Despite lawmakers' warnings, few Iowa farmers face estate tax

If the tax reform packages that have now passed the U.S. House and Senate become law, at least one thing appears likely: The federal estate tax will be slashed and perhaps eliminated altogether.

That will represent a victory for Republicans in Iowa’s congressional delegation, who have consistently opposed the tax and argued it unfairly lumps in the state’s farmers with some of the country’s richest families.

But a review of federal tax data and nonpartisan research on the subject shows that family farmers and small business owners represent a tiny share of estate tax payers, and that the taxes they owe rarely force them to sell land or quit farming.

The number of Iowans paying the estate tax actually numbers in the dozens each year, out of roughly 1.4 million who file federal tax returns each year. IRS data from the last five years shows the number of Iowa taxpayers owing estate taxes ranged from 32 in 2012 to 61 in 2015, and that the vast majority of those probably were not farmers or small business owners.

Despite that evidence, U.S. Sen. Chuck Grassley, a member of the tax-writing Finance Committee in the Senate, has long presented the estate tax as a potentially ruinous burden on farmers and small business owners.

“The federal estate tax may force family members to liquidate to pay the death tax,” Grassley said in a statement released earlier this year. “It’s harder than ever for families to pass down the family-run farm or business from one generation to the next. The death tax creates financial hardship for family businesses to survive and thrive.”

The estate tax is a 40 percent tax on wealth assessed when a person dies, and currently is applied to assets above $5.5 million for individuals and $11 million for couples. The House and Senate bills double those exemptions to $11 million and $22 million, and the House version abolishes the tax completely in 2024.

In a statement after the House bill passed, U.S. Rep. Steve King, a Republican from Iowa’s ag-heavy 4th District, cheered the changes, arguing the estate tax “often falls hardest on family-owned farms and small businesses.”

Likewise, U.S. Rep. David Young, a Republican whose district includes the Des Moines metro, has highlighted changes to what Republicans often call the “death tax.”

In a newsletter sent on Friday, Young called it a "myth" that "repealing the estate tax is a massive giveaway to the wealthiest Americans."

Rather, he wrote, "The estate tax (sometimes called the death tax) negatively impacts farms and businesses all over the 3rd District. ... Death should not be a taxable event and families should not have to fear the Internal Revenue Service and more taxes making it more difficult and costly to pass on the farm or family business to the next generation."

That view, in fact, has been a GOP talking point for a generation or more. President George W. Bush made the exact argument in 2001 when pushing tax cuts that raised the estate tax exemption and lowered rates.

“To keep farms in the family, we are going to get rid of the death tax,” Bush declared back then.

Few farmers affected

The arguments from Grassley, Young, King and others, however, don’t match the reality found in federal tax data – particularly for Iowa.

The estate tax applies to around 5,000 taxpayers across the entire country each year, and very few of them come from Iowa. Of the Iowans subject to the tax, only a fraction are actually farmers, and a vanishingly small number of them face a tax bill requiring them to sell off farmland or other assets.

No data is available breaking down the occupations or asset types held by the Iowans subject to the estate tax. But national data shows farmers and owners of farm assets make up a tiny share of estate tax payers.

According to IRS data from 2016, just 682 tax filers in the entire country who owed estate taxes owned any farm assets. That represents about 13 percent of the 5,219 estate tax returns in which taxes were owed.

And even that figure likely overstates the number of primarily farm operations subject to the tax. A 2015 report from the Congressional Research Service projects that just 65 farm estates annually across the U.S. face an estate tax liability. Less than a quarter of these, the congressional report finds, have insufficient cash to pay their tax bills.

A U.S. Department of Agriculture analysis published earlier this year found a somewhat higher number of farm estates owed the tax in 2016: 0.4 percent, or about 160 nationwide.

Kristine Tidgren, the assistant director of the Center for Agricultural Law and Taxation at Iowa State University, said she’s not aware of any Iowa estates forced to sell land since the estate tax exemption was raised to its current level in 2012.

“I haven’t come across any examples of an Iowa family that had to sell the farm to pay the estate tax,” Tidgren said. “I don’t think the current estate tax system threatens family farmers.”

The USDA report puts hard numbers to the tax liability faced by the few farms subject to the estate tax.

Operations the USDA classifies as small family farms (those with annual income under $350,000) face an average tax bill of about $620,000, or 11 percent of their total value of the estate. For mid-size farms (with annual income between $350,000 and $1 million), the average bill is $3.7 million, or about 24 percent of the estate’s value.

Tidgren said the farmers facing such a bill are typically diversified — perhaps with an off-farm job or business and liquid assets like stocks and bonds in addition to real estate and equipment.

“With the price of land, there are some farms in Iowa that definitely have to worry about the estate tax, and they might end up having to pay some,” she said. “But generally those are larger operations and oftentimes they have other assets outside of the farm property.”

