify how the Biden administration’s proposed tax increases would affect farm estates.

USDA finally provided its data in a report entitled The Effect on Family Farms of Changing Capital Gains Taxation at Death. The report used mortality estimates from the Social Security Administration to simulate the probability of a person’s death to generate an estimate of the number of farm estates that would be created as a result. Then using farm-level survey data, USDA estimated the impact of AFP tax proposals on family farmers and ranchers. 

ERS evaluated the American Families Plan, which proposes to eliminate stepped-up basis for inherited assets greater than $1 million for individuals’ estates and $2 million for married couples’ estates while deferring capital gains tax liability on business assets as long as the business remains family operated.

ERS found that of the estimated 32,174 family farm estates in 2021, 1.1% would owe capital gains taxes at death, 18.2% would not owe capital gains taxes at death but could have deferred tax liability if the farm assets do not remain family-owned and operated, and 80.7% would have no change to their capital gains tax liability.

ERS’ results show 15.5% of small farm estates (GCFI less than $350,000), 63.9% of midsize farm estates (GCFI between $350,000 and $1 million), 77.5% of large farm estates (GCFI between $1 million and $5 million), and 93.9% of very large farm estates (GCFI greater than $5 million) would have a deferred capital gains tax liability but no tax at death assuming an heir continues to operate the farm.

About 1.1% of all primary-operator family farm estates would owe capital gains tax at death. For these farm estates that would owe capital gains taxes on nonfarm assets at death, the average tax rate was estimated to be 11% of the value of total nonfarm assets.

Although those numbers might offer comfort for some, Newton says the big takeaway from the report is 65% of the value of ag production would have a new tax liability if we were to see the elimination of a stepped-up basis. “It’s a complete 180-degree reversal from what USDA said this spring in that only 2% of family farmers will be impacted by the elimination of stepped-up basis,” he says.

The additional taxable gain on farm assets across all affected estates averaged $1.8 million per farm family. The percentage of affected farmers is nearly 10 times higher than the administration’s claim that only 2% of family farms would be affected. According to USDA’s analysis, Newton found that by combining the deferred tax and the immediate tax for the total new tax liability, 17% of small farms, 66% of midsized farms, 80% of large farms and 96% of very large farm operations would have a new tax burden with the elimination of stepped-up basis.

Senate Agriculture Committee Ranking Member John Boozman, R-Ark., says the ERS report proves USDA’s “math was beyond fuzzy—it was outright wrong.”

Boozman continues, “By its own account, USDA now shows changes in stepped-up basis will saddle many family farms with millions of dollars in taxable gains that could be subject to capital gains tax rates as high as 43.4%. Put simply, USDA’s own economists have shown that the administration’s plans pose a threat to rural America.”

About the Author(s)

Jacqui Fatka

Policy editor, Farm Futures

Jacqui Fatka grew up on a diversified livestock and grain farm in southwest Iowa and graduated from Iowa State University with a bachelor’s degree in journalism and mass communications, with a minor in agriculture education, in 2003. She’s been writing for agricultural audiences ever since. In college, she interned with Wallaces Farmer and cultivated her love of ag policy during an internship with the Iowa Pork Producers Association, working in Sen. Chuck Grassley’s Capitol Hill press office. In 2003, she started full time for Farm Progress companies’ state and regional publications as the e-content editor, and became Farm Futures’ policy editor in 2004. A few years later, she began covering grain and biofuels markets for the weekly newspaper Feedstuffs. As the current policy editor for Farm Progress, she covers the ongoing developments in ag policy, trade, regulations and court rulings. Fatka also serves as the interim executive secretary-treasurer for the North American Agricultural Journalists. She lives on a small acreage in central Ohio with her husband and three children.

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