When President Trump signed the Working Families Tax Cuts (WFTC) into law last July, he enacted a variety of provisions that would “Make Rural America Great Again.” The law expanded and made permanent pass-through small business deductions, extended 100% immediate expensing, doubled and made permanent small business expensing, added immediate expensing for new manufacturing and production structures, and renewed the opportunity zone program to better target rural areas. However, the most important provision in WFTC for rural America was the extension and indexing of the increased estate tax exemption made in the 2017 Tax Cuts and Jobs Act (TCJA).
The estate tax is a levy on an individual’s transfer of property upon death. Farms, ranches, and other family businesses can be hit especially hard by the tax, as they tend to be “asset rich and cash poor,” potentially leaving them with large estate tax liabilities but not enough cash to pay the bill. Often called the “death tax,” the estate tax can turn a time of mourning for the passing of a loved one into a race against time to pay Uncle Sam. Nine months after the death of a family member, farms and other family businesses can owe the federal government up to 40% of their farm’s value above an exemption limit. To pay this bill, farms sometimes must sell tractors and other machinery, livestock, or even portions of their landholdings. Sometimes these businesses must be sold altogether to pay these bills, even if the succeeding generation wanted to keep the business going.
NTU has never been a fan of the death tax. We argued for full repeal in the TCJA, noting the massive economic harm that can come from any expansion of the estate tax. Back then, we noted that full repeal could result in GDP growth of almost 1% by itself, with federal revenue reductions of only $24 billion over 10 years. The complex nature of the estate tax has allowed for the creation of a whole industry dedicated to helping wealthy individuals avoid the tax, taking funds away from more productive areas of the economy and creating a dead weight loss. An NTUF study in 2017 estimated the total time burden related to the estate tax at more than 2 million hours. We also noted that, not only has the estate tax not been a key part of federal revenues in a long time, but that it is also pretty common for OECD member countries to go without one.
Most importantly, the estate tax discourages entrepreneurship, possibly causing the very asset concentration that some in the progressive policy world want to avoid. The WFTC set a permanent estate tax exemption level of $15 million, indexed for inflation. Had the exemption level been allowed to revert to the pre-TCJA level of $5.5 million after 2025, even more modest family farms would have faced massive tax bills, thanks to skyrocketing equipment costs, input prices, and land values. This important change allows for more smooth transitions from generation to generation, without having to sell business, farmland, or other assets to pay the IRS.
While WFTC did indeed make a series of big and beautiful changes to help farmers, including increased agricultural research support, new trade promotion assistance, and increased disaster assistance for farmers, the most pro-rural provision was clearly the permanently lowered estate tax. More than 1.5 million family-owned farms benefited from this measure, helping to preserve rural America by making it easier to pass family ranches, farms, and small businesses from one generation to the next.