Following an outcry from farm groups and rural lawmakers, House Democrats proposed a tax package Monday that omits President Joe Biden’s proposal to tax capital gains at death.
Biden’s proposal would defer the tax liability on family farms for as long as they stay in operation, but ag groups said the tax would create a number of problems for farms, including making it harder for farmers to get loans on inherited land.
Under current law, heirs pay taxes only on the gain since the prior owner died, a benefit known as stepped-up basis. That policy would not change under the Democratic tax package.
A number of rural Democrats had raised objections to the Biden proposal, including House Agriculture Committee Chairman David Scott, D-Ga., and Sen. Jon Tester, D-Mont. Nearly 330 ag groups signed a recent letter urging the Democratic chairmen of the House Ways and Means and Senate Finance committees to preserve existing tax rules for inherited assets.
"The writing was on the wall because a bunch of rural Democrats said they didn’t want to see this change happen," said Brian Kuehl, a principal with the accounting and consulting firm K Coe Isom.
The tax package released by the Ways and Means Committee Monday morning is needed to fund the $3.5 trillion Build Back Better spending plan that Democrats want to enact this fall, and they are working with razor-thin margins in both the House as well as the 50-50 Senate.
Chuck Marr, senior director of tax policy with the Center for Budget Policy and Priorities, a progressive advocacy group, lamented Democrats' failure to include Biden’s proposed transfer tax.
"The most glaring omission in the House package is that it does not tax capital gains at death – i.e. people like Jeff Bezos and Elon Musk will continue to go through life and death without paying our main tax – individual income – on much of their income. Senate needs to fix,” Marr tweeted.
The tax provisions largely target corporations and high-income individuals. The corporate tax rate would rise from 21% to 26.5% for companies with income over $5 million, while the capital gains tax rate would be increased to 25% for high-income individuals and there would be a 3% surcharge on incomes over $5 million a year.
The corporate tax rate would remain 21% for income between $400,000 and $5 million and drop to 18% for earnings below $400,000, under the legislation. Some farms are structured as C-corps and pay the corporate rate.
The package also includes a change to a deduction related to estate taxation that could benefit agriculture. The limit on the Section 2032A valuation reduction for real property that is used in a family farm or family-owned business would be increased from $750,000 to $11.7 million. The provision is limited to land that will be used in the business both before and after the owner dies, and the reduction is limited to close relatives, according to Beth Swanson, a tax analyst with K Coe Isom.
The provision is seldom used by farms now, but the increase could make it more valuable to farms, even with the restrictions, and it also could come into play if the personal estate tax exemption is lowered at some point.
The personal exemption, which also is $11.7 million for 2021, is scheduled under current law to return to $5.5 million in 2026.
Reads like Chuck Marr doesn't much care for the proposal.