Texas A&M Study Analyzes the Impact of Inheritance Tax Code Changes on Farmers
The Sensible Taxation and Equity Promotion (STEP) Act and the 99.5 Percent Act were two bills introduced in the U.S. Senate. In a research study, the Agriculture and Food Policy Center at Texas A&M University found that if both the STEP Act and the 99.5 Percent Act were simultaneously implemented, 92 of the 94 representative farms in their study would be impacted, with additional tax liabilities incurred averaging $1.43 million per farm.
The Agriculture and Food Policy Center (AFPC) at Texas A&M University analyzed the impact of two pieces of legislation introduced in the U.S. Senate that would change the tax liabilities for generational transfers of farms and ranches. The results showed the majority of farms would be negatively impacted.
The Sensible Taxation and Equity Promotion (STEP) Act proposes to eliminate stepped-up basis upon death of the owner. While the 99.5 Percent Act would decrease the estate tax exemption to $3.5 million, or $7 million per couple, among other things.
Under current law, $11.7 million per individual and $23.4 million per couple in assets are exempted from estate tax when a farm owner dies. Then when the decedent passes farm assets to an heir, the heir is allowed to take fair market values as their basis in the property, otherwise known as stepped-up basis. These two rules protect most farms from estate taxes and capital gains taxes.
In their analysis, AFPC used their database of 94 representative farms in 30 different states in conjunction with a farm-level policy simulation model.
The results showed that under current tax law, only two of 94 representatives farms would be impacted by an event triggering a generational transfer. Under the STEP Act, 92 of the 94 representative farms would be impacted, with additional tax labilities averaging $726,104 per farm. Under the 99.5 Percent Act, 41 of the 92 representative farms would be impacted, with additional tax liabilities incurred averaging $2.17 million per farm.
“Given that cropland values have roughly tripled over the past 25 years, most producers are extremely sensitive to any changes to the estate tax exemptions or stepped-up basis,” explained AFPC’s report.
Sen. John Boozman, ranking member of the Senate Agriculture Committee and Rep. G.T. Thompson, ranking member of the House Agriculture Committee, asked AFPC to examine the impact of the proposed legislation on producers, prompting this study.
“The livelihoods of American farmers are on the chopping block with proposed changes to stepped-up basis and the estate tax,” responded Thompson, a Republican from Pennsylvania. “The economic harm that will inevitably fall onto on our farmers, ranchers, and producers is too great a burden to gamble with, even with proposed carve-outs and exemptions. The report released from the Agricultural and Food Policy Center underscores what the industry has known for years—new taxes on farmers are more than just an annoyance, they’re a generational threat to farm families.”
“The data speaks for itself and should give pause to anyone considering this approach as an option to pay for new additional federal spending,” said Boozman, a Republican from Arkansas. “If changes of these magnitude are pursued, as some have discussed, the economic harm it will cause will have a lasting impact on rural America.”