Copyright 1999 Federal News Service, Inc.
Federal News Service
SEPTEMBER 30, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
2411 words
HEADLINE: PREPARED STATEMENT BY
JOHN W.
LINCOLN
PRESIDENT
NEW YORK FARM BUREAU, INC.
ON BEHALF OF THE
AMERICAN FARM BUREAU FEDERATION
BEFORE THE HOUSE WAYS AND
MEANS COMMITTEE
SUBCOMMITTEE ON OVERSIGHT
SUBJECT - REGARDING THE IMPACT
OF TAX LAW ON LAND USE
BODY:
My name is
John Lincoln. I am a dairy farmer from Bloomfield, New York, where I own and
operate Linholm Farm with my wife Anne, daughter Julie and son-in-law Michael. I
serve as the elected President of the New York Farm Bureau and I am a member of
the Board of Directors of the American Farm Bureau Federation.
Like most New
York farmers, I have a special interest in land conservation. My farm is located
in Ontario County near Rochester. I serve on the Farmland Protection Board of
Ontario County and know first hand how development and urban sprawl can turn
farms and open space into housing projects and shopping centers. Thank you for
the chance to present the views of Farm Bureau on the impact of tax law on land
conservation. The American Farm Bureau Federation's interest in tax policy and
its impact on land conservation is keen. Production of food and fiber by farmers
and ranchers requires the use of large amounts of land. Roughly 43 percent of
the land in this country is farm and ranch land. When the lands owned by federal
and state governments are subtracted, farm and ranch land accounts for almost 70
percent of the privately owned land.
While tax policy is usually made with
the intent of doing good, often little thought is given to the "unintended
consequences" of tax policy on land use. Our comments will address both intended
and unintended consequences of the current tax system.
Federal Estate Taxes
At the top of the list of concerns of farmers and ranchers about unintended
consequences on land conservation from the current tax system is the federal
estate and gift tax. Farms and ranches are ongoing businesses. Many of these
businesses are multi-generation family businesses. The death of one member of
the family can directly impact the ability of remaining members of the business
to carry on operations after paying estate taxes. Land that would normally
remain in the family and be devoted to agricultural production is then available
to be put to other uses. Thus, the current federal estate tax law has, at times,
the unintended consequence of forcing familyowned farms out of business and
shifting agriculture land to other uses.
Owners of these multi-generation
farms and ranches often seek legal advice for estate planning to structure their
assets and operations to minimize the estate tax consequences of the death of a
member of the family. These actions are costly and may reduce the economic
efficiency of dayto-day operations. Land is not easily gifted in small blocks to
avoid the gift tax on yearlytransfers, therefore, limiting the usefulness of
gifting as an estate planning tool.
Farm Bureau policy has long called for
the elimination of estate and gift taxes. This would be the simplest, cleanest
approach to cancel the impact of estate taxes on land use. If elimination of the
estate and gift tax is not politically feasible, there are ways to lessen the
unintended consequence of forcing farmland to be sold and possibly shifting to a
different use.
The current per person exemption for assets in an estate is
$650,000. Current law will increase the per person exemption to $1 million by
2006. Farm Bureau policy calls for increasing that exemption to $5 million per
person. Exact figures are not available, but it is a reasonable estimate that as
high as 99 percent of the farmers and ranchers would be exempt from estate taxes
if the per person exemption was increased to $5 million and then indexed for
future changes in the overall price level. These farms could then be kept in the
family and continued as ongoing businesses. The changes in estate taxes in 1997
created a family-owned business exemption of $1.3 million. This is helpful, but
we continue to be concerned about how this section is administered so that as
many families as possible qualify for the exemption. In addition, this section
of the law is very complex and its use necessitates extensive and expensive
estate tax planning. Farmers and ranchers worry that even with careful planning,
their estate may be fail to meet all the eligibility criteria at their death
making a bad situation even worse. Increasing the regular per person exemption
would remove some of these uncertainties.
