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Opposition to Ending Stepped-Up Basis Confounds Progressives

Posted on Aug. 31, 2021

Mounting opposition among some wings of the Democratic Party to President Biden’s plan to tax unrealized gains has progressive activists frustrated that some of their own are breaking ranks over what they see as a policy slam-dunk.

“This is painful. It’s painful to see how effective the other side is at lying and creating straw men, just so that superrich people don’t have to pay their fair share of taxes,” lamented Frank Clemente of Americans for Tax Fairness.

Multiple Democratic members of Congress have signaled discomfort with the Biden administration’s proposal for deemed realization, as outlined in his American Families Plan and laid out in greater detail in Treasury’s fiscal 2022 green book. Over a dozen House Democrats representing rural districts co-signed a letter in May expressing concern for farmers, while House Agriculture Committee Chair David Scott, D-Ga., sent his own letter, citing concerns on behalf of the owners of small farms.

Most recently, former Democratic Sen. Heidi Heitkamp of North Dakota took that discomfort a step further with the launch of an organization expressly dedicated to preventing proposals for the deemed realization of gains from becoming law.

A common objection among critics is that Biden’s plan would harm family farms and small businesses and that many families would be forced to liquidate some or all of their farm or business to pay the tax.

That criticism, according to an August 30 report from the Center for American Progress (CAP), “is simply not true.” The proposal to end the tax-free step-up in basis is “the most important way that Biden’s plan combats the tax code’s preferential treatment of income from wealth over income from work,” the CAP report asserts.

CAP’s report defends Biden’s proposal by noting that it includes a variety of protections for family-owned and -operated farms and businesses, including deferring any tax until the business is sold or ceases to be family-operated, and even then allowing any tax on gains from illiquid assets to be paid over 15 years.

The report also takes aim at two studies that have figured prominently in critics’ arguments against taxing unrealized gains at death: one by the Agricultural and Food Policy Center at Texas A&M University and another by EY. Both reports fail to consider what Biden has actually proposed and “cherry-pick their examples” of family farms or businesses to inflate the economic impact of deemed realization, according to CAP.

“Those affected by the Biden proposal will not be family farmers or family business owners, but rather the heirs of stockholders, bondholders, and landlords. The working class will be protected, even as the passive rich will not,” the CAP report concludes.

What’s on the Menu?

For Democrats to sour on deemed realization now would be a critical misstep, advocates of the policy say.

“It’s a really big deal: Will there be any semblance of any tax on income derived from wealth? Is that going to happen or not? We’re in danger of losing all that,” Clemente said.

Amy Hanauer of the Institute on Taxation and Economic Policy similarly argued that if Congress leaves stepped-up basis untouched, other aspects of Biden’s plan will lose their revenue-raising potential. If, for example, lawmakers raise the capital gains tax rate, as Biden has proposed, the wealthy will avoid that increase by holding on to their assets until they die, she said.

Congress then has to block that approach by ending the break for unrealized gains on inherited assets. So you can see that tax fairness really requires all of these pieces to work,” Hanauer argued.

Both Hanauer and Clemente were at a loss to explain why some Democrats aren’t inclined to end stepped-up basis, except to acknowledge — as Clemente put it — that the critics’ side is “loaded with money.”

Hanauer further noted that Heitkamp’s position is a reversal from her position just months ago. During an April 25 appearance on ABC NewsThis Week to discuss Biden’s proposal, Heitkamp described the tax-free step-up in basis as “one of the biggest scams in the history of forever” and argued that to “demonize [Biden’s proposal] and say it’s going to hurt the little guy . . . that just is not factual.”

Hanauer concluded that it’s “hard to believe that Heidi Heitkamp really believes what she is saying now.”

Similarly, Clemente said he was “totally disgusted” when Scott made his opposition to ending tax-free stepped-up basis public, but he expressed hope that the Biden administration could “work out a deal with the farm community” that would definitively put to rest the concerns voiced by that sector.

Valid Criticisms

All the criticisms are especially frustrating to Bob Lord, a coauthor of the CAP report and tax counsel to Americans for Tax Fairness, because he believes there are valid critiques of Biden’s proposal to be made.

For example, Lord recalled a situation in which a farmer indicated that his own children didn’t want to continue farming, so he wanted to leave the farm to two of his longtime employees. But because the employees aren’t family members, they’d get much harsher tax treatment under Biden’s proposal, he said.

“If you step back, why should the policy of not immediately taxing the gain on the farm be limited to where it’s left to a family member? Why not encourage it just as much if it’s left to a couple of loyal employees?” Lord asked. Then, when the farm is eventually sold, the tax can become due, he suggested.

There are other “sympathetic situations” when limiting the protections for farms and small businesses to immediate family members could be unnecessarily constraining, Lord said, such as if a second marriage breaks up but a strong relationship is maintained with a former stepchild, or if there’s a family in which a child gets a divorce but the parent continues a strong relationship with the former son-in-law or daughter-in-law.

While there are improvements that need to be made to Biden’s proposal, the policymakers pursuing deemed realization are receptive to feedback, Lord said. The problem is that “the people who would need the help aren’t out there actively seeking it,” he said.

The farming and small business associations that are most critical of the proposal could be working with the administration to sharpen it, but instead they’re “screaming that this is the death knell for farms and small businesses” and insisting that the only way to protect them is to preserve stepped-up basis, Lord said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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