In his first address to a joint session of Congress April 28, President Joe Biden unveiled his $1.8 trillion plan for education and care that would place higher taxes on larger corporations and wealthier Americans. Of utmost importance to agriculture producers is how Biden’s tax plan will affect them.
The American Families Plan would cost around $1.8 trillion over 10 years to boost funding for education, family and child care, and expanded tax credit extensions. The cost would be offset by increasing taxes on households making $400,000 per year or more and increasing funding for IRS enforcement. The administration said in combination with the American Jobs Plan, the plan would be fully offset over 15 years. For those making over $400,000 per year, their taxes would be raised to 39.6 percent from 37 percent.
Prior to Biden’s speech, USDA released a press release regarding the American Families Plan and how it will impact producers.
“The American Families Plan includes critical tax reform to ensure that the wealthy pay their fair share of taxes in order to finance essential investments in workers and families, including childcare, nutrition, higher education and more,” the release said.
The plan will change ways capital gains are treated in the tax system so that for people making over $1 million, “the tax system no longer favors income from wealth over income from work,” the statement read.
Impacts on family farms
The plan will not raise taxes on anyone making less than $400,000 a year. Part of the plan is also to eliminate what USDA calls the stepped-up basis loophole. Unrealized capital gains would be taxed at death above $2 million in gains per couple. The department emphasized this would not affect family farms that stay in the family and they estimate more than 98 percent of farm estates will not owe any tax at transfer if the farm stays in the family. The tax the remaining 2 percent would owe would be on their non-farm assets.
USDA said the plan would protect family farms and ranches in two ways: There would be no capital gains taxes at death for family farms; and there would also be a $2 million exclusion from increased capital gains for married couples. If the farm includes the family home, the exclusion would be $2.5 million. Heirs would continue to receive the step up in basis on the first $2 million in gains, and if the heir decides to sell the farm, the first $2 million in gains is tax free.
USDA offered two examples for how the capital gains reforms would affect family farms. If a married couple with $900,000 of farm gains and $200,000 of non-farm gains passes the farm onto their children, no capital gains taxes are owed. This includes even if they sell the farm because the $1.1 million in gains are below the $2 million per-couple exemption.
If a married couple with $3 million of farm gains and $250,000 of non-farm housing gains passes the farm to heirs, no taxes are due as long as the heirs keep the family farm.
In response to the plan details, National Cattlemen’s Beef Association (NCBA) criticized the proposal to eliminate stepped-up basis. NCBA Senior Executive Director of Executive Affairs Danielle Beck said, “Preserving long-standing tax provisions such as stepped-up basis and like-kind exchanges is critical when considering the financial viability of farms and ranches, as well as the ability for the next generation of producers to carry on the family business and conserve the land that has been in their family for generations.
She added, “To be clear, we firmly believe that it would be irresponsible to pay for an infrastructure bill on the backs of farmers and ranchers and with that, counterintuitive with this administration’s conservation agenda.”
American Farm Bureau Federation (AFBF) and the Family Business Estate Tax Coalition released a study in mid-April about the potential damage that could be caused by eliminating the stepped-up basis tax provision.
The study found that overall in the economy, eliminating stepped-up basis would lead to a decline of 80,000 jobs each year for 10 years, and in the long run, a 100,000-job decrease each year. In addition, it would cause a $10 billion decrease in GDP each year.
“By eliminating step up in basis, it means more capital gains taxes have to be paid, which makes it all the more challenging to get that business to be viable for your heirs,” said AFBF Economist Veronica Nigh. — Anna Miller, WLJ managing editor