Inheritance Tax Burden Falls Heavily on PA Farmers

Pennsylvania's inheritance tax often is a difficult financial hardship for families with small farms and businesses, but eliminating it would force lawmakers to cut $800 million from programs in the state budget.

The state imposes the inheritance tax on the transfer of real estate and personal property through a will or other arrangement. This past year, the state collected $805 million, according to the state Department of Revenue. 

But the tax, intended to break up large accumulations of wealth that pass from one generation to another, falls most heavily on small businesses and family farms, the value of which is more likely to be tied to one individual or a family. 

Gov. Tom Corbett wants to eliminate the inheritance tax for that reason, said Dan Hassell, a deputy secretary at the Department of Revenue. 

Lawmakers have presented more than a dozen proposals to change how the state assesses the inheritance tax. The plans mostly seek to create exceptions for low-value estates or for special circumstances, reduce the tax rate or phase out the tax within the coming decade. 

Because the tax must be paid in cash, and farming families are frequently “land rich but cash poor,” families frequently have to sell their land to pay the bill, said Joel Rotz, director of the Pennsylvania Farm Bureau, which represents 53,000 family farms in the state. 

“If land needs to be sold to pay for the tax, succeeding generations will receive farms that are less productive,” said Rotz. “Forced sale of farm assets to pay for inheritance tax liability directly hampers efforts by farm families to sustain viability.” 

In the event that physical assets of a farm or small business have to be sold to cover the cost of the tax, those families are left with less productive businesses that often employ fewer people and thus produce less tax revenue.

The Pennsylvania chapter of the National Federation of Independent Businesses, which represents small business owners in the state, also favors the elimination of the tax. 

If the inheritance tax was to fully disappear from the state’s balance sheet, other revenue or equal cuts in programs would be necessary. The revenue goes toward the state’s general fund without being targeted for any specific purpose. 

“You could probably find a reason to eliminate any tax,” said state Rep. Phyllis Mundy, D-Luzerne, minority chairwoman of the House Finance Committee. “But the question is, how do you continue to fund state government and the programs that people rely on?” 

Sharon Ward, director of the Pennsylvania Budget and Policy Center, a liberal Harrisburg-based economic think tank, said the inheritance tax helps to reduce concentrations of power and require those who have large estates to contribute to the state when they die. 

“Public services that are provided by state government aid in the accumulation of private wealth,” Ward said. “The inheritance tax provides a form of reinvestment in the state and in our communities. It allows us all to give something back.” 

State Rep. Kerry Benninghoff, R-Centre, chairman of the House Finance Committee, which held a hearing on the issue earlier this month, said the tax also unfairly affects unmarried people, because they cannot take advantage of the tax-free transfer to a spouse at death. 

No tax is applied if the transfer is made to the deceased's spouse or child younger than the age of 21. However, transfers to children older than the age of 21 are taxed at 4.5 percent, transfers to siblings are taxed at 12 percent and transfers to anyone else are taxed at 15 percent. 

“My belief is we should either eliminate the tax or standardize the rate,” said Benninghoff. “We have to determine if government’s dependency on the tax revenue is the only reason not to do that.” 

Hassell said the state inheritance tax is less oppressive for high-income groups than the federal estate tax, which is a progressive tax applied at higher rates for more valuable estates. 

In Pennsylvania, more than 40 percent of the inheritance tax forms filed last year were for estates valued at less than $50,000, but those estates account for only 2 percent of the tax’s revenue, according to state Department of Revenue data presented Monday. Estates valued at more than $1 million account for nearly half of the revenue collected by the tax. 

Neil Trama, vice president of the Pennsylvania Society of Public Accountants, a professional organization for public accountants and tax practitioners, said the outcome of the tax is that inheritances end up being taxed twice. 

“Taxes are paid on wages, profits, dividends and capital gains, so the accumulation of wealth is already taxed,” Trama said. “In a case where the same inheritance is passed down through several generations, the money is taxed multiple times.” 

He said the PSPA supports the existence of the inheritance tax, but would like to see low-income households exempted. 

Ward said lowering the tax for the sake of lowering the tax was not good policy, but suggested creating an exception for taxes paid by family members in the same household. 

The goal, she said, is to have a tax system based on the ability to pay. 

David Logan, an economist with The Tax Foundation, a conservative Washington, D.C.-based economic think tank, said estate taxes have existed since 1797 in one form or another, but they have generally failed to achieve their goal of breaking up large accumulations of wealth. 

On the other hand, the absence of such a tax has several benefits, including more growth and better use of economic resources. 

“Forgoing an estate tax would help decrease income inequality, provide the state with at least the same amount of tax revenue and allocate resources more productively into the economy at a time when it needs them most,” Logan said.