Even Some Democrats Are Warning Against A New Backdoor Death Tax On Family Farms And Small Businesses

Former Senate Democrats From Rural States Warn ‘Eliminating The Step-Up Would Devastate Family-Owned Businesses, Ranches And Farms’ Because ‘All Of A Sudden, For The First Time, We Are Going To Be Taxing Unrealized Capital Gains’

FORMER SEN. MAX BAUCUS (D-MT), Former Senate Finance Committee Chairman: “Congress is considering a provision that would hit family businesses with taxes they can’t pay. This proposal would eliminate the step-up in basis at death on capital gains of more than $1 million and $2.5 million for couples. That means family businesses would have to pay taxes on their appreciated value even if that value is still locked up in the business. Eliminating the step-up would force family businesses and ranchers to liquidate when an owner dies and to lay off employees while bringing in little revenue for Uncle Sam. Lawmakers should know this is a mistake. In 1976 and again in 2010, Congress passed legislation eliminating the step-up in basis. Both times it had to be reinstated because of the devastating effects on family-owned businesses. Proponents try to temper criticism by suggesting carve-outs, but we’ve learned from experience that they are ineffective. Congress tried that in 1997 for inherited family-held businesses but the exceptions were too narrow to benefit anyone, and widening them would have been tantamount to repealing the estate tax altogether…. Eliminating the step-up would devastate family-owned businesses, ranches and farms. That’s why I call on Democrats to preserve the step-up as it is.” (Max Baucus, Op-Ed, “A Tax Plan to Destroy Farms and Ranches,” The Wall Street Journal, 9/01/2021)

FORMER SEN. HEIDI HEITKAMP (D-ND), Former Senate Agriculture Committee Member: “I’m trying to sound the alarm, both economically and politically, for Democrats that this is not a path to walk…. The disruption that it would create for small family business and farmers and family assets is not worth the pain…. The piece of this that I find most troubling is that all of a sudden, for the first time, we are going to be taxing unrealized capital gains…. My position has always been you ought to realize the capital gain…. Family assets are about more than a balance sheet…. Family assets are about where we work, where we live and where we recreate. When you look at taxing unrealized capital gains, what you are doing is opening up a Pandora’s box that won’t be closed for a long, long time.” (“Former Sen. Heidi Heitkamp, A Democrat, Says Biden’s Plan To Tax Assets At Death Would Hurt Family Businesses,” CNBC, 9/01/2021)

• “Former Sen. Heidi Heitkamp, one of the Democratic Party’s leading voices on tax policy, said President Joe Biden’s proposal to tax appreciated assets upon death would hurt family farms and family-owned businesses…. Her opposition to Biden’s plan is the immediate tax upon death, she said. Families should only owe a capital gains tax when the asset is sold and the gain is realized, she said…. She gave an example of a truck driver named Sam, whose family has owned a lake cabin in Minnesota for generations and has seen its value skyrocket over time with gentrification. Next door, a wealthy buyer buys a piece of land for $2 million and builds a $2 million mansion. If both die, the wealthy owner could pass his property to his family and pay no tax, since they would have a high, current basis. Sam’s family, however, would potentially owe millions in taxes when he died, even if the family doesn’t sell the property. She said the same would apply to family-owned businesses and farms.” (“Former Sen. Heidi Heitkamp, A Democrat, Says Biden’s Plan To Tax Assets At Death Would Hurt Family Businesses,” CNBC, 9/01/2021)

Even A Number Of House Democrats Are Concerned This Tax Hike Could Result In ‘Losing Family Farms’

“Rural Democrats issued a warning Thursday about the Biden administration’s plan to tax unrealized capital gains at death, saying they are worried about the potential impact on family farms…. ‘I’m all in support of the Jeff Bezoses of the world paying their darn fair share because they can afford it and we need it,’ Rep. Cindy Axne (D., Iowa), the letter’s lead author, said Thursday. ‘But we can’t create an unintended outcome of losing family farms.’ Other signers include Rep. Jim Costa (D., Calif.), Abigail Spanberger (D., Va.) and Kurt Schrader (D., Ore.)…. ‘I’m laying down the marker, and I’ve got 13 colleagues who say we agree,’ Ms. Axne said. ‘And many of us come from really difficult seats.’” (“Farm-District Democrats Raise Caution Flag on Capital-Gains Tax Plan,” The Wall Street Journal, 5/06/2021)

