Omaha.com - Estate Tax Fight in Congress Has Midlanders' Attention - Especially Farmers, Ranchers

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by Joseph Morton

Nebraska rancher John McFadden will be watching this week as the House votes on eliminating the federal estate tax, which could affect how much of his 500-head cattle operation he leaves to his children.

McFadden saw much of his grandfather's land sold off to pay taxes and other costs when he died in the 1970s. A chunk of his father's estate was eaten up when he died in the 1990s.

At age 72, McFadden is now doing whatever he can to shield his own estate from the tax when his time comes.

Skyrocketing land values mean that the heirs of farmers and ranchers can end up with millions of dollars in taxable assets but not a lot of cash to pay the bills, said McFadden, who has about 6,000 acres near Taylor, Nebraska.

"Farmers and ranchers live in poverty all their life, and then when they die they're millionaires," he said.

The House of Representatives is expected to vote today to repeal the estate tax, a move that would add about $270 billion to the deficit over 10 years. The bill has little chance of becoming law. Senate Democrats appear to have enough votes to block it and President Barack Obama has already threatened a veto.

The Obama administration says the money would be better spent elsewhere and has offered a laundry list of tax cuts it says would benefit millions of middle class Americans rather than the small number of households now subject to the estate tax.

Republicans and a small number of Democrats who support repeal, including Rep. Brad Ashford, D-Neb., say they have philosophical objections to the estate tax, which they often call a "death tax." Some critics describe it as double taxation: Uncle Sam tacking on an extra tax bill after a lifetime of paying property and income taxes.

Expect the debate to include plenty of shout-outs to the family farm.

"The death tax directly threatens many farms, ranches and small businesses, undermining the lifelong work of Nebraskans who hope to pass their livelihood on to their children and grandchildren," Rep. Adrian Smith, R-Neb., said last month when he voted for eliminating the tax as a member of the House Ways and Means Committee.

Administration officials question the scope of the impact on agriculture.

They point to statistics that the estate tax is expected to affect only a tiny slice of estates this year -- 5,400 nationwide, with 60 in Nebraska and 60 in Iowa.

In a briefing with reporters this week, Vice President Joe Biden questioned whether anyone has lost their farm recently because of the estate tax.

"Maybe there's one or two now, I don't know, but come on, man," Biden said. "I come from a farm state, and we have the second-most-expensive farmland in the country in the state of Delaware, and by the way agriculture is our biggest industry, and I don't know anybody that lost their farm."

One reason why so few estates are affected by the tax today is that Congress has increased the exemption levels. In 2001 the exemption was $675,000, or $1.35 million for couples. Assets above that were taxed at a top rate of 55 percent. The exemption is now $5.43 million, or nearly $11 million for couples, with a tax rate of 40 percent on assets above the exemption level.

In 2000, 2 percent of estates had to pay taxes; in 2013, just 0.18 percent had to pay taxes, according to the Joint Committee on Taxation.

Farms and ranches are particularly at risk of being subject to the estate tax because agricultural land values are high, farm advocates say.

An American Farm Bureau analysis cited by a spokesman for Sen. Deb Fischer, R-Neb., says that Nebraska cropland values appreciated 340 percent between 2002 and 2013. The farm bureau said that meant that 40 percent of Nebraska farms were worth more than $5 million.

But farmers have many ways of avoiding the estate tax: spousal transfers, trusts, gifts and other methods.
The U.S. Department of Agriculture estimates that only 0.6 percent of farms would have to pay an estate tax. And the nonpartisan Tax Policy Center estimates that only 120 farms and small businesses, where at least half the assets are in farm or business assets, had to pay the estate tax in 2013.

Biden said that by definition paying the estate tax means someone has been very successful.

"I hope my children have to pay an estate tax someday because it means they're worth millions of dollars," Biden said.

Lawmakers from Nebraska and Iowa didn't offer any recent examples of farms lost to the estate tax, but several said that isn't really the point.

"Those who attempt to minimize the impact of the death tax on farmers by claiming no one has "lost the farm' as a result are raising a red herring," said Sen. Chuck Grassley, R-Iowa. "The truth is, while somebody may not lose the entire farm, they may have to sell off a big enough chunk that the family farm may only be a shadow of what it used to be. Farmers and business owners shouldn't have to sell part of their land or otherwise worry about this tax."

Grassley added that "even if only one family farm or small business is affected, that's one too many."
Rep. David Young, R-Iowa, said it's sad when any family has to sell off part of the farm to pay off the government.

"You rarely hear about these tragic stories because people are too private to share this information -- it is deeply personal," Young said. "The vice president is entitled to his opinion, but to Iowa farm families, it simply comes across as hurtful and insensitive."

One example offered up by Nebraska advocates was McFadden, who grows corn, soybeans and alfalfa in addition to his cattle operation.

McFadden is determined to mitigate the estate tax hit as much as possible. He has retained a skilled attorney specializing in real estate law.

"I've been doing all the ways to kind of skirt around it -- insurance and corporations and shares and trusts and stuff," he said.

Rep. Steve King, R-Iowa, said he has known farmers who have to either take on mortgages or sell off part of their farms to satisfy the estate tax. He suggested talking to Ron Heck, who farms about 4,000 acres in central Iowa with his son-in-law, growing soybeans and corn.

When Heck's father died a year and a half ago, the family faced a decision about the estate tax. Heck said they decided to pay the tax and keep the land, even though that wasn't the most economically prudent action.

Heck is concerned that as farms get larger and machinery gets more expensive, it will be harder for families to keep their farms. Instead, he said, ownership will shift toward people who have made money elsewhere.
"The farmer-owner can't buy the land back from the government every time a generation dies," he said. "It's not possible."

Part of the administration's pitch is that the $270 billion price tag for eliminating the estate tax would be better directed toward a package of tax policies that would provide benefits to millions of Americans, rather than saving millions of dollars for a handful of wealthy heirs. Administration officials also suggest that their policies would be better at fostering economic activity.

"This isn't just about fairness," Biden said. "It's about growth."

The administration's proposals include expanding the Earned Income Tax Credit and providing tax credits for those with children in day care or in college. And they would close some tax loopholes to help offset the cost of those credits.

Making day care more affordable, Biden said, would help mothers who want or need to work.

"What would you do if you want to grow the economy in Omaha?" Biden said. "Well, you want more women in the workforce. It grows the economy. It's really kind of basic stuff."

King said the administration's tax proposals represent an attempt to divide the country along the lines of class.

"The death tax is directly a tax on the American dream," King said. "The American dream is to be able to utilize all of our God-given liberties and then be successful. And when you're successful, if you've paid the tax on those assets, then Uncle Sam has gotten all that he should have a claim to."

Even some Democrats disagree with the administration's position when it comes to the estate tax.
Ashford said the estate tax creates a whole industry geared toward avoiding the tax. Repealing it, he said, would give people more incentive to invest and become entrepreneurs.

"By putting a tax on success, even though it's very, very large success, still I think it's just the wrong philosophy," Ashford said.

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