The number of small businesses impacted by the estate tax is similarly small. That same Congressional Research Service report finds about 94 estates annually that hold half or more of their assets in a small business that heirs will continue to operate after the owners die. And fewer than half of these don’t have the cash on hand to pay the tax.

All this means, in essence, is that lawmakers’ argument for abolishing a tax that generates tens of billions of dollars annually is based on the challenges faced by perhaps a few dozen farm estates and a few dozen more small businesses across the entire country.

When asked for data supporting Grassley’s view, his Senate office offered a report from the American Farm Bureau Federation, which showed that rising land values in recent years have increased the number of farms potentially subject to the estate tax.

That report found Iowa farms with as few as 625 acres — encompassing as much as 30 percent of farms in the state — could be subject to the tax in 2016.

This analysis overlooks key factors, however. For one, it applies an exemption level of $5 million, which is roughly the exemption for an individual. For married couples, the first $11 million in assets are exempt from the tax. Using the Farm Bureau’s analysis but applying an $11 million exemption suggests only farms with more than about 1,400 acres might face the estate tax. Ten percent or less of Iowa farms are that size.

The Farm Bureau analysis also does not account for various deductions available that can drive an estate’s taxable value below the $5 million threshold. Of the 120 Iowa taxpayers who filed an estate tax return in 2016, 118 claimed deductions and 44 actually owed taxes.

Young, King and 1st District U.S. Rep. Rod Blum voted for the House version of tax reform containing the estate tax repeal. Grassley and Iowa Sen. Joni Ernst likewise voted for the Senate version, and Grassley this year co-sponsored standalone legislation to permanently abolish the estate tax.

In a Nov. 29 interview, Grassley was adamant about the need for change, even if farmers and small business owners represent a tiny minority of estate tax payers. The reason, he said, is as much philosophical as practical.

An estate tax effectively and unfairly taxes a person’s earnings twice, he argued: first when they earn it and again when they die. And, he added, it penalizes savers without touching spenders.

“I think not having the estate tax recognizes the people that are investing,” Grassley said, “as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.”

The seven-term senator runs an operation in Butler County with his son and grandson and frequently describes himself as a farmer. When asked if his own family farm would be subject to the estate tax, Grassley initially said it would not.

Then, after mulling it over a moment, he backtracked, noting that if he and his wife died on the same day the estate would be subject to the $5.5 million exemption rather than the $11 million exemption and likely would have to file an estate tax return.

What the changes might mean

Should the tax reform package ultimately pass with language doubling the exemption or ending it all together, Tidgren said one likely effect would be simplifying farmers’ financial planning. That’s particularly true for those who end up owing little or nothing, but must take complicated steps to get there.

“There is a lot of expensive planning going on to try to reduce any liability that you have. That’s just smart business,” she said. “So the one thing I would say about the proposals on the table is they would definitely reduce the need for the vast majority of our farmers to worry about it at all.”

Grassley echoed that point in a statement to the Des Moines Register, citing estate tax-related planning as a major headache for farmers and business owners.

“Family farmers, small businesspeople and others that may be affected by the estate tax understand that it is law, so many are forced into spending large sums of their hard-earned dollars on lawyers and accountants to avoid its impact instead of reinvesting in their business,” he said. “This means that while many don’t end up paying the tax, it still has a negative effect on the economy.”

Beyond that, of course, pulling back or eliminating the estate tax would save billions for the richest Americans. Seventy-two percent of estate tax payments come from the top 1 percent of U.S. taxpayers; 42 percent comes from the top 0.1 percent.

How the estate tax works

The estate tax is a 40 percent tax on assets assessed when a person dies. The rate and income levels subject to the tax have bounced around a lot over the last two decades, but under current law it kicks in on assets above $5.5 million for individuals and $11 million for couples.

How might that play out in real life? Imagine a couple with assets — property, stocks, cash savings, etc. — valued at $21 million. When the surviving spouse dies, the estate would owe $4 million in estate taxes — 40 percent of the $10 million above the $11 million exemption.

(This is just an example; there are several available deductions that could drive down the tax liability even further.)

The tax bill that passed the Senate last week doubles the exemption to the tax, so that it’s applied only to an individual’s estate above $11 million or a couple’s estate over $22 million. In the example given above, the couple would no longer be subject to the estate tax at all; their assets are below the $22 million exemption.

The House’s tax reform package, passed in November, is even more generous: It doubles the exemptions starting in 2018 and then abolishes the tax altogether in 2024.

The Senate version would reduce government revenues by $83 billion between 2018 and 2027, according to the Joint Committee on Taxation. The House approach would reduce government revenues $150.7 billion over that time.

The House and Senate must now reconcile the differences between their bills and send a final version to President Donald Trump.