During this last year and a half of the COVID-19 pandemic, U.S. farm income plummeted nearly $30 billion. Yet there is legislation being proposed in Congress called the Sensible Taxation and Equity Promotion (“STEP”) Act, proposed by Sen. Chris Van Hollen from Maryland and Rep. Bill Pascrell from New Jersey.
If enacted, the STEP Act would classify inherited land or business assets as being “sold” when the owner dies, forcing the new owners — most often the next generation of farmers, the sons and daughters — to pay taxes on the appreciated value of the farm left to the next generation. If this is passed, those next in line to operate the farm or small business, those same sons and daughters, would be faced with a hefty, retroactive tax on assets.
While some in Congress or from more urban states do not understand the importance of agriculture to a state’s economy, New Hampshire’s citizens realize how important farming is to the state. New Hampshire ranks first in the nation in both direct sales both as a percentage of all farm sales and organic sales of all farm sales. Moreover, the Granite State has the third highest percentage of women farm operators.
It’s no secret that land appreciates over time and the value of farmland, particularly in New Hampshire, has risen in value over the last several decades. What many don’t know, however, is that household farming income has not kept pace with increased values, even before the trade wars of the past few years or the COVID-19 pandemic.
Currently, an accounting procedure called “step up in basis” has been used to ensure that those who inherit the family business, including a farm, don’t have to pay an arm and a leg in taxes when their parents die. The proposed “STEP Act” would scrap this commonsense measure, effectively levying a sizable tax bill on farm families making $100,000 or less.
Here’s an example. Under the Van Hollen “STEP Act,” Susan inherits her father’s farm, a 100 cow dairy farm he had operated for fifty years. She would have to pay for an appraisal and report to the IRS an updated cost basis. If the farm was worth $75,000 back in 1970, now appraised at $2.5 million, under the “STEP Act” Susan would no longer be able to claim the “step up in basis” in order to reduce her tax obligation.
Instead, Susan would have to make a hard choice. Either pay over $580,000 in taxes or be forced to sell off her father’s farm, which she inherited and had worked on since high school. New Hampshire would lose yet another family farm. She would lose her “job,” one or two other jobs (hired help) could be lost and the state would lose about $1,500,000 in local economic benefit.
Advocates of the STEP Act proposal might counter, saying Susan could pay off this tax over 15 years, as the bill stipulates, or just take out a loan. But not so fast! What proponents of this legislation don’t want you to know is that under the current terms of the bill banks could be forced to classify the tax as a lien, drying up credit options.
Farms are a capital-intense business with thin margins. Susan might not even be able to take out another loan to keep the farm running or be forced to pay perhaps up to half of her take-home pay each year, to reduce her “tax” debt. This ignores the risk of rising inflation, additional future tax increases, and necessary capital improvements, not to mention recovery from setbacks as a result of the recent tariff wars and the pandemic.
Rep. Kuster is on the record as pro-farming, sitting on both the influential House Energy and Commerce Committee and the House Agriculture Committee. Yet she has been silent on the STEP Act so far. I believe Rep. Kuster knows the importance of New Hampshire family farms and recognizes that all small businesses are the backbone of New Hampshire’s economy. Now it is time for her to speak up and protect our farms.
With new spending proposals and additional relief measures for small businesses and families circulating and such tax proposals being bandied about by Congress, it is more important than ever that lawmakers don’t accidentally jeopardize the well-being of New Hampshire’s hardworking farmers by not supporting the “Van Hollen Step up Act.”
(Jay Phinizy is a former NH state rep and former USDA Farm Service Agency state executive director. He is a member of the New Hampshire Farm Bureau Federation and lives in Acworth.)