January
2008

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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01-24-08

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Farmland Assessments—Present and Future


The assessed value of farmland will go up for property tax bills in 2008. And in 2009. And, probably, in 2010 and 2011. Here's what's going on.

Like most states, Indiana assesses farmland based on its "use value." That means a farm acre is valued based on what it earns from agricultural use, not on its potential value for development.

Use value starts with a "base rate" per acre set by the state's Department of Local Government Finance (DLGF). The same value is used for all farmland in the state. This base rate is multiplied by a soil productivity factor, which measures the productivity of the soil for growing corn. The factor ranges from 0.5 to 1.28 and varies by soil type. Some ground also is adjusted by an "influence factor," which reduces the value because of features such as flooding or forest cover.

The base rate is calculated with a "capitalization formula," which divides the estimated net income earned from growing crops on an acre by an interest rate. It's the amount someone would have to invest at that interest rate to earn that net income. And that, the theory goes, is the most a prudent investor would pay for an acre of farmland.

The base rate was $880 for 2006 assessments, which was used for taxes in 2007. The 2007 base rate was $1,140, which will affect taxes this year. And the DLGF has just announced that the 2008 base rate is $1,200 for taxes in 2009.

The devil's in the details, of course, but the DLGF is very upfront with the details. The department has posted a 60-page collection of documents showing the sources of the numbers it uses, and how it uses them. (See http://www.in.gov/dlgf/rates. Look under the "Reports" heading. (Careful, it's 7 megabytes in size.)

DLGF uses a six-year rolling average to iron out fluctuations. The base rate for taxes in 2008 used data from 1999 through 2004. The base rate for taxes in 2009 drops the data from 1999 and adds data from 2005. So, the increase in the base rate to $1,200 results from differences in the numbers between 1999 and 2005.

In 1999, the interest rate was 8.77 percent. In 2005, it was 7.22 percent. Dividing by a smaller number increases the formula's result. In 1999, average gross cash rent was $110 per acre. In 2005, it was $126. Rent is one measure of net income used in the numerator. In 1999, the average corn yield was 132 bushels per acre. In 2005, it was 154 bushels. Yield is also in the numerator. So are soybean yields and prices, which also went up. Costs are subtracted from net income in the numerator, and they went up too. That kept the base rate from increasing more.

We know most of the formula numbers through 2007. That means we can make a pretty good guess about the base rate for taxes in 2010 and 2011. Replace the 2000 numbers with 2006 numbers for taxes in 2010, and replace the 2001 numbers with 2007 numbers for taxes in 2011.

The interest rate was lower in 2006 than it was in 2000, about the same in 2001 and 2007. Rents were up in both years. Corn yields were up a little in both years, but soybean yields were lower in 2007 than in 2001. Corn and soybean prices were up in both years, by a lot, but costs were up, too.

Be careful. Not all the 2007 numbers are in. Formulas can change. Data can be revised. But, at this point, it looks like the base rate for taxes in 2010 will be about $1,250, an increase of 4 percent over $1,200 in 2009. And it looks like the base rate for taxes in 2011 will be about $1,380, an increase of 10 percent over 2010.

Remember, the increase in assessed value is not the same as the increase in tax bills. The change in the tax bill is also affected by local government spending and by changes in the assessed values of other property in the county. It's also affected by policy changes. And we may see a few of those before the General Assembly is through.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,