Larry DeBoer: Farmland taxes becomes hot legislature topic
Thursday, January 29, 2015 11:01 AM
WEST LAFAYETTE – Once again, farmland assessments and property taxes are going up. The Department of Local Government Finance, which oversees the property tax in Indiana, has set the base rate per acre of farmland for 2015 taxes at $2,050 per acre. That’s a 16 percent increase from the base rate for 2014 taxes. In December the DLGF announced the base rate for 2016 at $2,420, another 18 percent increase.
The base rate has been rising for years. But, this year, it’s a hot topic in the General Assembly.
The base rate is the starting point for farmland property tax assessment. It’s a statewide dollar amount per acre. It’s adjusted by each acre’s productivity index so that the acre’s value reflects how much corn it can grow. Some values are adjusted downward for factors like forest cover or frequent flooding. The resulting assessment is multiplied by the sum of the tax rates for the local governments where the land is located. That’s the tax bill.
The base rate is calculated with a capitalization formula that includes commodity prices, yields, rents and costs in the numerator and an interest rate in the denominator. Until recently, prices have increased, and the interest rate has decreased. That has pushed the base rate up a lot.
The numbers enter this formula with a four-year lag, meaning the most recent data used for the pay-2016 base rate are from 2012. Since we know the formula and the data through 2014, we can make really good guesses about future base rates. In 2017 the base rate will likely be about $2,770; in 2018 the base rate will be near $3,050. Between 2007 and 2014 total agricultural property taxes increased by 47 percent, far more than any other category of property. If the base rate keeps rising, farm property taxes will too.
The governor pledged to prevent this rapid increase in his State of the State address. This past summer a legislative study committee recommended a base rate freeze and further study of the problem.
After all these years, why is this a hot topic now?
The answer has to do with that four-year lag. Until recently farm incomes were rising, so higher property taxes could be paid out of higher incomes. But now farm incomes are falling. Corn and bean prices peaked in 2013 and have fallen a lot since then. The lower 2014 prices can’t even start to affect the base rate until 2018. Until then property taxes will rise, even if farm incomes fall.
But providing farmland property tax relief isn’t easy. Consider some possible answers.
We could eliminate the four-year lag. Taxes in 2016 could be based on assessments in 2015, which would be based on data through 2014. That’s a two-year lag. But the formula’s result using data through 2014 was $3,050 per acre. We’d get the base rate to drop sooner, but before then we’d see even bigger tax increases.
We could change the capitalization formula. This is tricky, because the Indiana Supreme Court says that assessments must be based on “objective measures of property wealth.” Capitalization is a recognized method for valuing property wealth. All the numbers that go into the formula are objective, measured and published by outside agencies. The base rate formula looks like it satisfies the court’s definition. Any changes in the formula must meet this definition, too.
Suppose we could change the formula to reduce the base rate. Or suppose we introduced some deductions from farmland assessments. Or suppose we reduced some deductions for other kinds for property. With all these policies, taxes would go down for farmers and up for other taxpayers.
One thing the state constitution does allow is a tighter tax cap. The constitution says farmland taxes may not exceed 2 percent of assessed value. The General Assembly could pass a law to set a lower cap. That could provide a lot of tax relief for farmers. It could also cause a lot of revenue losses for rural, local governments, especially those with relatively high tax rates.
It seems likely that something will be done about farmland property taxes. How it will be done, and who will foot the bill are the big questions.
DeBoer is a professor of agricultural economics at Purdue University.