Iowa farmers may be forced to sell land if efforts to change inheritance taxes pass, agriculture groups say

Legislation intended to force the nation's richest Americans to pay taxes on inherited fortunes would instead drive hard-working farmers to sell land that families have owned for generations, ag and business groups say.

Five leading U.S. senators, including former Democratic presidential candidates Sens. Cory Booker of New Jersey and Elizabeth Warren of Massachusetts, proposed legislation last month that they say would close a loophole that allows wealthy Americans to sidestep paying taxes on massive inheritances. It could potentially impact farmers, whose valuable land would be taxed when passed on to the next generation.

Sen. Bernie Sanders, a Vermont Independent, said it's absurd that many of the country’s wealthiest people "never pay a cent" of capital gains taxes "on millions or even billions" they inherit, while "working people pay taxes on every check they receive.”

But Sen. Chuck Grassley, an Iowa Republican, said the legislation would "steal money from hardworking Americans."

"I have to ask these Democrats — and it's well beyond the sponsors of these bill — why would they want to hurt family farmers?" Grassley said in a recent call with reporters.

A coalition of 60 groups, including the National Association of Manufacturers, U.S. Chamber of Commerce, the American Farm Bureau Federation and American Soybean Association, financed an analysis that found proposed tax changes would hurt family-owned businesses — and the broader economy.

As the adage goes: Farmers may be land rich, but they're cash poor, said Patricia Wolff, American Farm Bureau's director of congressional government relations. And they would face "a huge new tax bill," potentially forcing them to sell land or take out large loans to cover it, she said.

Currently, property that appreciates in value over time steps up to the current market price when the owner dies and leaves it to family members. That means no one has to pay capital gains taxes on the increased value unless the family inheriting the property sells it. Even then, they must pay taxes only on the improved value while they held it.

The family inheriting the property must pay taxes only if they sell the property and only on any increased value since the day they inherited it.

Under the legislative proposal, heirs would be required to pay capital gains taxes on the entirety of the property's increased value over time, said Kristine Tidgren, director of Iowa State University's Center for Agricultural Law & Taxation.

And the taxes would be due when the death occurred — not just when the property is sold, she said. The legislation would change what's called the "step up in basis."

While Iowa land values are high — averaging $7,559 an acre last year — most farm families aren't rich; they've sacrificed for years to buy land they want to give to their children, said Brian Jones, who farms in central Iowa with his father and brother-in-law.

"On paper, farmers may be worth tons of money, but that's not money that they can spend," said Jones, 43. "They're not going to Europe for a month, buying Mercedes or taking cruises. ... It's all tied up in land.

"You can't farm without land," he said.

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Land values are high, but profits are not

Neil Hamilton, former director of the Drake University Agricultural Law Center, said he doubts any politician — Democrat or Republican — wants to be responsible for driving farmers to sell land needed to grow crops.

"I can’t imagine Congress enacting changes in estate planning — or even the step up in basis — that would have an unmitigated impact on agriculture," he said.

"They will do something unique for agriculture," said Hamilton, who's been critical of congressional leaders worried about the federal estate tax, since it exempts about $23 million in inherited wealth per couple and impacts few farmers.

Lawmakers have taken just the first of about 100 steps needed to actually change the law, he said.

Ag groups are worried, though. An American Farm Bureau analysis shows land values in Iowa have climbed 322% since 1997, the first year U.S. Department of Agriculture data was available. Iowa's growth is the sixth-highest nationally, following only South Dakota, North Dakota, Wisconsin, Minnesota and Nebraska, the report shows.

Iowa farmers would need five years to pay off the capital gains tax, if an owner were renting the farmland, the analysis shows.

Despite a recent rally in corn and soybean prices, farmers have struggled in recent years to make a profit, said Jones, who farms near Greenfield in central Iowa.

And any additional costs can make it difficult for small farmers to survive, he said.

While the legislative proposal provides 15 years to pay the tax — and exempts the first $1 million in gains — it's not an expense that could be deferred when times are tough, such as buying equipment, said Jennifer Zwagerman, the Drake Agricultural Law Center director.

Even with improved prices, farm income is expected to decline over the next couple of years, given the loss of government subsidies, Zwagerman said.

Last year, government payments were about 38% of $123 billion in farm income, U.S. Department of Agriculture data show. The payments helped offset losses from trade wars, the coronavirus pandemic, drought and other natural disasters. This year, farm payments are expected to fall 45% from last year, a USDA forecast shows.

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Jones said it's tough for a farm to support more than one family. Jones' family hits the road for weeks after planting their crops in the spring, custom-harvesting 10,000 acres of wheat from Oklahoma to North Dakota, so their operation can support three families.

That's in addition to growing corn and soybeans on 2,000 acres and operating a 250-head cow and calf operation.

"People want to support local farms, but when these tax proposals come up, small farms disappear," he said.

Zwagerman agreed, saying that the tax proposal could drive additional consolidation of land under ever-larger operations.

"Bill Gates is already the nation's largest farmland owner," she said. "We'd likely see more farmland bought as an investment."

Proposal comes as Iowa farmers age

Wolff, the Farm Bureau government relations director, said the tax proposal is designed to create revenue to help offset increasing government spending.

"All the tax increases are tied to the need to fund spending proposals," she said.

President Joe Biden has called for spending $2 trillion to replace and repair U.S. roads, bridges and other infrastructure. And he's expected to propose another $1 trillion in spending to support working families and public education.

Congressional leaders backing the tax changes say the step up in basis is one of the largest tax breaks in the federal tax code, worth $41.9 billion this year alone, based on a congressional Joint Committee on Taxation report.

The legislation comes as the state and nation are expected to transfer a huge amount of farmland. About 60% of about Iowa's 30.6 million farm acres is owned by people over the age of 65, an Iowa State University report shows. Nationally, 10% of 911 million acres was expected to transfer nationally through 2019, a USDA report says.

Grassley said changes like Warren and Sanders propose would "take away the livelihoods and opportunity for the next generation."

"Family farmers from Charles City to Ocheyedan told me eliminating the step up in basis would create a burdensome tax liability on sons and daughters trying to keep the farming operation afloat," Grassley said in an email about the changes.

Jones said the proposal could be devastating for young Iowans.

"It's a business. It pays the bills. But it's also a legacy that you're trying to build on," he said. "There's a responsibility to pass it on."

Donnelle Eller covers agriculture, the environment and energy for the Register. Reach her at deller@registermedia.com or 515-284-8457.