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State Inheritance Tax Exemption
Testimony to PA House Finance Committee
Support of Inheritance Tax Reduction, Elimination
Including Exemptions Provided in HB 1864
October 17, 2011, Harrisburg, Pennsylvania
Offered by Joel Rotz, Director, State Governmental Relations, Pennsylvania Farm Bureau
Chairman Benninghoff and members of the Committee, good morning and thank you for the opportunity to participate at this hearing. My name is Joel Rotz, State Governmental Relations Director, and I am offering testimony on behalf of Pennsylvania Farm Bureau, the state’s largest general farm organization with a membership of more than 53,000 families, representing farms of every size and commodity across the Commonwealth.
Pennsylvania Farm Bureau has made reform of our inheritance tax laws a priority in our organization’s legislative efforts for many years. Ideally, Farm Bureau supports elimination of inheritance tax obligations in the Commonwealth. The original justifications for inheritance taxation that persons owning assets are “wealthy” and persons receiving those assets through death can “afford” to pay death taxes do not hold true today, at least with respect to families who are trying to viably manage a business. And those assumptions are especially are untrue for farm families operating their farm businesses.
You may have heard of the saying that “farmers are land rich, but cash poor.” That saying accurately reflects the current state of affairs for the majority of Pennsylvania’s farm families and their businesses. Farming is a capital-intensive enterprise. Ownership and use of large amounts of land, equipment and livestock are not “luxuries” for which a “luxury tax” like the inheritance tax is warranted. These assets are necessary components to the current viability of the family’s farm business. And as the state’s and nation’s agricultural economy continues to evolve, continued investment of land and assets will continue to be necessary components of the family’s future viability in farming.
Many farm families have already experienced the economic and personal burdens that imposition of inheritance tax obligations can place on the family’s ability to transition the farm business to succeeding family members. And in addition to farming full time, numerous farm family members work locally off the farm for small, family-run businesses. Employment in those businesses provides the family with an important source of supplement income to help sustain the family’s livelihood. But inheritance taxation similarly threatens the economic future of those family businesses when death forces transition of ownership and management to successors.
Pennsylvania Farm Bureau recognizes and is appreciative of efforts the legislature has made over the years to support and encourage farm families to continue their operations in the state. Pennsylvania’s Farmland Preservation Program, the Clean and Green Program, and even more recently the ACRE Law, are prime examples of the legislature’s efforts to keep families farming in the Commonwealth. And yet the practice of financially burdening surviving farm family members with an inheritance tax continues to challenge their farm’s existence for the future at a very economically vulnerable time created by the death of a loved one.
Unlike the Federal Estate Tax, Pennsylvania's state inheritance tax does not provide for a tax credit or exclusion of any sizeable portion of an estate that passes to surviving family members (other than the surviving spouse). Pennsylvania's families pay inheritance taxes on the first dollar of value of the decedent's taxable estate.
In 2000, the Pennsylvania General Assembly attempted to soften the blow of inheritance taxation by reducing the rate of tax to 4 1/2 percent for assets passing to children (and other direct-line descendants) and 12 percent for assets passing to brothers and sisters. But even at the reduced tax rates, inheritance taxes still seriously hamper the financial ability of farm families to pass farm businesses between generations.
Children who receive a $500,000 farm through death of the parent will still be required to pay $22,500 in inheritance taxes. A family member receiving a $500,000 farm through the death of a brother or sister would be required to pay $60,000 in inheritance taxes.
Payment of the tax is required to be made in cash. While some farm families may be able to manage the costs of inheritance taxes through estate tax planning and life insurance, many others are struggling in today’s farm economy, and these tools can be very expensive and use money needed to operate the farm.
If the farm business does not have available cash – again, farm families are often “cash poor” – the family will need to sell off farm assets to pay the tax, with no guarantees that the money the family will receive from the sales of assets will generate the dollars that these assets are truly worth. If land needs to be sold to pay for the tax, succeeding generations will receive farms that are less productive.
Those in farming know how thin the profit margin normally is in agricultural production, and the critical need for farm families to continue to improve productivity and cost efficiency to keep their farms viable. Forced sales of farm assets to pay for inheritance tax liability directly hampers efforts by farm families to sustain viability.
For the remainder of my testimony, I would like to comment on one of the bills this Committee is considering today – House Bill 1864, which was introduced by Representative Steve Bloom and cosponsored by over fifty members of the PA House. House Bill 1864 takes a measured approach in amending the Commonwealth’s inheritance tax laws to address the tax consequences faced by families who are trying to continue their farm after the loss of a family member.
The bill would provide a limited tax exemption, specific to the passage of farm assets from a deceased family member to brothers and sisters and to children, grandchildren and others in the direct family line. For families genuinely wanting to continue the family’s farm business, these family members will be the normal recipients of farm assets in the overwhelming majority of cases.
The Pennsylvania Department of Revenue estimates that for the first year after HB 1864 would be in effect, state inheritance tax revenue would decrease by approximately $2.1 million. Pennsylvania Farm Bureau believes this modest loss in revenue is worth the economic benefits that will be provided through inheritance tax relief to farm families. Inheritance tax relief will increase the economic likelihood for families to continue their farm business. Continuation of family farms and families’ purchases of farm supplies and sales of farm products will help maintain stability and integrity of local rural economies, and will sustain confidence among local businesses that agriculture will be there and continue to support their businesses and the local economy.
If the General Assembly is not in position to fully eliminate inheritance taxation, Farm Bureau would strongly encourage this Committee and the General Assembly to enact the more targeted approach of providing an exemption for Pennsylvania’s farm families contained in House Bill 1864.
Pennsylvania Farm Bureau urges the House Finance Committee to advance House Bill 1864 for the full House’s consideration. Thank you again for the opportunity to address the Committee.
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