Proposed tax change could devastate Maine’s farmers
By Donald Flannery
The 1970s back-to-the-land movement left an indelible impact on Maine and launched a new generation of farmers throughout the Pine Tree State. This movement became synonymous with our state, generating new economic growth, creating jobs and putting healthy food on our tables. Fast forward to today and you will find many of those same farmers are now looking to continue their cherished way of life by passing down their family farms to the next generation.
But as Maine continues to recover from the COVID-19 pandemic, many family farms are still struggling just to stay afloat. And the most recent agricultural census data report that Maine lost 10 percent of its farmland between 2012 and 2017. Sadly, a new tax proposal being considered in Congress could raise taxes on family farms and has the potential to force even more of these multi-generational businesses to go bankrupt.
In April, President Joe Biden unveiled his American Families Plan, which has a total cost of $1.8 trillion. To help pay for this spending, the president promised that he would only raise taxes on the rich and that no middle-class families would see their taxes go up. To accomplish this, the president endorsed a proposal similar to the Senate legislation called the STEP Act, which would create a new tax on inherited assets, trusts and estates, like a family farm, by getting rid of a tax provision called “step-up in basis” and by taxing inherited unrealized gains. This means family farms could see a new tax bill when they are passed from one generation to the next.
Step-up in basis is a longstanding and important tax provision that allows the heirs of a farmer to pay capital gains taxes, if they sell the farm, only on the farm’s increase in value since the date they inherited the farm, as opposed to paying the full increase in value of the farm since it was first purchased by the deceased relative. For example, let’s say a farmer in Dover-Foxcroft took out a $100,000 loan to buy a farm in 1975 and today the operation, including the land, equipment and buildings, is worth $2 million. When the farmer dies and passes the farm down to his children and they decide to sell the farm, they would not have to pay capital gains taxes on the $1.9 million in accrued value because the IRS steps-up the cost basis of the inherited farm to today’s market value.
The STEP Act would eliminate step-up in basis with a $1 million exemption and create a new retroactive tax that forces inheritors to pay much higher new capital gains rates, even if they don’t sell the farm, just to keep the family business alive. Most farms are land-rich, and cash-poor, meaning their wealth is tied up in equipment and buildings that cannot be easily sold. Without step-up in basis and the tax on unrealized gains, the next generation of farmers could be forced to sell off their land just to pay the taxes. And a new report from Texas A&M’s Agricultural and Food Policy Center highlights how eliminating step-up in basis could be devastating on middle-class farmers across Maine.
After a lifetime of hard work, Maine’s farmers deserve to pass on their legacy to their children without the IRS collecting additional taxes from them. No matter how much President Joe Biden talks about making the rich pay their fair share, this study shows that his proposed tax increases could hurt middle-class families.
The survival of family farms across Maine now depends on whether our elected leaders in Washington will speak out against these tax increases. Since he was first elected in 2018 to represent Maine’s 2nd Congressional District, Jared Golden has prided himself on being fiercely independent and not beholden to his party. So far, he has been silent about protecting family farms against proposals to eliminate step-up in basis. There are a number of farmers in Maine that need our delegation to stand up for common sense and tell the Biden administration that middle-class families can’t afford any new tax increases.
Flannery is the executive director of the Maine Potato Board.