Estate tax debate makes planning for death even more difficult

By Sara Wyant

“My wife and I are trying to do estate planning, but we don’t know how Congress is going to change the law,” lamented an elderly Kansas farmer during a recent meeting. “Do you have any idea of what they are going to do?”

Unfortunately, the estate tax picture, as well as the general tax picture in Congress, is about as clear as mud right now. As you may know, the federal estate tax expired December 31, 2009 after Congress was unable to reach an agreement on either a permanent or short-term extension. There is no federal tax on estates if you die this year, but then the death tax comes back with a vengeance.
The tax will be re-instated on January 1, 2011, with only a $1 million exemption and a 55% tax on amounts over that level--- unless Congress takes action to change the law. As a result, even smaller farms and businesses could end up paying a bucketful of taxes when the owner dies next year.

Several lawmakers have introduced bills to raise the exemption and change the tax rates. But changing the law won’t be easy. The Statuatory Pay-As-You-Go Act of 2010, enacted in February 2010, requires that any changes to the estate tax beyond a two-year extension of 2009 law must be fully offset by cuts in programs or revenue raisers. In 2009, there was a $3.5 million exemption on estate taxes with a 45% top tax rate. An estate tax bill was passed by the House last year that would basically reinstate the 2009 exemption and rates.

In addition to the estate tax, there are a multitude of tax issues that need to be tackled before year’s end. The biodiesel tax incentive lapsed at the end of 2009 and has yet to be renewed. As a result, dozens of biodiesel plants are idling and investors are losing their confidence in renewable energy. Later this year, the Volumetric Ethanol Excise Tax Credit (VEETC), widely known as the "Blenders' Credit" is set to expire. Last, but certainly not least, are the “Bush” tax cuts that you hear about so often about in political debates. If these tax cuts are not renewed, you could see tax increases in individual rates, capital gains, and dividends.

Fiscal war?

Tax issues could brew into a fiscal war of sorts for the country. President Obama wants to allow the Bush tax cuts to expire for individuals making more than $200,000 a year and for couples making more than $250,000. Regarding the estate tax, Administration sources say the president’s position is to restore the estate tax and extend it at the 2009 rates.

Several GOP lawmakers are fighting to reduce the estate tax and continue the previous tax cuts. They argue that, with the economy sagging and millions unemployed, it’s exactly the wrong time to force small business owners to pay more taxes. Doing so will place an additional damper on economic recovery.
Yet, others say that continuing the current tax cuts will be fiscally irresponsible and add to an already alarming federal deficit. The Congressional Budget Office recently forecast that the federal deficit will reach $1.34 trillion for this fiscal year.

Even former Federal Reserve Chairman Alan Greenspan, an influential voice in favor of the first Bush tax cut in 2001, weighed in recently. On NBC's Meet the Press Aug. 1 he said that extending the cuts without making offsetting spending reductions could prove "disastrous."

"I'm very much in favor of tax cuts, but not with borrowed money," said Greenspan.
Tax package ahead?

When the Senate returns in mid-September, lawmakers are likely to consider a small business bill which could include a “fix” for the estate tax problem. The American Farm Bureau Federation is supporting an amendment to the small business bill that was introduced by Sens. Blanche Lincoln (D-AR) and John Kyl (R-AZ.). Their measure would set the estate tax exemption at $5 millionwith a 35 percent maximum rate.

Another bill, introduced by Sen. Diane Feinstein (D-CA), would defer estate taxes on farms and ranches if a number of conditions are met. Her “Family Farm Estate Tax Referral Act of 2010, includes provisions that the farm must be passed on to an individual or family member who has been materially engaged in its management and operation for at least five years, and the heirs must continue to use the land for farming purposes.

A “recapture tax” would be owed if the farm or ranch was subsequently sold outside the family or was no longer used for farming or ranching. The tax due would be based on the value of the estate at the time the property is sold or ceases to be used for farming or ranching.

Yet another measure has been introduced by Sen. Bernie Sanders (I-VT.). His bill is cosponsored by Sens. Tom Harkin (D-IA), Sheldon Whitehouse (D-R.I.), and Sherrod Brown (D-OH). The bill would exempt the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009, and create a progressive rate so the so called “super wealthy” pay more. The tax rate for estates valued between $3.5 million and $10 million would be 45 percent, the rate on estates worth more than $10 million and below $50 million would be 50 percent; and the rate on estates worth more than $50 million would be 55 percent.

The AFBF supports the Lincoln/Kyl amendment because it seeks a permanent forgiveness of estate taxes while the Feinstein bill is a deferral with taxes owed if property were ever sold outside the family or ceased to be used for agriculture.
The National Farmers Union sent a letter of support for the Lincoln/Kyl bill, but their policy actually calls for a $4 million individual exemption. Chandler Goule, NFU’s VP for Government Relations says the Lincoln/Kyl measure is preferable to current law and says a conference between the two chambers could come close to what NFU has been supporting.

Failure to include estate tax reform in the Small Business bill increases the likelihood that estate tax reform will be included in a major tax package that is expected to be considered in a “lame duck” session after the mid-term election, says Patricia Wolff, Director, Public Policy for AFBF.

Where the offsets would come from to pay for estate tax reform or other changes in the tax code is still anyone’s guess.

