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Farm-District Democrats Raise Caution Flag on Capital-Gains Tax Plan

By Richard Rubin 

WASHINGTON -- 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.

In a letter to House leaders, 13 members said they appreciated the administration's proposal so far to let family-owned farms and businesses defer the taxes if they stay in family control and operation. They said they would push to ensure strong protections for farms as the plan advances and details get written.

"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.).

The Democrats' letter doesn't draw any red lines, unlike a Republican letter this week that raised similar concerns and opposed any change to capital-gains rules. But with Democrats enjoying a slim 218-212 advantage in the House, just a handful of Democrats could hold up President Biden's broader plans to raise taxes and use the money for preschool, child tax credits and other initiatives.

"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."

President Biden's tax plan would raise the top capital-gains tax rate to 43.4% from 23.8%. It would also alter what happens when people die with unrealized gains in stocks, land, businesses or other assets.

Currently, no capital-gains tax is due upon death, and heirs have to pay the tax only if they sell the asset and then only on the increase in value since the prior owner's death. The estate tax is separate, applying to net worth upon death and only above an $11.7 million per-person exemption that spares almost all farms.

Democrats say today's rules offer an unjustified break to a handful of very wealthy people, letting enormous asset appreciation escape the income tax. Under the Biden proposal, capital gains would be taxed as if sold at death, with a $1 million per-person exemption and existing exclusions for principal residences.

The plan also includes a special rule for farms and family-owned businesses: Heirs who continue to own and operate the business could defer the tax payment until they sell or stop running the business.

The U.S. Department of Agriculture says these rules mean that more than 98% of farms won't owe tax if the farm stays in the family, with the remainder paying because of their nonfarm assets.

"No one should have to sell a family farm they inherit to pay taxes and the president's tax reform guarantees that," the department said in an April 28 statement.

These proposals come in addition to Mr. Biden's proposal to limit real-estate investors' ability to defer capital gains when exchanging property, a change that could affect many farmers.

The American Farm Bureau Federation will be fighting any efforts to change capital-gains taxes, said Pat Wolff, the group's senior director of congressional relations. She said the administration's idea about deferring taxes for family-owned and operated businesses still needs work to protect farmers who are land-rich and cash-poor.

"That's a very simple statement, and the way that farms transfer from one generation to the next is very complicated," she said. "The administration was unable to provide a lot of details."

There also could be administrative challenges in determining the cost basis for assets purchased long ago. Similar concerns helped doom a previous attempt to change capital-gains tax rules in the 1970s.

Beyond that, the leading congressional proposals for changing capital-gains rules at death so far don't offer specific farm exemptions, though they do allow payments tied to illiquid assets to be spread over 15 years in the Senate version and seven years in the House version.

Rep. Bill Pascrell (D., N.J.), the lead House author, said current tax rules that allow unrealized gains to escape income taxation are a prime cause of inequality. The current rules reduce federal revenue by more than $40 billion a year.

"Of course we would be open to discussing ways to strengthen our legislation to reform our tax system," he said. "But ultimately our main focus remains on sealing this loophole because its abuse by the super wealthy must end."

Designing rules that satisfy farm-district Democrats without leaving gaps for others to exploit could prove difficult. Wealthy non-farmers have long found ways to get agricultural tax breaks. For example, former President Donald Trump put goats on his New Jersey golf courses to reduce property tax bills.

"The more of those nuances you write in, the more estate planners try to shove other assets into family businesses in order to protect them," said Jennifer Bird-Pollan, a tax law professor at the University of Kentucky. "A lot of this is a political question rather than an actual tax-consequence-for-real-people question."

Canada, which has taxed capital gains at death for nearly 50 years, has no general exemption, but it does have a special exemption for farming and fishing property, along with deferred payments if those businesses stay within families. Canada has no estate tax.

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."

--Rachel Louise Ensign contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com

 

(END) Dow Jones Newswires

May 06, 2021 12:57 ET (16:57 GMT)

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