Another way to lessen the
potential for the estate tax to force a change in land use is through
special-use assessment under section 2032A. This provision allows for land to be
valued for estate tax purposes at its agricultural value rather than its market
value. Current law limits the special use evaluation to a reduction in value of
$750,000 (indexed for inflation). Removing the limit, or at least increasing the
minimum, would reduce the potential for land to change uses to meet the cost of
estate taxes, especially near large urban areas and around protected areas such
as national parks.
The yearly gift allowance should be increased to $50,000
per year so that land could be transferred before the death of the owner. Farm
property that is restricted by a voluntary conservation easement, while actively
farmed by the heirs, should be exempt from estate taxes.
The best way to lessen the impact on estate taxes on land
use would be to repeal the estate and gift
tax. The second best would be to increase the personal
exemption to the point that most farms and ranches would not be adversely
impacted by the estate tax. The third best solution is to expand the number of
ways that estate taxes can be reduced or delayed.
Establishment of Basis
The tax package that was passed by the House and Senate this summer and
recently vetoed by President Clinton had important estate tax changes supported
by Farm Bureau. The estate tax would have been repealed in 2009 and replaced by
a capital gains tax when property is sold. Of great concern to farmers and
ranchers was the loss of stepped-up basis for capital gains tax purposes. Under
current law, the basis for capital gains tax purposes is stepped-up for the
heirsto the value of the assets at the time of death of the decedent. The heirs
only pay capital gains taxes on the increase in value of assets during the time
they own the assets. The recently vetoed legislation would have made the
original basis of the decedent the basis for the heirs. This would have
significantly increased capital gains taxes for heirs who sell assets.
If
the assets of a multi-generation farm are not sold, basis is not an issue. But
in many cases the loss of stepped-up basis will impact whether or not land stays
in farming or is moved into other uses. Often one sibling in a family remains in
farming and/or ranching while other siblings pursue off-farm employment. The
farm or ranch is often the principal or only asset of the older generation. At
death, the farm or ranch is divided among the siblings. The sibling that has
remained in fanning or ranching has to buy, lease or rent the portions owned by
the other siblings.
If the other siblings wish to sell and use the money
for other purposes, they will face substantial capital gains taxes based on the
original basis for the property. This makes it more difficult for the actively
farming sibling to buy the land. If the basis was stepped-up, the taxes would be
less and the sibling wishing to buy would be in a better position to purchase
the land and keep it in farming or ranching.
In many situations, none of the
heirs wish to continue farming or ranching and all wish to sell. A capital gains
tax based on the carry over method increases the cost of buying land for younger
farmers just getting started and those wanting to expand their farming or
ranching businesses. When new or neighboring farmers and ranchers can't afford
to buy farmland, selling the land for alternative uses becomes the only option.
Capital Gains Tax
The capital gains tax is another tax that has
unintended consequences for land use and is closely tied to estate and gift
taxes. The capital gains tax is a tax on asset transfers from one form to
another, such as from farmland to certificates of deposits in a bank. The tax
can be avoided by simply not making the asset transfer.
Many farmers and
ranchers nearing retirement or in retirement are interested in selling land to
younger farmers and ranchers, including family members involved in the farm or
ranch operations. The current 20 percent capital gains transfer tax is a large
impediment to taking such action. Rather than making an orderly transition of
land ownership from one generation to the next, the land is often held by the
older generation until death and then caught in the estate tax web discussed
earlier.
Part of the problem with the capital gains tax is that it is a tax
on the total dollar gain in value, including the portion of the gain that simply
reflects the change in the overall price level for the economy as a whole. For
example, farmland is often held for 30 years or more. The overall price level is
roughly four times what it was 30 years ago. Land valued at $500 per acre in
1969 would have to sell for $2,000 per acre in 1999 for it to have the same
purchasing power as the $500 had in 1969. Any increase beyond the $2,000 would
be the "real" gain in the value of the land. Capital gains taxes are paid on the
entire increase in the value of the land, not just on the real gain. Once again,
this law leads to economic inefficiencies and unintended consequences of forcing
land use changes.
