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Family Farms get Relief with End to Death Tax

Pennsylvania repealed the inheritance tax, or “death tax,” as it applies to family-owned farms.

By Melissa Daniels | PA Independent

HARRISBURG — Jay Grove’s grandfather built Gro-Lan Farms in 1905, the Franklin County dairy farmer said proudly.

More than a century later, Grove and his brother, Jeff, grow grain to feed their dairy cows on 425 acres and produce some 10,000 8-ounce glasses of milk a day.

Not all family farms experience this success. Grove tells a story of a neighboring farmer who sold his 130 acres to a developer who built more than 130 houses there.

“Family farms have struggled over the years just to stay alive,” he said.

But Grove said Pennsylvania took a step in the right direction to help keep farms in the family.

The state repealed the inheritance tax, or “death tax,” as it applies to family-owned farms, a passage celebrated at a news conference at Gro-Lan Farms in early August.

The death tax for family farms provides only a sliver of the overall death tax revenue. This past fiscal year, the state collected $827.7 million in overall death tax revenue. Without taxing farms, the state expects to lose between $2 million and $3 million in revenue next year.

By 2015, the overall death tax revenue will decrease by $5 million without the family farm revenue. Other sources for inheritance tax revenue include shared bank account assets, stocks and bonds, mortgages and other real estate.

For a family farm, the death tax was 4.5 percent for the child of a decedent, and 12 percent for a sibling. It applied to the total value of the farm, including equipment.

For example, if a farmer’s daughter was to inherit a farm worth $500,000 from her parent, the tax would be $22,500, paid within nine months.

The Legislature wrote the exemption into the Pennsylvania Tax Code, which passed with the fiscal 2012-2013 budget.

The new exemption applies to farm property that generates an annual income of $2,000 or more through family-run agricultural operations.

Mark O’Neill, media relations director with the Pennsylvania Farm Bureau, which represents more than 55,000 farmers in the state, said the agency has been fighting to repeal the tax for years.

When it comes to farmers, the adage is sometimes true that they can be “land rich, and cash poor,” O’Neill said.

“Profit margins in farming are very tight to begin with,” he said. “There isn’t this cash lying around to pay this tax.”

Often, those who inherit the land would sell a portion of the farm to pay the tax or take out a loan. Other times, they would get out of farming and sell the entire whole farm, he said.

Kevin Shivers, executive director for Pennsylvania’s chapter of National Federation of Independent Businesses, a small business advocacy group, said removing the inheritance tax is in line with the state’s open space preservation programs. It could keep portions of farms from getting sold to developers, he said.

“In the southeast, where they are really concerned about sprawl, you have family farms where the property was passed on from the parent to the children,” he said. “They couldn’t afford to the pay the taxes to keep the land and the family farming. Ultimately, they sell the land to a developer.”

State Rep. Stephen Bloom, R-Cumberland, who sponsored the death tax repeal measure, said taxing family farms that could render them out of business made no sense, especially while the state spends $200 million annually in the agriculture industry.

“Obviously it was important to eliminate the death tax for family-farm properties but, to me, that is the beginning of a long sustained process we need to pursue to completely eliminate the Pennsylvania death tax,” Bloom said.

Speaking at a news conference at Gro-Lan Farms to a members of the Grove family and Pennsylvania Future Farmers of America, Gov. Tom Corbett said he supports phasing out the death tax altogether.

“At some point I hope I get to do this with other taxes in Pennsylvania,” he said.

Pennsylvania Independent is a journalism project dedicated to open and transparent state government that reports on the agencies, bureaucracies, and politicians in the Commonwealth of Pennsylvania.

edmund dantes August 23, 2012 at 06:18 PM
Contra to the above spin, there are two kinds of taxes that may be triggered by a death: the inheritance tax and the estate tax. An inheritance tax is imposed on the value received by the heir, the estate tax on the total value given. The federal tax at death is an estate tax. States may have estate taxes, inheritance taxes, both or neither. The phrase "death taxes" is a handy way to refer to all of these special, once-in-a-lifetime taxes that are, in fact, triggered by a death, without the need to get into all the details. Now, imagine two families, they both own businesses worth $1 million. One is a farm, the other is anything else, hardware store, dry cleaners, some family owned operation. Why should the death tax be suspended for the heirs of a farm, and not the heirs of any other family business? Politicians craft death taxes on the assumption that an estate consists only of cash, so giving the government a cut will be easy. That's not the real world. That's why so many people oppose these taxes.
edmund dantes August 23, 2012 at 06:23 PM
You know who loves the estate tax? Agribusiness, that's who. Countless family farms already have been sold to the big conglomerates in order to raise case to pay death taxes. So if you love agribusiness, keep up your support for death taxes. Warren Buffett loves the estate tax too, because he gets to buy businesses at distress sale prices.
CyD252 August 24, 2012 at 12:43 AM
"Why should the death tax be suspended for the heirs of a farm, and not the heirs of any other family business?" Gonna hazard a guess on this one... Over the past century, the number of farm-owned families has plummeted as subsequent generations are increasingly likely to leave farming in favor of other occupations. Incentives like these are used to encourage these people to stick with farming. By contrast, more people are willing to go into hardware/dry cleaning, etc., to cite your examples.
Toni Kistner August 24, 2012 at 01:06 PM
Just curious- so is it just that the tax is greater on farms because the value of the estate is greater due to the acreage involved?
edmund dantes August 24, 2012 at 04:16 PM
The tax rate for farms is the same as for any other asset. But farms present two problems. First, liquidity, finding cash available to pay the tax. If I inherit a $2 million stock portfolio, and so a $350,000 estate tax is due (2013 rates and exemption), I can just sell some stock to get the money to pay the tax. But if I inherit a $2 million farm, the land might be worth $1.5 million, the buildings and equipment and livestock $450,000 and there might be $50,000 in cash. How do I raise the other $300,000? Sell some of the farm equipment? Then how can I run the farm? The more important problem for many family farms is that the land might be more valuable if it were sold to a developer. Acreage worth $1.5 million as a farm might be worth $5 million if sold to a developer. In that case the death tax itself could come to $1.5 million. Sure, the heirs could sell out at a profit, but what if they wanted to continue to farm? There are provisions to soften this problem (special use valuation) but they are really complicated, only lawyers can handle them, and even they make plenty of mistakes. So, it's a nightmare. When I was a kid, I had lots of relatives in agriculture, now almost none. Partly it's that farming is hard, risky work for little pay, but part of it is that all the farms in the family had to be sold at the owner's death.

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