• “But the idea is running into intense opposition, with even some Democrats uncomfortable with the proposal. Last week, House Agriculture Chair David Scott (D-Ga.) called the administration’s plan ‘untenable.’” (“Democrats Struggle With Plan To Tax Dynastic Wealth,” Politico, 6/08/2021)

FLASHBACK: Last Month, The Senate Voted 99-0 To Oppose These Proposed New Taxes On Family Farms And Small Businesses

No senator voted against Sen. John Thune’s (R-SD) amendment opposing a proposed tax on family farms and small businesses by eliminating stepped-up basis protections in the tax code. (S.Amdt.3106, S.Con.Res.14, Roll Call Vote #318: Adopted 99-0: D 48-0; R 49-0; I 2-0, 8/10/2021)

Senate Republicans: It Would Be ‘A Significant Tax Increase That Would Hit Family-Owned Businesses, Farms, And Ranches Hard’ As ‘Democrats Foist The Bill For Their Reckless Taxing And Spending Spree On Rural America’

SENATE REPUBLICAN LEADER MITCH McCONNELL (R-KY): “President Biden campaigned on a pledge not to raise income taxes on the vast majority of Americans. But the latest reckless taxing and spending spree that Democrats are cooking up would crush our country with a historic set of sweeping tax hikes. Here’s one of the targets in their crosshairs: Family farms. It appears our colleagues’ plan will eliminate tax rules that allow family property to be passed down without facing a new devastating tax burden. Without the fix in question – the so-called stepped-up basis for capital gains taxes – scores of family businesses across America could feel a massive squeeze. In states like Kentucky, family farms drive the rural economy. But as I’ve heard from many of my state’s family farmers, it’s operations like theirs that are especially at risk. … Family farming in the Commonwealth isn’t just a way of life. It’s considered a birthright. But if Democrats foist the bill for their reckless taxing and spending spree on rural America, a lot of this heritage could be ripped out of families’ hands and put on the auction block.” (Sen. McConnell, Remarks, 7/21/2021)

• LEADER McCONNELL: “In states like Kentucky, family farms drive the rural economy. But as I’ve heard from many of my state’s family farmers, it’s operations like theirs that are especially at risk. One Kentucky farmer said his family has worked the same land in Muhlenberg County for nearly 150 years. He had hoped to one day pass his property along to his children, just like it was passed to him. But after generations spent improving and investing in the same farm, he’s worried it could all be gone in the blink of an eye. Another Kentuckian described how her family, like many farmers, is ‘asset rich [but] cash poor.’ If the stepped-up basis is eliminated, her family could lose the home, barns, machinery, and fields that have been their life’s work.” (Sen. McConnell, Remarks, 7/21/2021)

SENATE REPUBLICAN WHIP JOHN THUNE (R-SD): “[I]t is stunning that President Biden is proposing new tax increases on family-owned businesses and agricultural producers to pay for his $3.5 trillion reckless tax-and-spending spree. The U.S. tax code allows family-run businesses to be passed down to the next generation without imposing capital gains taxes on the built-in gains from the prior generation. After all, many of these ‘gains’ are unrealized – the price of the land may have risen since being owned by previous generations, but farmers aren’t seeing a penny of actual gain. It’s called ‘step-up in basis,’ and it prevents families from paying a fortune when a loved one dies. But the Biden administration is targeting this longstanding part of the tax code as it scrambles to pay for its far-left crusade to permanently grow the federal government and fund the massive tax breaks they’re proposing for wealthy Americans in blue states.” (Sen. Thune, Op-Ed, “Biden, Dems’ Reckless Tax-And-Spending Spree Would Decimate Family Farms And Businesses,” Fox News, 8/08/2021)

