3-25-05

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Base Rate Update

Property tax issues are forever. Here's what's going on now.

Several years ago, the Indiana General Assembly passed a law that requires assessors to update property assessments every year. It wouldn't be a full-blown reassessment, just a tweaking of the assessment formulas so assessed values would keep up with changing market values. 

The reason was to lessen the shocking effects of reassessments on taxpayers. Indiana usually goes six to 10 years between reassessments. When that many years of property price changes are incorporated into assessments all at once, taxpayers see big changes in their tax bills. Annual updates would chop these big changes into smaller pieces.

Farmland assessments would be updated every year along with assessments of other land and buildings. The updates would be done by adjusting the "base rate per acre."

Farmland assessments start with the statewide base rate, which was set at $1,050 per acre, during the 2002-03 reassessment. For the assessed value of any acre of farmland, the base rate is adjusted up or down with soil productivity and adjusted down for other factors, such as flooding or forest cover. The result is multiplied by the local tax rate, and after credits are subtracted, that's what the landowner pays.

The state's Department of Local Government Finance (DLGF) calculates the base rate using a capitalization formula. In the numerator is an average of land rents per acre and estimated net operating income per acre. In the denominator is an interest rate. Divide numerator by denominator, and the result is a measure of land value. DLGF averaged the calculation for the four years 1995 through 1998 to get $1,050, the base rate used in the 2002-03 reassessment.

To update farmland assessments, DLGF just recalculates the base rate. When it used the rent, net income and interest rate numbers for 1999 through 2002, the base rate came out at $880 per acre, 16 percent less than $1,050. The main reason was a decline in estimated net operating income, and the main reason for that was a decline in corn and soybean prices. You can see the new calculation on the DLGF Web site, http://www.in.gov/dlgf. Click on the "What's New" button for the link to the land values calculation.

This update would cause a substantial reduction in property taxes on farmland in most Indiana counties. The update would raise the assessments of most property, while reducing the assessments of farmland. The Legislative Services Agency, which is the research arm of the General Assembly, calculates that taxes on an average acre of farmland would drop 29 percent. Some of that reduction would be shifted to other agricultural property, and tax levies rise each year, so the overall reduction in agricultural taxes would be smaller. Still, the update would cut taxes for most farmers.

The trouble is, Indiana's assessment system isn't ready to do annual updates. The regulation telling local assessors how to do it wasn't signed until the end of December, just two months before the March 1 deadline. That's not enough time.

So the General Assembly is considering a bill (SB 327) to postpone annual updates until March 1, 2006. It also was considering a bill (HB 1367) to go through with the base rate reduction to $880 per acre, even if the overall update was postponed. If the farmland base rate drops but no other assessments are updated, the tax cut on farmland would average about 14 percent, before levy increases.

HB 1367 died on March 1 when the Democrats walked out. But Speaker Bosma has included it on his "top 40" list of bills to be revived, by attaching it to a bill that has passed the Senate. Senate Bill 327 is a likely candidate.

Of course, if farmers pay less, other taxpayers will have to pay more. In urban and suburban counties, homeowners and businesses probably won't notice the effect of the base rate change, because farmland is a small part of the tax base. In rural counties, however, farmland is a big part of the tax base. Homeowners will notice.