Monday, March 02, 2009

New Attempts to Abolish PA Inheritance Tax

Pennsylvania's "death" taxes are again targeted for phase-out by some mid-state legislators. But given the grim economy both nationwide and statewide, their chances for success appear dim.

On February 28, 2009, the York [PA] Daily Record & Sunday News reported, in its article entitled 'Death tax' targeted by mid-state lawmakers, by Richard Fellinger, that "a] group of midstate House Republicans are trying to kill the so-called death tax -- or at least cripple it."

Rep. Will Tallman, R-Hanover, has sponsored a bill to eliminate the state inheritance tax this year. The tax is levied on taxable assets that change hands after someone's death.

Meanwhile, Rep. RoseMarie Swanger, R-Lebanon, is preparing to re-introduce a bill that would phase out the tax over the next several years. And Rep. Dan Moul, R-Adams, is pushing a bill that would exclude heirs from paying the tax on estates worth less than $250,000.

Tallman said the tax has to go because it puts a heavy burden on the families of farmers and small business owners after an owner dies.

"What is happening is we are really impairing the ability of businesses or farms to be transitioned to family members," Tallman said. * * * [Links added.]

Not mentioned in the article are other House and Senate bills also introduced in the 2009-2010 Legislative Session with similar long-term phase-out and repeal effects.

The Pennsylvania Farm Bureau lists "Reduction or Elimination of State Inheritance Tax on Farms " as one of its ten key legislative concerns affecting farmers in the Commonwealth.

Pennsylvania’s inheritance tax imposes significant burdens on the ability of farm families to financially manage the transition of farms between generations.

Unlike federal estate tax, state inheritance tax laws essentially impose tax on the first dollar of value of an estate passing from a deceased family member to another family member.

Children who receive a $500,000 farm through death of the parent will be required to pay $22,500 in inheritance taxes.

Payment of the tax is required to be made in cash. If the farm business does not have available cash, the farm family will need to sell off farm assets to pay the tax, with no guarantees that the family will receive a price from the sales of assets that equals what these assets are truly worth.

If land needs to be sold to pay for the tax, succeeding generations will receive farms that are less productive and are less likely to be viable in the future. * * *

That calculation ignores availability of the special rules applying to the valuation of farmland, which are described on page 9 in the Instructions to Schedule A of the REV-1500 (PA Inheritance Tax Return for a Resident Decedent) regarding "Special Farm Use Valuation."

Under Section 9122 of the Inheritance and Estate Tax Act of 1991, land devoted to agricultural use, agriculture reserve or forest reserve may be eligible for preferential assessment measured by particular use, rather than by fair market value. assessments.

If you elect to use this method of valuation, the special use valuation under the Pennsylvania Farmland and Forest Land Assessment Act of 1974, 72 P.S. §5490.1, et. seq. must be reported. You will also be required to submit fair market value appraisals of the residential property, farm outbuildings and agricultural property so that a proper valuation may be made if the special use is discontinued or if the property does not meet all requirements. * * *

Pennsylvania's "Special Farm Use Valuation" provisions differ from the special valuation rules for farms under the Federal Estate Tax. See: Pamphlet, The Pennsylvania Inheritance Tax in Comparison with the Federal Estate Tax (PDF, 2 pages) published & posted by the Pennsylvania Institute of Certified Public Accountants.

But this already-available valuation advantage is not the reason why termination of the Pennsylvania Inheritance Tax likely will not occur any time soon. State budget concerns likely will rule instead, as in the past. See: PA EE&F Law Blog postings "House Passes Bill Abolishing PA Death Taxes" (01/18/08) and "Repeal PA Inheritance Tax?" (11/16/06).

This continuing reality was noted in the recent York Daily article:

As unpopular as the tax is with some conservatives, eliminating it will be a challenge with state revenues on the decline. Gov. Ed Rendell has predicted a $2.3 billion budget shortfall this year.

Last year the inheritance tax brought in $828 million for the state, and this year it was projected to raise $849 million, but collections are down.

As of Jan. 31, the state collected $450 million from the inheritance tax, which is $46.9 million below estimate, according to the Revenue Department.

Swanger introduced her bill to phase out the tax last term, but it languished. She acknowledged it's a longshot this year with the state facing revenue problems.

"But it's something my constituents want done away with, so I'm willing to introduce it," she said. * * *
These are the presently pending House or Senate bills that would affect application of the Pennsylvania Inheritance Tax and the Pennsylvania Estate Tax:
Also noteworthy is House Bill 577, introduced by Representative ADOLPH , which would exempt certain disabled persons from payment of PA Inheritance Tax.