September 27, 2010
Grassley: Estate Tax Resolution is Long Overdue
The majority party has had control of the Senate since January 3, 2007.
That was 3 years, 8 months, and 24 days ago.
During the 3 and half years of control, my colleagues have had an opportunity to address the death tax.
More pointedly, the leadership had a duty to provide certainty in the law as it relates to the estate tax.
My colleagues have had the duty to address the fact that this ill-conceived tax will snap back to pre-2001 law on January 1, 2011. That is only a little over 3 months away. To be exact, it is 3 months and 5 days from now.
Unfortunately, as this chart shows, the estate tax is not the only piece of long overdue tax legislation.
The practice of “good government” is providing certainty in the law.
What I mean is, our country is made up of law-abiding citizens. As legislators, we were hired by these law-abiding citizens to make the law.
When we fail to provide certainty in the law, we fail to do our jobs.
But, despite the fact that the Democratic Leadership has not acted in over 3 and half years we still have 3 months before the estate tax reverts to a 55% tax rate and a $1 million exemption amount. So, Congress still has time to act.
But, I am skeptical that the Democratic Leadership will indeed act.
Why? Because when my friends on the other side of the aisle were in the minority earlier in this decade, they blocked – let me repeat, blocked – Republican efforts to make permanent an estate tax law that law-abiding citizens all across America could rely on.
The first effort was made in 2002. Specifically, on June 12, 2002, the Democratic Leadership blocked legislation that would have permanently repealed the estate tax.
In 2004, Republicans in the House of Representatives approved a bill that would have permanently repealed the estate tax. But, due to maneuvering by the Democratic Leadership, a vote in the Senate was never allowed to occur.
Finally, in 2006, Republicans offered a compromise proposal on the estate tax. Under that compromise, the estate tax unified credit exemption would have gradually been increased to $5 million. The rate would have also been phased in to a 30% tax rate.
But again, the Democratic Leadership filibustered the proposal to its death.
I believe, on our side, were practicing good government as it relates to the estate tax.
We were doing our jobs, and providing certainty in the law.
Yet, the Democratic Leadership stymied the practice of good government.
To this day – the Democratic Leadership continues to stymie efforts to provide certainty in the law.
So why is the estate tax being held hostage?
Because a number of liberal-leaning Senators would be satisfied if the estate tax reverted to pre-2001 law – that is, a 55% tax rate and a $1 million unified credit exemption amount.
And why wouldn’t they? There’s $233 billion in extra revenue to spend.
Also, in this hyper-partisan environment that is plaguing the Senate, many policymakers are politicizing the estate tax issue.
What do I mean?
A number of Senators have taken to the Senate floor and characterized a reasonable estate tax rate as a “give-away” to the rich.
These Senators also argue that if the estate tax is ratcheted up to a 55% tax rate, we could use that revenue to reduce the deficit.
I respect every Senator’s opinion, but I question whether these members are actually going to use this revenue to reduce the deficit.
Unfortunately, we have seen my friends’ desire to spend, spend, spend. Increasing the deficit one dollar at a time. Not the other way around.
I will acknowledge that due to the budget rules that we must live by here in the Senate, making permanent an estate tax regime at a tax rate lower than a 55% will result in revenue loss to the government.
For example, Congressman Pomeroy – a Democratic Congressman from North Dakota – sponsored a bill to make permanent the estate tax at a 45% tax rate and a $3.5 million unified credit exemption amount.
When you compare this proposal against what the estate tax would revert to in 2011 – a 55% tax rate and $1 million exemption – you find that this change in the law would cost around $233 billion over 10 years.
Now, when you compare $233 billion to the $2.5 trillion health care reform bill that was recently signed into law, it’s a drop in the bucket.
Also, compare this to our $13 trillion national debt.
But, $233 billion is nothing to sneeze at.
While it could be used to reduce the deficit, my colleagues on the other side of the aisle have made every indication that they will simply spend this money.
My colleagues on the other side will gloss over their plans to spend, and instead attack any proposal that includes a tax rate lower than 55% as a “give-away” to the rich.
I have some news for my colleagues. A large number of Americans who would be impacted by a 55% tax rate and a $1 million unified credit exemption are not “rich.”
Let me repeat that. Those taxpayers that would be impacted by the estate tax if it reverted to pre-2001 levels are not rich.
I would like take a moment and provide my colleagues with a real world example of an Iowan who would not consider herself “rich.”
Recently, I received an email from Landi McFarland, who is a 6th generation Iowa farmer.
