WASHINGTON – Rural Democrats warned Thursday of the Biden government’s plan to tax unrealized capital gains on death, saying they were concerned about the potential impact on family businesses.
In a letter to leaders, 13 members said they appreciated the government’s proposal so far to allow farms and family-owned businesses to defer taxes if they remain under family control and ownership. They said they would press for strong farm protection as the plan moves forward and details are written.
“I’m all in favor of Jeff Bezoses of the world paying their damn fair share because they can afford it and we need it,” said Rep. Cindy Axne, D., Iowa, the letter’s lead author, Thursday. “But we cannot have an unintended result of losing family businesses.”
Other signatories are Rep. Jim Costa (D., California), Abigail Spanberger (D., VA) and Kurt Schrader (D., Erz).
The Democrats’ letter doesn’t draw red lines, unlike a Republican letter this week that raised similar concerns and opposed a change to the rules on capital gains. With Democrats in the House of Representatives having a small advantage of 218-212, only a handful of Democrats could hold back President Biden’s broader plans to collect taxes and use the money for preschool, child tax credits, and other initiatives.
“I set the marker and I have 13 colleagues who say we agree,” said Ms. Axne. “And a lot of us come from really difficult places.”
President Biden’s tax plan would increase the highest tax rate on capital gains from 23.8% to 43.4%. It would also change what happens when people die with unrealized gains on stocks, land, companies, or other assets.
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Currently, there is no capital gains tax payable after death, and heirs only have to pay the tax if they sell the asset and then only on the increase in value since the previous owner’s death. Inheritance tax is separate and applies to wealth after death and only above an exemption of $ 11.7 million per person, which spares almost all farms.
Democrats say that today’s rules offer an unjustified breach to a handful of very wealthy people and miss a huge appreciation in income tax. Under the Biden proposal, capital gains would be taxed as sold on death, with an exemption of $ 1 million per person and existing exclusions for primary residence.
The plan also includes a special rule for farms and family businesses: heirs who continue to own and operate the business can defer paying the tax until they sell or no longer run the business.
The U.S. Department of Agriculture says these rules mean that more than 98% of farms owe no taxes if the farm remains family-owned, with the remainder paying on their non-farm assets.
“Nobody should have to sell a family farm they inherit to pay taxes, and the president’s tax reform guarantees it,” the department said in an April 28 statement.
These proposals come on top of Mr Biden’s proposal to limit the ability of property investors to defer capital gains on property exchanges, a change that could affect many farmers.
A dairy farm in Westby, Wisconsin, last October.
Photo:
kerem yucel / Agence France-Presse / Getty Images
The American Farm Bureau Federation will tackle any effort to change capital gains taxes, said Pat Wolff, the group’s senior director of congressional relations. She said the government’s idea of deferring taxes on family owned and operated businesses still needs work to protect farmers who are rich in land and poor in money.
“It’s a very simple statement, and the way farms move from one generation to the next is very complicated,” she said. “The administration couldn’t provide many details.”
There could also be administrative challenges in determining the cost base for assets acquired long ago. Similar concerns helped frustrate an earlier attempt to change capital gains tax rules in the 1970s.
In addition, Congress’s leading proposals to amend the rules on capital gains on death do not yet provide specific farm exemptions, although they allow payments to illiquid assets to be spread out over 15 years in the Senate Constitution and seven years in the House of Representatives execution.
Rep. Bill Pascrell (D., NJ), the House lead author, said current tax rules, which allow unrealized gains to evade income taxation, are a major cause of inequality. The current rules reduce federal revenues by more than $ 40 billion a year.
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“Of course we would be open to discussions about ways to strengthen our legislation to reform our tax system,” he said. “But ultimately, our main focus remains on bridging this gap, because its abuse by the super-rich must end.”
It may prove difficult to devise rules that will satisfy the Farm District Democrats without others being able to take advantage of them. Wealthy non-farmers have long found ways to get agricultural tax breaks. For example, former President Donald Trump brought goats to his New Jersey golf courses to lower property taxes.
“The more of these nuances you write, the more estate planners try to move other assets into family businesses to protect them,” said Jennifer Bird-Pollan, professor of tax law at the University of Kentucky. “Much of this is more of a political issue than an actual tax consequence for real people.”
Canada, which has taxed capital gains on death for nearly 50 years, has no general exemption, but there is a special exemption for farm and fishing property, as well as deferred payments if those businesses remain in families. Canada has no estate tax.
JR Peterson grows soybeans and corn on 700 acres in northern Iowa that has been in his wife’s family for three generations and is concerned about the possible changes. Even if there is a spin-off for farms that stay in a family, he fears that his children will face a million-dollar tax burden if they sold the family’s land after inheriting.
“We don’t consider ourselves rich, we scratch and scratch for everything,” said Mr Peterson. “If something like this went off, there are a lot of people who are responsible for putting safe and healthy food on the tables of people who are going to be massively affected.”
On Thursday in Kentucky, Senate Minority Chairman Mitch McConnell (R., Ky.) Highlighted the capital gains tax changes when he criticized Mr Biden’s broader agenda.
“These are not necessarily rich people, these are people who have worked hard their entire lives and want to leave their family farm or small business to their children,” he said. “I or don’t think any of my Republican colleagues would be willing to support this.”
– Rachel Louise Ensign and Andrew Duehren contributed to this article.
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Write to Richard Rubin at richard.rubin@wsj.com
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