Washington, D.C., is an island surrounded by reality. The latest example is new White House proposals on raising taxes. These proposals would cause significant harm to family farmers, a reality the White House should face before going any farther.
Through his State of the Union speech, the President said he wants to increase the top tax rate on capital gains to 28 percent from 23.8 percent and subject assets passed to heirs to capital gains taxation payable upon transfer.
Farming is a highly capital intensive industry that requires significant investments in land, buildings, and farm equipment. Increasing the capital gains rate would raise a barrier to new farmers and reduce the flexibility of existing farmers to make changes in their operations by selling off unneeded assets or to expand their operations.
Subjecting assets passed to heirs to immediate capital gains taxation would unwind a considerable amount of the progress made in reducing the burden of the estate tax on family farms over the last decade. For those estates subject to the estate tax, it would result in a second layer of tax that could result in tax rates topping 60 percent on assets transferred at death. It also would result in estates that currently are shielded from the estate tax due to the $10 million per couple exemption being subject to significant capital gains taxes.
Given the significant increase in the price of farmland over the past several decades, this proposal could result in a tax bill the average farmer could not pay without selling off significant assets. As a back-of-the-envelope calculation, a farmer who purchased a farm in the 1970s could face a tax bill easily topping a half million dollars if the President’s proposals were to become law. This analysis does not even consider assets other than land, such as buildings and equipment.
The President claims his proposals would include protections for small family-owned business, but he has yet to explain how he intends to do that. In any event, the President’s proposals would be a planning nightmare for family farmers. His ideas would be good business for accountants and tax lawyers but could be devastating to the family farm.
On a point of good news for family farmers, Sen. Al Franken and I have introduced legislation that would reverse a Supreme Court ruling (Hall v. United States) that makes it harder for family farmers to reorganize their finances when they fall on hard times.
The bill has been referred to the Senate Judiciary Committee, where I am the chairman. The Family Farmer Bankruptcy Clarification Act of 2015 remedies a May 2012 Supreme Court ruling that said despite Congress’ express goal of helping family farmers, the language inserted into the bankruptcy code in 2005 conflicted with the tax code.
The bill clarifies that bankrupt family farmers reorganizing their debts are able to treat capital gains taxes owed to a governmental unit, arising from the sale of farm assets during a bankruptcy, as general unsecured claims. It removes the Internal Revenue Service’s veto power over a bankruptcy reorganization plan’s confirmation, giving the family farmer a chance to reorganize successfully.
Family farmers are in a unique situation where so much of their capital is in the land itself. Congress made clear that it wants farmers to be able to reorganize so they can stay in the business of farming. Unfortunately, the Supreme Court’s 2012 ruling failed to recognize that, and we intend to fix it. The bottom line is that the farmer and the small business creditors should come first, not the IRS.