This is what Landi had to say about the impact of the estate tax and her ability to continue the family farm:
“… As a 6th generation Iowa farmer whose family homesteaded land in Union county 154 years ago, I have concerns about current estate tax law. I am 26 years old and have a dream of pursuing a future in agriculture, the same as the generations that have come before me.
I currently raise Angus cattle with my parents and grandparents, where we are tax-paying citizens and supporters of our local economy and schools. My grandparents are both 84 years old, and own about 90% of the land, cattle, and equipment on our farm. Their combined estates will total approximately $7 million (the vast majority of this being farm assets like land and cattle). Recent land values have escalated the values of my grandparents' estate.
This rise in land values, however, does not increase the value of what the land produces (Angus cattle sell for the same price no matter if the land is valued at $1000 or $4000 per acre).
If my grandparents pass away AFTER 2010, and current estate tax laws are not fixed, my family will not be able to afford to pay the estate taxes without liquidating the herd and selling a large portion of the farm ground. This will put an end to our business that we love, and hence and end to our support of local businesses through daily business operations.
In the last four years, my family has worked on estate planning to try to help ease the burden of estate tax. This includes taking advantage of the $12,000 tax-free gifting each grandparent can do per person per year.
However, this only amounts to a total gifting of $48,000 per year, a drop in the bucket for a combined $7 million estate.
We are one of the oldest Angus operations in the country, and is all we wish to do is continue our family business that has been built with our own blood, sweat and tears over the past years. If current estate tax laws are not fixed, there will be thousands of small family businesses like ours put out of business. We need a SENSIBLE and PERMANENT fix.
…
Thanks for your help,
-Landi”
Landi’s story is not unique to her. There are more farmers like her in Iowa and around the country.
But, I want to talk more broadly now about how failing to address the estate tax sunset will affect Iowa farmers.
Over the past few years, farm prices have been escalating dramatically. According to the U.S. Department of Agriculture, U.S. farm prices have nearly doubled in the last decade.
While recent economic troubles have led to home prices dropping, this has not been the case for farmland. In fact, as reported in a recent LA Times article, Wall Street investors have actually turned to purchasing farmland in hopes of finding refuge from an unstable stock market. This in turn has pushed farm prices higher. Based on a recent survey by the Federal Reserve Bank of Chicago, Iowa farm prices are up 8% in the past year alone.
Why is this discussion of escalating farm prices significant?
Because this means that should the estate tax law revert to 2001 law, many farmers are going to be surprised to discover they will be considered “rich”.
Now, I am not talking about wealthy corporate farmers, I am talking about many family farmers, just like Landi, who are taking over a farm that has been passed down for generations.
In 2007, the U.S. Department of Agriculture reported that there were 92,800 farms in Iowa.
In 2007, the average Iowa farm was 331 acres.
According to a survey conducted by Iowa State University, in 2009 the average acre was worth $4,371.
Let’s do some simple math. If we multiplied the average acreage of an Iowa farm – which was 331 acres as reported in 2007 – by the average cost per acre in 2009 – which was $4,371 in 2009 – we find that the average Iowa farm is worth $1.4 million.
$1.4 million exceeds the $1 million unified credit exemption amount that would be in place on January 1, 2011, if Congress does not act.
Admittedly, the value of a farmer’s farmland does not tell us conclusively whether or not the farmer will be subject to the estate tax. Farmers sometimes carry debt.
That would reduce the value of the farm. But, they also have assets, including farm equipment, bank accounts, a house, etc. that would increase the value of the farm.
The Joint Committee on Taxation has told us that out of 92,700 estates of decedents dying in 2011, 49,000 of these estates would be taxable under a 55% rate and $1 million exemption estate tax regime.
If the law were changed to a 35% tax rate and $5 million exemption amount – for example – 3,900 estates would be taxable.
That’s a 13 to 1 ratio.
For every 1 estate that would be taxable under a 35% and $5 million estate tax regime, a whopping 13 estates would be taxable if the law reverted to a 55% rate and $1 million exemption.
Even if the rate were set at 45% and an exemption amount of $3.5 million, this ratio is 8 to 1. That is, for every 1 estate that would be taxed under a 45% rate with a $3.5 million exemption amount, 8 estates would be taxable under a 55% rate and $1 million exemption estate tax regime.
Let’s now take a look at farmers that would be affected. Based on the same JCT estimate, in 2011, 3,200 farms would be taxed if the law included a $1 million exemption amount.
Compare that to 300 farms that would be taxable if the exemption amount were $3.5 million.
That means that the result of no action will be that 10 times as many family farms will be hit by the death tax.
The time for action on the estate tax is now. Not a month from now, or three months from now. We owe it to farmers and small business owners – and their young heirs -- to give them certainty.
I yield the floor.