No, the estate tax isn’t destroying family farms

Congress is voting this week on whether to repeal the estate tax. The step would be a huge boon to billionaires and others whose fortunes would forever escape taxation, creating an even larger dynastic class of inheritors who owe their riches to their skill at picking their parents.

But that’s not what was heard at a House Ways and Means Committee hearing last week. Instead the theme was how the tax was eviscerating American farmers.

This plan has no chance of becoming law while President Barack Obama is in office, but it has some Democrats running scared instead of standing on their principles. Some of them are talking about exempting farmers from the estate tax.

On the basis of the hearing, it’s hard to imagine why any people would want to farm or run their own business — that is, if you assume the hearing was grounded in reality.

The fact is that any claim that the estate tax is killing family farms is a lie.

How many of America’s 2.2 million farms have been sold to pay estate taxes? None.

Committee Republicans tried to explain away that inconvenient fact by saying that the estate tax forces farmers to set aside so much money to pay it that it interferes with their operations. Their rhetoric was as long as the facts were short.

Some committee members asserted that the estate tax forces heirs to sell farmland to pay estate taxes, resulting in smaller and less efficient operations. But the only example cited by a witness dated to the late 1990s, when the amount of wealth exempt from the estate tax was about a tenth of what it is today. That farm exists in an urban setting — meaning its continued operation is not the highest and best use of that land.

Estate tax or no, farmers have always sold out in urban areas and moved to less costly land — a lesson I learned in the 1950s growing up on an orange ranch in Orange, California. Hundreds of acres of orchards where my pals and I built forts with orange crates, re-enacted World War II and camped out on summer nights were bulldozed, the huge piles of trees set ablaze to make way for suburban houses.

The Ways and Means hearing came 14 years after I hunted for farms that had been lost because of the estate tax. President George W. Bush wanted to repeal the estate tax entirely, and to advance that cause he repeatedly said it was destroying family farms.

But the Bush White House could not point me to a single example, nor could the American Farm Bureau or other organizations I contacted.

Harlyn Riekena and two dozen other central Iowa farmers — every one a Republican — told me they favored increasing the estate tax exemption, then about $1.3 million for a married couple, but not the repeal proposed by Bush and other party leaders, which they saw as a favor to Wall Street.

When I met with the Marshall County board of supervisors, all of them farmers, they laughed out loud when asked if we needed estate tax repeal to save family farms. In salty language, one supervisor said he was surprised at the gullibility of network television journalists whose reports lacked any skepticism about Bush’s statements.

Professor Neil Harl, an Iowa State University economist whose tax advice has made him well known among Midwest farmers, said for 35 years he searched without finding one family farm lost to the estate tax.

“It’s a myth,” he said.

I did finally manage to find two examples — not that they were particularly apt and not that we should make national policy on the basis of anecdotes.

One was a California vineyard, but the problems dated to 1981, before federal estate tax law was changed to allow a surviving spouse to inherit free of tax.

The other was a Colorado rancher whose family inherited little of what could have been a good-sized fortune. Their father had failed to file income taxes for years, did no estate planning and did not even write a will, resulting in the Internal Revenue Service’s auctioning off the land after he died to pay taxes, penalties and interest. Had he availed himself of the tax avoidance opportunities Congress allows, his family could have inherited all his land while paying little or no tax.

Two months after my piece about the myth of the family farm ran on the Sunday front page of The New York Times, I was astonished to learn that Bush told an Iowa audience he had just spoken to families whose farms were lost to the estate tax. My calls to the White House press secretary asking for details so I could run a corrective piece evoked promises to call me back. I never received a follow-up call.

That Rep. Paul Ryan, the Wisconsin Republican who chairs the tax writing Ways and Means Committee, could not find a single case of a farm lost to the estate tax for last week’s hearing illustrates his willingness to use lies to sell his policies.   

So just how common is the estate tax burden among farmers now? Even if no one is forced to shut down the farm or even sell some land, how many farms pay this tax after the farmer dies?

In 2013 just 660 taxable estates included any farm assets, the latest IRS report shows. The average value of those farm assets was $2.8 million, well below the current exemption from the estate tax of $5.2 million ($10.4 million for a married couple).

Congress grants extra exemptions for working farms and for small businesses (a twofer for farmers, since a farm is also a business). Congress also allows big discounts for minority interests in land given to heirs during a farmer’s life. Then there are blockage discounts because as long as Mom or Dad is alive, the children cannot sell the land, further reducing the value for estate tax purposes.

The estate tax rules are so lax that a farmer with two or more children who starts arranging an orderly transfer of assets a decade or two before dying can pass on tens of millions of dollars for less than the cost of a new subcompact car while retaining ironclad control of the operation until death.

All this means those 660 taxable estates were not yeoman farmers working their own land but more likely gentlemen such as the cable television billionaires Ted Turner and John Malone, who each own more than 2 million acres of land.

On top of all this, when estate taxes are due on a farm, Congress lets people take years to pay off the obligation, in effect granting a loan from the government. The interest rates are exceptionally favorable, far below what any bank or credit union would charge.

The Tax Policy Center did a sophisticated analysis of the most recent estate tax data using its proprietary computer model. The center is a joint project of the Brookings Institution and the Urban Institute and is run by economists who have worked in both Republican and Democratic administrations. The center’s computer model has proved highly reliable over the years.

Nationwide, only 20 farms a year pay estate taxes, the Tax Policy Center estimated. That’s less than 1 in 100,000 farms. That estimate is limited to estates in which the farm represented more than half the wealth, thereby excluding gentleman farmers like Malone and Turner.

And what of the burden of the estate tax? The top tax rate is 40 percent. So just how big is the actual bite?

Just 4.9 percent of the value of the taxable estate, the Tax Policy Center calculated.

We need to reform the estate tax system. I would start by changing the code to tax capital gains at death, as Canada does, and to limit the estate tax to huge concentrated fortunes — say, of $1 billion or more. But we should all agree to reform it on the basis of facts, not lies.