Estate Tax Bills Pose Threat to Arkansas Family Farms (Jessica Richard Commentary)

If Congress approves legislation to alter federal estate taxes, it will likely mean the end of many Arkansas family farms. In fact, if the current bills become law, it could mean many young Arkansas farmers and ranchers would have to work three and half years or longer without pay just to meet the new tax burden.

Under current law, most farms aren’t subject to federal estate taxes. But proposals in Congress would significantly lower the exemption threshold, potentially affecting twice as many farms in the state.

First, let’s provide some context for how these tax laws apply.

Suppose a farmer’s son or daughter inherits the farmer’s land and other assets. The difference between what the farmer paid for assets (or value at inheritance) and fair market value is, at the time of transfer, called capital gains.

Capital gains are taxed if they are held more than a year, but these taxes can be avoided by changing the basis on which the assets are valued. In this scenario, the current fair market value becomes the basis, which is a “step up” from the original value or price paid for the asset.

Should the son or daughter get out of the business and sell the assets five years later, the tax liability is a function of the new fair market value minus the fair market value at inheritance — or “stepped up basis.” In short, the capital gains tax provisions can be avoided at the time of inheritance as long as “stepped-up basis” is in place.

In Arkansas, it takes about 3,400 acres of farmland to reach the current exemption level. This means, at the time of inheritance, any acreage above that threshold would face the estate tax. The current proposals would lower the exemption level, making more farms subject to the capital gains tax. The Sensible Taxation & Equity Promotion Act would eliminate the stepped-up basis provision, while a measure called the For the 99.5 Percent Act would lower the exemption level by nearly 70%.

What does this mean for Arkansas farmers and ranchers? A lot, unfortunately, because so much value of the asset base in farming is tied up in land, where appreciation causes a dramatic increase in tax liability without the change in basis. Simply put, an increased tax liability will exceedingly make it more difficult to make a living in agriculture.

It may not be the intention to have the agricultural community carry more than its fair share of the tax burden, but the consequences are far reaching for the state’s top industry.

The Arkansas agriculture community has an interest in explaining how we would be affected by these tax proposals to avoid the impacts that would result from proposed changes.

Based on the latest U.S. Department of Agriculture Census of Agriculture data, lowering the exemption level from its current provision will effectively double the number of farms in Arkansas that will be subject to the capital gains tax.

For more on the topic, Arkansas Farm Bureau has developed an in-depth analysis of the two proposals and how each could affect the Arkansas ag industry. The analysis includes Arkansas row crop and cattle ranch examples from a Texas A&M study. You can read that analysis at arkansasbusiness.com/farmstep.

If the changes move forward, the next generation of farmers can’t begin to generate income to pay themselves until after the tax liability is paid. Can you imagine a young Arkansas farmer or rancher choosing to continue a family farming tradition if taking over means going years without pay?

From an agriculture economics perspective, it’s safe to say the future of Arkansas agriculture is at stake.

Jessica Richard holds a doctorate in agricultural economics from Oklahoma State University and a master’s in agricultural economics from the University of Kentucky. She is director of commodity activities and economics at Arkansas Farm Bureau.