WASHINGTON — Agricultural groups and farm-state lawmakers notched a significant win when U.S. House Democrats chose not to touch a big tax break for inherited property, avoiding for now a confrontation.

But opponents remain wary that the idea could come back at any time as Democrats shape their massive $3.5 trillion budget reconciliation package, and search for ways to help pay for the most significant expansion of the social safety net since the New Deal.

Farm lobbies and Republicans, along with influential Democrats like House Agriculture Chairman David Scott of Georgia, strongly objected to tax changes that President Joe Biden proposed in his “Build Back Better” plan for farmland and other assets handed from one generation to the next.

Biden, along with Agriculture Secretary Tom Vilsack, wanted to end the “stepped-up basis” for determining capital gains taxes on those assets. Vilsack, the former governor of Iowa, has taken to the pages of The Wall Street Journal and popped into a White House press briefing to make the case that closing loopholes like these is necessary to make sure the wealthy pay their fair share.

Over the next decade, the administration’s plan for taxing farmland inheritances could bring in as much as $322 billion in new federal tax revenues.

But U.S. Rep. Randy Feenstra, an Iowa Republican, said farmers in his district have been complaining to him about the proposal ever since it was unveiled earlier this year. The farmers, he said, are worried that a new tax scheme would make it impossible to keep farms in the family.

“Let’s say a mom and dad bought their farm at $2,000 an acre, and now it’s worth $12,000 an acre. If they want to give it to their son or daughter or whoever, [the heir] would have to pay tax on the difference of that,” Feenstra told States Newsroom in an interview.

“A son or a daughter wouldn’t have that money, so they’d have to sell the land to pay the tax,” he continued. The buyer would most likely be a large corporation, not a local farmer, he said. “That’s why so many people are worried that it will destroy the family farm, literally destroy the family farm.”

Emotional pleas

Proponents for the change say those concerns are overblown or easily addressed through policy tweaks. But the emotional pleas to save small-town America appear to have won this round.

Democrats on the House Ways and Means Committee, the group that handled the tax aspects of Biden’s economic revival plan, left out the president’s proposed changes to the stepped-up basis when they approved their piece of the reconciliation bill last week.

The idea could reemerge later, as the package continues its journey through the House and Senate. But the committee’s decision reflects how politically radioactive the idea has become.

Several Democrats balked at Biden’s proposal, as well. Scott, the chair of the House Agriculture Committee, wrote the president in June, arguing that the stepped-up basis was “a critical tool enabling family farming operations to continue from generation to generation.”

“I have been working tirelessly to ensure that stepped-up basis is protected,” Scott said in a statement last week, “and I am very pleased that the package released does not impact the benefit’s operation.”

But Vilsack, who owns 600 acres of farmland, argues that the stepped-up basis is really just a way for rich people to avoid paying taxes.

“This policy has allowed the wealthy to amass large fortunes,” Vilsack wrote earlier this month in The Wall Street Journal.

“Millionaires and billionaires borrow against their assets, usually stock or real estate, but also art and collectibles, really anything a bank will lend against. When those assets are transferred upon death, their heirs can sell the property without being taxed to pay off the debt. This is one of the most popular ways the rich avoid taxation, and it must end.”

The agriculture secretary said Biden’s proposal had special protections for family farms.

First, the administration wanted to impose the capital gains tax only when the heir sold the property. So in Feenstra’s example, the son or daughter wouldn’t have to pay taxes when they inherited the farm, only when they sold it.

Second, Vilsack said that the Biden plan would exempt all capital gains of up to $2.5 million. He claimed that 95 percent of family farms would not owe anything with that level of an exemption.

A no-brainer?

Marc Goldwein, a senior vice president and senior policy director for the Committee for a Responsible Federal Budget, said the fact that House Democrats so far have not included changes to the stepped-up basis was a “discouraging starting point.”

Getting rid of the policy, he said, should be a “no-brainer.”

“You want tax policy that treats people in similar situations similarly, that doesn’t create bad incentives and that raises revenue in a progressive way,” he said. “Stepped-up basis fails all three of those.”

It makes no sense, he argued, that someone who sold their property the day before they died would have to pay capital gains on it, but that someone who inherited the same property and sold it a day later would have to pay none.

The policy encourages people to hold on to their assets longer than they otherwise would, just to avoid taxation. And it disproportionately benefits rich taxpayers, Goldwein said.

He also said the policy mostly affects people with assets other than farms.

A 2014 U.S. Treasury study, for example, found that farm assets made up only 2 percent of the fair market value of assets that are protected by the policy.

Stocks and bonds, on the other hand, made up more than half of the value of protected assets.

Consequences for farmers

But Dustin Sherer, the director of congressional relations for the American Farm Bureau Federation, said the administration is underplaying the potential consequences for farmers if stepped-up basis is removed.

While Vilsack touted the administration’s proposed exemption of the first $2.5 million of capital gains, Sherer noted, that would not be enough to shield farmers with a typical 500-acre farm in Vilsack’s home state of Iowa.

There are more than 18,000 farms in Iowa that are bigger than 500 acres, Sherer said.

“More to the point,” Sherer asked, “if you’re trying to go after billionaires, why is $2.5 million your exemption level?”

And the administration’s proposal to impose the capital gains tax when property is sold, rather than when it is inherited, still causes problems, Sherer said.

The lingering tax obligation would make it harder for the new property owner to take out a loan, for example.

“It completely changes the dynamics of the transfer,” he said.

Sherer said he was encouraged that the policy hasn’t gained traction in the House so far, but he worries that it could become part of the deal later.

“As long as politicians in D.C. are looking for money to offset their spending, it’s not over,” he said.

The reconciliation bill now goes to the House Budget Committee, which will consolidate input from other House committees. Speaker Nancy Pelosi has said she wants the full chamber to vote on the package before the end of the month, but that deadline could slip.