ERS: the reinforced basic taxation proposal impacts 20% of farms
For months, farmers have been concerned about the proposed tax changes, including the elimination of the enhanced base. New research from the USDA’s Economics Research Service confirms these concerns are justified, as nearly 20% of farms may have increased tax debt, including 65% of the value of U.S. agricultural production.
While farmers heaved a sigh of relief when the House Ways and Means Committee’s initial tax changes did not include a reinforced base change, Democratic leaders could once again reinsert some form of reinforced base change. as this Congress’ second major partisan bill is finalized as part of the administration’s Build Back Better program.
John Newton, the Republicans’ chief economist on the Senate Agriculture Committee, said last week Agriculture Secretary Tom Vilsack was still defending these proposals on a stronger basis to use the tax changes. on capital gains to pay off the $ 3.5 trillion package, despite its own economist saying it would impact more farms.
“Farmers and ranchers have made it quite clear throughout this process that removing the reinforced base will be detrimental to farms,” Newton said. “And I think it’s important to continue this 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 U.S. Plan for Families released earlier this year, which was the starting point for many legislative proposals currently under consideration under the $ 3.5 trillion reconciliation program. dollars, the USDA issued a statement stating that 98% of farm estates will owe no transfer tax, provided the farm remains in the family.
Republican members of the Senate Agriculture Committee have asked the USDA to release a detailed explanation and any supporting economic analysis that clarifies how the tax increases proposed by the Biden administration would affect the estates. agricultural.
The USDA eventually provided its data in a report titled The Effect on Family Farms of Changing Capital Gains Taxation at Death. The report used Social Security Administration mortality estimates to simulate the probability of a person’s death to generate an estimate of how many farm estates would be created as a result. Next, using farm-level survey data, the USDA estimated the impact of AFP’s tax proposals on family farmers and pastoralists.
ERS evaluated the American Families Plan, which proposes to eliminate the strengthened base for inherited assets greater than $ 1 million for estates of individuals and $ 2 million for estates of married couples while deferring tax on capital gains on business assets as long as the business remains family operated.
The ERS found that of the estimated 32,174 family farm estates in 2021, 1.1% should pay capital gains taxes on death, 18.2% should not pay capital gains taxes on death. death, but could have a deferred tax if the farm assets do not remain family owned and operated, and 80.7% would have no change in their capital gains tax liability.
ERS results show 15.5% of small farms (GCFI less than $ 350,000), 63.9% of medium-sized farms (GCFI between $ 350,000 and $ 1 million), 77.5% large farms (GCFI between $ 1 million and $ 5 million) and 93.9% of very large agricultural estates (GCFI over $ 5 million) would have a deferred capital gains tax, but no death tax, assuming an heir continues to operate the farm.
About 1.1% of all family farms where the primary operator would be liable for capital gains tax on death. For those agricultural estates that owed capital gains taxes on non-farm assets upon death, the average tax rate was estimated at 11% of the value of total non-farm assets.
While these numbers may reassure some, Newton says the big takeaway from the report is that 65% of the value of agricultural production would have to pay new tax if we were to see the elimination of a strengthened base. “This is a complete 180-degree reversal from what the USDA said this spring, in that only 2% of family farmers will be affected by the elimination of the base plus,” says he.
The additional taxable gain on farm assets in all affected areas averaged $ 1.8 million per farm family. The percentage of farmers affected is almost 10 times higher than the administration’s claim that only 2% of family farms are affected. According to USDA analysis, Newton found that in cumulating deferred tax and immediate tax for the total of the new tax debt, 17% of small farms, 66% of medium-sized farms, 80% of large farms and 96% of very large farms would have a new tax burden with the elimination of the increased base.
Ranking member of the Senate Agriculture Committee, John Boozman, R-Ark., Says the ERS report proves that “USDA’s calculations were more than fuzzy, it was downright false.”
Boozman continues, “On its own behalf, the USDA is now showing that changes in the strengthened base will impose millions of dollars in taxable earnings on many family farms that could be subject to capital gains tax rates of up to. reach 43.4%. Simply put, USDA’s own economists have shown that the administration’s plans pose a threat to rural America.