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The state repealed the inheritance tax, or “death tax,” as it applies to family-owned farms, a passage celebrated at a news conference at Gro-Lan Farms in early August.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.
The inheritance tax is a form of income tax, which (like all other income taxes) is paid by a living person who receives income.
Second, money is taxed when the ownership changes. If it goes from your employer to you, it is taxed. If it goes from you to a friend, it's taxed. If it goes to a family member, it's taxed. Granted, there are exemptions that allow you to give rather large amounts to family members, tax-free, but like so many things in life, you must have the foresight to do it before you die. Third, money is ALWAYS taxed multiple times. You pay taxes on your income. And when you use your income to buy a new refrigerator, you pay taxes on the purchase, even though it's the same money on which you already payed taxes. This is no different. When money ownership changes, taxes are paid. It doesn't matter whether the money is going to a store owner, or the fruit of your loins. Which brings me to the bit I like... "The founding fathers of this country would have tarred and feathered people for such tyranny." Actually, they DID tar and feather people - but they were ones who held YOUR beliefs. The people being tarred and feathered were "loyalists," so named for their loyalty to the British Crown... and the extended British royal family of aristocrats, who were able to amass enormous wealth, passing it down within their own families, tax-free.
Liberty1 - As you describe it, it's theft. But that's not what's happening. Your property isn't being taken by force, because it's not your property. Dead people can't own property. If the value of your former (you're dead, remember) estate is high enough to be subject to estate taxes, then your inheritors must pay a tax. There are two things you need to remember. First, your inheritors are not necessarily your family. You can will your estate, or any portion thereof, to anyone. It can be family. Or friends. Or a charity. Or complete strangers. Whether the person who inherits the money shares a fraction of your genetic makeup is irrelevant. And second, you are not your children. When you die, your estate is no longer your estate. It becomes their estate through a process called "income." They never paid taxes on that income. Sure - YOU did, but that was when the estate entered YOUR possession. And once more - you are not your inheritors. ...
But after you are dead, all bets are off. If you prepared, that's great. Otherwise, your property becomes the *income* of your inheritors, and is subject to the rules which apply to all income. In the meantime, let's quantify what we're arguing about with a hypothetical problem: Let's say that your father dies next month, leaving an estate valued at $5,135,000. How much inheritance tax must be paid? The answer, and I expect this will surprise you, is a mere $1750. The remaining $5,133,250 is all yours. Now, the estate tax rates and caps change from year-to-year, but for the past decade, estates worth under $1 million have never been affected by the tax.
But as I said, it's easy enough to mitigate the bite IF you have the foresight to plan ahead. If a multi-million dollar estate is owned by a family trust at the time you die, taxes paid by the inheritors are reduced enormously.
CyD252 - As a form of income tax, it is theft. Thanks for agreeing! :) I have a question to ponder, though it overlaps another topic, if dead people can't own property - then why are some allowed to vote?
And it's not a double-tax... For it to be a double-tax, the same owner would be paying taxes on it twice. You are labor under the incorrect assumption that money is taxed. It's not. *People* are taxed when they assume ownership of money (or equivalent assets). That's why the estate tax is NOT double-taxation. You pay taxes on it ONCE when it comes into YOUR possession. Once in your possession, you will never pay taxes on it again. Liberty1: They're not. It is not legal to cast votes under the name of another person, living or dead.
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Sorry - I just had to say that.
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.
Warren Buffett loves the estate tax too, because he gets to buy businesses at distress sale prices.
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.
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.