As with the estate and girl tax, the best policy reform
approach would be to eliminate the capital gains tax. If that cannot be done,
the gain should be indexed for the change in the overall price level and the
real gain taxed at a lower rate of 15 percent. Another option would be to allow
retiring farmers and ranchers to sell land and put the money into an IRA-type
account and pay taxes when the money is withdrawn from the account. Another
option to provide capital gains tax relief would be to make current exclusion of
the first $500,000 of gain on the sale of a principle residences to apply to
sale of a farm.
All of these approaches would allow for an orderly
transition of land from one farmer to another and increase the potential for
land to remain in production agriculture rather than be shifted to other uses.
Tax Incentives for Environmental Mandates
Tax incentives should be
provided for expenses required to meet mandated environmental policies. For
farms and ranches with slim operating margins, mandated environmental expenses
can turn operating profits into operating losses. If these losses continue for a
few years, selling the land may be the only option for survival. Other farmers
and ranchers are reluctant to assume the risk of expenses to meet the
environmental mandates on the land. Thus, selling for nonproduction agriculture
uses may be the only viable option. Providing tax incentives should help meet
environmental policy goals while keeping land in agriculture, a positive
intended consequence.
One drawback of tax incentives for mandated
environmental actions is that they only have value if the farm or ranch is
making money and paying taxes. It is important to recognize during these
difficult economic times in agriculture that tax incentives may have little to
no value. They are not an adequate substitute for cost-sharing that provides
direct assistance to farmers and ranchers to carry out environmental mandates.
Incentives for Voluntary Conservation Easements
While harboring the same
drawbacks as other tax incentives, tax deductions or credits for voluntary
conservation easements is another way to meet environmental policy goals while
keeping land in agricultural uses. The easement could be to a public agency or a
private conservation group and should apply to both donated easements and
easements that are purchased. As stated previously, the bulk of a farmer's net
worth is in land. The separation of development rights from property can
decrease land value tremendously. It is therefore difficult to devise a tax
credit that will adequately compensate farmers and ranchers for donated
easements, limiting their effectiveness.
Farm Profitability and Land Use
Farms and ranches that are profitable will remain in agriculture therefore
preventing changes in land use. Farmers and ranchers must deal with volatile
income swings that result from unpredictable weather and markets. Tax code
provisions that allow the matching of expenses with income are of great
help.Enactment of Farm and Ranch Risk Management Accounts (FARRM accounts) that
allow farmers and ranchers to reserve part of their income for bad financial
years is a Farm Bureau priority. FARRM accounts were included in the Taxpayer
Refund and Relief Act passed by Congress but vetoed by the President. Repeal of
the alternative minimum tax would simplify the tax system for farmers and
ranchers and allow them to more effectively manage their tax burden. Cash
accounting is an important financial management tool. Recent changes to allow
income averaging have been helpful.
Many other tax law changes would help
farmers and ranchers stay on the land and reduce the potential for the land to
shift to other uses. Two Farm Bureau priorities are allowing for the full
deductibility of health insurance premiums paid by the self-employed and
increasing the amount that small businesses can expense each year.
Implications for Future Tax Policy
This Subcommittee faces a major
challenge in considering the impact of federal tax policy on land use. Current
tax law has a major impact on land conservation because the overall tax load is
large enough to cause landowners to seek legal means to reduce that tax load.
Farmers and ranchers whose families have worked hard to accumulate assets in
land do not want to pay confiscatory tax rates. Thus, they seek alternatives
that may directly impact land conservation.
Two choices are available to
deal with these problems. One option is to continue to add features to the
current tax system to try to offset the negatives in the system. We have
proposed some ways to do that for issues of particular concerns to farmers and
ranchers.
The other option is to start working toward reform of the entire
federal tax system. We have made some suggestions for that approach as well.
We applaud the subcommittee for recognizing that inactivity is not a
realistic option and encourage changes that will help keep farmers and ranchers
on the land and keep land in farming and ranching.
Thank you.
LOAD-DATE: October 1, 1999
