Closing loopholes divide democrats.

Congress is heading into a heated debate about how much taxes should be raised to finance President Biden’s Build Back Better agenda. While pragmatic Democrats may not agree with every proposal being considered, there is one that the whole party should unite behind: closing the step-up basis loophole.

When investors sell an asset, such as a stock or bond, they are usually required to pay capital gains taxes on any increase in the asset’s value since they purchased it (the “basis”). But under current law, if the original owner dies before selling the asset, those unrealized gains are never subject to income taxes. Whenever the heir sells the asset, they are only required to pay taxes on the increase in value since they inherited it (the “stepped-up” basis).

This loophole creates an enormous incentive for wealthy individuals to buy and hold assets until death: more than half the value of estates over $100 million are comprised of unrealized capital gains that have never been subject to any income tax. And thanks to concerted Republican efforts to gut the federal estate tax, much of this unearned income is never subject to taxation of any kind. Wealthy people can also dodge taxes by using funds tied up in investments as collateral for loans, which frees up cash without triggering the capital gains tax (a tax avoidance strategy known as “buy-borrow-die”).

President Biden has proposed to shrink the step-up basis loophole by taxing unrealized gains over $1 million at death. This move would make our tax code significantly fairer and raise revenue exclusively from the wealthiest Americans to finance his agenda over the next decade. Unfortunately, some rural-state Democrats and a constellation of special interest groups have sought to undermine the proposal by framing it as “a tax plan to destroy farms and ranches.” They argue that the policy would hurt family farms and small businesses because families would have to sell those ventures off to free up cash needed to pay the tax.