OPENING STATEMENT OF

CHAIRMAN RICHARD LUGAR
SENATE COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY

HEARING ON IMPACTS OF ESTATE TAXES ON FARMERS

FEBRUARY 25, 1997

Two years ago, this committee held a hearing on tax policy reforms that would help strengthen American agriculture and agribusiness. At that time, I pointed out that while less than one-quarter of American farms receive direct government payments, changes in the federal tax structure could affect virtually all of our farms and ranches.

Since that hearing, there have been some notable federal tax changes for the better. The income tax deduction for the health insurance costs of farmers and other self-employed individuals was restored and will increase in coming years. In addition, the deduction for depreciation of capital expenses was increased. But tax relief in two important areas for agriculture is still lacking. That is why we assemble again to discuss tax policy today.

Foremost among the taxes that, if reformed, would benefit our nation's agricultural sector are the estate, gift and capital gains taxes. These taxes have particular relevance for farmers and ranchers for two reasons. First, our agriculture community is getting older, with the average age of farmers approaching 60. Many of these "senior" producers will be subject to capital gains taxes as they sell off assets to pay for retirement, or, if they die, their families will owe estate taxes. Secondly, as we all know, farms and ranches are capital-intensive businesses. The book value of many producers may be relatively high, but their assets are not liquid and the return on their investments is low. Today, we will concentrate on the estate tax. According to the 1992 Census of Agriculture, 95 percent of farms and ranch operations are sole proprietorships or family partnerships, potentially subjecting most of these estates to inheritance taxes upon the death of the owner.

The implications of the estate tax go well beyond agriculture to other family businesses. A 1995 Gallup poll found that 37% of business owners who paid estate taxes downsized the business in order to do so. Meanwhile, more than two-thirds of the businesses say it is the estate tax that discourages them from investments and the return associated with those risks.

In short, it is my view that the estate tax discourages saving and investment, stifles growth and robs us of potential new jobs. At the same time, the estate tax generates only 1% of total federal tax revenue. And some experts argue that more income tax revenue is lost through the maneuvers of estate planning than is ultimately gained by the inheritance tax.

Tax issues are under the jurisdiction of the Finance Committee, and I have been in contact with Chairman Roth and his staff on our hearings. But many farmers and ranchers have expressed strong interest in tax reform, and this committee can highlight the unique perspectives and needs of the agricultural sector. I have introduced three bills on estate taxes. Many other senators -- some of whom are with us this morning -- have also put forward legislation pertaining to this and several other tax issues. Concern about tax policy is broad-based, bipartisan, and extends to the Agriculture Committee. So it is appropriate that we discuss the issues here today.

I look forward to hearing from our knowledgeable witnesses. First, I am pleased to yield to the distinguished ranking member, Senator Harkin.