The voices of Tax Policy Center's researchers and staff
Who needs death panels? Representative Cynthia Lummis (R-WY) claims that ranchers and farmers in her state are planning on ending dialysis or other life-extending medical treatment before the end of the year so they can avoid paying the estate tax. This may cost the Treasury some revenue, but there is a silver lining for deficit hawks. After all, it will save Medicare a bundle.
Many Republicans opposed a provision in an early version of the health bill that would have let Medicare pay physicians to talk to their patients about end-of-life choices. But it seems Wyoming ranchers need more than medical advice. They really need to talk to a good lawyer. If they did, nearly all of these suddenly suicidal cow punchers would realize that pulling the plug is, from a tax planning point of view at least, completely nuts.
To understand why, remember the current state of play over the estate tax. Thanks to the 2001 tax law, estates of all people who die in 2010 are tax-free. But that 2001 law expires on Dec. 31. If Congress does not act, starting on Jan. 1 estates of $1 million or more will be subject to a tax of up to 55 percent.
Thus, we have a specter of a tough and independent Clint Eastwood-like cowboy who chooses to head prematurely for that great roundup in the sky, all to save his hard-earned herd from some Internal Revenue Service bureaucrat hovering over his hospital bed, awaiting that final breath. It brings a tear to the eye.
Except it is all a carefully crafted myth.
Start with the cowboy. Some Wyoming ranchers have been on their land for generations—property stolen fair and square from Native Americans in the 19th century. Others are grazing their herds on federal land while paying cut-rate fees for the privilege. And still others are LA doctors, lawyers, and actors who spend a few weekends a year on their ranchettes, where they enjoy both spectacular scenery and generous income tax subsidies for grazing a few head of someone else’s cattle.
The second myth is that their heirs will lose their ranches to the taxman. To start, there is no serious discussion in Congress of allowing the estate tax to return to 2000 levels. Even President Obama and the congressional Democratic leadership would at least return the law to where it was in 2009, exempting the first $3.5 million ($7 million for couples) from tax and setting a rate of no more than 45 percent. In addition, family farmers and small businesses get an extra $1 million exemption ($2 million for couples) for a total exemption of $9 million. And in the rare case where farm estates do owe tax, they can defer the debt for up to five years and extend payments for a decade after that.
So how many of these yeoman ranchers would lose their land if we returned to the 2009 law? Roughly none. The Tax Policy Center estimates that in the entire United States, about 110 small farm and small business estates would owe any estate tax in 2011. Citizens for Tax Justice estimated that under the 2004 rules (when the exemption was only $1.5 million) only 62 Wyoming estates of any kind owed tax. And not all of them, of course, had farm assets.
Finally, a rancher who chooses to die this year may end up costing his heirs money. Because 2010 is also a year when heirs lose the benefit of stepped-up basis, if they eventually sell the ranch they will end up paying capital gains tax based on its value when it was first acquired rather than on what it was worth at the time of death. While this provision applies to all assets, ranches, where the tax basis is usually quite low, are exactly the sort of property that could get hit.
Over-the-top hyperbole is all part of the political game, of course. But if Rep. Lummis is aware of constituents who are planning on killing themselves to avoid the estate tax, she has something of a responsibility to let them know the difference between reality and myth.
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