Farmers could stand to lose as much as any segment of the economy if political leaders don’t avert the fast-approaching “fiscal cliff.”
The impact on farmers of potential changes to the estate tax is “extremely dramatic,” compared with other fiscal cliff effects, which include income and payroll tax rate increases, said Dave Miller, director of research for the Iowa Farm Bureau Federation.
If leaders cannot agree on a fix before the end of the year, the estate tax rate will increase from 35 percent to 55 percent, and the exemption will drop from $5 million to $1 million.
Those changes, coupled with the rapid recent run-up in farmland values, could force farmers with even modest acreage to sell part of their land just to pay the taxes, said Trudy Wastweet, the Iowa Farm Bureau’s national policy adviser.
“The reality is, land prices have tripled during the past decade,” greatly increasing the percentage of Iowa farm families subject to the estate tax, Miller said.
Whereas once it might have been a “big farm” issue, it is now a “farm” issue, he said.
“It’s not millionaires. It’s hardworking farm families. I get a little emotional about it,” said Miller, who farms in Lucas County south of Des Moines,
Under laws signed a decade ago by former Republican President George W. Bush, the estate tax is applied to inherited assets at 35 percent after a $5 million exemption. President Obama has said he wants to raise the rate to 45 percent after a $3.5 million exemption. If the Bush rates are allowed to expire and Congress does nothing, the rate will return next year to the pre-Bush levels of 55 percent after a $1 million exemption.
If that happens, the number of farm estates subject to the tax will increase 24-fold, and the number of small business estates will increase 10-fold next year, according to a Joint Committee on Taxation estimate.
While the percentage increase would be large, the number of estates affected would remain relatively small.
This year, only about 3,600 estates nationwide are likely to be affected by the estate tax — a number that would increase to about 53,000 next year, according to estimates from the independent Tax Policy Center.
Neil Harl, professor emeritus of economics at Iowa State University and a longtime author and lecturer on farm estate succession, said he is not worried about the fiscal cliff’s impact on farmers.
“I don’t believe it is going to happen,” said Harl.
“Farmers are land rich and money poor,” said Jason Russell, 33, a sixth-generation livestock farmer in northeast Linn County.
While the potential changes in the estate tax don’t affect him personally, Russell said he worries that friends and neighbors might not be able to keep their farms in the family — that a substantial part of a family farm handed down from one generation to the next would have to be sold to pay the estate taxes.
When Russell graduated from Monticello High School in 1997, good farm ground was selling for about $1,600 an acre, he said.
“Fifteen years later, it’s pushing 10 times that,” he said.
While a few Iowa farms have recently sold for more than $16,000 an acre, the average sale price during the past year was less than half that, according to Iowa State University economics professor Mike Duffy, who coordinates the annual Iowa Land Value Survey.
Still, the tripling of Iowa farmland values during the past 10 years means more Iowa farmers will be subject to estate tax, Duffy said.
In 2002, Duffy said, the average value of Iowa farmland was $2,083 per acre. In 2011, the average value stood at $6,708 an acre, and the forthcoming 2012 survey is likely to show at least a 15 percent increase during the past year, which would put the average around $7,700 per acre.
In 2011, the size of the average Iowa farm was 333 acres, and its value this year would be $2,564,100.
More than 80 percent of farmers’ assets are in land, buildings and equipment, according to the Farm Bureau’s Wastweet.
“It’s not as if their estate is cash in the bank. It’s a fixed asset essential to the operation of their business,” she said.
Wastweet said the potential “fiscal cliff” increase in capital gains tax rates from 15 percent to 20 percent next year would also have a disproportionately large negative effect on farmers.
“For many farmers, their retirement plan consists of selling the quarter section down the road and moving to town. With the recent farmland appreciation, they are in effect being exorbitantly taxed on their retirement plan,” she said.