• SEN. THUNE: “The Texas A&M Agricultural and Food Policy Center studied how this new tax would affect family operations, and it found that 98 percent of the representative farms in its 30-state database would pay a big price. How much? On average, the proposal would increase the tax liability by $726,104 per farm. … This could devastate states like mine where agriculture is the number-one industry and our lifeblood. In South Dakota, nearly every single farm is family-owned and family-operated. Farmers dream of passing their operation to their loved ones in a better condition than when they received it, and in fact, more than 2,500 farms in South Dakota have been under the care of the same families for 100 years or more.” (Sen. Thune, Op-Ed, “Biden, Dems’ Reckless Tax-And-Spending Spree Would Decimate Family Farms And Businesses,” Fox News, 8/08/2021)

• SEN. THUNE: “This proposed tax – the Democrats’ new ‘double death tax’ – could threaten our economic recovery and potentially jeopardize the future of agriculture in America. It would be profoundly unfair to America’s hardworking farmers and other generationally owned businesses, and it would particularly devastate rural communities and small-town jobs. … Family-run businesses and farms have weathered the worst in pursuit of the American dream, and they deserve better from Washington.” (Sen. Thune, Op-Ed, “Biden, Dems’ Reckless Tax-And-Spending Spree Would Decimate Family Farms And Businesses,” Fox News, 8/08/2021)

ALL 50 REPUBLICAN SENATORS: “Under current law, passing down a family business to the next generation does not impose a capital gains tax burden on the business or its new owners. Rather, the decedent’s tax basis in the business is ‘stepped-up’ to fair market value, preventing a large capital gains tax bill on the growth in the business’s value. If the functional benefit of the step-up in basis were eliminated and transfers subject to the estate tax also become subject to income tax … many businesses would be forced to pay tax on appreciated gains, including simple inflation, from prior generations of family owners—despite not receiving a penny of actual gain. These taxes would be added to any existing estate tax liability, creating a new backdoor death tax on Americans. These changes are a significant tax increase that would hit family-owned businesses, farms, and ranches hard, particularly in rural communities. These businesses consist largely of illiquid assets that will in many cases need to be sold or leveraged in order to pay the new tax burden. Making these changes could force business operators to sell property, lay off employees, or close their doors just to cover these new tax obligations.” (Sen. Thune, Press Release, 7/21/2021)

REMINDER: It’s ‘A Backdoor Death Tax’

THE WALL STREET JOURNAL EDITORIAL BOARD: “[T]he Biden Administration has proposed a $1 million cap on the ‘step-up in basis,’ which excludes unrealized gains from taxation at death. This is a backdoor death tax, and Penn Wharton estimates the change would raise up to $113 billion over a decade.” (Editorial, “The Capital-Gains Revenue Illusion,” The Wall Street Journal, 5/06/2021)

“Democrats want to fund a big chunk of their spending package by curbing the nearly century-old provision, sometimes called the Angel of Death loophole and technically known by the clunky term ‘stepped up basis at death.’ Along with a related plan to raise capital gains rates on millionaires, it is projected to raise more than $300 billion over 10 years.” (“Democrats Struggle With Plan To Tax Dynastic Wealth,” Politico, 6/08/2021)

• “The Biden proposal would blow up several longstanding tax concepts: That capital gains deserve a lower tax rate than wages and that people can inherit old assets without paying capital-gains taxes.” (The Wall Street Journal, 4/29/2021)

• “Opponents of Mr. Biden’s plan warn of steep combined rates on people hit by both taxes. ‘If we lose the step-up in basis, that turns the estate planning world upside down,’ said Alvina Lo, a tax attorney and chief wealth strategist at M & T Bank Corp. unit Wilmington Trust.” (The Wall Street Journal, 4/29/2021)

Family Farmers, Small Business Owners, And Even Those Who’ve Simply Owned Their Homes For A Long Time, Are Deeply Concerned About Getting Hit With This Tax Hike

“Farmers worry about having to pay tax on land that’s been appreciating for decades while small business owners are concerned about being able to hand down their companies to children.” (“Democrats Struggle With Plan To Tax Dynastic Wealth,” Politico, 6/08/2021)

“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.’” (The Wall Street Journal, 4/29/2021)

