Oregon’s Death Tax Initiative

We’ll likely be voting this November on an initiative to phase out Oregon’s Estate Tax.  If the initiative passes, the “death tax” will be reduced each year until it is finally eliminated for persons dying after January 1, 2016.  Most farm organizations strongly support repeal.  This puzzles me since I believe a good argument can be made that the great majority of farmers risk paying more taxes.  Instead of repealing the estate tax, we should be concentrating our efforts on raising Oregon’s estate tax exemption to the current federal level — $5.12 million for an individual and $10.24 million for a married couple.

According to a recent USDA study, 0.5% of all farms and 4.2% of “commercial” farms pay federal estate taxes.  Most estates that include farmland are well under the exemptions and pay no tax.  However, most farmers do benefit from the “stepped-up basis” provisions of the estate tax law.  The “stepped-up basis” rule allows inherited property to be valued for tax purposes at its fair market value at the time of the death of the previous owner, i.e., its tax “basis” used in computing capital gains tax is increased to the “fair market” value at the time the assets were inherited.

Although few farmers plan to put their farms up for sale, the “stepped-up basis” still reduces taxes.  Children and grandchildren often inherit parts of the farm after they have moved away and lost interest in farming.  Family members who continue to farm usually end up buying out these non-farm heirs.  The capital gains tax paid on sales within families is much reduced by the “stepped-up basis.”

The “stepped-up basis” is easy to justify for estates that pay estate tax.  The estate tax is calculated based on the fair market value of assets at death.  Without the “stepped up basis,” capital gains taxes on subsequent sales would amount to a double tax on part of the asset’s value (the difference between fair market value at death and the price originally paid by the decedent).

If the estate tax is eliminated and the stepped-up basis continued, wealthy taxpayers who are able to hold assets until death would avoid all capital gains taxation.  This seems unfair to many and may explain why the “stepped-up basis” was eliminated when the federal estate tax briefly expired in 2010.

I’ve probably already lost you in this maze of tax law.  To summarize, if the exemption is raised to $5 million, few farmers will be subject to the estate tax.  Totally eliminating the estate tax risks losing the “stepped-up basis”—which benefits most farmers.


3 thoughts on “Oregon’s Death Tax Initiative

  1. Tom, this is a very thoughtful piece, but do you know that Oregon currently essentually has a $7.5 million exemption for family farm, forest and fishing estates? It was enacted in various fits and starts over the last 3 legislative sessions, with a big fix and great clarity in how it works in the 2011 legislative session.

  2. Thanks for pointing out the new $7.5 million exemption. I followed the enabling bills with interest as they worked their way through the several legislative sessions. I didn’t mention the higher natural resource exemption because my post was getting complicated and I wanted to keep the focus on the “stepped-up basis.” Oregon’s higher exemption for family farms reinforces my argument. Only a tiny minority of farms will pay Oregon estate tax, but repeal will remove the main justification for the “stepped-up basis.”

  3. I agree with your negative assessment of Measure 84, but I get at it from a different, non-farming perspective.
    Having spent most of the last 20 years in nonprofit organizations, I know that the federal estate tax and the state inheritance tax sometime encourage people to see their advisors about performing effective estate planning to reduce their estate taxes. Inevitably, this results in wills and trusts, and sometimes these people recognize that, after a life of giving to charities they care about, they want to leave something to these charities after they’re gone. So, indirectly, charities benefit from having these “death” (I dislike the term) taxes around. I’m OK with increasing the exemption level to max the feds. I hope Oregon voters vote “no” on 84.
    [By the way, I’d love to read more of your blog. If you add a subscription option to your home page, I’d be able to subscribe and receive it automatically. Larry Austin referred me to your blog today. He said he thought he remembered that we had been fraternity brothers at Whitman. I assured him that was true.]

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