Democrats wage war against family farmers and small business owners

https://apnews.com/article/joe-biden-business-6019bbf1969016cbd2749b213ba47a08

As tax changes loom, farmers worry about the next generation

By Tim Grant

SHARPSVILLE, Pa. (AP) — Michael Kovach got into the farming business 13 years ago with the purchase of a 107-acre farm in Mercer County after retiring from the oil and gas industry at 39.

“I’ve worked too hard on this piece of ground to really even consider the thought of it turning into anything other than what it is and getting better than what it is,” said Mr. Kovach, 52, owner of Walnut Hill Farm in Sharpsville.

He has two full-time employees who help him raise grass-fed livestock such as Angus cattle, lambs and chickens, which are sold direct to consumers at the farm. His wife, Karen, runs the farm stand.

Mr. Kovach bought the farm hoping to one day pass the mantle of ownership to his daughter, who is 17. Now he and and other family farmers across the state worry how changes in the tax law could impact their plans to transfer their farms from one generation to the next.

President Joe Biden has proposed tax changes in order to pay for the American Families Plan, which provides government benefits and tax breaks for middle- and lower-income people.

The proposal that’s garnered the highest profile in the business community has been Mr. Biden’s plan to raise the 21% corporate tax rate that has been in place since 2018. He’s proposed changing it to 28%, which is targeted at the largest corporations, some of which effectively pay no income tax on billions in revenue.

Small-business owners are most concerned about increased taxes on capital gains — profits on the sale of assets — and on inherited wealth. Mr. Biden’s plan calls for nearly doubling the top tax rate on capital gains and eliminating a significant tax benefit on appreciated assets known as the “step-up in basis.” The combined tax rate increase could add up to 61% on inherited wealth.

For example, if someone dies after starting a business decades ago that’s now worth $100 million, under the current tax law, the business would pass to family members with no capital gains tax because the cost basis of the business is stepped-up to its current value at death.

Under Mr. Biden’s plan, the heirs would immediately owe a capital gains tax of $42.96 million based on the capital gains rate of 39.6%, plus the net investment income tax of 3.8%, minus the $1 million estate tax exemption. The proposal would reduce the estate tax exemption from $11.7 million to $1 million.

If the estate tax remains unchanged, the family would also pay an estate tax of 40% on $57.04 million of the remaining assets. Including exemptions, the estate tax would amount to $18.13 million.

The combined federal estate tax and capital gains tax liability would total $61.1 million on the heirs’ original $100 million inheritance. That’s without including state capital gains and estate taxes.

“That’s a really important thing if I’m the daughter of a business owner and I want to inherit stock in my family’s company,” said Elizabeth “Li” Connolly, a partner at the Connolly Steel accounting firm in Avalon. “Me, as a regular person, could be theoretically not targeted by this, but it’s going to affect everyone in a negative way.”

Dividend payouts and stock buybacks

The tax proposal most closely tied to the larger economic recovery is the corporate tax hike that could go from 21% to as much as 28%, although negotiations are ongoing, and media sources have reported Mr. Biden floating the idea of a minimum corporate tax of 15%.

Prior to the corporate rate being reduced in 2018 by the Tax Cuts and Jobs Act, corporations paid a tax rate as high as 35%.

Pennsylvania State Treasurer Stacy Garrity said she has met with small-business leaders across the state who are interested in expanding their companies but are holding back due to the uncertainty of tax changes.

Pennsylvania has 1.1 million small businesses, which Ms. Garrity said make up 99.6% of all businesses in the state.

She said owners of farms in rural Pennsylvania are particularly worried about a capital gains tax hike.

More than 8% of U.S. adults have at least $1 million in assets, according to the Global Wealth Report 2020 by Credit Suisse. That comes out to slightly more than 20 million Americans.

The Pennsylvania Farmers Union has 300 members, all of whom are owners of family farms. The national farmers organization has 200,000 members.

“Some of these farmers have had these farms in their families for generations, and now, if they go to pass on the farm to the next generation, anything over $1 million they would have to pay that capital gains tax on it,” Ms. Garrity said.

Farm operator households usually have more wealth than the average U.S. household because they own significant capital assets, such as farmland and equipment necessary to run a farm. In 2019, the average farm household had $1,042,855 in wealth, according to the U.S. Department of Agriculture.

Gus Faucher, chief economist at Pittsburgh-based PNC Financial Services Group, said the bank is waiting to have a better sense of what’s likely to get through Congress before incorporating the tax increases into its forecast.

But on the surface, he said, it’s not likely to have a significant impact on economic growth.

“We saw very little change in growth when the corporate income tax cuts were passed under the Trump administration in 2017,” Mr. Faucher said. “There was a modest growth pickup in business fixed investment following passage of the tax cuts, but that faded in 2019.

“Mostly the impact of the corporate income tax cut was to increase dividend payouts to shareholders and boost stock prices, with little impact on the real economy. Therefore, I would expect a very small negative economic impact from the proposed Biden tax cuts.”

‘Tax is a price’

A tax increase of a few percentage points can be absorbed by most profitable companies.

“If they know what the tax rate is, over a period of months they will adjust to it,” said Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown. “They will adjust just like we do in our homes and our personal finances. We adjust to changes in pricing. Tax is a price. It’s part of what corporations pay to do business.

“You could argue that corporations spend too much money on this or that or pay people too much at the top,” he said. “That’s just financial management. But taxes in and of themselves is neither good nor bad. It’s how they are applied to the business. I’m not advocating for higher taxes. But we do have to pay for what we’re spending.”

Mr. Fragasso, whose company manages nearly $2 billion for clients, said lawmakers could get a false impression of how much corporations are making without taking into consideration that profitability varies from year to year, and responsible company managers put money aside for unforeseen events that will impact their future.

“That’s what we do,” he said. “A legislator could look at us and say, ‘Tax them more because they are a rich company’ when in fact we set it aside for the future to hedge the unexpected or to use to grow the company and create more employment.”

Ms. Connolly noted that nothing is carved in stone yet.

“Over the years, I don’t get worked up about anything until I see it signed into law because there’s going to be a lot of changes,” she said.

“Everything right now is still speculation because there’s going to be a lot of negotiation as part of this.”

June 19, 2021. Tags: , , , , , , . Economics. Leave a comment.

A poll about the inheritance tax in the U.S.

A long time ago, when there were no laws against killing bald eagles, someone made a sculpture that included a stuffed bald eagle.

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August 16, 2012. Tags: , , , , , , , . Animals, Art and sculpture, Politics, Polls. 2 comments.