Last month, the congressional “super committee” announced that it failed to reach an agreement on ways to cut $1.2 trillion from the budget deficit over 10 years. As a result of this failure, an automatic reduction of $1.2 trillion will occur with across-the-board cuts, with drastic cuts in defense spending. Shortly after the announcement, committee member Sen. Pat Toomey (R-Pa.) acknowledged that the 12-member group never came close to forging an agreement on program cuts and revenue raisers.
While the outcome is not all that surprising, the ramifications for California farmers and ranchers are significant, primarily as it affects tax decisions and tax certainty.
The talks had the potential to extend and/or revise the 2001 Bush tax cuts. Republican negotiators sought to extend last December’s two-year tax extension for another 10 years, thus locking in the current treatment for estate, gift and capital gains taxes. Where there was hope that tax reform would take place in the super committee, we are now back where we began – only we face the very real threat of losing ground.
Consensus Unlikely In Election Year
After a push last year by Farm Bureau to ensure extension of the Bush tax cuts and to secure a deal for the estate tax, a two-year extension was signed into law. Estate tax reformers won the best deal possible, which brought us some calm in January 2011. With most political compromises, some bad always comes with the good. The bad: A two-year extension meant the next battle would take place in the 2012 election year. And the very worst-case scenario is that any deal will take place in a lame-duck session of Congress in the closing days of 2012. So, we could have a full year of uncertainty ahead of us.
If tax reform was the big issue last year, it has been replaced this year with the question of how to rein in the growing deficit. In August, Congress created the “super committee” of 12, charged with slashing a minimum of $1.2 trillion in federal spending over 10 years. Nothing was off-limits. Three months later, however, the super committee is no more. Instead, automatic caps on spending across most of the federal government will take place beginning in 2013.
During the super committee negotiations, the stalemate came down to fundamental, ideological differences between the parties. It turned into a standoff between spending cuts versus going after the “wealthy” through higher individual tax rates. Although the estate tax wasn’t specifically called out, we suspect that before it’s over the estate tax will be at the very heart of this fundamental divide. If, under extreme pressure to compromise, 12 members of Congress cannot agree on this deficit/tax extension/reform question, how likely are a Republican House, Democratic Senate and president to come up with a deal before the elections?
There is a real danger of kicking the estate tax can down the road. Importantly, in last year’s tax extension compromise, the estate and gift taxes were unified. In simple terms, this means that a portion of an estate gifted to an heir reduces the total amount that is included in an estate settlement. For example, an owner who gives the maximum allowable $5 million will be taxed on the remaining amount left in the estate. Remember that each individual situation triggers different and complex rules that require the guidance of a competent estate tax accountant and attorney.
Farms Unfairly Hit By Estate Taxes
The message we have sent to Capitol Hill is that the estate tax unfairly hits farm estates due to the way the assets are held and the intrinsic value placed in maintaining the family farm. We have been successful in convincing key members of Congress that this is a real issue that threatens the continuation of the family farm. Unfortunately, during much of the past decade, California was one of only a few states with high asset values far exceeding the exemption levels. But now that could be changing. The Federal Reserve Bank of Kansas City recently documented a whopping 25 percent jump in farmland values in seven Midwestern states.
The more states that face what we in California have experienced in estate tax settlements, the better the chance of solving our farm estate tax problems. We expect to partner with farm organizations from more states to put forward a reform measure that can enable farmers and ranchers to pass their operations to future generations.
Today’s reality is that tax uncertainty will be the norm heading into 2012. It makes estate tax planning and gifting even more critical. Depending on a family’s individual circumstances, it merits a close look at actions that still can be taken this year and next.
And with all the uncertainty, stand ready to go to battle next year over the estate tax.
Josh Rolph is director of international trade, farm policy, taxation and plant health for the California Farm Bureau Federation. He may be contacted at firstname.lastname@example.org.