When we ought to be solving the budget problems and avoiding the fiscal cliff, Rep. Kristi Noem and Senator John Thune dredge up their death-tax chant again. Rep. Noem recites her poor-me story about her dad Ron's death and her family's need to take out a loan to pay the estate taxes due on their big farm... a story that could have been avoided, I take it, if Ron Arnold had had the good sense to buy more life insurance and make his still-living wife a co-owner. (See David Lias's sensible treatment of this issue in his August 2010 discussion of Noem's estate-tax sob-story.)
But don't let Kristi's tear-glimmered eyes or Ron's bad planning distract you from the main point of the story: the Noems and Arnolds did not lose their farm. Whatever they paid in estate taxes back in 1994—or, more likely, over the ten years that land-rich, cash-poor farms can usually defer their payments—they got back from Uncle Sam in the form of over three million dollars in farm subsidies. In other words, the Arnold heirs have nothing to cry about.
Neither, it seems, does any other farm-based opponent of the estate tax. Back in 2001, when we labored under the tougher estate tax regime to which we will revert if Congress can't strike a deal by year's end, estate-tax opponents couldn't cite a single example of the estate tax taking away anyone's farm:
Neil Harl, an Iowa State University economist whose tax advice has made him a household name among Midwest farmers, said he had searched far and wide but had never found a case in which a farm was lost because of estate taxes. ''It's a myth,'' Mr. Harl said.
Even one of the leading advocates for repeal of estate taxes, the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes.
...In Iowa, the average farm has a net worth of $1.2 million. Loyd A. Brown, president of Hertz Farm Management in Nevada, Iowa, which runs more than 400 farms in 10 states, said none of his firm's clients nor anyone he knew was facing problems because of the estate tax [David Cay Johnston, "Talk of Lost Farms Reflects Muddle of Estate Tax Debate," New York Times, 2001.04.08].
Talk of farms lost to the estate tax is just that: talk. Rep. Noem didn't lose her farm to the estate tax; neither has anyone else. Once again, Republicans prefer slogans and imagery to reality in forming policy in Washington.
Related: Rep. Noem translates this empty talk into justification for a full repeal of the estate tax. However, repealing the estate tax for the ag industry could hurt small farms by driving up land prices.
Oh the problems involved with inheriting millions of dollars! Poor Kristi!!
Hey Kristi - You didn't build that. But you got the money anyway. I'm o.k. with it if we replace the estate tax with an income tax payable by beneficiaries.
A lot can change in a decade.
According to the good folks at SDSU, combined Ag Land is currently valued at $1,742 per acre (Cropland $3,084, Native Rangeland $737, Pasture $1,218, and Hayland $1,758).
The earliest date I could find from the same report was 2004, where combined Ag Land was valued at $541 (Cropland, for instance, was $1,733, less than what Hayland goes for now).
Think what the value of that land would be in 2001. Assuming a 10% climb every year, figure it was about $400 per acre in 2001. That means a farmer could pass on 2,500 acres or 15.6 quarters of ground before ever paying a nickel to Uncle Sam in estate taxes.
At $1,742, a farmer could pass on about 574 acres (3.5 quarters of ground) before he or she would trip that $1 million mark. Effectively, that allows 3 quarters of ground to be passed on tax free. Since the tax rate is 55% of anything above $1m, the taxes on that fourth quarter would be about $76,600 (55% x 1742 x the 80 acres subject to tax).
After that, the average tax bill is going to be about $960 per acre of land in the estate, and $0.55 on every dollar the folks had saved.
As of 2010, the average size of the 31,800 farms in South Dakota was 1,374 acres (8.5 quarters of ground). So the average farm is worth $2.4 million, meaning each estate gets to pay at least $766,400 in taxes.
Good luck coming up with that from under the sofa cushions.
The gross rate of return on ag land in 2012 was 4.2% (6th consecutive year with the gross rate of return being below 4.5%, even with farm subsidies and bumper crops). That's before property taxes, income tax, etc.
