In a November 6 statement to the U.S. Treasury Department, American Farm Bureau Federation (AFBF) tax specialist Pat Wolff testified her organization “remains committed to full repeal of the federal death tax” because of its potential to prevent the transfer of farms from one generation to the next.
Wolff, participating in a Treasury Department roundtable on jobs, growth, and abolition of the death tax, said “death taxes have long been a concern for farmers and ranchers, and Farm Bureau members consistently list it as the organization’s top tax priority.
“While other sectors of the economy have similar concerns, farmers and ranchers are particularly sensitive to the death tax issue for several reasons,” Wolff continued. “Most notably, farm and ranch estates face heavier, potentially more disruptive death tax burdens than other estates.”
Death taxes fall more heavily on farm and ranch estates because they typically own more property (land) than the average homeowner, and that land is valued more highly than other land. The death tax is potentially more disruptive to farm and ranch families because, since the land is both valuable and productive, those families desire to keep the property in the family and prefer not to sell at the time of the death of a head of household.
Wolff said that in the late 1990s, roughly twice as many farm estates paid federal death taxes as did estates in general, given the higher valuation of the farm land. Moreover, the average death tax paid by farm estates was greater than what was paid by most other estates that paid taxes.
Opponents of death tax repeal claim no farm families have been hurt by the current death tax. But three case studies appear on a Web site, http://www.deathtax.com, created and maintained by The Seattle Times.
California Ranch at Risk
Tim Koopman’s family has owned ranch property in California for most of this century. His children would like to continue to run the ranch, but the death tax may prevent this.
Since Tim’s mother died four years ago, the Koopmans have paid about $400,000 in death taxes. For three of those years, however, Tim has been able to pay only the interest on the death tax bill, and soon he will not be able to pay that without selling some or all of his land. This is a decision he does not want to face. This land is an important part of his life.
The Koopmans faced the death tax once before. In 1973, Tim was forced to sell one of the family’s ranches to pay the $125,000 death tax bill he owed when his father died. Now the family faces the death tax again. Tim wants to pass the ranch on to his children, but the hefty death tax may leave little ranch for him to do so.
Idaho Rancher Faces $3.3 Million Tax Bill
Lee Ann’s family owns a ranch in Idaho. They have lived there for three generations, providing jobs for the local economy and helping to create a strong community. The family did not acquire a lot of material wealth, so it came as a great shock when the government hit them with a $3.3 million death tax bill after their father’s death.
Although the death of Lee Ann’s father was devastating, the death tax bill made it worse. The family had no debts and owned their land outright; they thought they had nothing to tax.
However, their land had increased in value enough to trigger the death tax. Lee Ann’s mother, who has been under tremendous strain since her husband’s death, is haunted by the realization that after she dies, her family may lose the ranch because of this tax.
Another concern is who will buy the ranch if they are forced to sell. Lee Ann worries that, as is the case with so many other properties, the purchaser will not be another family rancher, but rather a wealthy absentee owner who flies in once or twice a year for a vacation. This has been happening more frequently in Idaho, and the sense of community that Lee Ann enjoyed for most of her life is quickly being lost.
Colorado Family Could Face $200 Million Tax Bill
Robert Sakata is a 42-year-old vegetable farmer from Brighton, Colorado. Back in 1944, his father paid $6,000 for 40 acres of land to begin a family farm. Six years later, he purchased additional land for $700 an acre. Today, the elder Sakata is 73 and owns 2,000 acres of farmland near the Denver International Airport–a piece of land worth nearly $380 million.
This might seem like a wonderful situation for the Sakata family, yet the family owns no other investments; after the elder Sakata and his wife pass away, Robert will face a tax bill of more than $200 million. Robert has admitted he would have to sell off half the farm and lay off many of his 350 workers “who are like family.” “We don’t live like millionaires,” Robert has stated. “We’re just trying to sustain a family business.”
They will have a difficult time. The death tax will force them to lay off workers and sell land that has been part of the family for more than five decades. This treatment of hardworking successful citizens is hardly the story line for an American dream.
According to Heritage Foundation economist William W. Beach, “The death tax is the nightmare of the American dream.”
Changes in the Law Don’t Help
The Unified Federal Gift and Estate Tax Credit allows all American citizens to pass a certain amount of their estate to heirs tax-free. While the credit can be used during one’s lifetime, it is more commonly used after someone has died and the estate is being distributed.
Under provisions of the Taxpayer Relief Act of 1997 and the Tax Relief Act of 2001, the Unified Credit has been gradually increasing. The credit will increase from $1 million per taxpayer in 2002 and 2003 to $3.5 million in 2009.
In addition, the top estate tax rate will be falling gradually until 2010. The top marginal rate will decline from 50 percent in 2002 to 45 percent in 2009. In 2010, the rate is zeroed out.
But unless Congress acts to make the credit and rate reforms permanent, between 2011 and 2013 the top estate tax rate will revert to its 2002 level of 50 percent, and the Unified Credit will fall again, to the 2002 level of $1 million.
“The reinstatement of death taxes in 2011 would translate into a wider range of medium and large farm estates owing more taxes in 2011 than in 2001 before the latest round of reforms began,” Wolff said.
A tax burden of that magnitude would be large enough to disrupt farm and ranch operations, Wolff said, and exacerbate for a growing number of families the problem of transferring farms and ranches from one generation to the next.
“These are the farms and ranches that produce more than 80 percent of all agricultural production in the United States,” Wolff said. “When the death tax disrupts these farms, it disrupts a very critical part of the U.S. economy and our future ability to maintain production of food and fiber.”
John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].
For more information …
The National Tax Limitation Committee makes available online a petition calling for repeal of the death tax. You can sign the petition at https://www.ifr-ors.com/ors_2_live/clients/NTLC/deathtax_petition/index.cfm?A=0&L=NULL&P=NULL.