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A group aligned with Senate Minority Leader Mitch McConnell is airing a new ad in Kentucky that touts the Republican leader as a friend of farmers.
The new 30-second spot, which began airing April 1, 2014, is part of a $1.8 million ad buy from the Kentucky Opportunity Coalition, which hopes to boost McConnell as he enters a primary challenge and re-election battle. It features a farmer who laments the impact of the "death tax," known officially as the estate tax, on family farms.
"As a farmer there’s good years and bad," he says. "The last thing we need is Washington making it harder on us. The death tax makes it harder for us to hand our farm on to our kids. Mitch McConnell has been fighting to end the death tax to help us keep our Kentucky family farms. For our family farms to survive, we’ve got to get in this fight."
McConnell (like many Republicans) is a staunch opponent of the estate tax, a tax on property transferred after death through an inheritance. It’s mostly viewed as a tax on wealthier individuals, but the pro-McConnell ad claims it threatens "Kentucky family farms" as well. Is that true?
Recent history of the estate tax
The estate tax was first established in 1916 to offset a decline in tariff revenue caused by the first World War, according to the Congressional Budget Office. Congress has tinkered with it many times throughout the years, especially during the past decade or so.
In 2001, President George W. Bush signed legislation that created an exemption for the first $1.5 million of an inherited estate. The exemption increased for the next few years to $3.5 million with the intention of eliminating the estate tax completely in 2010.
But the law was scheduled to sunset in 2011, along with the rest of the so-called Bush tax cuts. In 2010, Congress and President Barack Obama agreed to extend the Bush-era tax rates by two years, while also raising the exemption on the estate tax to $5 million in 2010 and indexing it to inflation for 2011 and 2012. Income after $5 million was taxed at 35 percent.
In 2012, Congress and Obama compromised to keep the estate tax above $5 million but increased the tax rate to 40 percent. That’s where it sits today.
You can see why this is viewed as a tax on the wealthy. The vast majority of Americans do not pass along estates to their children after death valued at greater than $1.5 million, let alone $5 million. According to the nonpartisan Tax Policy Center, in 2011 the top 1 percent of earners paid almost 80 percent of the estate taxes collected; the top 5 percent paid 97.6 percent.
The small percentage who do pay the tax, however, face a stiff fee. The 3,200 estates with taxable returns in 2011 paid a combined $10.6 billion.
Where do farmers fit in?
Republicans and opponents of the estate tax have often held up farmers as an example of a population especially burdened by this levy. Because many farmers own a lot of land and expensive machinery, the values of their estate can add up quickly, they say, but many don’t have the money to pay the high tax and could risk losing their farm.
Estimates, however, say that just a small percentage of farmers are actually affected by the tax. A 2005 study from the Congressional Budget Office estimated that if the exemption were set at $3.5 million in 2000, only 65 of the 4,640 farm estates filing returns that year would have surpassed the threshold needed to pay the estate tax. Of those, just 13 wouldn’t have enough money to pay their tax liability.
More recently, the Tax Policy Center estimated that in 2011, with the exemption at $5 million, 120 farms and small businesses would have to pay the estate tax. Their total taxes paid equated to about 6.3 percent of all estate taxes collected that year. About 40 of these filings came from "small farms or businesses," according to the analysis.
Congress has built in a number of provisions throughout the years to assist farmers. For example, the exemption doubles if the farm is owned by a couple, even if one of the owners dies. "The idea that if you’re married now you’re approaching $10 million, that’s a pretty hefty farm," said Bob Williams at the Tax Policy Center.
There is also an exemption that allows closely held family farms a reduction of up to $1.5 million to bridge the gap between the value of their property at the "current use value" versus the "highest and best use value."
If a farm does qualify for the estate tax, heirs also have 15 years to pay the tax.
But taking advantage of these provisions comes at a price, said Don Williamson, executive director of the American University Kogod Tax Center, not the least of which is the cost of accountants and lawyers who understand the complexities of estate planning.
Individuals that take advantage of certain provisions for closely held family farms also have to hold onto to the property for 10 years and use it for farming purposes. During that time the IRS places a lien on the property that makes it difficult to take out loans, said Williamson, who through his private practice has handled estate planning for farmers.
Farms close to urban hubs are especially at risk of seeing large increases in the property value when compared to their value as a farm, Williamson added.
Ongoing battle on the Hill
In his most recent budget, Obama called on Congress to return the estate tax to 2009 levels when the exemption was $3.5 million and the tax rate was 45 percent. Obama’s administration said the country can no longer afford to keep the exemption at $5 million and the rate at 40 percent.
However, it is unlikely Republicans who control the House are willing to renegotiate the terms of the 2012 compromise and increase the reach and the rates of the estate tax.
Sen. John Thune, R-S.D., has introduced a measure to eliminate the estate tax entirely. McConnell supports that idea, but it's equally unlikely to move forward.
Ed Koren, a wealth and estate lawyer and an adjunct professor at the University of Miami Heckerling Estate Planning Institute, said where the exemption falls will ultimately determine how many farmers are affected.
"Certainly if compared to those who would like to take it back to the way it was in 2000, it’s absolutely true (that farmers are threatened), even if you take it back to what the Obama budget proposal has said, there’s some truth to it," Koren said. "But it’s not that big of an issue if you keep the law where it’s at today."
The Kentucky Opportunity Coalition ad said the estate tax is a threat to family farms. If the exemption levels are changed, more farmers could be affected. Bureaucratic and accounting hurdles to avoid the tax can be difficult to navigate without assistance.
But most of the statistical evidence says that the vast majority of farms bequeathed to relatives don’t pay any estate taxes at the current exemption level. Even fewer are in a position where they can’t pay the liability. And there are provisions that make the payment process easier for farmers than other estate holders.
Further, the estate tax generally most affects the very wealthy. Nearly 98 percent is paid by the top 5 percent of earners.
The statement has an element of truth but leaves out important details that would give a different impression. We rate it Mostly False.
Kentucky Opportunity Coalition ad "Advocate," April 1, 2014
Kentucky Opportunity Coalition, "Kentucky Opportunity Coalition Turns to Family Farms and Taxes with New TV Ad," April 1, 2014
Congressional Budget Office, "Effects of the Federal Estate Tax on Farms and Small Businesses," July 2005
Kentucky Farm Bureau Newsroom, "AFBF: Death Tax Repeal Act ‘gets the job done’
Office of Sen. John Thune, "Thune, Brady Re-introduce Bill to Repeal Death Tax," June 19, 2013
Tax Policy Center, "Wealth Transfer Taxes: Who pays the estate tax?" accessed April 2, 2014
Tax Policy Center, "Estate and Gift Taxes," April 2, 2014
White House, "Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance," Dec. 7, 2010
Internal Revenue Service, "Estate Tax," accessed April 2, 2014
Internal Revenue Service, "Frequently Asked Questions on Estate Taxes," accessed April 2, 2014
Congress.gov, "H.R.8 - American Taxpayer Relief Act of 2012," accessed April 2, 2014
Phone conversation with Ed Koren, leader of Holland & Knight's Private Wealth Services Group and adjunct professor at the University of Miami Heckerling Estate Planning Institute, April 2, 2014
Phone conversation with Don Williamson, Executive Director of the American University Kogod Tax Center, April 2, 2014
Phone conversation with Bob Williams, Sol Price Fellow at the Tax Policy Center, April 1, 2014
Email conversation with Erin Donar, spokeswoman for the U.S. Treasury Department, April 2, 2014
Email conversation with Scott Jennings, spokesman for the Kentucky Opportunity Coalition, April 1, 2014
Treasury Department, "General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals," March 2014
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