CHOSEN RELEVANT QUOTES:
“A lie makes it halfway around the world while the truth is still putting on its shoes.”
“I hate being lied to my face when I know every bit of the truth.”
“When someone lies to you, it’s because they don’t respect you enough to be honest and they think you’re too stupid to know the difference.”
THE PROPOSED LEGISLATION
The 99.5% Act and the Sensible Taxation and Equity Promotion (STEP) Act are Progressive bills that would increase taxes on the super wealthy by taking away some of the legal mechanisms that the wealthiest 1% use to avoid substantial estate and capital gains taxes upon transfer of wealth to their heirs. These changes would at least stop and in some cases begin to reverse the incredible and growing gap in wealth between the wealthiest 1% and 99% of Americans.
As is always the case, Republicans worry a great deal about the super wealthy and since it is hard to generate sympathy for obscenely wealthy people, they routinely lie about the impact of tax changes on regular folks. These lies have the added benefit of scaring their voters, who are part of the 99%, into voting against their own and the country’s best interest by voting for Republicans who will put the interest of the 1% over theirs.
PULLING THE CON
Joni Ernst uses a slide created by Texas A&M Agriculture and Food Policy Center as the backdrop to her disinformation. The clear goal of the disinformation is to make farm families believe that the STEP Act will result in almost every farm estate paying taxes of around $1 million. This is primarily designed to generate fear that their heirs will be forced to sell the farm to pay taxes on the estate. This is not a new Republican tactic. Similar lies are trotted out by farm state Republicans any time progressive changes in taxes are proposed.
The slide contains the false or deliberately misleading claims that:
- 98% of family farms will face higher tax liabilities due to the STEP Act, implying to farmers that their heirs will almost certainly have to pay more taxes than before, if the Act is passed.
- The additional tax liability per farm will be $1,031,657, implying to farmers that when their heirs will inevitably have to pay more taxes, it will be to the tune of around $1 million.
VAGUENESS AND CONFUSION ARE FEATURES NOT BUGS
The slide refers to the STEP Act but does not make it clear which provision of the Act supposedly will affect 98% of family farms. This makes it hard to formulate a simple counter argument. Additional confusion can be generated in people’s minds by mixing together the proposed changes in the inheritance tax (99.5% Act) and the changes in the capital gains tax (STEP Act) when discussing this issue. Some of that muddling together may be deliberate, whereas some is just failure to be explicit.
I am not an estate planner, although darn good at math and complicated concepts. It was extremely hard for me to understand what each act included and why the claims Ernst makes were likely false, although they immediately failed the smell test. I have tried to make things as simple and truthful as possible. Republicans will rely on the fact that few if any farmers are going to take the time to talk to anyone, including their lawyers, before being scared out of their wits by these claims. FYI — Don’t talk to the Farm Bureau, they are spreading this misinformation too.
WHAT IF ERNST IS REFERRING TO CHANGES IN THE ESTATE TAX (99.5% ACT)?
Changes would reduce maximum exemptions from $11 million and $22 million per individual and couple, respectively, to $3.5 million and $7 million. Plus, there is a further exemption of $3 million for farm estates. Here’s recent experience:
2009: Exemption $3.5/$7 million (individual/couple) – less than 1% of all estates paid estate taxes. This percentage was similar for farm estates.
2017: $5/$10 million (individual/couple) – less than 1% of all estates paid estate taxes. This percentage was similar for farm estates.
2019: $11/$22 million (individual/couple) – less than 0.5% of all estates paid estate taxes. This percentage was similar for farm estates.
2021 (99.5% Act): $3.5/$7 million for all estates (individual/couple) + $3 million for farm estates; same for non-farm estates as 2009; More generous for farm estates than 2009
Since 2009, the increase in exemptions has benefited only the wealthiest and has significantly reduced revenues. Interestingly, economic analysis determined that going below $3.5/$7 million was neither necessary nor reasonable because, while it would impact several more percent of estates, the revenues generated did not make it worth burdening additional families.
Therefore, if people think Ernst is referring to the changes in estate tax, the 98% claim is grossly false as it is almost certainly going to be 1% or less.
