A group of 13 House Democrats, led by Iowa’s Cindy Axne and California’s Jim Costa, is pressing party leaders to exempt family farms from a tax increase President Joe Biden has proposed on inherited assets to help pay for new child care, education and other spending.
Under Biden's $1.8 trillion package of family-related assistance, heirs would no longer receive "stepped up basis" for capital gains tax purposes, which resets the value of inherited property to the date of death. Instead they'd be liable for the tax on the full appreciation in value from the time the original owner purchased the assets, in some cases many decades earlier.
“The requirement to recognize capital gains at death runs the risk of forcing farms and ranches to sell part, or all, of a farm that may have been passed down for several generations in order to pay the tax burden,” the group wrote in a letter to Speaker Nancy Pelosi, House Majority Leader Steny H. Hoyer and Ways and Means Chairman Richard E. Neal.
Biden's proposal would start taxing gains on inherited assets above $1 million, or $2.5 million per couple factoring in the current tax exclusion for up to $500,000 in gains on a primary residence. Furthermore, Biden would raise the top capital gains tax rate from the current 23.8 percent to 43.4 percent for those earning above $1 million annually.
Biden’s proposal calls for "protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business," sparing them from having to pay the tax immediately upon the original owner's death.
But the White House's fact sheet doesn't provide any detail on how that exemption would work. And when the Joint Committee on Taxation analyzed a similar proposal from former President Barack Obama, the JCT found that such rules "are likely to be highly complex and, because of the attractiveness of the deferral benefit they provide, could become a significant source of disputes with" the IRS.
The rural Democrats joining Axne and Costa in the letter expressing concern about Biden’s proposal are Illinois’ Cheri Bustos; Minnesota’s Angie Craig; New York’s Antonio Delgado; Oregon’s Kurt Schrader; Virginia’s Abigail Spanberger; Arizona’s Tom O’Halleran; Washington’s Kim Schrier; and four Californians, Julia Brownley, Salud Carbajal, John Garamendi and Josh Harder.
House Republicans’ campaign arm is targeting most of those 13 Democrats in the 2022 midterms. Brownley and Carbajal are the only two not on the National Republican Congressional Committee’s list of incumbents they think they can oust.
Of those signing the letter, six are on the Democratic Congressional Campaign Committee's Frontline program list of lawmakers slated for special help with their midterm races: Axne, Craig, Spanberger, O'Halleran, Harder and Schrier.
“The repeal of stepped-up basis for capital gains and immediate taxation could especially hurt family farms, some of which have been in families for generations; therefore, we strongly urge you to provide full exemptions for these family farms and small businesses that are critical to our communities,” the group of Democrats wrote.
Groups like the American Farm Bureau Federation have fought against proposals to repeal stepped up basis for years.
In a report last month the Farm Bureau co-authored with the American Soybean Association, the groups looked at Agriculture Department data going back to 1997 and found the average value of cropland has risen 223 percent since then.
That could lead to such steep tax bills that affected farms would need years to pay it off, the report said. In a handful of states, including Iowa and Minnesota, the average increase in value tops 300 percent.
Some of the letter's signers are ready to work with the administration on the proposal, however, to ensure it only hits the wealthiest families.
In an interview, Axne said she thinks the exemptions Biden has proposed — deferring taxation on inherited assets above $1 million per spouse until the time of sale — is enough to mitigate against any unintended consequences.
“The land is worth quite a bit, but these are not your Jeff Bezos' of the world,” she said, referring to Amazon's founder, the world's richest person, according to Forbes. “In Iowa this barely impacts anybody.”
The Democratic letter-writers acknowledge that Biden’s intent is to ensure vast fortunes are not passed on without any taxation and that the president promised protections for family-owned businesses and farms. They ask Pelosi, Hoyer and Neal to work closely with them in drafting the legislation “to ensure those protections are well executed.”
One argument the Democrats make for a full exemption is the “administrative difficulties” of taxing farm assets compared to other inheritances like shares of stock that are easier to value.
“Taxing other assets when they’re sold gives a clear reference price for valuation, so capital gains taxes have thus far been relatively simple to administer,” they wrote. “However, since farms, machinery, and some small businesses may be illiquid or difficult to value, the administrative difficulty is increased.”
The Farm Bureau says the provision would reach further than Biden thinks it would.
“The value of many farms is tied up in land and equipment and most farmers don’t have large amounts of money on-hand to pay capital gains taxes. They could be forced to sell the farm or take out costly loans just to pay capital gains taxes,” American Farm Bureau Federation President Zippy Duvall said in a statement. “Eliminating the stepped-up basis isn’t a tax on the rich — it’s a tax on the middle class.”
'Sold a bill of goods'
Axne has similar goals. She wants to keep family farms in family hands and prevent sales or closures that would in turn impact other small businesses in rural communities that rely on farmers’ supply.
“I was out two weeks ago and I toured four farms ranging from organic farms to row crop farms to cattle producers. Every single one of them brought this up,” she said. “This is not a partisan issue here.”
Axne said her constituents are generally happy to see the wealthy pay their fair share of taxes as Biden has proposed, but she worries about misleading characterizations of his plan.
“I’ll be honest; they’re being sold a bill of goods by the Republicans,” she said. “I’m actually trying to get a bill that helps rural America. ... When I say I’m concerned about this, it’s because Democrats truly do care about rural America, and I’m really tired of hearing the lies that we don’t.”
Axne won reelection by less than 2 percentage points in 2020, in a district where voters narrowly favored President Donald Trump by 0.2 percentage points over Biden. She is considering a 2022 Senate bid against longtime Iowa GOP Sen. Charles E. Grassley, who used to chair the tax-writing committee.
Axne is confident the legislation can be written to protect family farms and businesses and that the dozen Democrats who joined her in the letter will push for the necessary exemptions.
“I’ve got 13 of us right now and I know there’s more,” she said. “Right now the math is showing me that the speaker would be wise to put this in. We’re sitting at a small majority.”
Democratic leaders will need those 13 members' votes if they want to push ahead with the tax offset, which Republicans universally oppose.
A day before the Democrats sent their letter, GOP Rep. Adrian Smith of Nebraska led more than 130 Republicans in writing to Pelosi and Minority Leader Kevin McCarthy with similar arguments about the impact Biden’s proposal would have on family farms and small businesses.
Unlike the Democrats, however, the Republicans are asking the stepped-up basis provision remain untouched because properly valuing appreciation to determine capital gains could be “expensive and difficult” or result in a “phantom gain” if the original value cannot be determined.