A major piece of the Biden administration’s Build Back Better plan includes significant tax changes. Several members of Congress continue to seek out additional insight on how proposed changes could impact their rural constituents.
The plan would eliminate the step up in basis above $1 million per individual or $2 million per couple. Second, the plan would increase the capital gains tax to as much as 43.4% for individuals with an income over $1 million. And finally, the plan would place a cap on the use of like-kind exchanges.
In announcing the administration’s proposed tax changes including the elimination of the stepped-up basis and higher capital gains taxes, USDA issued a statement indicated that 98% of farm estates will not owe any tax at transfer after a death, providing the farm stays in the family. However, Republican members of the Senate Agriculture Committee sent a letter to Secretary of Agriculture Tom Vilsack seeking additional information as to how USDA reached that figure.
“We are deeply concerned about the impact of these proposed tax policy changes on America’s family farms and ranchers,” the letter states.
Some estimate as many as 84% of farmers could be impacted by the proposed tax changes on capital gains and stepped-up basis.
The committee’s ranking member Sen. John Boozman, R-Ark., led the efforts, along with Sens. Chuck Grassley, R-Iowa, Cindy Hyde-Smith, R-Miss., Roger Marshall, R-Kan., Mike Braun, R-Ind., Tommy Tuberville, R-Ala., John Hoeven, R-N.D., and Joni Ernst, R-Iowa.
“The proposed tax impacts are dependent on a number of factors, including but not limited to appreciation in farmland assets prior to a property owner's death, size of the farm operation and associated assets, income of the heirs, and the farm's ownership structure. Given these factors, we are writing to seek a detailed explanation and supporting economic analysis clarifying how these tax provisions will affect farm estates, including specifically how USDA arrived at the conclusion that fewer than 2% of farm estates will be impacted by the proposed tax changes,” the senators wrote.
Related: Tax policy changes troubling farmers
The letter also asked for an explanation on what special rules or exceptions would exist for farm estates and to include a breakdown of the analysis by farm type and farm size.
A major concern of the tax proposal includes the elimination of the stepped-up basis. The basis in the property received by an estate is generally “stepped up” to the fair market value of the property at the time of the decedent's death. However, farm operations tend to be “asset rich” and “cash poor.”
Grassley also took the opportunity to question Biden’s nominee to head the Office of Tax Policy within the Department of Treasury on the potential devastating effects repealing stepped-up basis rules could have on American family farms and small businesses. In a Senate Finance Committee hearing May 25, Grassley questioned Lily Lawrence Batchelder, nominee to be assistant secretary of tax policy, on how Biden plans to change rules related to transferring appreciated assets without hurting family farms around the country.
Grassley shared that Congress attempted to eliminate stepped-up basis in the Tax Reform Act of 1976. This proposal did not subject the gains to an immediate tax but generally replaced the stepped-up basis with the carry over basis. “This proved very unworkable and led to outcries,” Grassley shared and detailed how he worked with Sen. Robert Byrd, D-W. Va., to postpone the rule and ultimately repealed it in 1980.
Batchelder said in response to the questioning that she’s aware of the provision passed in the 70s that was repealed before it was enacted, but also said she understood it was not well-designed. In the Bush tax cuts, when the estate tax was phased out in 2010, the basis in assets transferred from a decedent was no longer stepped up; instead, a modified carryover basis regime took effect.
Batchelder said she has not heard of very large issues that happened because of that but would be interested to looking into that further.
She also again noted that the treatment of family and farms as she understands it would delay any tax due for all family farms until it was no longer owned and operated by that same family.
Batchelder previously served as the chief tax counsel under former Senate Finance Committee Chairman Max Baucus, D-Mont. During her opening testimony she committed to engaging with the members on a bipartisan basis.