A Taxing Fight Over How to Save Family Farms

Chester Thigpen of Montrose, Miss., a grandson of slaves, started out with a small plot of land in 1940. Today he has built it into an 850-acre farm and is a member of the Mississippi Agriculture and Forestry Museum Hall of Fame.

But Mr. Thigpen's children will probably not get the farm: After they inherit it, they expect to sell it simply to pay estate taxes.

At least that's the story told by Edmund Peterson, chairman of Project 21, a conservative African-American group. He spoke on Capitol Hill earlier this week. The story is a familiar one, says a coalition of interest groups and their allies in Congress: Farmers and small-business people can't pass along to their heirs the farms and businesses they have worked all their lives to build. So 16 senators and 115 members of the House of Representatives - mostly Republicans but some Democrats - are cosponsoring the "Family Heritage Preservation Act" to repeal the estate tax altogether.

Repeal is "the right thing to do. It's fair," says Rep. Christopher Cox (R) of California, chief sponsor of the measure in the House. The measure is supported by some 200 organizations, ranging from the American Farm Bureau Federation to the National Federation of Independent Business to 60 Plus, a conservative senior-citizens' group.

Under current law, estates less than $600,000 are tax exempt. That goes up to $1 million on certain family-owned businesses. But repeal proponents say many farmers and small-business owners have land or other assets not easily convertible to cash. Thus, when their heirs inherit the estate, they must sell the farm or the business just to pay the taxes.

Iris Lav of the liberal Center on Budget and Policy Priorities in Washington disputes the notion that the law needs fixing. Only 1 percent of estates are worth more than $600,000, she says. "We're really talking about people leaving very substantial estates subject to taxation." Society has an interest in taxing estates in order not to have huge amounts of money passing from one generation to the next never subject to tax, she says.

Repeal proponents say that money is taxed when it is first earned and that the estate tax is really a case of the same money being taxed twice. Ms. Lav says, however, that a lot of income goes untaxed: For example, the capital gains on an asset are not taxed if the asset remains unsold before the heirs receive it.

But proponents of repeal say the tax amounts to appropriating people's property, is inefficient, and costs jobs. Estate taxes are less than 1 percent of federal tax revenues, and compliance and enforcement costs eat up 65 cents in fees for every $1 collected.

Senate Republican leaders take a less radical approach to estate-tax reform. They would raise the exemption gradually to $1 million by 2002. In addition, $1.5 million of a family-owned business, plus 50 percent of the remaining value of the business, would be exempt when the business makes up more than half the estate. The Center for Budget and Policy Priorities finds that "would not benefit ordinary, middle-class families."

President Clinton's 1998 budget proposes changes that would exempt up to $2.5 million of certain family-owned businesses. "We recognize that the estate tax needs a new look," a Treasury official says. "We have to look at the appropriateness of the rate and at the appropriateness of the exemption schedule...." But, he says, "repeal would be a mistake, would not be fair, and would be costly."