Bacon's Rebellion

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Conservation Credits Meet the Death Tax

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by

James A. Bacon
in

Conservation tax credits are back in the news. Gov. Timothy M. Kaine says that legislators should not “grievously wound” Virginia’s land conservation program as the price for repealing the inheritance tax on the estates of multimillionaires.

Kaine supports the repeal of the Death Tax, but he also sees conservation tax credits as essential to his goal of preserving an additional 400,000 acres of open space from development by the end of his term. However, estimating that the death tax would drain some $100 million a year from state revenues, the General Assembly imposed a $50 million cap on the amount of conservation tax credits that could be granted in any one year. As the popularity of the program increased in recent years, lawmakers in the state Senate worried that it would create an open-ended loss state revenue.

Here’s the rub: The Death Tax/Tax Credit trade-off was a critical compromise that enabled the Senate and House of Delegates to come to a budget deal only days before the start of a new fiscal year. There just isn’t time to re-open the issue.

Oh, well, maybe next year.

Bob Lewis with the Associated Press has the story here.

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10 responses to “Conservation Credits Meet the Death Tax”

  1. Ray Hyde Avatar
    Ray Hyde

    It is probably worse than that. Taking another 400,000 acres out of development will undoubtedly push other existing home values up enough so that more than a few would have become eligible for the death tax. Even a modest home in my Alexandria neighborhood is now pushing $700,000. Some of them are being bought and torn down in favor of bigger homes.

    It is another example of the kind of transfer of wealth that is ocurring as a result of how we are preasently managing our conservation efforts. The combination of conservation and development ios going to cost more than either one.

  2. Anonymous Avatar
    Anonymous

    While you’re on the subject of the EState Tax Repeal (or the Paris Hilton Relief Act), please tell us what happens if the Federal repeal (as presently contemplated) includes the denial of the stepped up basis.

    I’m not an expert, but if the heirs must assume the basis of the preceeding generation(s) on an asset, a serious record problem raises its head — not to speak of a real valuation problem in a small family business situation.

    Admittedly it’s a middle class problem and really is of no concern to those who have employed armies of accuntants and lawyers over the years but what about the family that’s built a small business up? How do you handle a valuatiuon question that may go back over 50 years? What about those records that “Dad” threw away because he thought the kids would get a stepped up basis in his estate?

    Of course there’s no problem if no one wants to get out–ever. But if one or more of the kids does–what then?

  3. Anonymous Avatar
    Anonymous

    I think I’d have to argue that if you inherited before the law went into place, that ou would still get the sep up. If you inherited after the law went in place you would still have that last previous step up.

    Surely they can’t expect to eliminate the step ups that have already occurred over many geneations.

    Then again, they don’t seem to have any problem making zoning rules retroactive. You could buy a place zoned for four lots and have them disappear the next day – just ask a lot of people in western Loudoun County.

  4. Anon 12:01 Avatar
    Anon 12:01

    Thanks Anon 1:20…but I think the problem lies in the “I’d have to argue…” part of your answer. As you point out, interpretation does not always follow the equitable path.

    And if my “rich uncle” dies the day after the law goes into effect, we’d still have a problem figuring out his basis if he hadn’t kept great records…Of course, the problem about the sale of the store or other small business asset would still be there. It looks like a real problem for middle class to me.

    Maybe one of the knowledgeable persons out there who hold forth so often will deign to enlighten us.

  5. Ray Hyde Avatar
    Ray Hyde

    I agree with you, I raised the same issue on a related previous post. For properties held a long time, the basis is anybody’s guess.

    I think the situation ought to be as follows. It isn’t income until you sell it, so no tax is due. If you do sell it, then it was a gift and therefore your basis is zero. the first case minimizes the tax and the second maximizes it.

    That way it all gets taxed *eventually* and everybody ought to be happy. Until someone sells out, the policy supports continuity, thrift, and all those other good virtues. By keeping the business intact it keeps the revenue stream intact and therefore maximises current taxes based on real income generated.

    Otherwise, you could inherit a million dollar property with a basis of one million. If you sold it for 950,000, you would have a 50k loss and get a tax credit for your inheritance!

  6. Anon 12:01 Avatar
    Anon 12:01

    No I have always understood that no tax is due unless there has been a sale. The problem, as I see it (and I might not see it correctly) is where there is a sale.

    Under current law, for estates over $2 million where the father dies leaving his assets to his children, no tax is due. The children pick up his stepped up basis. So the GE stock he bought in 1960 for $20/share now ges a “new” basis for his children of say the equivalent of $300/share. They can sell with no tax because they have no gain.

    Under current law, if Dad dies with an estate of more than $2 million an estate tax may be due.

    Under the proposed law, if the children ever sell that GE stock (no matter the size of the estate), they will pay a capital gains tax on the difference between the $20 valuation and the $300 valuation. That is, the kids don’t get the advantage of the stepped up basis.

    Now figure if Dad has a significant asset such as a restaurant/convience store/ gas station which he has bult up over the years and he has 3 kids. Two want to sell to the 3rd who wants to continue the business. No stepped up basis==great big crippling capital gains tax.

    You also have the expense and trouble of evaluating the small business (no mattter the size of the estate)

    It looks like the scheme for doing away with the federal estate tax is going to hit the middle class pretty darn hard…Paris Hilton-no sweat, chump change: Joe Sixpack big problem.

    If I’m wrong, I’ll stand corrected.

  7. Ray Hyde Avatar
    Ray Hyde

    You are right. I was only considering the situation where the tax was due regardless of the sale.

    But I think the correct situation is that there should be no tax under any circumstances until there is a sale. Otherwise, if the inheritance tax kicks in then it may cause a sale, which is a real catch 22.

    Suppose Pop owns stock, as you describe. The day before he dies, he sells the stock and pays the tax, and you inherit the cash. What is your basis in the cash? Your basis is zero and you can sell the cash for its face value. Suppose he dies the day before he sells it and you inherit the stock. You get the stepped up basis and sell the stock the same day – no tax, and the government gets cheated out of what would have been income.

    If you inherit it with his old basis, you can continue to earn the dividends and pay tax on them, but if you sell the gov’t finally gets it share.

    In theory it’s OK, and no one is really getting screwed. In practice, figuring out the basis could be hard.

    But if it is over $2 million in stock, you may have to sell it to pay the inheritance tax. Same if it is a home worth over $2 milllion, or a business. You are paing tax on income you don’t really have, yet. Same with Real estate whose assessment rises. You are required to pay real tax with real dollars based on imputed income, and I think that is wrong.

  8. CG2 Avatar
    CG2

    Ray and Anon have pointed out that the federal estate tax repeal is effectively a political shell game for all but the very wealthiest Americans. Government will still get the taxes … they’ll just be called capital gains taxes instead of death taxes.

  9. Anonymous Avatar
    Anonymous

    The law of unintended consequences is striking again — on both the conservation tax credits and the estate tax. But the election mailers will have lots of things to brag about in the meantime.

  10. Anonymous 12:01 Avatar
    Anonymous 12:01

    Unintended consequences, my foot. It’s a serious burden to the middle class and will result in a tax increase in a number of instances…to call it a reduction is just wrong….another shell game. Hooraay for Paris Hilton!

    CG2 is right.

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