More than a dozen House Democrats are urging their leaders to ensure that family-owned farms and small businesses are exempt from plans to curtail stepped-up basis, a potential preview of legislative fights to come.
Taxing unrealized gains at death and requiring those taxes to be paid immediately “could especially hurt family farms, some of which have been in families for generations,” said a May 6 letter signed by 13 House Democrats from rural districts. “We strongly urge you to provide full exemptions for these family farms and small businesses that are critical to our communities.”
The Biden administration has already signaled that it is sympathetic to those concerns. A fact sheet for the American Families Plan says its proposal to end tax-free stepped-up basis at death for individuals above a $1 million exemption threshold would be “designed with protections so that family- owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”
The letter warns that taxing capital gains at death could force the owners of family-owned farms and ranches, which may have built value over several generations, to sell some or all of their property to pay the tax. Valuing a farm’s illiquid assets presents additional administrative difficulties and costs, the House members said.
Accommodating the House members’ wishes to protect family farms and businesses in practice could prove challenging, according to Dean Zerbe of Alliantgroup LP.
“It’s easy to say that in a press release. It’s more difficult to do it in statutory language,” Zerbe, a former top Republican Senate Finance Committee adviser, told Tax Notes. To draft a provision like that in a way that narrowly applies to the intended target demographic won’t be easy, “because everyone will want to say, ‘That’s who I am, too,’” he said.
The Sensible Taxation and Equity Promotion Act of 2021, a recent proposal by Senate Budget Committee member Chris Van Hollen, D-Md., would similarly tax unrealized gains at death with a $1 million exemption. That proposal doesn’t offer any exclusion for family farms or businesses; however, it would allow taxes owed on some types of property to be paid over a 15-year period to avoid the forced liquidation of assets to pay the tax.
The letter could turn out to be one of many requests from House lawmakers representing varied interests, according to Zerbe. This and the statements on the state and local tax deduction cap highlight that “it’s not a walk in the park to be responsive to all these member priorities in terms of crafting the bill,” he said.
More than 30 House Democrats have drawn their own red line, saying they would not support an infrastructure package that didn’t include repealing the SALT deduction limitation. The White House has responded that it’s open to considering it, if repealing the SALT cap is paid for.
Requests like these will inevitably slow the bill’s progress through the legislative process, Zerbe said. The taxwriting committees also risk trouble if they go too far in accommodating lawmakers’ requests for exceptions or carveouts, because the Joint Committee on Taxation will “really hit your score hard” if the proposals seem too loose, he said.
“It isn’t just Santa with his sled; now you’ve got not just presents but coal coming, and it’s difficult to navigate that,” Zerbe said.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.