NOVEMBER
2003

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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11-26-03

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Property Taxes on Farmland


Most farmland owners in Indiana are seeing property tax increases this year. Here's the story.

Farmland is assessed based on its use value. Each acre starts with a base rate. This dollar figure is multiplied by a productivity factor, which ranges from 0.5 to 1.28. Soil that's better for growing corn gets a higher factor. Some assessments are then adjusted by an influence factor. Land that floods every other year has its assessment reduced by 50 percent, for example.

This is "use value" because the only thing that counts is productivity. Farmland in rural Warren County or downtown Indianapolis is valued the same way, even if it could be sold for tens of thousands of dollars for development. This is a tax break for farmers whose land borders residential or business development.

In the last two reassessments, for taxes paid in 1990 and 1996, the base rate of a farm acre was set at $495. Why $495? No reason, that was just the number negotiated between farm representatives and the state.

On Dec. 4, 1998, the Indiana Supreme Court found the state's rules for assessing property unconstitutional. It required that new rules be based on "objectively verifiable data" with "meaningful reference to property wealth." For most property that means assessing based on market value, the predicted selling price.

But the court also said "assessment based upon value in use is a reasonable measure of property wealth." That means that farmland can still be valued at its productivity in agriculture, not its development potential.

Clearly, the method used to derive the $495 base rate wasn't based on objectively verifiable data. The state's Department of Local Government Finance (DLGF) had to come up with a new way to set the base rate for 2003.

It used "income capitalization." It averaged cash rent and operating income for a typical acre. For 1998 it got $96.50. It divided this figure by a 9.1 percent rate of return. The result was $1,060, which is what buyers will pay for an asset yielding $96.50 each year, if they expect to earn 9.1 percent. DLGF did this calculation for 1995 to 1998, averaged the four results together, and arrived at the new base rate, $1,050.

That's way less than the average market value of farmland, which is more than $2,000 an acre, but probably it's constitutional. Use value is OK, said the court, and the method uses objectively verifiable data. Still, $1,050 is a 112 percent increase in the assessed value of farmland.

Here's what that means for a farmland owner in a typical place in Indiana, say, Jefferson Township in Newton County. Suppose a farm acre has a productivity factor of one, with no influence factor, so it was valued at $495 for 2002 taxes and $1,050 for 2003. In 2002, the tax rate was $2.94 per $100 assessed value. Multiply by $495, and the gross tax was $14.55. The state provided a property tax replacement credit (PTRC) of 15.15 percent, subtracted from the gross tax. That leaves a tax bill of $12.35.

Now, for 2003, the tax rate is down to $2.14 per $100 assessed value. Tax revenues have increased, but not as much as assessed value, so tax rates have fallen. The rate times $1,050 gives a gross tax of $22.47. PTRC is now 31.17 percent. That's higher than in 2002, because the General Assembly passed added tax relief in June 2002. Subtracting PTRC gives a net tax bill of $15.47. That's a 25 percent tax hike, $3.12 for the acre.

We've got tax rates for more than a thousand taxing districts so far, and, in half of them, farmland tax bills go up by 25 percent or more.

Of course, farmland is not all of farm property. In many places, farm buildings, equipment and inventories should see tax reductions that will at least partially offset the land tax hikes.

First there was good news. The court let use value assessment stand. Then came bad news. Farmland taxes are up. The news on the rest of farm property may not be good, but it probably won't be as bad.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox