Editor's Note: The following guest editorial by Arkansas Farm Bureau President Randy Veach ran in the Jan. 2 edition of the Arkansas Democrat-Gazette. This editorial was written before the fiscal cliff bill cleared both houses of Congress. The recently approved bill will change estate tax laws in the following ways: Estates will now be taxed at a top rate of 40 percent (up from 35 percent), with the first $5 million in value exempted for individual estates and $10 million for family estates.
Thanks to Sens. Mark Pryor and John Boozman for their efforts to bring common sense to the discussion on the estate tax, the most pressing tax matter for our state’s farmer and ranchers.
Pryor is co-sponsor of Senate Bill 3440, which would extend by one year the current estate-tax regulations, which provide for a $5 million exemption and a top tax rate of 35 percent. Without congressional action, the estate-tax exemption would shrink to $1 million per person and the top rate would balloon to 55 percent. Boozman has expressed support for the extension as well.
Pryor’s efforts to deal with the estate tax as part of the fiscal-cliff debate have been in opposition to his party’s position on estate-tax reform. Thankfully, Pryor and Boozman are trying to protect Arkansas’ farm families and other small businesses with a more reasonable approach to the estate tax.
In Arkansas, United States Department of Agriculture data indicate that there are 7,543 farms and ranches that would be affected by a drop in the exemption rate to $1 million. The $5 million exemption excludes all but 1,015 Arkansas farm entities. So that’s more than 6,500 Arkansas farms and ranches that could be affected by the proposal.
This is an example of how our tax policies in this country have not kept up with technology/equipment costs and the pace of change in agriculture. To stay in business with razor-thin profit margins, many farms have had to get larger, taking advantages of economies of scale to remain profitable, and therefore sustainable. This has led, naturally, to investment in more land, larger equipment, expansion of herds and livestock operations, which have increased the asset levels for many family farms.
Estate taxes hit family-owned farm and ranch operations hard because of the asset-heavy nature of farm and ranch business property. With 84 percent of farm and ranch assets tied up in land, agriculture producers have fewer options when it comes to generating cash to pay the estate tax.
When the tax on an agricultural business exceeds cash on hand, surviving family members can be forced to sell needed land, buildings or equipment to keep their businesses operating. This can cripple a farm or ranch operation, but also hurts the rural communities and businesses that agriculture supports.
While a one-year extension is helpful, it is imperative that lasting estate-tax reform be part of the ongoing financial debate in Washington. It is worth mentioning that the assets that get transferred to the family upon death have already been taxed when they were first earned, a confounding situation of double taxation.
The temporary up and down nature of the estate-tax exemption makes it difficult, if not impossible, for farmers and ranchers to engage in planning for the transfer of a family business from one generation to the next. While estate planning may be able to protect some family farms and ranches from the devastation of estate taxes, planning tools are costly and take money that would be better used to operate and expand businesses.
Even with planning, changing asset values and family situations make it impossible to guarantee that a well thought-out estate plan will protect a family business from estate taxes.
Farmers and ranchers—and the Arkansas Farm Bureau—understand the need of our country to get its financial house in order. We have proven a willingness to take proportionate cuts in support programs. But if we overreach on tax issues that disproportionately hit agriculture, we affect the profitability and sustainability of agriculture, and the jobs the industry supports.
The estate-tax issue is just one of the issues that must be dealt with. Thanks, again, to Sens. Pryor and Boozman for trying to bring common sense to the equation.
Randy Veach is a cotton, soybean, corn and wheat farmer from Manila. He serves as president of the Arkansas Farm Bureau, the state’s largest agricultural advocacy organization.