Businesses embrace new estate tax
Photo/Amber Waterman
Jeff Timberlake, at his eighth-generation orchard in Turner, says expensive farm equipment, like the $115,000 mower behind him, can spike the value of agriculture estates
Although Jeff Timberlake’s proposed bill to exempt farmers from the estate tax failed in the last legislative session, Timberlake — a farmer and Republican state representative from Turner — is nonetheless pleased with the latest changes to the law. Instead of a $1 million tax exemption on estates, the Legislature raised the exemption to $2 million. And that, Timberlake says, will help business owners and farmers.
“The average farmer makes $17,000. And if you walk in the farm dooryard, you see all this equipment that’s been accumulated. All that costs between $300,000 and half a million dollars,” Timberlake says, not including the value of the land. “If you die and didn’t get your tax planning done in time, you owe a lot. You’re forced into a fire sale.”
The new biennial budget approved in June doubles Maine’s former exemption on the estate tax, also known as the “death tax,” so that heirs
of property, investment portfolios, farms or businesses don’t pay taxes on the first $2 million of their inheritance. The $6.1 billion budget passed with strong support from Democrats and Republicans after weeks of negotiations includes a compromise on the estate tax. Some backers would have preferred to see a $5 million exemption, matching the federal tax exemption, or no estate tax at all.
The estate tax has long been politically divisive. Opponents say the tax acts as a disincentive to business owners to invest in their business, or worse, can force a smaller business to liquidate. The American Family Business Institute, an anti-estate tax trade group in Washington, D.C., claims that with every $1 increase in federal estate-tax revenues, states and local governments lose almost $3 in non-estate tax revenues. Forbes publishes a map called “Where not to die,” which includes Maine and other states with estate taxes.
But supporters of the tax cite a 2005 Congressional Budgetary Office report that states fewer than 2% of estates are affected by the tax nationwide, and only a small percentage of them are businesses or farms. In Maine, there is no data on how many taxable estates are made up of business assets versus family homes or personal savings, according to Dennis Doiron, director of Maine Revenue Services’ income and estate tax division. Tax supporters also say there is scant data supporting claims that the tax causes farms to close or encourages people to relocate.
Doiron says Maine stands to lose $24 million in revenues from changes to the estate tax in the first budget year and a little under $27.5 million the second year. The number of estates that would have been affected by the old estate-tax exemption was about 400, a number that will be reduced by 50% to 60% under the new law, he says.
The Maine Center for Economic Policy, a progressive policy think tank in Augusta, opposed the higher tax exemption in part because of concerns the tax will contribute to a $400 million budget shortfall down the road, says Kit St. John, the center’s founder. St. John calls the new exemption the most egregious example of the budget’s “irresponsible and unreasonable tax cuts that favor a minority in Maine.”
“We thought that was a poor priority to target estates with the greatest assets and with many beneficiaries of those estates [living] out of the state when 100,000 are unemployed or underemployed and many are suffering from the poor economy,” he says.
But others in Maine say the changes to the tax will be a welcome relief to business owners who want to preserve their company for their offspring and for affluent people who want to leave a generous inheritance.
Elizabeth High, an attorney with LeBlanc & Young, says at her small Portland firm, which specializes in estate planning, clients with enormous to moderate net wealth are considering a move.
“There are many families who have, based on Maine’s estate-tax impact, decided after sad and careful consideration to leave the state. Most who do that are Maine’s foremost citizens, involved in their communities and charities,” she says.
Yet Dan Coyne, Maine Center for Economic Policy’s legislative director, argues that studies show the wealthy don’t relocate to pay fewer taxes. Instead, he says, “it might be climate, jobs, state infrastructure, or the family moves, the son or daughter. Taxes tend not be part of that decision.”
A planning tool
Timberlake says the new higher exemption in Maine is a great aid for his family business. Timberlake, an eighth-generation farmer, helps run Ricker Hill Orchards in Turner. Before his grandfather died, the farm was divided among Timberlake and his siblings, a plan that managed to avoid the tax and keep the farm intact. Timberlake says it doesn’t always work out this way. “What you risk is one brother saying, ‘I want to sell off my share,’ and that forces your hand to do something. In my case, we were lucky.”
Kevin Hancock, president of Hancock Lumber in Casco, addressed the U.S. Senate Finance Committee in 2007 about the estate tax, saying his company held $50 million in non-liquid assets — with no cash reserves — as well as millions in forestland, and employed 550. He said paying the death tax after his mother dies would force him to sell part or all of the business, mostly likely the forestlands.
Yet, St. John says he’s not convinced the estate tax hinders most small businesses, not even Hancock Lumber. “Hancock Lumber has been quoted as saying they’re a sixth-generation business and have found the estate tax very difficult for the company,” he says. “But obviously, they’ve passed the estate from generation to generation and it hasn’t crippled the company; the company is thriving. The evidence before our eyes is that the stories that the estate tax cripples small business are simply not true.”
In an e-mail, Hancock writes in response, “Everyone would agree that taxes for public sector programs and services are important and necessary. The question is to what degree. … I feel lower taxes encourage more private-sector investment and growth and higher taxes discourage them.” Read Kevin Hancock's full response below.
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