Considering we're content to let our health insurance agencies be capped at 20% profits, I don't suppose we should be too offended with a 4% profit margin for our farmers.
Let's do the math quick, though - since you can defer taxes on that land and keep it. 4% gross return is about $70 per acre x 10 years = $700. That still leaves a hole of $260 on that one acre of ground, and you've been deprived of any ability to reinvest in your farm (let alone pay property taxes, etc.) for an entire decade.
I grant I'm not adjusting for 10 years of inflation. Maybe the math works out, but I wouldn't count on it. You're still talking a lot of wealth being taken from salt-of-the-earth kind of people. These aren't high rollers with a different sports car to drive every day. These are people who don't just clock in from 9-5 to make their living.
You can leap on me all you want, but I say they've earned it. Farming is a tough, crummy, dirty job with great risk of injury. The reward is knowing if you take care of the land, the land will take care of you & your family. There's not much incentive if your family cannot benefit from the sweat of your brow.
WayneB makes good sense.
Farms are broken up for multiple reasons. I have one of Harl's books, but farms and ranches have been crippled if not broken up by inheritance and estate taxes in the past. Sorting out reasons for farm sales is probably not a matter of black and white clarity.
Land is taxed enough as it is. We get next to zero services from our land taxes. The land taxes amount to a huge subsidy for city and town residents when the land is included in the school districts.
Increase the exempted amount for inflation yearly. Of course, then the partisan hacks will lose another issue that does not need to exist.
Bloomberg: "In a joint statement today, Buffett, Soros and more than 20 other wealthy individuals asked Congress to lower the estate tax’s per-person exemption to $2 million from $5.12 million and raise the top rate to more than 45 percent from 35 percent."
http://www.bloomberg.com/news/2012-12-11/buffett-joins-soros-in-effort-to-raise-taxes-on-estates.html
Big Beef behind fat kids:
http://www.kansascity.com/2012/12/10/3954235/industry-fights-back-using-money.html
They should set the exemption amount at something reasonable (3 to 5 million) and raise it yearly to account for inflation.
As another commenter pointed out, Kristi's family was also affected by the State of South Dakota's estate tax which we no longer have.
"The Hefty estate tax that Noem is talking about paying was the very high South Dakota Extate tax that had only the first $35,000 exempt. Her party was the one that was always against raisining that level up or eleminating that, Larry Diedrich who ran for congress was canpaingning on elminnating the federal estate tax that has the first million or so exempt however when he was in the South Dakota Legislature he repeatedly along with his republican colleges voted on party lines to modify or eleminate in many differant bills this tax. If Noem is complaining about the hefty bill she had to pay she can thank her party who were always against changing it. It just amazes me how the big taxing republicans can make the public think they are against taxes!!!!"
A pair of problems with WayneB's analysis. First, married couples can double that $1 million exemption. Second, estate planning can further minimize estate taxation. Third, anybody subject to estate taxation has a minimum net worth over $1 million - which is exempt from any tax at all. No estate tax is going to take any estate down below a million dollars to pass along.
But let's just do away with the estate tax, and impose income taxes on the beneficiaries. If Jr. earned $1 million working for mom & dad, he'd pay income taxes on it. So if he receives $1 million from mom & dad without working he ought to pay income taxes on it and consider himself lucky he didn't have to actually work for it.
fairtax.org Ror...read it. Contrary to Cory worrying about fraud without the IRS, there is much less fraud in the sale tax collection by private and public retail.
Rorschach,
1) a) I believe you are in error - the tax is levied on the estate of the deceased. The rate doesn't care if the decedent was married or otherwise. b) Even if I'm in error, I contend we shouldn't hinge the fairness of a policy on whether or not one is married. We shouldn't compel our farmers to hitch up just to avoid estate tax penalties. It's doubly unfair for anyone who is a homosexual farmer, I might add.
