Farmers and ranchers have lobbied hard against the estate tax this year, but are resigned to massive increases as the so-called "fiscal cliff" nears.
“I talked to Max (Baucus) on the 10th and he thought they’d get it fixed, but it doesn’t look like it to me. Harry Reid doesn’t want it, and he’s the head of the Senate,” said Bob Hanson, a White Sulphur Springs rancher and Montana Farm Bureau Federation president.
A big issue for Montanans in agriculture, the estate tax has been a sleeper subject in the debate over the fiscal cliff — the $7 trillion in tax increases and government cuts expected to kick in Jan. 1 if Congress and the president fail to reach a deal by week’s end.
Currently, there’s a 35 percent tax on estates worth more than $5.12 million, a bar set high enough so most farms and ranches can be passed to heirs without triggering the tax.
Without congressional action, two things will happen on New Year's Day that producers say will make it impossible to keep farms and ranches in the family.
First, the tax rate on estates will increase to 55 percent.
Second, the level at which the tax kicks in will fall to $1 million.
Estate taxes have generally been adjusted downward — at least six times — since 2001. Problem is, Congress didn’t make matching spending cuts to go with the estate tax break and many others. Consequently, deficit spending mushroomed.
The estate tax used to be a tax to which farmers and ranchers didn’t pay much attention, but Montana farmland values more than doubled between 2002 and 2007. As a result, many farms that never had the value to trigger the estate tax now do.
“The value in Meagher County has been driven up by non-ag purposes,” Hanson said. “People buy them for recreational purposes.”
In the last decade, ranches in Hanson’s region have sold to a former vice president of Goldman Sachs, an oil baroness and a dot-com executive. Those transactions became the comparable sales for appraising Hanson’s property, which increased in value 60 percent. The recession slowed ranch sales for recreational purposes, which lowered values some since 2007, but not enough for many Meagher County ranchers to escape the estate tax, Hanson said.
Federal lawmakers, at least those from farm states, are assuring constituents there’s still hope that an agreement can be reached to keep the tax from increasing.
"We cannot let Montana families get hit with an estate tax hike next year,” said Sen. Max Baucus, D-Mont. “I'm doing all I can to get the best possible deal to make sure family farms and ranches can stay in the family where they belong."
Some lawmakers, as well as President Barack Obama, would like to see the estate tax increased, though not to the level triggered by the fiscal cliff.
Earlier this year, Obama suggested raising the estate tax top rate to 45 percent and lowering the exemption level to $3.5 million, which is where the levels were in 2009. That proposal was supported by Senate President Harry Reid, D-Nev.
Raising the estate tax would generate considerable revenue to help with the federal deficit. If the estate tax rate rises to 55 percent Jan. 1 and the exemption rate falls to $1 million, roughly 53,000 estates would become subject to the tax. The Tax Policy Center, an independent group, estimates that taxes on those estates could raise $40 billion.
Obama’s proposed increase would tax about 7,500 estates and generate about $22 billion.
The current rate targets relatively few estates, roughly 3,600.
The last couple of years have been dicey for the estate tax, with Congress crafting extensions of the current levels before heading home for Christmas break. This year, the extension will have to come in the few remaining days of 2012, if at all.
Hanson said he suspected last spring that the estate tax debate wasn’t going to end well in 2012.
He and his wife spent several months jumping through the tax hoops available for people who want to pass on a $5 million gift. The federal government allows a husband and wife $5 million each for one-time gifting.
The Hansons will use that tool to keep their ranch in the family. That’s not really an option for someone who didn’t start the process several months ago, Hanson said.