Saving the Family Farm

With an eye on the farm vote, President Ford last week proposed a major change in U.S. estate-tax rules. Purpose: to protect farm families and owners of small businesses from having to sell their properties in order to pay stiff federal inheritance taxes. Ford's plan, unveiled in a speech to the American Farm Bureau Federation in St. Louis, would apply to estates valued at $300,000 or less that consist of at least a 20% share in a farm or small business. The heir to such an estate would not have to begin paying estate taxes until five years after the owner's death. He would then get 20 years to pay the taxes and would be charged interest of only 4% each year on the unpaid balance, a rate well below expected market interest rates.

The President's plan thus amounts to a five-year interest-free loan to heirs, followed by a 20-year subsidized loan. Under present law, an heir to an estate of any size over $60,000 must begin paying taxes within nine months of the owner's death, must complete payments in ten years and must pay interest at 9% (the rate will go down to 7% on Feb. 1).

Ford's program, though, does not go as far toward helping farmers as a sweeping rule change suggested by Indiana Senator--and Democratic presidential hopeful--Birch Bayh. His bill would exempt the first $200,000 of an estate from taxation entirely, though only for people who inherit family farms that were owned and controlled by the deceased for at least five years. Inheritors of small businesses would not be helped at all. Bayh charged last week that Ford's tax-deferral plan would only mean "slow death for family farms, instead of sudden death."

That seems hyperbolic; Ford's plan has much to commend it. Inheritance taxes now place a disproportionate hardship on small estates, partly because it is often hard to appraise the true value of small farms and businesses. Another reason: the tax schedule is not very progressive. The current average effective rate on a $300,000 estate is about 10%; the effective rate on a $1 million estate is less than double that--about 18%.

Moreover, the heir to a large fortune usually has an easier time coming up with the cash to pay the estate tax than the person whose inheritance consists of farmland and animals or the building and equipment of a laundry, clothing store or restaurant. Even so, the widely held belief that estate taxes have mightily contributed to the decline of the family farm is difficult to prove: few if any statistics exist to document it. That is not likely to deter politicians of either party from harping on the belief as they pursue the farm vote this year.

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