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Democrats, Don’t Go Wobbly on the Estate Tax

Biden’s plan won’t hurt family farms and will affect only the rich. So why are some Democrats waffling?

A close up of former Senator Max Baucus.
Brendan Hoffman/Getty Images

The budget reconciliation bill now before Congress raises the exciting possibility that the Democrats will become once again the party of the working class. To get there, though, they’ll have to overcome stiff Republican resistance. They’ll also have to overcome a few internal obstacles, the most exasperating of which is their own squeamishness about increasing taxes on inheritances.

Former Democratic Senators Heidi Heitkamp of North Dakota and Max Baucus of Montana are on the warpath against the Biden administration’s plan to tax capital gains on inheritances when those gains exceed $1 million ($2 million for couples). Taxation on the estate itself will remain unchanged; that means estates worth less than $11.7 million will continue to evade taxation. Yet 13 House Democrats have joined all 50 Republican senators in opposing Biden’s plan. As ever, the complaint is that Biden’s proposal will destroy the hallowed institution of the family farm. 

Never mind that Biden’s proposal, which would raise an estimated $19.5 billion over 10 years, stipulates that no taxes will be paid on a farm or certain other types of family business “until the interest in the business is sold or the business ceases to be family-owned and operated.” Imposing a tax penalty on family members who sell off grandpa’s back 40 has the effect of discouraging the dissolution of multigenerational family enterprises, not accelerating it.

Baucus, a former chairman of the Senate Finance Committee, waves his hand at the mere mention of any carve-out for family farms. “We’ve learned from experience,” he wrote last week in The Wall Street Journal, “that they are ineffective. Congress tried that in 1997 for inherited family-held businesses but the exceptions were too narrow to benefit anyone, and widening them would have been tantamount to repealing the estate tax altogether.”

Oh, please. The Internal Revenue Service concluded in 1999 that almost no working farmers paid any estate tax. In April 2001, David Cay Johnston of The New York Times stumped the American Farm Bureau Federation, which lobbies furiously against the estate tax, by asking it to identify a single family farm—just one!—that got sold off because of estate taxes. The Farm Bureau couldn’t name any. President George W. Bush slashed the estate tax anyway, repealing it entirely in 2010. When Congress reinstated it, starting in 2011, it exempted estates valued at less than $5 million. (Previously the threshold was $650,000.) Barack Obama was president, and the Democrats controlled both houses of Congress. It didn’t matter. The exemption began its steady climb to $11.7 million. Today, fewer than 0.1 percent of deaths result in payment of any estate tax.

Whenever Democrats propose a tax increase, Republicans demagogue that they’re picking the working man’s pocket. That’s usually a con. But you absolutely can’t make a populist-sounding argument against what Republicans like to call the “death tax,” either as it exists today or as Biden would apply capital gains tax to inheritances. Working-class people simply don’t inherit assets worth $1 million or more. To look at it from the viewpoint of heirs, you’ll pay tax on your inheritance only if you’re rich and only if (at least for the purposes of this levy) your riches were earned off the sweat of someone else’s brow.  

This didn’t use to be a big ask. Subjecting large estates to taxation was fairly uncontroversial when its modern incarnation was introduced 105 years ago. Even Andrew Carnegie favored the idea. “The growing disposition to tax more and more heavily large estates left at death,” Carnegie wrote in his famous 1889 essay, “The Gospel of Wealth,”

is a cheering indication of the growth of a salutary change in public opinion.… Of all forms of taxation, this seems the wisest. Men who continue hoarding great sums all their lives, the proper use of which for public ends would work good to the community, should be made to feel that the community, in the form of the state, cannot thus be deprived of its proper share. By taxing estates heavily at death, the state marks its condemnation of the selfish millionaire’s unworthy life.

Democrats today don’t speak half so forthrightly about the dangers of what the economist Thomas Piketty calls patrimonial capitalism.

The Biden proposal would eliminate the so-called “angel of death” loophole that allows capital gains to escape taxation at the time of death. Heirs don’t pay taxes on the run-up in an estate’s value that occurred during the deceased’s lifetime. Since the deceased didn’t pay any capital gains tax, either (assuming he didn’t cash out of the investments in question), that capital gain, in the eyes of the law, never happened. Under Biden’s proposal, capital gains on home sales would be exempt up to $250,000, or $500,000 for couples. And remember, you won’t have to pay this tax at all if your total inheritance is less than $1 million ($2 million for couples).

Most wealth taxes make clumsy policy tools. Unlike income taxes, they require you to pay tax on money long tied up in investments based on valuations over which you have no control. Better to tax income, which by definition is something you were given only in the past 12 months. 

But the estate tax, and Biden’s proposed capital gains tax on inherited wealth, are different. They avoid the usual mess of wealth taxes by taxing the wealth only as it passes from one hand to another. In effect, an inheritance is income; it’s a quantity of cash or property that you didn’t have last year but acquired this year. 

The only risk posed by Biden’s exemption for family farms is that it will be too generous. Take the Hibbard family ranch in Adel, Montana, an exquisite piece of the American dream that’s been in the family since the nineteenth century; the current generation, who are related to Baucus by marriage, are the fourth and fifth generations to work the land.* Who decreed that a sixth generation must inherit it? If it’s profitable, someone else can carry on the ranching tradition just as easily. If it isn’t profitable, better to sell it and put the land to more practical commercial use, or set it aside for conservation. 

In a film posted on the ranch’s website, we meet Ashley Wertheimer Hibbard, an artist who uses the property as inspiration for her sculpture, and her husband, Cooper Hibbard, who does the actual ranching. They’re an attractive, prosperous-looking couple. Cooper co-owns the ranch with his father, Scott Hibbard (which probably will minimize its potential exposure to taxation when Scott passes on). 

According to the film, Cooper improved the resiliency of the ranch’s soil, and therefore its grasses, when climate change threatened to dry up its pastures. Cooper’s all about carbon sequestration. Well done!

But as a result, Cooper explains in the film, “we increased our forage harvest and production rate in this pasture by 485 percent.” Cooper’s conservation efforts enabled him to put more cattle on that pasture. Each of those cows (Cooper doesn’t mention this part) will belch out an estimated 220 pounds of methane each year. Cooper is saving the planet in order to kill it.

Remind me why we must exempt these nice people from paying capital gains tax? 

But again: The Biden capital gains proposal on inheritances does not target Sieben Ranch, and it certainly won’t affect less baronial farms. Let’s hope the Democrats ignore Baucus’s and Heitkamp’s ridiculous claim that they are despoiling rural America.

* An earlier version of this article incorrectly referred to the Hibbard family ranch in Adel, Montana, as the Sieben Ranch. It is the Sieben Live Stock Company. The Sieben Ranch is a different ranch, also in Baucus’s extended family, located outside Wolf Creek, Montana.