Protecting farms by reducing the estate tax burden
by Nathan L’Etoile, Collaborative Steering Committee
While speaking at Agriculture Day at the Massachusetts State House in April, Massachusetts Farm Bureau Federation President Ed Davidian raised the idea of reducing the impact of the Massachusetts estate tax on our family farms. The idea apparently resonated with Governor Charlie Barker who interrupted, shouting “that’s a great idea!”
There are two bills working their way through the legislature that would address this issue. As an advocate for family farmers and forest landowners pushing for a change to our estate taxes, I’m often asked for the numbers behind this issue. How many farming families in Massachusetts face the estate tax? How large does a farm need to be before this issue matters? How much farmland is affected? And the most important for many policy makers: what is this going to cost the State? There are no simple or exact answers to these questions, but the following offers a sense of the scale, impact, and cost of this issue.
For background, all estates valued at over $1,000,000 are subject to the Massachusetts estate tax. As a stepped-rate tax, estates of $1,000,001 in value are taxed at 3.32%, and the rate goes up over the course of 12 steps, topping out with estates over $5,340,000 being taxed at 8.08%. In order to determine the impacts, we must consider how many farms in Massachusetts fall into the taxable categories, and how many of them might be subject to the estate tax due to the owners passing away in any given year.
If we assume that farmers die at the same rates as the general population, and analyze the numbers of farmers in various age groups, based on the USDA 2012 Census of Agriculture, and the death rates of those groups, based on Social Security Administrations data, the death rate for farmers in Massachusetts is, on average, 1.71%. This number might be a little be a little low given that younger farmers own less land on average than older farmers, and the death rate among those older farmers is considerably higher than this average, but it’s a functional estimate. Given this death rate, how many of our farms are big enough to be affected?
It is worth noting that there is little good data available on farm debt, making it very hard to determine the cash value of an estate, but we do have data on the land and hard asset values for farms. Of the more than 7,700 farms in Massachusetts about an estimated 1,263, are large enough to make an estate taxable1 assuming there is no debt on the farm. Those farmers steward roughly 335,000 acres and the farmland and associated structures are worth an estimated $3.5 billion. Note that some smaller estates may have other, non-farm assets that raise the total value of the estate to the level where the estate tax kicks in.
So how large are the taxes that these farms might face? Land values vary dramatically across the state: 5 acres in Suffolk County; 40 acres in Norfolk county; 60 acres in Plymouth or Middlesex; and about 100 acres in Worcester county and to its west are all enough to cause a farmer on “average” land in that county to have a farm that makes their estate taxable. A 125-acre vegetable farm in Norfolk County or a 400-acre dairy farm in Berkshire County would have a value of over $3 million. Unless extensive estate planning has been done to transfer most of the value out of the ownership of the deceased, these estates would owe $182,000 on the value of the farm assets alone. For many families, often the only solution is to sell all or part of the farmland in order to pay this tax, and in many of these cases the purchase is a developer and the farmland will be lost to agricultural production forever.
Given all of this data, there are approximately 22 farmers who pass away each year with farms large enough to cause the estate to be taxed under the Massachusetts Estate Tax. On average, these 22 farms represent roughly 5,700 acres of land, which is then at high risk for development and fragmentation after the principal operator passes away. If we can reduce the risk to this land by helping families to avoid the estate tax in exchange for a commitment to keep the land in agriculture for a period of time, we can greatly reduce the loss of farmland in the Commonwealth. Both proposals working their way through the legislature would have the effect of reducing or eliminating the estate tax, one by simply exempting the first $5 million in value (H.2618), the other by reducing the valuation of the farmland itself to values used for property taxation under chapter 61A (H.3323/S.1584).
The burden of estate taxes has a significant negative impact on farms and farmland in Massachusetts. The more we can do to protect farms as they transition through generations, the stronger our Commonwealth’s food system will be. The MA Local Food Action Plan calls for “enacting legislation to modify state estate tax to allow farmland to be valued according to its current use,” and the pending bills do just that. Please keep up with this legislation through the Collaborative or Farm Bureau as it makes its way through the legislative process.
1 756 farms valued at $1M-$2M (with an estimated 13 deaths per year);
392 farms valued at $2M-$5M (with an estimated 6.7 deaths per year);
99 farms valued at $5M-$10M (with an estimated 1.7 deaths per year); and
16 farms valued at over $10M (with an estimated .3 deaths per year).