President Joe Biden faces opposition in his own party to his proposal to roll back a key tax provision that limits the taxation of assets passed on at death.
The White House has pitched eliminating the step-up in basis at death for capital gains above $1 million per person or $2.5 million per couple. The step-up in basis allows inherited assets to be taxed at the appreciated value of when they were inherited as opposed to the basis value of when they were first bought. It can permit the appreciation of an asset over the course of a decedent’s life to go untaxed, although the estate tax may still apply.
Many on the Left contend that it affords the wealthy a loophole to hold assets without paying taxes. Republicans, though, argue that the policy doesn’t just affect the wealthiest people, but also helps farmers and small businesses.
Max Baucus, a Democrat who served as chairman of the Senate Finance Committee during his more than three decades representing Montana, blasted the Biden proposal in an opinion piece published on Wednesday in the Wall Street Journal. He said that if approved, the proposal will be devastating for family businesses and farms after the owner dies and will force those ventures to be liquidated while bringing in little tax revenue.
“Lawmakers should know this is a mistake. In 1976 and again in 2010, Congress passed legislation eliminating the step-up in basis. Both times it had to be reinstated because of the devastating effects on family-owned businesses,” said Baucus, who also served as former President Barack Obama’s ambassador to China.
For an example of the way the step-up in basis works now, if a farmer purchased $1 million worth of land two decades ago and it increased four times in value before death, current law states that a child would inherit the $4 million farm and only pay taxes on gains accrued after he or she inherits it. Under Biden’s plan, the inheritor would end up having to pay a capital gains tax on $3 million, the amount it appreciated over the 20 years before he or she inherited it.
To allay concerns, the White House has said that under its proposal, family farms and businesses that are family-owned would be exempt from paying the tax until the assets are sold. Families would also be afforded 15 years to pay off the tax on the assets.
Baucus is not the only Democrat pushing for lawmakers to reject this specific aspect of the $3.5 trillion spending package, which is expected to be pushed through the House and Senate without a single Republican vote using a budgetary process called reconciliation.
This week, former Democratic Sen. Heidi Heitkamp warned that the proposal would hamstring not only the wealthy but would also negatively affect farmers, including those in her home state of North Dakota. She said families should only face capital gains taxes on inherited assets when those assets are sold and the gains are realized.
“I’m trying to sound the alarm, both economically and politically, for Democrats that this is not a path to walk,” she said on CNBC. “The disruption that it would create for small family business and farmers and family assets is not worth the pain.”
Other Democrats have also expressed apprehension over changes to the step-up in basis. In June, House Agriculture Committee Chairman David Scott, a Georgia Democrat, said he was “very concerned” that some of the revenue-raising proposals, such as curtailing stepped-up basis, could hurt farmers.
Thirteen other Democratic lawmakers also sent a letter to House Speaker Nancy Pelosi and leadership in May expressing concern about changes to step-up in basis and how it could affect their constituents, many of whom own family farms.
“Farms, ranches, and some family businesses require strong protections from this tax change to ensure they are not forced to be liquidated or sold off for parts, and that need is even stronger for those farms that have been held for generations,” the group wrote.
The Democratic division over the matter could end up working in favor of those who oppose altering stepped-up basis because of the party’s wire-thin majorities in both chambers of Congress. Every single Democratic vote is needed in the Senate in order to pass the legislation through reconciliation and have Vice President Kamala Harris cast the tiebreaking vote, so even one senator threatening defection over the provision could derail the spending package.
The Washington Examiner contacted the offices of several lawmakers who have rural constituents or are considered to be more fiscally centrist than their liberal colleagues but did not hear back from any except for Sen. Mark Warner of Virginia. A spokesperson for Warner noted that he has not yet taken a public position on the matter.
A spokesperson for Sen. Jon Tester of Montana pointed to comments the Democrat made in May indicating that he did not support rolling back stepped-up basis.
"We don't like that," Tester said of the proposed change. "That's a non-starter."
In addition to the change to step-up in basis, the tax plan calls for raising the top individual income rate to 39.6% and taxing capital gains for households making more than $1 million as ordinary income. People making $1 million or more may end up being subject to a federal rate of up to 43.4% when an existing Obamacare surtax on investment income is included.
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Original Author: Zachary Halaschak