JANUARY
2007

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

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01-25-07

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Farmland Assessments Are Going Up


The memo from the Indiana's Department of Local Government Finance (DGLF) is dated Dec. 28, 2006. It's a page-and-a-half of technical jargon, with some signatures at the end. The last sentence is the most important. For 2007 assessments, and property tax bills in 2008, the base rate of farmland is $1,140 per acre.

That's almost 30 percent more than the current base rate of $880. And that means farmland owners will pay more in property taxes in 2008. You can see the memo on my Web site, http://www.agecon.purdue.edu/crd/localgov.

Here's what's going on. In 1998, the Indiana Supreme Court decided that Indiana had to base property taxes on objective measures of property wealth. For most property, that meant market value assessment, which bases the value of land, buildings and equipment on their potential selling price.

Taxing farmland at its market value, which includes its potential for development, could put a lot of farmers out of business. So, like almost every other state, Indiana decided to tax farmland at its "use-value." Calculate the value of each acre based just on its productivity in farming and tax that.

Use-value assessment uses a capitalization formula. Take the net income from a typical acre and divide by an interest rate. The net income is based partly on land rents and partly on corn and soybean yields, times their market prices, less costs.

The result is the "base rate." For each farm acre, the base rate is adjusted for soil productivity and other factors, such as flooding or forest cover. The tax bill is based on the result.

The DLGF figured a base rate of $1,050 per acre for the 2002-03 reassessment. That hit farmland owners hard, because it more than doubled the old base rate of $495 (which was calculated a different way).

Then, in 2001, the General Assembly mandated "trending," to adjust assessments every year for changing market values. Trending was set to start in 2005, for taxes in 2006.

Trending farmland is easy. Just update the rents, yields, prices and interest rate used to figure the base rate. DLGF did this, and, because commodity prices had fallen since reassessment, the base rate dropped to $880. That would mean a tax cut for farmland owners.

But assessors weren't ready for trending in 2005, so the legislature postponed its start to 2006, for taxes in 2007. Farmers were disappointed. They wanted that tax cut as soon as possible. The legislature obliged. Trending would start a year early for farmland, and the base rate would remain at $880 for two years. The capitalization calculation would resume in 2007, for 2008 taxes.

It's 2007, and that's what the memo is about. DLGF has recalculated the base rate. Since the last calculation, commodity prices have gone up, and the interest rate has gone down. With a higher numerator and lower denominator, the result has to rise. And it did, by 30 percent, to $1,140.

It's hard to say how much this will affect tax bills. That depends on location, local spending and what the General Assembly decides to do with local government finances. Here are some back-of-the-envelope guesses.

Suppose the local government tax levy increases 4 percent, and trending and new construction make the assessed value of other property rise 5 percent. In a rural area, farmland might be close to half of all assessed value. A higher base rate will cause a big increase in total assessed value. The tax rate will fall. The tax bill increase on a farm acre would be about 10 percent. Other property owners would see a tax cut.

In a suburban or urban area, though, farmland is a much smaller share of the tax base. That means total assessed value isn't affected much by farmland. Tax rates won't be much lower because of a higher base rate. If farmland is only 5 percent of the tax base, the tax bill increase could top 20 percent. Not much would happen to other property owners.

The General Assembly is debating property tax reform again this year. You can be sure that agriculture's representatives will add the rising base rate to the already crowded agenda.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox