Taking away stepped-up basis would impose $680,000 tax on typical Iowa farm
Dem Ag Committee Chairman: “This would make it more difficult for young, beginning, and socially disadvantaged farmers to get into farming.”
President Biden’s plan to take away stepped-up basis will impose a second Death Tax on the American people. It will hit a typical Iowa farm with $680,000 in new taxes.
As noted by the Iowa Torch:
The planned exemption for a married couple is a million dollars. Any excess would likely be taxed at about 40%. Given the average Iowa farm size of 359 acres at the current value of $7,559 per acre, that would leave the couple with $1.7 million exposed to taxes.
That amount is after the exemption is figured. The tax bill could reach as much as $680,000.
Biden and congressional Democrats are right now trying to eliminate step-up in basis. Elimination of stepped up basis would impose an automatic capital gains tax at death — separate from, and in addition to — the Death Tax.
This forced capital gains tax from Biden will hit Americans regardless of whether assets are sold or kept.
In this video, you can see a sample of the many times Biden has threatened to eliminate step-up in basis.
PUSHBACK FROM CONGRESSIONAL DEMOCRATS
But Democrats are getting an earful from their constituents. And some prominent Democratic congressmen are sounding the alarm.
House Agriculture Committee Chairman David Scott (D-Ga.) sent a letter to Biden stating:
I have serious concerns about proposed changes in tax provisions that could hurt our family farmers, ranchers and small businesses.
I am very concerned that proposals to pay for these investments could partially come on the backs of our food, fiber, and fuel producers. In particular, “step-up in basis” is a critical tool enabling family farming operations to continue from generation to generation. The potential for capital gains to be imposed on heirs at death of the landowner would impose a significant financial burden on these operations. Additionally, my understanding of the exemptions is that they would just delay the tax liability for those continuing the farming operation until time of sale, which could result in further consolidation in farmland ownership. This would make it more difficult for young, beginning, and socially disadvantaged farmers to get into farming.
While I appreciate that the proposal provides for some exemptions, the provisions could still result in significant tax burdens on many family farming operations.
STEPPED UP BASIS WAS ONCE KILLED IN THE 1970s, WITH DISASTROUS RESULTS
Biden was in the Senate the last time congress took away stepped up basis. In 1976 congress eliminated stepped-up basis but had to reverse course.
As noted in a July 3, 1979 New York Times article, it was “impossibly unworkable”:
Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.
As noted by the NYT, intense voter blowback ensued:
Not only were there protests from people who expected the tax to fall on them — family businesses and farms, in particular — bankers and estate lawyers also complained that the rule was a nightmare of paperwork.
So, Biden saw all of that first hand and STILL wants to take away stepped-up basis. Iowa Senator Chuck Grassley has a powerful op-ed in the Wall Street Journal on this episode.
I introduced Arley Wilson, an Iowa “country lawyer” who schooled policy makers on the impracticality and inefficiency of the tax law. He brought 35 years of experience in probate to the table. He explained how its application on top of the estate tax would be the “death knell” for family farms and small businesses. Among other issues, it would require complex reconstruction of the decedent’s assets, give rise to extended audits, and trigger litigation for next of kin. Eliminating step-up in basis is another post-death tax grab, adding punitive taxes on thrift, savings and investments.
Congress realized its mistake and voted in 1978 to suspend carryover basis and repeal it in 1980—both with then-Sen. Biden’s support. He’s forgotten the lesson he should have learned.
Four decades later Democrats want to dismantle a century-old tax law that has stitched the economic and social fabric of American agriculture together for generations. The 1921 Revenue Act codified step-up in basis at death. It has allowed property and livelihoods to be passed on to the next generation without a confiscatory tax.
HOW THE BIDEN PLAN WOULD WORK
In a Forbes piece titled “This Biden Tax Hike Hike Will Hit Mom & Pop Hard” tax lawyer Robert W. Wood writes:
Under current tax law, assets that pass directly to your heirs get a step-up in basis for income tax purposes. It doesn’t matter if you pay estate tax when you die or not. For generations, assets held at death get a stepped-up basis—to market value—when you die. Small businesses count on this.
Biden’s proposal would tax an asset’s unrealized appreciation at transfer. You mean Junior gets taxed whether or not he sells the business? Essentially, yes. The idea that you could build up your small business and escape death tax and income tax to pass it to your kids is on the chopping block. Biden would levy a tax on unrealized appreciation of assets passed on at death. By taxing the unrealized gain at death, heirs would get hit at the transfer, regardless of whether they sell the asset.
As reported previously by CNBC:
“When someone dies and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center.
As reported by Richard Rubin of the Wall Street Journal:
Manufacturers and farmers, who tend to be more asset-rich and cash-poor, are watching closely for those details, concerned they might have to sell illiquid businesses to pay the taxes.
Courtney Silver, president of Ketchie Inc., a family-owned, 25-employee machine shop in Concord, N.C. that started in 1947, said she was concerned about the potential impact.
“I really can’t imagine being hit with that decision of that potential tax implication,” said Ms. Silver, 40 years old, who took over the business when her husband, Bobby Ketchie, died in 2014. “That to me is really hard to wrap my head around.”
It could be challenging for asset owners to figure out their tax basis, which is what they paid for the property and invested in it. That complexity is part of what doomed a similar proposal in the late 1970s, which Congress passed, then delayed, then repealed.
As noted in an Ernst and Young study, if a small business is unable to provide sufficient evidence to prove the cost basis of an asset, then it may set to $0. In other words, tax would be applied to the entire value of taxpayer assets:
“Family-owned businesses may also find it difficult to comply because of problems in determining the decedent’s basis and in valuing the bequeathed assets. It seems likely that these administrative problems could lead to costly disputes between taxpayers and the IRS. Additionally, if sufficient evidence is not available to prove basis, then $0 may be used for tax purposes. This may result in an inappropriately large tax at death.”
It is appalling that Biden is trying to take away stepped-up basis. He also wants to raise the federal corporate tax rate to a higher-than-China rate of 28% and wants to impose the highest capital gains tax since Jimmy Carter in 1977. His plan would also hit nearly two million small businesses with tax increases — all while Americans try to dig out from the pandemic.