“J.R. Peterson farms 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 potential changes. Even if there is a carve-out for farms that stay within a family, he worries that his children would be faced with a tax bill in the millions if they chose to sell the family’s land after inheriting it. ‘We don’t consider ourselves wealthy, we scrape and claw for everything,’ Mr. Peterson said. ‘If something like this would go through, there are a lot of people responsible for putting safe and healthy food on people’s tables that are going to be massively impacted.’” (“Farm-District Democrats Raise Caution Flag on Capital-Gains Tax Plan,” The Wall Street Journal, 5/06/2021)

“Vera Dunn lives in Beverly Hills, Calif., with her 102-year-old mother in a house bought for about $100,000 in 1965. Ms. Dunn estimates the house would be worth $10 million to a buyer who would tear it down. She said she has borrowed $4 million against the house to pay for her mother’s care and is already concerned about California tax changes on inherited property. If her mother lives past the effective date of the Biden plan, Ms. Dunn said, it would be impossible to pay the taxes and keep the house. ‘It happens to be a beautiful house in a beautiful location. It happens to be all I have,’ she said.” (The Wall Street Journal, 4/29/2021)

Associations Of Farmers, Ranchers, And Small Businesses Warn Of The ‘Catastrophic Impacts That The Repeal Of Stepped-Up Basis Would Have On All Family-Owned Businesses’

ZIPPY DUVALL, American Farm Bureau Federation President: “Passing on the family farm to the next generation is a top priority for many farmers and ranchers. Eliminating stepped-up basis and increasing capital gains taxes will make it much more difficult, or even impossible, for parents to pass on their farm or ranch to their children. This is a critical tool for America’s farmers and ranchers, and we urge all members of Congress to oppose efforts to eliminate it.” (Sen. Thune, Press Release, 7/21/2021)

• AMERICAN FARM BUREAU FEDERATION: “To minimize the impact of burdensome capital gains taxes, farmers and ranchers use stepped-up basis, which provides a reset for the asset value basis during intergenerational transfers. … To protect these family farms and minimize the impact of capital gains taxes, it’s important that farms have continued access to stepped-up basis. Eliminating stepped-up basis to generate more federal income risks the livelihood of America’s family farms and the economic sustainability of these family operations long into the future.” (“Elimination of Stepped-up Basis Poses Hazards to Family Farms,” American Farm Bureau Federation, 4/07/2021)

MARK HANEY, Kentucky Farm Bureau President: “Removing stepped-up basis would require the heir of the property to pay tax gains based on the original purchase price of the farmland rather than the market value on the date of inheritance. Farm Bureau opposes this, and we must continue our efforts, at all levels, to ensure sound legislation is passed that would help farm families, not penalize them for wanting to continue a tradition which we all depend upon.” (“KFB President Mark Haney: Passing The Farm To The Next Generation,” Kentucky Farm Bureau, 5/05/2021)

COURTNEY TITUS BROOKS, National Federation of Independent Business (NFIB) senior manager of federal government relations: “At a time when small businesses are working to recover from the COVID-19 pandemic, repealing stepped-up basis would be a devastating setback for family-owned businesses. The current proposal to eliminate stepped-up basis would cause significant job losses and would leave heavy tax burdens on future generations. Small businesses thank Senators Thune, Daines, and Crapo for advocating on behalf of family-owned businesses and urge Congress to keep this important policy in place.” (Sen. Thune, Press Release, 7/21/2021)

DANIELLE BECK, National Cattlemen’s Beef Association senior executive director of government affairs: “We appreciate the efforts of Senators Thune, Daines, and Crapo to inform President Biden on the catastrophic impacts that the repeal of stepped-up basis would have on all family-owned businesses and are grateful to see so many in Congress are fighting to preserve the common-sense tax provisions so critical for U.S. cattle producers…. Family-owned agricultural operations are the economic drivers of rural communities across the United States; therefore, it is imperative that this Administration understand that resiliency can only be achieved and maintained when new generations – whether their family has had a long history in agriculture, or they are breaking into the industry – can build upon the contributions of today’s farmers and ranchers.” (Sen. Thune, Press Release, 7/21/2021)