In The Moment ... Estate Tax Update With SDPB’s Lee Strubinger

Oct 31, 2017

In The Moment ... October 31, 2017 Show 210 Hour 2

Congressional Republicans want to make one of the largest overhauls of the federal tax law in decades. The estate tax is on the chopping block. SDPB’s Lee Strubinger joins us to unpack how the debate is playing out in the state.

The Federal estate tax has been around since 1916.

It comes into effect during the transfer of wealth or property to an heir following the death of the owner of that wealth or property. But there’s a certain threshold, or exemption, that a transfer of property or wealth has to meet before the tax comes into play. Right now, it’s at around $5.5 million. The exemption has steadily risen over the last 20 years, except in 2010 when it expired completely.

According to data from the 2014 South Dakota Ag Economic Contribution Study, there are roughly 32-thousand farms in South Dakota at an average of almost 1400 acres. That study says the average farm in South Dakota is worth about 2.8 million dollars. That’s the farm operation, which doesn’t include any other personal assets.

Repealing the estate tax is something congressional republicans have been eyeing for some time.  Congresswoman Kristi Noem sits on the House Ways and Means committee, which is leading the charge on tax reform. Noem is the main sponsor of the bill to repeal the estate tax.

“Shouldn’t our tax code be fair to everybody?" Noem says. "Again, if we leave this tax in place, we’re again choosing to penalize somebody more than anybody else. And you’re penalizing them because something very bad happened to their family.”

WALSH: Why is Representative Noem so involved in this issue?

Noem has said this is what prompted her to get into politics. This stems from a family tragedy. In March of 1994 her father was killed in a farming accident. She was 21 and in college — and she dropped out of college to work the family farm. She says not long after his death her family received a bill from the IRS.

When that happened to Noem’s family, the Estate Tax exemption level was at $600,000 per individual, or $1.2 million per couple. Since Noem’s father’s estate exceeded that exemption, the maximum estate tax rate they paid was around 55 percent.

As I said earlier, that exemption is at $5.45 million, or around $11 million per couple.. and that maximum tax rate is down to 40 percent.

WALSH: How many South Dakota farms and ranches will be impacted by the estate tax?

That depends on who you talk to. Representative Noem says the estate tax would hit a South Dakota farm with an average of 1,400 acres of crops in the ground.

According to the American Farm Bureau, this could affect thousands of South Dakota farms.

Contrary to that, the Center on Budget Policies and Priorities estimated there were 20 taxable estates in South Dakota.

I talked with Marc Feinstein. He is a Sioux Falls attorney who specializes in tax and estate law. He is also a former Democratic state representative from 2006 to 2014.

He says nationally, one fifth of one percent of estates end up paying an estate tax. He says the best way to ensure an estate is not eaten up by taxes is to draft an estate plan.

“We should plan as to the best ways to preserve and protect, and there are ways to do it," Feinstein says. "It’s not tax avoidance, it means proper planning and stepping up to say, ‘Hey, I was successful, I want other people to be successful, I want my kids to be successful, I want my grandkids to be successful, so let’s see how we can best do that.”

WALSH: We talked with Gary Deering last week, who is the president of the South Dakota Stock Growers Association. He wants to see a full repeal of the estate tax. We have audio from that conversation where he says, essentially, over the last ten years crop land has increased in value and an unexpected death could really affect the family farm.

“When you’re speaking from the perspective of farmers and ranchers who don’t often have a lot of cash on hand, it makes it very difficult to pay that," Deering says. "If the assets are there right now, you take a look at just a few years ago when a lot of our farm land when up about 20 to 25 percent in value, that could happen overnight before you had time to plan your estate.”

Accidents do happen, but Feinstein says that if a farm or ranch ends up becoming a taxable estate, it’s likely that there’s not been a tax on that increase in value of the property. Feinstein used the example of a farmer buying a piece of land for five hundred dollars an acre. Years later, that piece of property is worth 2,500 dollars an acre. He says that increase in value was likely never taxed.

“That gain from $500 to $2500, until this point has never been taxed on an income tax basis," Feinstein says. "Yes, you pay property tax on it, and yes may have paid an income tax on what that property produced, whether it be cattle, whether it be crops, and if there’s net income you’ve paid an income tax… But on that value that went from $500 to $2500, there’s been no tax.”

What happens when those who receive that land that’s suddenly worth more?

They receive what’s called a 'step up in basis,' which essentially means that if an inheritor were to receive that property which had increased in value, then turn around and sold it after a few years and that property further increased in value, they would only pay a tax on the increase in value from when they inherited the property.

Several people I’ve talked to are worried about the step up in basis going away with the estate tax repeal. They say that could impact more South Dakota farmers and producers than the estate tax ever would.

WALSH: There are varying perspectives for and against taxes of all kinds. How much has this become a political rather than an economic debate?

The estate tax generates roughly $20 billion a year, which is about one percent of the federal budget. That’s according to the Center for Budget Policies and Priorities, which is around the cost of covering the crop insurance, conservation and commodities programs in the farm bill, not including the food stamp program.

Those in favor of the repeal call the estate tax a tax on death. Others argue in favor of estate tax to reduced disparity in wealth.

Feinstein says the best tax in the world is the one somebody else pays…

“We all have to realize that we live in a society where taxes are an integral part to our daily life, anywhere from our schools, to roads, fire protection and other things that go on in our daily lives," Feinstein says. "It’s just part of living in civilized society in today’s world.”

Some lawyers I talk to question the effectiveness of the estate tax in reducing disparity in wealth, and argue for an increase in the top income bracket to make up for lost revenue.

WALSH: What are some of South Dakota’s other congressional representatives hoping for?

They all say they want a full repeal of the tax. However, during a call last month, Senator Mike Rounds said he would feel comfortable with a $30 million exemption for couples, at least, if the Senate can’t get a full repeal through.

“If we’re going to do something with it and some of my colleagues say they can’t support a total repeal, then let’s at least get that deduction, that exemption up to where it actually makes a difference for the estates in South Dakota,” Rounds says.

WALSH: How do Republicans plan on making up for lost revenue if they are successful repealing the estate tax?

Some of the finer nuts and bolts are expected to come out this week in Washington. I posed that question to Senator Thune’s office. They said in an email, “Until the entire bill is available, it’s hard to say exactly how all of the individual pieces, like the death tax repeal, would fit in. Republicans do believe that pro-growth tax reform would grow the economy, boost wages for middle-income Americans, and create more jobs.”

Thus generating more revenue for the government.