Breaking Through the Glass Ceiling in Preserving Farmland
By Congressman Jim Gerlach and Congressman Joe Pitts
February 18, 2005
It's no secret. Despite the fact that agriculture is still the state's leading industry, we're losing Pennsylvania 's family farms.
State and various local agencies have undertaken various farmland preservation programs in order to reverse, or at least slow, this trend. These programs have achieved remarkable success through sharing the cost of preserving farmland. But limitations presented by the federal tax code present a glass ceiling, hindering the effectiveness of such programs.
Current law allows a farmer to sell the right to develop his land (the development rights) to any person for the fair market value of the rights. For the asset rich but cash poor farmer, employing this strategy offers an influx of cash to cover the costs of upgrading facilities, purchasing new equipment, acquiring more land, paying off debts, or hiring more employees.
The tax code however, subjects the sale of development rights to capital gains taxes. In doing so, it asks farmers alone shoulder the cost of using this means to preserve farmland. This is particularly burdensome for farmers who have owned their land for a long time, or farm land that has been in the family for generations. These farmers acquired land for a fraction of what it's worth today. To sell the development rights today means they would pay more in taxes than they paid for the land decades ago.
One Chester County dairy farmer sold the rights to develop his land in an effort to keep his land in farming. The money he received went right back into the farm, buying new farmland and improving his facilities. But the government seized between 25 percent and 30 percent of the proceeds from the sale. For this farmer, whose father passed the farm on to him, taxes prevented him from doing more.
That's why we introduced The Family Farm Preservation Act of 2005 this month. Our legislation makes a simple change in the tax code to shift the tax burden for preserving farmland from farmers to developers.
First, the bill exempts proceeds from the sale of development rights to a qualified non-profit organization or government-run preservation program from capital gains taxes. Farmers are then free to use the proceeds of the sale to best suit their own needs.
Second, our plan focuses relief where there is greatest need. The challenges facing every farmer are particularly acute for farmers in counties like Chester , Montgomery , and Berks, so-called exurban counties surrounding urban areas. This legislation applies to farms in counties with a population of at least 100 persons per square mile.
Third, the bill requires the culprit who builds on the land to forfeit the amount that would have been paid in capital gains taxes under current law plus interest to the government. This severe penalty increases with time. Rather than penalize farmers up front for trying to preserve their land, we ask developers to bear the cost of plowing under our family farms.
This strategy works well because it capitalizes on market forces, not government mandates. A farmer who sells the development rights to his land makes it far less attractive to developers, effectively lowering the market value of the land along with his property and estate tax bills, the latter of which reach as high as 60 percent. These other taxes must also be addressed to save farmland across the nation.
The Family Farm Preservation Act follows a similar effort by the United States Senate. While it did not pass before Congress adjourned last year, the Senate's charitable giving bill (S. 476), provided a 25 percent exclusion from capital gains on the sale or exchange of property development rights to a qualified organization for conservation purposes. Our bill merely increases that percentage to 100 percent in order to maximize the farmland we preserve.
Our area has a rich farming heritage. Families have farmed this land for generations, some tracing their ancestry to the days of William Penn. By exempting the sale of development rights from the capital gains tax, the Family Farm Preservation Act gives farmers the opportunity to keep their farms in the family and in business. This simple change in the tax code will help preserve our state's beautiful open spaces.
Congressman Gerlach represents Pennsylvania 's 6th Congressional District encompassing parts of Berks, Chester , Lehigh and Montgomery Counties .
Congressman Pitts represents Pennsylvania 's 16th Congressional District encompassing all of Lancaster County and parts of Berks and Chester Counties .