| Posted July 13, 2006:
Judging by the amount of effort that some farm organizations
have put into their support of eliminating the estate tax (also
dubbed the death tax), one would think that most farm heirs
are like the maiden in the typical silent film melodrama. As
the piano player builds to a musical climax, the villain (played
by the federal government’s estate tax) tells the helpless
maiden (read farm heirs) that if she doesn’t give him
the deed to the ranch he is going to tie her to the railroad
tracks.
In an era of federal budget deficits it seems to us that it makes sense to
determine how likely such a scenario is. Is the federal estate
tax breaking up family farms and driving the next generation
off the farm? The Congressional Budget Office examined that
question in a report they completed in July 2005. The report
is titled, “Effects of the Federal Estate Tax on Farms
and Small Businesses,” and is available online at www.cbo.gov/ftpdocs/65xx/doc6512/07-06-EstateTax.pdf.
The report shows that in 2000, the number of farm estates
that had to file an estate tax return was 4,641 and of those
a little over one-third (1,659) owed any estate tax at all.
Of the 1,659 who owed estate taxes only 138 did not have sufficient
liquid assets to immediately pay the taxes due. It should
be noted that for farmers, the estate tax payments can be
paid over as many as 14 years. The 2000 filings included the
estates of persons dying in 1998, 1999, and 2000 and the exemption
level varied from $625,000 to $675,000, according to the year
of death.
If the exemption level were raised to $1.5 million, the number
of farm estates required to file an estate tax return would
shrink to 1,005 with just 300 of those having to pay any estate
tax. Of that 300, only 27 would lack sufficient liquid assets
to immediately pay the tax. At a $3.5 million exemption the
numbers would be 187 tax returns, 65 owing any tax, and 13
with insufficient liquid assets to pay the estate tax liability.
The CBO notes that its analysis “probably overestimate[s]
the number of estates with taxes in excess of liquid assets
because they do not reflect money held in trusts.”
If we accept that the number of commercial farms in the US
is around 500,000, then with a $3.5 million exemption, only
3-one thousandths of one percent of farms would be in jeopardy
of having to sell some land to pay the taxes. These numbers
also assume that at least one of the heirs wants to stay on
the farm and continue the operation. In some cases the farm
is broken up after death not because of taxes but because
some of the non-farm siblings want to sell the land and invest
the money in other ways.
It is often the lack of interest by family members to remain
in farming that causes the break-up of family farms, not estate
taxes. 
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