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The death tax

Written by Bll Streeter on .

Government’s role is to encourage, not discourage investment.

Congressional inaction on the Farm Bill is a hotly debated item this election year, as well it should be. A stable agricultural policy must be in place for all of us in agriculture (farmers, ranchers and agricultural businesses) to make sound business judgments.

Your commodity groups and Farm Bureau are doing an excellent job of keeping pressure on the political class. Political inaction is caused by a wait-and-see approach to the presidential election. Important as the Farm Bill is, however, there’s another legislative policy on the table that greatly affects agriculture: taxation.

The consequences of misguided tax policy are dire. I realize taxation covers a lot of ground. So let me focus on one item. The estate tax should be front and center. As they should be, the majority of mainstream agricultural groups are focused on the estate tax for farmers and ranchers. Why?

Those of us in agriculture refer to the estate tax as the death tax. Let me explain.

Many farmers are land rich and cash poor. USDA statistics show that farm real estate (land and buildings) is the largest asset on the balance sheet of farmers and ranchers. In fact, those same statistics show farm real estate accounting for 84 percent of total U.S. farm assets. Additionally, land values right now are appraised in many cases at levels far exceeding agricultural values.

The National Cattlemen’s Beef Association recently used a ranch family in Florida as an example of the effects of this tax. Purchased in the 1930s and home to four generations, the ranch ran into real trouble after the death of the grandfather at 86 in 1971.

The family owed $1 million to the federal government. Gross income was $200,000 per year. They had nine months to pay the death tax to the Internal Revenue Service. The family survived that debacle by taking on additional debt.

Years later, that same ranching family, between 2010 and 2011, incurred expenses of $7,000 for reappraisal, $16,000 for transitioning to an LLC, $15,000 for developing wills and trusts, and $4,000 for associated costs. All in response to the death tax.

The point of the story, outside the sums involved and the indignity of government confiscating capital from grieving families, is that this capital could have been better used for investment, expansion and improvement.

At the time of death, the farm family survivors must sell assets, whether equipment, land or the entire operation, to pay tax liabilities on land that has already faced taxation two and three times.

MFA Corporate Board Member Glen Cope of Aurora, Mo., has strong feelings on this very topic. In his role at Missouri Farm Bureau and chairman of the AFBF Young Farmers and Ranchers Committee, Cope addressed the subject publicly: “You can imagine my frustration when considering that one day when my parents pass on, the IRS will be knocking on our door asking, no demanding, a sizable portion of what my family has worked so hard for to provide a better life for the next generation working on our farm.”

In rural America, the death tax is one of the leading causes of the breakup of multi-generational family farms and ranches. It hurts small producers, not larger operations with deeper pockets. The result, of course, is consolidation. It also increases the likelihood that the land goes to commercial developers.

Consider, too, that 40 percent of U.S. farm ground is owned by individuals age 65 or older.

That’s the reason so many in agriculture refer to this estate tax as the death tax. Not only does it fall after a farmer or rancher dies, in many cases it kills the agricultural operation.

In 2010 Congress passed a temporary estate tax relief effective through Dec. 31, 2012. This temporary relief also contains spousal transfer and indexes the estate tax exemption for inflation. If allowed to expire, the tax will revert to previous rates.

That’s why it is so important for Congress to act before the current tax rate expires and reverts to confiscatory rates of as high as 55 percent at the beginning of 2013.

That’s also why all of the groups in agriculture argue so fiercely for its elimination or at least a permanent extension of the 2011 comprise that set the tax at 35 percent with an exemption of $5 million per person.

The time for this action is now. This month’s election grows more important by the day.

Bill Streeter is President and CEO of MFA Incorporated.

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