2) Estate planning can help, but it requires resources, lawyers, and a LOT of forethought... there's only so much even lawyers can do to insulate heirs from the tax code, though. I have a serious problem with hiding the secret golden ticket to and penalizing people for not knowing better.
3) That's kinda the point. You'll get to keep that $1 million worth of estate, but it'll absolutely decimate anything above that amount. Again, given that the average farm consists of 8.5 quarters, and you can get 3.5 free and clear, that's still 5 acres of land... meaning you have to sell 3 to pay the taxes on them. That's a 35% reduction in your ability to make ends meet.
4) Regarding turning inheritance into income: Why should we take away the ability of people to bequeath their assets to others? Why should that transfer be taxed? You may not have "earned" that gift, but someone did and already paid the taxes to have it free & clear.
Practically speaking, I would be more likely to agree with you on counting it as income so long as inheritance was taxed at the rate of all Capital Gains; then getting a loan to pay 15% tax is much more manageable. It doesn't negate my moral outrage for double taxation, but it at least causes less harm.
I contend it is an essential tenet of the American Dream to reap the rewards of our hard labor, and ensure our offspring can enjoy a better life than we had. How can we hope to do that if we allow our government to take an additional slice of what's already been paid for? Realistically speaking, I cannot count on a social safety net - the Boomers ate too much at the trough. The inheritance I hope to get from the hard work of my grandparents and my parents will play a crucial role in ensuring I am not a burden upon society in my elder years.
If sales-tax fraud happens in Freeman, but there are no tax cops to hear it, did the fraud really happen?
Apparently Ror's parents and grandparents weren't very industrious Wayne.
You've obviously never had a tax license and as well sales tax audits Cory.
How many IRS agents or CPA's pay your tax if it is incorrectly figured Cory?
.
If I as a retailer sell you a tractor, and incorrectly figure the tax or for some other odd reason including fraud the proper amount is not paid, I am required to make up the difference or the full amount.
.
Don't you think the might be a little less fraud with income tax if it worked that way with the above mentioned?
O.K., so we still need tax cops, right? If I can hide income, I can hide sales, right? Is sales tax easier to enforce just because there are fewer points of collection to monitor?
I have a sales tax license, Les. I just don't have lots of sales. (Head down to Cliff Hangers Gallery and buy some paintings dang it! :-) )
If a married couple puts their estate in trust they each get an estate tax/gift exemption. This year they could double 5.12M and pass on over 10M tax free. If congress won't compromise it goes back to 1M next year. That's not fair for small businesses and especially hard on those that don't do tax planning!
And yes, this policy discriminates against gay farmers everywhere.
Of course we need cops Cory, even for you and I. :-)
Barter will alway be Uncles worst enemy when it comes to tax evasion. But, you only pay tax on the difference in a trade now so prob isn't a big deal.
.
I have no reason to sell you a $100 tool and not charge tax, but a cash deal can always happen I guess, though immediately I spend that $100 and pay the tax so it happens so much more quickly than with income.
The criminal loot gets spent with no tax and is a large number that would thus get taxed.
We will have the same tax police we now have in our state revenue dept.
I haven't inherited anything yet Les. Those who I might inherit from are still alive, thankfully, and doing fine financially. But if I do inherit over $1 million that I did not personally earn, which is a distinct possibility, you won't find me whining about doing my share to reduce Uncle Sam's deficit. I'll just be happy about the amount I get to keep - 100% of which will be unearned by me.
I just don't feel like listening to people whine about the taxes owed from their unearned windfall. Lottery winners pay income taxes. Big heirs are lottery winners of a sort - having simply been lucky to receive the fruits of someone else's labor. It's not double taxation to impose income tax on lottery winners or inheritance beneficiaries. Each of them should pay only one income tax on what they receive.
Very wealthy people have long worked to create multi-generational wealth with no guilt about using every tax loophole and shelter. It's about time middle class people get a chance to pass a modest inheritance without having to hire a team of tax lawyers to do it.
