Proposed new tax would harm San Joaquin Valley’s family owned farms, small businesses

In his first 100 days in office, President Biden wasted no time in laying out his administration’s vision for how to “build back better” following the COVID-19 pandemic.

The American Families Plan, announced in late April, seeks to “grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive.” These are worthy goals and are desperately needed to help restore California’s struggling economy, especially for our small business owners and farmers.

However, there is concern that the president’s proposal to reform the tax code will have unintended, far-reaching and devastating consequences for middle-class California families that he aims to help.

To pay for the American Families Plan, President Biden is proposing a change in the way capital gains taxes are paid on estates and trusts when people die. This change was first proposed earlier this year in the form of legislation introduced by Sen. Chris Van Hollen, D-Maryland, the Sensible Taxation and Equity Promotion (STEP) Act. This bill would create a new layer of taxes on trusts, property, or assets — including inherited small businesses or farms — that have been passed down from generation to generation.

Under current tax law, individuals who inherit family businesses or farms from a deceased relative do not pay taxes on any value that accrued under the previous owner. For example, let’s say someone took out a loan and bought a small business in 1970 for $1 million, and today the business is worth $5 million. If the owner dies and leaves the business to their children, their kids do not have to pay capital gains taxes on the $4 million increase in the value of business. This is known as a “step-up in basis” and has been a fundamental part of the tax code for 100 years, since the Revenue Act of 1921.

Plans that would eliminate stepped-up in basis would require inheritors to pay capital gains taxes on any unrealized gains over $1 million passed on by the prior owner at the time of death. In the example above, this would mean that the children who inherited their parents’ $5 million business would have to pay capital gains taxes on increased value of the business at the time of transfer.

These changes may seem like they would only impact wealthy Americans. But this new tax would inflict severe economic harm on California’s family owned businesses and farms, especially here in the central San Joaquin Valley, and it would serve as a middle-class tax hike, something President Biden promised he wouldn’t do.

Many of California’s 4.1 million small businesses are multi-generational family enterprises that tend to have the vast majority of their assets tied to property and equipment. If inheritors do not have the cash to pay for this new tax, they would be forced to cut wages, lay off employees, or sell off the business entirely.

The impact to California’s nearly 70,000 farmers is even worse. Many of our region’s farmers live off lines of credit due to unpredictable crop conditions. Struggling farmers facing a massive, unexpected tax bill could be denied new loans from lending institutions until this new tax is paid, which would be seen as a lien or a tax liability on their books.

The STEP Act and similar proposals undermine the goals President Biden laid out in the American Families Plan. We cannot undercut the small businesses and farmers who will ultimately determine whether we can successfully build back better. We urge California’s senators and our local representatives to recognize the devastating consequences of this new tax and work to protect California’s middle class.

This story was originally published August 25, 2021 at 11:35 AM.