Undoing 100 years of protections would place farm families in the crosshairs.
Believe it or not, the focus in the Iowa presidential caucus is starting to shift from the personalities of the candidates to their actual policies. August delivered a plethora of campaign swings throughout Iowa including the State Fair, which provided a platform for candidates to discuss issues. The first Republican debate, although light on tax policy, allowed the candidates to start engaging on a number of issues. For Iowans, there is an important intersection of tax policy we should be paying closer attention to: death taxes and the capital gains tax. More specifically, Iowans must be wary of any changes to how the cost basis of inherited assets is calculated or our farm families could end up paying a steep price.
Often during a primary season candidates will embrace and promote policy ideas that have broad appeal to the base of their own political party. That’s why it is odd to see Republican candidate Vivek Ramaswamy touting tax ideas that align with a plan Democrat senators pushed back in 2021. At that time, lawmakers including Bernie Sanders and Elizabeth Warren attempted to pass a tax bill that would have done away with stepped-up basis for inherited assets, including family farms. Throughout 2021, Iowa Senator Chuck Grassley fought against the proposal, calling it a death knell for family farms and small businesses. Tax policy should never be used as a weapon for class warfare or to punish certain groups of people, including the “wealthy.”
For a quick refresher, stepped-up basis simply means that when calculating the capital gains tax, a beneficiary uses an asset’s value at the time of the owner’s death, not what the owner originally paid for it. Consider a farmer who bought an averaged size farm of 350 acres in 1980. At $2,000 an acre, that farm was worth $700,000 when it was purchased. As the farmer worked hard for decades to make ends meet, paying property taxes and income taxes along the way, they likely did not accumulate a substantial amount of assets away from the farm itself. Given the appreciation of farmland over the past four decades, today that same farm is likely worth more than $11,000 per acre, or nearly $4 million in total. Without a stepped-up basis, that farmer’s children may easily owe more than $1 million in capital gains taxes if they choose to sell the farm they inherit.
Iowans for Tax Relief Foundation understands how dangerous it is when government funds its unquenchable spending desires by looking beyond the grave for more revenue, whether that be via the capital gains tax, the estate tax, or the inheritance tax. To the credit of the Iowa Legislature, they joined forces with Governor Kim Reynolds to eliminate Iowa’s inheritance tax in 2021. While Iowans are growing accustomed to state officials delivering one taxpayer protection after another, they’ve also gotten used to politicians from Washington, D.C. coming up with new schemes to reach into their pocketbooks.
To be clear, stepped-up basis is not a Trump-era reform that’s set to expire in a few years. Rather, it has been part of the U.S. tax code for over a century, having been implemented in the 1920’s. Whoever America sends to the Oval Office in next year’s election will have the opportunity to put their own stamp on our nation’s tax code. Some of those changes could deliver an expensive tax bill to many Iowans, which is precisely why Iowa voters need to understand how campaign talking points could play out in real life. Beyond the sheer cost, there is one other practical matter to take into account if stepped-up basis is eliminated: determining the actual dollars involved in farmland transactions that took place 50, 60, or even 70 years ago may prove expensive at best and impossible at worst.
And that brings us back to Mr. Ramaswamy. In a June interview, he touted the theoretical merit of an extremely high inheritance tax in an effort to create equal opportunity. While he described that measure as unimplementable and calls the concept a “thought experiment,” he instead promoted ending stepped-up basis as a “practical” alternative.
Presidential candidates certainly want to pass policies they believe would promote economic growth and opportunity. New candidates injecting new ideas into the debate is ultimately a good thing, but Iowans need to make sure they are soundly rejecting the policy ideas that would be damaging to our state. The candidates would benefit from remembering that what might sound good to the media would not play so well here in the heartland.
Iowa voters should take advantage of the numerous chances we all have to meet the candidates and ask them where they stand on this issue and tax policy in general. After all, Iowa has made great progress reshaping its state tax laws for the better in recent years. Eliminating stepped-up basis on inherited assets would push aside a key building block of federal tax law that has transcended Republican and Democrat administrations. Iowans shouldn’t let a bad policy idea like that take root.
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