In 2011 the exemption was 5M: "Tax data suggests that farmers account for a very small amount of estate taxes paid. According to the Tax Policy Center, of the 3,270 taxpayers paying an estate tax in 2011, fewer than 50 were small farms and businesses, representing just over one percent of total estate taxes paid.
The top one percent of earners, by contrast, paid nearly 80 percent of the estate tax last year. The top 0.1 percent paid nearly half."
http://www.cnbc.com/id/100296248/Next_Battle_on_the_039Cliff039s039_Edge_Estate_Taxes
Plan ahead: if you want to pass a multi-million-dollar farm down through the family, if the next generation is already putting in lots of time and effort on the farm, why aren't those younger folks owners already? Make those kids owners right away when they start putting in their sweat, and inheritance isn't even an issue.
And let's not forget, there isn't one example of the Paris Hilton tax breaking up a family farm. Not one.
Ror, in my family past and present, the children worked long hours usually through their college years. That didn't or doesn't end there with continued sharing of their time throughout life. Maybe that didn't happen in your life and maybe yu just don't feel you deserve anything if it did.
.
Cory, it isn't about those of us smart and able enough to bring about estate tax relief. It is about forcing enough rules on a system where you will catch the unaware or unable which will always be the smaller operators, people such as yourself who may end up with some rental prop, investments turned gold or where even inflation took you by the horns in yr golden years where savvy operations are not the rule of the day.
.
Your no example of a lost farm is bs, with anywhere from 500 to 1000 on up percent inflation in land that scenario doesn't hold water. That was then, this is now.
Denise Ross: John Thune has no significant policy achievements.
Where are NOem's misty eyes when it comes to the protection of women? Why does she not support the Violence Against Women Act? We may have to ask Tim Giago on that as it was he who gave his support to her as someone who could do good things for Indian Country. She betrays that the same as her fake outrage over this non existent tax.
Les, consistency check: if farms worth millions deserve exemption from the estate tax, do other businesses of similar worth deserve that protection?
All family operations suffer at the hands of this issue. I'm not the horn for the farmers Cory. They don't need me.
.
I have a brother wealthier than I'll ever be who says, there are always legal options whether it is income or estate taxes. There are many who don't have the resources be it brains or money to make that work.
US borrowed at least $4trillion to fund fake WMD now it's time to pay up: "The estate tax began in 1916 as a way to help raise money for World War I by taxing what the super rich leave to their heirs."
http://www.marketplace.org/topics/wealth-poverty/past-present-and-future-estate-tax
We should be encouraging a strong middle class while discouraging American dynasties. One, 3, even 10 million dollar estates are not the super rich. A country with rich/poor is unstable. Crazy to watch the Koch brothers influence national policy (break unions etc).
Jerry and Larry, John Thune also voted against the Violence Against Women Act based objecting to protecting our Native American sisters.
Les, differences in smarts seem to justify all the more a tax system with no exemptions, no games to be played. Raise the exemption in accord with inflation, and make no exceptions. Make clear to everyone how much they get to inherit and how much we expect estates to put back into the game for everyone to compete for. A dynasty is a dynasty, whether they make their living in stocks or livestock. Concentrating wealth (cash, houses, land) in anyone's hands is bad for the overall economy. We can argue about the proper cut-off, but the estate tax is not the unmitigated evil Noem and Thune want us to believe it is.
I could agree with that scenario Cory.
Sparking of tax on ignorance. The lottto's and Deadwood continue to prove they are the easiest of all.
Gambling is a useful extreme test case of what you're talking about, Les. Folks with smarts stay away from gambling, because they know it's a losing proposition. I'll take estate, sales, property, and income tax as bases for government revenue over gambling any day. Given that one observer calls gambling "the single most insidious way that state governments raise money," maybe Noem, Thune, and others ought to turn their attention to stamping out gambling before they resume their hyperventilation over the inheritance tax.