CASPER, Wyo. — Wyomingites will see the return of a state estate tax if the country falls off the "fiscal cliff," according to Dan Noble, excise tax administrator with the Wyoming Department of Revenue.
Additionally, the Cowboy State and the rest of the country could expect a 20 percent jump in the federal estate tax, also known as the death tax, if Congress and the White House can’t reach an agreement to avoid sequestration by Dec. 31.
All citizens are in jeopardy of paying more on money or property they inherit, but small businesses in the agriculture industry fear federal tax hikes, mixed with the revival of a state tax, would cripple family operated ranches and farms in Wyoming.
If ranchers want to pass their operation to the next generation, the average family can’t afford to pay the estate tax based on livestock sales alone, Lander rancher Jim Hellyer said. Because ranchers are short on liquid capital and long in land value, it’s hard to keep pace, he said.
Barring an agreement between now and Dec. 31, the sequester would trigger automatic tax increases for everyone and federal spending cuts on Jan. 1. The federal estate tax rate would climb from 35 percent to 55 percent and the exemption threshold would nosedive from $5 million to $1 million for single couples and from $10.24 million to $2 million for married couples.
Those numbers may seem high to the average American, said Chris Bastion, an associate professor in the Agriculture and Applied Economics Department at the University of Wyoming. But, he said, people not connected with the agriculture industry “just don’t understand.”
“A million wouldn’t buy you an economic unit in the ranching industry today,” Natrona County Commissioner and third-generation rancher Rob Hendry said.
The average ranch in Natrona County sold for $3.4 million between 2002 and '04, according to a UW study. Today the average value of Wyoming agriculture operations is $16.3 million, according to the United States Department of Agriculture.
Jim Magagna is executive vice president of the Wyoming Stock Growers Association. He said developers and the wealthy are driving up land values in the state.
“Land values in Wyoming are not representative of what the land is worth to raise cattle or grow a crop,” Magagna said.
The state estate tax would resume the former revenue-sharing plan between Wyoming and the federal government. Residents would have to file a Wyoming tax form, but the revenue would be shared nationally, said Norton Francis, a senior research associate at the nonpartisan Tax Policy Center.
The state estate tax expired in 2005 after the federal government increased its own rates and converted its credit plan with states into a deduction, Noble said. It's an ad valorem credit based on the worth of an estate and increases with the estate's value. For a ranch worth a little more than $1 million, there would be a $38,000 fee plus a 6.4 percent tax on the approximately $962,000.
Francis said the state estate tax would bring in an additional $12 million per year to Wyoming. Noble said the amount would depend on the year.
"It could easily be that much," Noble said.
Philip Ellis is a ranch owner from Chugwater. He said estate planning is the best way to avert paying the highest estate tax rates. Today, the Wyoming Stock Growers Association is sponsoring the “Making A Plan” workshop at the Parkway Plaza Hotel and Convention Centre in Casper for those in the industry. In the 1970s when the federal estate tax reached as high as 70 percent, Ellis said, there were horror stories of ranchers who had to take out mortgages and loans to pay the estate tax just to stay in operation. Ellis would rather be tending to his livestock than writing a will, he said, but not doing so could mean losing the ranch.
There are a few ways to get around paying the full tax via gifting and annual exclusions. These methods are ways to pass on ranches to the next generation, but some of the exclusions could also expire Jan. 1.
Sen. Mike Enzi, R-Wyo., voted to eliminate the federal estate tax in 2006 and has voted to keep the rates as low as possible since. Rep. Cynthia Lummis, R-Wyo., supports keeping the current rates, but she wants to see the tax repealed.
“Being raised on a ranch and speaking with fellow ranchers in the state, I recognize and support the need for the death tax to be permanently repealed,” she said. “The most devastating consequence would be an automatic return to the old rate of 55 percent.”
Sen. Max Baucus, D-Mont., is leading the ag industry's charge in Congress by making calls to keep rates at their current levels. Sean Neary, a Baucus spokesman, said Baucus is specifically working to protect families who want to pass down their ranches to the next generation.
The U.S. House voted for an extension of the current rates in July, but the bill failed in the Senate.
Sen. John Barrasso, R-Wyo., said if the tax rates increase, many Wyoming ranchers may have to sell. The Senate Republican Policy Committee, which Barrasso chairs, found that more than 24,000 farms and ranches nationally would be affected if the federal rate increases.
“If the death tax is increased, many of Wyoming’s farming and ranching families will be forced out of their livelihoods,” Barrasso said. "The ability of the family farm to pass from one generation to the next will be lost. Our country and our state cannot afford for this to happen.”