Sen. Maria Cantwell (D-WA) has circulated an idea that would allow individuals to prepay their estate tax, based on current value. Conceivably, the federal government would receive more money up-front, but could lose money if an individual’s assets appreciate considerably between the time they pay and the time they die.

One relatively piece of good news for those of you trying to plan: There is little opposition to a stepped-up basis on asset values, says Wolff, so any of the proposed “fixes” will likely allow any appreciation of the affected property that occurred during a person’s lifetime to never be taxed.
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Farm groups divided over climate change legislation

Most farmers and ranchers are worried about all of the day-to-day tasks of getting a crop in the ground, taking care of livestock and making sure that lenders are getting paid on time, so climate change legislation is probably the furthest thing from their minds. But like it or not, terms like cap and trade, offsets and emission allowances need to be added to farmers' long list of concerns. Understanding these terms could have more to do with long-term farm profitability than decisions like picking the best variety to plant or whether or not to cull some of your cows.

That’s because, believe it or not or like it or not, climate change legislation is moving through the House of Representatives like a steamroller, driven by Speaker of the House Nancy Pelosi and Energy and Commerce Committee Chairman Henry Waxman. The two California Democrats want to demonstrate to the world that they can address global warming, even though they had to cut so many side deals with members from coal and oil producing states that the legislation is a far cry from the original package.

Although the far-reaching climate change bill is still a “work in progress,” Democrats on the House Energy and Commerce Committee told reporters that they expect to have enough votes to move their bill, the American Clean Energy and Security Act of 2009, out of committee by the Memorial Day recess. In what has become typical fashion this year, Waxman released the whopping 932-page bill, (H.R. 2454) on a Friday with a pledge to start marking it up on Monday----providing almost no time to read and comprehend the entire measure.

But thanks to modern technology, you can quickly search the legislation for words like “agriculture.” As expected, the word is barely mentioned.

So is that good news? Many think that agriculture should be a prominent player in any type of climate change legislation because so many agricultural and forestry practices can sequester carbon and be a big part of the solution. According to the USDA, agriculture and forestry have the potential to reduce 15-25 percent of U.S. greenhouse gas emissions and provide new revenue streams for farmers and foresters in the process.

In a letter to Waxman last week, National Farmers Union President Roger Johnson called for the Energy and Commerce Committee to establish a “robust and flexible” offset program and to make sure that agriculture is not subject to an emissions cap. In addition, NFU called for the inclusion of several key provisions, including:
The USDA is granted control and administration of the agriculture offset program;
Early actors are recognized;
No artificial cap is placed on domestic offsets;
Carbon sequestration rates are based on science; and
Producers are permitted to stack environmental benefit credits.

Earlier this year, NFU was one of 12 agricultural groups that signed off on a list of "principles” for greenhouse gas legislation - The American Farmland Trust, American Soybean Association, National Association of Wheat Growers, National Cattlemen's Beef Association, National Corn Growers Association, National Farmers Union and National Milk Producers Federation, National Association of Conservation Districts, National Council of Farmer Cooperatives, National Farmers Union, Public Lands Council, United Fresh Produce Association, and the Western Growers Association. An updated fact sheet on those principles is available here: http://www.wheatworld.org/userfiles/file/Climate%20Response_ALL_4%2021%2009.pdf

But after Waxman started pushing hard to move legislation without incorporating agriculture, some of those same groups came out opposed to the bill.

The National Corn Growers Association (NCGA) sent a letter to Congressman Waxman earlier this week, expressing its concern with the current version and outlining the potential for negative economic impacts to the agriculture sector if a cap-and-trade system is not structured properly.

“After reviewing the legislation, we can see the bill does not clearly provide for a mechanism by which corn growers can sell carbon credits on the market,” NCGA President Bob Dickey said. “We strongly believe the bill will increase input costs without specific opportunities to offset those additions. We cannot support the American Clean Energy and Security Act in absence of the provisions that we have explained in some length to the Committee.”

American Farm Bureau Federation President Bob Stallman struck an even harsher tone in releasing a statement on its opposition to the bill.

“The (bill) is laden with so many policy prescriptions that its impact on the U.S. is almost impossible to measure and evaluate,” Stallman said. “We can be certain of some things, however—it will increase our operating costs and reduce our competitiveness abroad.”

According to Stallman, the measure does not adequately provide for alternative sources of energy that will “plug the hole” created when fossil fuel costs escalate dramatically. Farm Bureau is also concerned about the potential impact on fertilizer prices, given their sensitivity to natural gas costs.

“The bill would effectively lock the United States into these changes regardless of what is done by other countries, such as China and India,” Stallman said. “Such an approach is little more than gambling with U.S. jobs and productivity. Taken as a whole, the bill falls far short of what is necessary for agriculture to survive and grow.”

So the battle lines are drawn. We know that some groups are working hard to have “a seat at the table” in order to influence whatever comes out of Waxman’s committee, while others are working feverishly to stop the legislation altogether. The measure could die a slow death “kill in the Senate, where . But the biggest wild card it that the Environmental Protection Agency (EPA) might attempt to lower greenhouse gas emissions through regulations if no legislation is adopted.

Agriculture News, Farm Policy, and Rural Policy

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