JANUARY
2009

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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01-22-09

Download the audio of Capital Comments: MP3, WMV

Farmland Assessments Will Keep Increasing


My mom used to tell me that sometimes you've got to brag on yourself, or no one else will. So, one year ago I predicted that the base rate assessment of farmland would be $1,250 per acre for property taxes in 2010. And, a couple of months ago, the Department of Local Government Finance announced that the base rate for 2010 taxes would, in fact, be $1,250 per acre. Thank you. Thank you very much.

Actually, that's not so marvelous a prediction. The base rate for 2010 taxes is calculated with numbers from 2001 through 2006. By last January, all those numbers were already known. Predicting the base rate was a matter of plugging the numbers into the state's base rate formula.

The statewide base rate is the starting point for the assessment of farmland for property taxes. To get the assessed value of an acre, the base rate is multiplied by a productivity factor, which is higher for soils that are better for growing corn. Some assessments also are adjusted downward by an influence factor, for reasons like forest cover or frequent flooding.

The state recalculates the base rate every year, using a capitalization formula. A measure of income is divided by an interest rate to get a land value. The results are averaged over six years to iron out fluctuations. The rate for 2009 taxes is $1,200, based on numbers from 2000 through 2005. The rate for 2010 is $1,250, based on numbers from 2001 through 2006. The base rate went up when the calculation dropped figures for 2000 and added figures for 2006.

Why? Land rent is one of the factors that determines income in the formula's numerator. In 2000 the average rent for an acre was $101. In 2006 it was $110. Income depends on commodity prices, too. The price per bushel of corn was $1.87 per bushel in 2000 and $2.47 in 2006. The price for beans was $4.71 in 2000 and $5.90 in 2006. Income also depends on yields of corn and soybeans. The yields for both corn and beans were higher in 2006 than in 2000. Finally, the interest rate in the denominator of the formula was 9.56 percent in 2000 and 8.17 percent in 2006.

The income measures in the numerator were bigger in the year that was added, and smaller in the year that was dropped. The interest rate in the denominator was smaller in the year that was added, and bigger in the year that was dropped. The formula dropped a smaller land value, and added a bigger land value. The base rate had to rise.

The most recent numbers used for the 2010 base rate are from 2006. We know the numbers for 2007, and we've got a pretty good idea about the numbers for 2008. Commodity prices went up a lot in 2007 and 2008, much higher than earlier in the decade. Yields are up, and the interest rate is lower too.

With figures from 2007 and 2008, we can predict the base rates for 2011 and 2012. The base rate is likely to rise to $1,400 for taxes in 2011 and to $1,690 for taxes in 2012.

Now costs are rising and commodity prices are dropping. If these trends hold in 2009, they could reduce the base rate—for taxes in 2013, at the earliest. The two years with really high commodity prices, 2007 and 2008, won't drop out of the base rate calculation until 2018. The base rate is likely to be high throughout most of the coming decade.

Higher base rates mean higher property taxes on farmland. The new property tax caps won't stop tax bills from rising. The caps are a percentage of assessed value. As assessed value goes up, so do the caps.

These base rate predictions will hold as long as the state uses the same data with the same formula. You can be sure that agricultural interests are working hard to find a different formula, friendlier to land. That might be a tough sell in the Indiana Legislature, though. Lower farmland assessments would shift taxes to homeowners. And higher taxes for homeowners are not on the General Assembly's agenda.

 

 

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Writer: Larry DeBoer
Editor: Olivia Maddox