Bid to protect farms from capital gains signals Democratic resistance to some tax hikes

President Biden likely will need to keep all Democrats on board to get his spending and related tax proposals through Congress.

A group of House Democrats last week warned that changing the capital gains tax could hurt family farms in their districts, a sign of resistance from within President Joe Biden’s party that could grow as Congress wrestles with tax proposals to pay for his infrastructure and social spending packages.

In a letter to House Speaker Nancy Pelosi, D-Calif., and other House leaders, 13 Democratic lawmakers expressed concern about a proposal that would end stepped-up basis and tax capital gains of more than $1 million on inherited assets.

The lawmakers, most of whom represent rural districts, want to shield family farms from the capital gains change.

“The requirement to recognize capital gains at death runs the risk of forcing farms and ranches to sell part, or all, of a farm that may have been passed down for several generations in order to pay the tax burden,” wrote Reps. Cindy Axne, D-Ia., and Jim Costa, D-Calif., and their 11 colleagues in the May 6 letter. “[W]e strongly urge you to provide full exemptions for these family farms and small businesses that are critical to our communities.”

Democrats hold a narrow majority in the House and the slimmest possible majority in the Senate, where they split the chamber 50-50 with Republicans and maintain control because of Vice President Kamala Harris’ tie-breaking vote.

Republicans almost certainly will be unified in resisting tax increases. If Biden uses a parliamentary maneuver to avoid a Republican filibuster in the Senate, he’ll need to keep all Democrats on board to get his proposals through Congress.

The recent letter from House Democrats shows that could be a challenge when it comes to his tax proposals to fund his $1.8 trillion American Families Plan, which would expand childcare, nutrition, education and health care and other programs.

“I would expect a lot of pushback similar to what this letter reflects,” said Joe Growney, a partner at the law firm Lathrop GPM. “You’ll see more vocal moderate Democrats raising questions like this. The Senate is going to be tough sledding anyway.”

Biden introduced the American Families Plan in a joint address to Congress on April 28. A little more than a week later, the House Democrats had sent their letter defending family farms.

“I don’t think it’s a good sign for leadership that one of their key provisions is taking on water already,” said Palmer Schoening, chairman of the Family Business Coalition, a group of small-business trade associations.

Schoening anticipates similar resistance from moderate Senate Democrats.

“They have to walk a tight rope on any change to the current tax code that affect small businesses, especially a new tax at death,” he said.

Financial advisers also have expressed concerns about Biden’s tax proposals.

THE STEP ACT

But Biden is getting support from Sen. Chris Van Hollen, D-Md., who has floated discussion-draft legislation, the Sensible Taxation and Equity Promotion [STEP] Act, that would end stepped-up basis.

Like Biden, Van Hollen sees the elimination of stepped-up basis as a way to ensure the wealthy pay their fair share of taxes.

“The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to wealthy heirs every year,” Van Hollen said in a statement following Biden’s April 28 speech. “Closing this loophole will stop subsidizing large intergenerational transfers of unearned income of the very wealthy and, instead, allow us to invest this huge amount of untapped revenue to lift up all Americans.”

A summary of the American Families Plan indicates that high capital gains taxes would not apply to family farms and businesses that are bequeathed to heirs who continue to run them.

But Schoening said that carve-out could be difficult to execute given the details of inheritance.

“It gets tricky,” he said. “It’s not as simple as they make it sound in the summary sheet.”

In addition to ending stepped-up basis, Biden’s tax proposals also include raising the highest ordinary income tax rate for families making more than $400,000 annually and boosting the capital gains rate to that level — plus a health care surcharge — for families making more than $1 million annually.