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A Project of The Annenberg Public Policy Center

Thune’s Estate Tax Distortions

In making his pitch to repeal the estate tax, Sen. John Thune grossly inflated an out-of-date statistic about the percentage of businesses forced to liquidate because of the tax.

Thune claimed that the nonpartisan Congressional Budget Office “said a third of businesses who owe the death tax owe more in taxes than what their assets are worth.” But Thune botched the statistic, leaving out several crucial qualifiers. In fact, the same CBO report that Thune cited concluded the “vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed.”

Thune went on to claim that “about a third of the farms in South Dakota” are “liable to pay the [estate] tax,” and that as a result, the tax is discouraging people from passing along the “family farm or business on to the next generation.” However, due to various exemptions in the law, only a tiny fraction of farms in South Dakota, or any other state, actually paid the estate tax in 2013.

Thune cited the statistics during a Fox Business News interview on March 25 in support of his efforts to permanently repeal the federal estate tax. The following day, Thune’s amendment passed the Senate in a 54-46 vote that fell almost entirely along partisan lines.

Effect on Small Business

Currently, the estate tax rate can be as high as 40 percent, though, in 2015, the first $5.4 million of the estate’s value (nearly $11 million for a couple) is exempted. As a result, roughly 3,700 estates, about 0.12 percent of the total, had to pay any estate taxes last year. The estate tax is a tax on the transfer of an estate through a will or other means after a person dies.

Thune argued the tax, which he calls a “death tax,” hits businesses and farmers particularly hard.

Thune, March 26: The Congressional Budget Office in 2009 said that a third of businesses who owe the death tax owe more in taxes than what their assets are worth. So, what typically happens is they have to liquidate the business in order to pay IRS.

In fact, as Thune’s office later confirmed, the South Dakota Republican was actually referring to a decade-old CBO report on the effects of the federal estate tax on farms and small businesses. Here’s the key sentence on which Thune’s claim was based.

CBO, 2005: As a consequence, one-third of estates claiming the QFOBI deduction and owing [estate] taxes in 2000 could not pay the estate tax out of their reported liquid assets.

What is QFOBI? It stands for “qualified family-owned business interest.” To qualify, half of your estate has to be in the family owned business. (See Box 2.) That excludes all estates where less than half of assets are in the family owned business. In other words, it’s a subset of all businesses. Thune left out that important qualifier. He also left out that the CBO was referring to “liquid” assets — in other words, specifically excluding the value of the land and equipment — leaving the mistaken impression that the estate tax bill came to more than the value of the estate in total.

In the very line preceding the one cited by Thune, the CBO report does speak more generally to the universe of small businesses and farms. And, the report states, among small-business owners, the “vast majority … had enough liquid assets to pay the estate taxes they owed.”

CBO, 2005: The vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed. However, estates involving farms or small businesses were less likely than the average estate to have sufficient liquid assets to cover their estate taxes. In 2000, about 8 percent (or 138) of the estates of farmers who left enough assets to owe estate taxes faced a tax payment that exceeded their liquid assets, compared with about 5 percent of all estates that owed taxes.

Thune is also citing an outdated statistic. The report referred to 2000, when the estate tax exemption was $675,000. It’s now $5.4 million. But even with the lower exemption, the CBO found that there were just 138 farms in the whole U.S. that might not have enough liquid assets to cover the amount they owed in estate taxes. The report also ran calculations with a few hypothetical figures, including if the exemption were $3.5 million. (In inflation-adjusted dollars, that comes to about $4.8 million in 2015, so it’s much closer to the actual estate tax exemption today.) Assuming that higher $3.5 million exemption, the report estimated there were 13 estates of farmers that would have insufficient liquid assets to pay the estate tax liability. The value of farmland has outpaced inflation since 2000, so presumably that number could be higher now. But we’re still talking about a very small number of farms.

The Effect on Farms

Thune went on to claim that “about a third of the farms in South Dakota are actually over the exemption amount, so they would be liable to pay the tax.” As a result, he argued, the estate tax is discouraging people from passing along the “family farm or business  on to the next generation.”

Thune’s office says the statistic came from a calculation by the American Farm Bureau Federation — which supports repeal of the estate tax — based on U.S. Department of Agriculture reports about farm and cropland values. According to AFBF, because of the rapid appreciation of farmland —  particularly cropland due to strong commodity prices —  a growing percentage of South Dakota farms are exceeding the estate tax exemption level. In 2013, the AFBF states, 12 percent of farm real estate and 32 percent of cropland exceeded the exemption level of $5 million. So Thune used the 32 percent figure for cropland, even though he said simply “farms,” which is 12 percent.

Moreover, even if the value of a third of the farms in South Dakota did exceed the exemption limit of $5.4 million, it’s quite another thing to be legally liable to actually pay the tax. According to IRS data, only 660 estates that listed any farm assets had to pay the estate tax in 2013 (and 100 of them had assets of $20 million or more). That’s nationwide.

According to a Congressional Research Service report in 2013, less than 1 percent of farm operator estates is projected to pay any estate tax.

And that’s because there are exemptions for farmers and small businesses written into the estate tax code that allow most farmers — with a bit of estate planning — to avoid the estate tax altogether. For example, if the heirs agree to farm the land for another 10 years, they can get up to a $1 million exemption by valuing land at its farm use value rather than development value. An additional $500,000 exemption is possible if one agrees to a perpetual conservation easement restricting the use of the land. It is also possible to reduce the value of an estate by giving portions of the estate to heirs as a gift over a number of years. For a full description of exemptions available to farmers, see this Congressional Research Service report, starting on page 2.

The law also includes a provision that allows those who inherit a farm, and are having trouble paying the estate tax, to spread those payments over 14 years at a low interest rate.

We reached out to Neil Harl, an Iowa State University professor of economics and agriculture,who has been studying the estate tax’s impact on small business and farms for decades. He said it is “absolutely untrue that [the estate tax] is a significant problem in the agricultural sector.”

“I have been involved in this area since 1958 and I have never seen land that had to be sold to pay the federal estate tax and I have conducted more than 3,400 seminars in 43 states which included federal estate tax planning,” Harl wrote to us in an email. The italics are his.

Harl said the push to repeal the estate tax is “being funded by a small number of very wealthy families. … The problem, if there is one, is that very large investors want the tax repealed and try to spread the word that it is harming family farmers and ranchers. It is not.”

Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center who spent 22 years at the Congressional Budget Office, agreed. Thune’s claim “just doesn’t jibe with common knowledge,” Williams said.

According to an analysis by the Tax Policy Center, only roughly 20 small business and small farm estates nationwide owed any estate tax in 2013. TPC defined a small business or small farm estate as one with more than half its value in a farm or business and with the farm or business assets valued at less than $5 million. Those 20 estates owed, on average, about 4.9 percent of the estate’s value in tax.

According to a Congressional Research Service report on Feb. 15, 2013: “About 65 farm estates (or approximately one per state) are projected to be subject to the estate tax, and constitute 1.8 percent of taxable estates. Less than a fourth (0.4 percent) [of all taxable estates] is projected to have inadequate liquidity to pay estate taxes. Less than 1 percent (0.8 percent) of farm operator estates is projected to pay the tax.”

As for small businesses, CRS said: “About 94 estates (about two per state) with half their assets in small business and who expect their heirs to continue in the business are projected to be subject to the estate tax; they constitute 2.5 percent of total estates. Less than a half (1.1 percent) [of total estates] is projected to have inadequate liquidity to pay estate taxes.”

— Robert Farley