As to the claim that the tax liability will be around $1 million per farm, note the teeny tiny print (if you can read it) at the lower left corner of the slide. It reads, “Average tax liability calculated for impacted representative farms only”. Once again, there will be no change in estate tax liability for 99% of farm estates because they will pay $0 in estate taxes.
WHAT IF ERNST IS REFERRING TO CHANGES IN CAPITAL GAINS TAXES (STEP ACT)?
In the past, inheriting capital assets (land, stocks, etc.) and then selling them fairly soon would generate little or no capital gains taxes. This is because capital gains are based on the growth in value above the “basis” (value when they were acquired), and the basis for the heir was the value at the time of inheritance. Little or no growth in the short term over this stepped-up basis would mean little or no tax following sale.
In this case, Ernst has ever so slightly more wiggle room. However, although it’s impossible to say exactly how many heirs will pay capital gains taxes after the law changes, consider this:
- Heirs will only pay taxes if they sell assets. So, no heir will be forced to sell the farm due to these tax changes.
- For heirs who choose to sell these assets, under the new law, the first $1 million in capital gains is exempt from taxation. If the heirs would realize capital gains when selling, then they could choose to sell up to the number of acres that would generate $1 million in capital gains and keep the rest, if any, for the next generation. One example of how this might work for farmland is given below.
Examples of the effect of year of purchase/inheritance by current farmers when the next generation inherits the land. How many acres would be below the $1 million exemption at today’s prices if all the land was purchased/inherited at the following times and is debt-free? In other words, how many acres could the heir(s) sell and pay no capital gains taxes under the new law. Let’s say the value at the time of sale was the current average value of Iowa farmland - $7,559/acre.
- Deceased generation bought/inherited farmland in 1960 – Basis $239/acre; Inheriting generation capital gains is $7320/acre; 136 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in in 1970 – Basis $392/acre; Inheriting generation capital gains $7167/acre; 140 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in 1980 – Basis $1,840; Inheriting generation capital gains $5719/acre; 193 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in 1990 – Basis $1,090; Inheriting generation capital gains $6469/acre; 155 could be sold for no taxes.
- Deceased generation bought/inherited farmland in 2000 – Basis $2000/acre; Inheriting generation capital gains $5559/acre; 180 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in 2010 – Basis $5,064/acre; Inheriting generation capital gains $2495/acre; 400 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in 2011 – Basis $6,708/acre; Inheriting generation capital gains $851/acre; 1,175 acres could be sold for no taxes.
- Deceased generation bought/inherited farmland in 2012 – Basis $8,296; Inheriting generation capital gains $0/acre; each acre sold would generate a capital loss.
- Deceased generation bought/inherited farmland in 2013 – Basis $8,716; Inheriting generation capital gains $0/acre; each acre sold would generate a capital loss.
- Deceased generation bought/inherited farmland in 2014 – Basis $7,943; Inheriting generation capital gains $0/acre; each acre sold would generate a capital loss.
- Deceased generation bought/inherited farmland in 2015 – Basis $7,633; Inheriting generation capital gains $0/acre; each acre sold would generate a capital loss.
Therefore, if people think Ernst is referring to the changes in capital gains taxes, then the 98% claim is likely to be grossly false because it is highly unlikely that 98% of heirs would both choose and be able to sell more acres of an inherited farm than would generate over $1 million in capital gains.
As to the claim that the tax liability will be around $1 million per farm, there is that disclaimer in tiny print. And for those “impacted representative farms”, that would mean that the average sale would generate $7.7 million total - $1 million exempt and $6.7 million in capital gains ($1 million/0.15). At current farmland value, this would represent a sale of over 1,000 acres, again, well less than 1% of Iowa farm estates.
No matter how you look at it or try to twist the meaning of these claims into knots. It is reasonable to say that Senator Ernst is trying to mislead/deceive and scare Iowa farmers who trust her.
Bonus misleading statement:
National average tax liability associated with the proposed STEP Act will be $726,104.
- This is clearly designed to imply that the average estate will pay $726,104 in some kind of taxes, in order to scare people into opposing the bill.
- An average is skewed by outliers (a few very low or very high values). So, assuming that this number is actually accurate, it could result from 99% of heirs/estates paying $0 in additional taxes (likely to be true) and a relatively small percentage of heirs/estates paying a large (but reasonable) amount from their immensely wealthy estates – the whole point of the bills.