Death and farming

Our view: A proposed estate tax break would accomplish little

January 17, 2012

Last year, Gov. Martin O'Malley testified in favor of legislation that would allow small farms to be excluded from Maryland's estate tax. The bill failed, but it's almost certain to get serious consideration this year since Senate President Thomas V. Mike Miller recently endorsed the proposal, too.

The argument in favor of such an exemption is compelling. Farm estates typically feature high-value land with far less in cash and other liquid investments. Heirs may be forced to sell the land to meet the tax obligation, thus accelerating loss of crop land as more is converted into tract homes, shopping centers and other forms of sprawl development.

We are certainly sympathetic to the desire to preserve farmland. But like most issues touching on taxes — and the particularly arcane field of estate and inheritance taxes — the reality is more complicated than backers of this legislation suggest.

Two years ago, the legislature approved a pilot program with similar designs. When farmers died, it would allow their heirs to postpone paying up to $375,000 in estate taxes (roughly enough to cover land worth about $4 million), essentially by providing an interest-free loan that wouldn't have to be paid off for seven years. Last year, the program was further sweetened — the tax payment could be deferred longer if the decedents agree to place the property in a permanent agriculture easement.

The program applied to all farmers who passed away in 2011 and beyond. Admittedly, it's still early (taxes don't have to be filed for nine months after someone dies), but as of today, how many people have so far asked the comptroller's office about applying for the tax deferment?

One.

That's right. If farm families are getting slammed by Maryland's estate tax, they aren't exactly coming out of the woodwork to seek redress. That's not to suggest there isn't Maryland farmland being sold by heirs every month of the year — but how often is the estate tax the real culprit?

Unfortunately, there aren't any reliable estimates of how often farm families are forced to sell inherited land because of estate taxes, only anecdotal accounts. It's certainly been a concern over the last decade, however, and Congress has gradually increased the exemption offered farm estates on the federal estate tax to the current $5 million (or $10 million for couples).

Maryland's estate tax applies after the first $1 million, but estate tax bills for properties with gross estate values of between $2 million and $5 million produce tax bills averaging less than $140,000. That might pose a burden to cash-strapped heirs, but it's hardly a game-changer.

As the measure was offered (and rejected by the state legislature) last year, the proposed estate tax exemption certainly includes reasonable limits. The tax wouldn't be lifted unless the property owners pledged to use the land for farming only and not sell it to developers. And it applies to no more than $5 million in property value.

Still, it appears to be aimed at helping families under the same circumstances as those assisted by the tax deferral that nobody so far seems to want. Budget analysts concede that the exemption probably wouldn't cost the state treasury much — perhaps a few million dollars per year. But that's little more than a guess and may be an overestimate.

So why bother? Is this really going to save Maryland agriculture? Or is it going to represent a tax exemption for one small business — farming — at the neglect of all others? Surely, families of other small business owners — from plumbers to dentists, and perhaps even tax attorneys — would love to get similar treatment.

Instead, the effort looks suspiciously like the kind of legislation lawmakers in Annapolis love to pass — a sop to a favored group that sounds like more than it really is. Legislators will be able to say they stood up for farm families without having done much. Ultimately, the consequences of their actions, good or bad, are negligible.

At a time when Mr. O'Malley is under heavy criticism for supposedly declaring a "war" on rural counties (merely by attempting to protect their land and water from polluting septic tanks and unregulated development), the estate tax break might be seen as a peace offering. And while the goal of preserving farms is commendable, it's better to wait and see if the existing estate tax deferral program provides relief before adopting a tax exemption of questionable merit.

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