Numerous ag-related organizations in the region are asking the lame-duck Congress to retain a $5 million exemption for people paying estate taxes, and the 35 percent top rate for those taxes, as well as a 15 percent top rate for capital gains taxes.
Without congressional action, the estate tax exemption reverts to $1 million per person and the top taxation rate would increase to 55 percent. The change in the exemption level had been part of the expiring Bush tax cuts in the Unemployment Insurance Reauthorization and Job Creation Act of 2010.
These are "vital to America's family farms," say officials of the Minnesota Farm Bureau. Estate taxes destroy family-owned businesses when the tax forces surviving family members to sell land, buildings or equipment to generate enough money to pay the tax, the organization says. "Individuals, family partnerships or family corporations own 98 percent of U.S. farms."
It is a small piece of the so-called "fiscal cliff" negotiations in Congress before Jan. 1, says Amber Hanson, assistant policy director for the Minnesota Farm Bureau.
Chris Radatz, the organization's public policy team director, says the recent report of land values at $10,000 an acre in the Drayton, N.D., area indicates that more farmers every day are involved in the limits. "You didn't think you were going to hit that range, and -- boom -- you are," Radatz says.
The American Farm Bureau Federation estimated the average Minnesota farmer would be affected by the lower exemption at 247 acres. But the number of acres would be lower in the southern part of the state where values are higher, Hanson notes.
Meanwhile, U.S. Sen. John Thune, R-S.D., says 71 percent of South Dakota farms would exceed the $1 million exemption rate, equated to 431 acres.
"Since many family farm and ranch assets consist of land, livestock, equipment and small cash reserves, this punitive tax leaves the next generation with little choice but to sell family holdings to pay the death tax," Thune says. Last March, Thune introduced the Death Tax Repeal Permanency Act, a perennial effort to repeal both the federal "death tax" and the "generation-skipping transfer tax."
In addition, the existing top rate for capital gains is 15 percent. If allowed to expire without Congressional action by the end of 2012, the rate would increase to 20 percent in 2013. "Farming requires large investments in land, buildings and equipment," Thune says. Any money paid to the government can't be reinvested in the farm and community.
Thune describes the estate tax as a double-taxation -- "taxes already paid before" now are being taxed again. He says there is a question whether it actually adds revenue. Farmers and others who have to pay then don't have the capital to generate new business, which means less income tax, for example, he says.
Thune acknowledges that he is concentrated on the estate tax level reduction in the short-term. But there is still a focus on repeal -- an idea he brought with him from his House of Representatives service. He carried it into the Senate where it was championed by Sen. Jon Kyl, R-Ariz., who is retiring. Thune says he'll probably inherit the issue, which has been proposed but hasn't come up for a vote because the Senate hasn't passed a formal budget for three years.
A high tax rate and low exemptions will mean some farms won't be viable because part of the assets must be sold to pay the estate tax bill. Hanson says that while the organization would prefer Thune's elimination of the estate tax, the political reality and budget pressures don't bode well for that, so the organization is focusing on changing the estate tax exemption levels and rates.
"The high rate and low exemption might affect millionaires in the general economy, but it also hits family farms who are in that category usually because they are 'land-rich' but find themselves 'cash-poor," Hanson says.
The organization calculates that farmers are more likely to pay capital gains taxes than the rest of the population at large. Forty percent of all farmer-ranchers report "some capital gains," which is nearly double the case for most taxpayers.