Estate Tax Reform for Agriculture
Ralph Grossi
President
American Farmland Trust
Testimony before the Senate Committee on Agriculture, Nutrition and Forestry
February 25, 1997
Mr. Chairman, American Farmland Trust appreciates this opportunity to provide your committee with our views on the effects of the estate tax on agriculture. I am president of AFT and a third-generation cattle rancher and grain producer in California. American Farmland Trust is a national, non-profit organization with 30,000 members working to stop the loss of productive farmland and to promote farming practices that lead to a healthy environment. I am here today to speak for AFT's members and the majority of farmers who care about resource stewardship.
Mr. Chairman, the present estate tax system is a growing problem for American agriculture. Allow me to make three observations on the current system.
First, the estate tax burden often forces families off the land -- even families that have successfully worked their farms and ranches for generations. Farmers tend to be land rich but cash poor. This lack of liquidity often results in farmers subdividing their farms to raise money to pay the estate tax.
To address this problem our field staff has been educating farmers about the need for estate planning, and promoting voluntary purchase of conservation easement programs as a way for farmers to become more liquid without having to sell the farm. The matching funds provided by the Farmland Protection Program in the 1996 Farm Bill will contribute to this goal, and we hope that the program can be expanded to meet the national demand. The liquidity problem is especially severe for farmers in areas that are suburbanizing because their proximity to urban centers increases the gap between the market value of their land and its agricultural value, increasing the estate tax burden. Of course, as more farms are developed into residential tracts the value of land even further from the urban center increases, leading to ever greater difficulty for farmers that want to keep their farms in production..
USDA data show that more than half the dollar value of American farm production -- including more than three quarters of America's fruits, vegetables and dairy products -- comes from counties on the metropolitan edge. The estate tax system is thus inadvertently speeding the conversion of America's most productive farmland to sprawl-type development.
The second problem with the estate tax system is that it creates additional costs to family farmers beyond the risk of losing one's farm. I refer to the additional burden imposed by the life-long costs incurred preparing to pay the estate tax, such as the substantial cost of life insurance premiums. I am familiar with many instances in which the family's premiums for life insurance are greater than the net farm income.
The third problem with the current system is that it is not indexed to inflation. The $600 thousand lifetime deduction is not longer adequate and in many geographic regions of the country inflation has outstripped the ability of parents to give their farm to their children under the modest $10 thousand annual gift cap.
To summarize, Mr. Chairman, the current estate tax system is not farmer-friendly. It taxes families off the land, and threatens the ability OF farmers in some of America's most strategic agricultural regions to produce the food and fiber upon which we all depend. That is why AFT supports general estate tax relief. We realize, however, that support for general estate tax relief is not universal, either due to social equity concerns or the need to reduce federal deficits. The Joint Committee on Taxation has just issued a report projecting that annual revenue from estate taxes will increase from its current $17 billion to $35 billion in ten years.
If general estate tax relief is not politically feasible, an acceptable alternative to American Farmland Trust would be an estate tax reform package that is more narrowly targeted and less expensive, and that gains something of value from landowners in return for tax relief.
There are two proposals that would achieve this goal: first, exclude land under conservation easements from taxable estates; and, second, defer estate taxes on land on which the owners have created or enhanced habitat to protect endangered and/or declining species.
With regard to the first, we strongly support a conservation easement exclusion, which is proposed in H.R. 195, sponsored by Representatives Houghton (R-NY) and Cardin (D-MD). Excluding land under voluntary conservation easements would directly protect farmland from conversion to subdivisions by targeting relief to family farms on the urban edge where it is most needed.
Another variation of this exclusion might be to create a "conservation election" under section 2032A of the Internal Revenue Service Code. Currently, section 2032A allows farming families to pay estate taxes based on a "special use valuation," but it is wholly inadequate. We favor expanding 2032A to include not only a ten year but also a voluntary permanent commitment to protect their land with an easement in return for the land passing tax-free to the next generation.
This change would benefit all farming families, regardless of whether they own or rent their land. Fifty percent of America's farmland is rented. Because absentee landowners and their heirs are not currently eligible to make the special election under 2032A, family farmers who rent their land are also often forced to sell out. Reform of the kind we are suggesting would keep land in production and keep families on the farm.
With regard to the habitat recommendation, American Farmland Trust favors deferring estate taxes for landowners that have created or enhanced habitat to protect endangered and declining species for as long as the habitat is maintained. It is increasingly apparent that new national solutions to this environmental issue are needed, solutions that give landowners an incentive to help achieve environmental goals while sharing the cost with the community at large. This issue is especially critical in California's Central Valley, which we regard as the most strategic agricultural resource in the country, if not the world.
Both of these approaches would build on the theme of the FAIR Act of 1996, with its emphasis on reducing government intervention in the market and on providing landowners with voluntary incentives to meet conservation goals.
In conclusion, Mr. Chairman, the current estate tax system is broken, but fixable. American Farmland Trust supports general estate tax relief for farmers, as well as targeted relief that would promote the conservation of farmland and wildlife habitat. Thank you for providing me with this opportunity to testify today, and I look forward to working with you to create a truly farmer-friendly estate tax system.