JANUARY
2010

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

Download the audio files or subscribe to our podcast.

 

 

1-27-10

Download the audio of Capital Comments: MP3, WMV

Another Increase in Farmland Assessments


Around the turn of every year Indiana's Department of Local Government Finance announces the new base rate for farmland. The base rate is a dollar amount per acre, and it's the starting point for assessing farmland for property taxes. Two years ago the DLGF announced the base rate for taxes in 2009 at $1,200 per acre. A year ago it announced the base rate for 2010 taxes, $1,250 per acre. And on Dec. 31, 2009, the base rate for 2011 taxes was announced. It was $1,400 per acre. There's a pattern here: up.

You can see the base rate announcement and all the numbers used for the calculation on the DLGF's Web site, http://www.in.gov/dlgf. Click on "Assessments" under "Information for Taxpayers," and you'll find an agricultural link.

To assess farmland for property taxes, the base rate is multiplied by a soil productivity factor, so more productive land has a higher value. Some assessments are reduced by an influence factor, which accounts for things like frequent flooding or forest cover. The resulting assessed value is multiplied by the local tax rate to get the tax bill.

The DLGF calculates the base rate with a capitalization formula. The income that can be earned from growing corn or beans on an acre, divided by an interest rate, is the amount a reasonable investor would pay for the land. This is called the "use value" of the land, because it counts only its value for growing corn or soybeans. Some farmland is extra valuable because it could be developed for residential or commercial use, but that doesn't affect its use value. This is a tax break for farmland owners, especially those with land near cities, where development is a possibility.

Each year the DLGF recalculates the base rate with updated prices, yields, rents, costs and interest rates. It adds the latest year into a six-year rolling average and an earlier year drops out. The base rate goes up if the use value of the new year exceeds the use value of the dropped year.

That's been happening. Corn and bean prices were much higher in 2007 and 2008 than they were earlier in the decade. Land rents are up. Costs have increased but not as much. Interest rates have fallen. The capitalization formula is producing higher values for recent years compared to earlier years. When the recent higher values are added and the old lower values are dropped, the base rate increases.

There's a four-year lag from the data to the base rate used for the tax bill. The base rate for 2010 taxes is calculated using data from 2001-06. The base rate for 2011 taxes uses data from 2002-07.

We already know the data for 2008 and almost all the data for 2009. We know how the calculation is done. So we can predict the base rates for taxes in 2012 and 2013. Run the new data through the calculation, add the new year and drop the old, and the results are base rates of $1,700 for taxes in 2012 and $1,810 for taxes in 2013.

That's a 21-percent increase in 2012 and another 6-percent increase in 2013. The base rate was $880 for taxes in 2007, so it will more than double over six years. The main culprits are the very high corn and bean prices in 2007 and 2008, which first enter the calculation for 2011 and 2012 tax bills.

We're putting caps on property taxes, but they won't hold farmland taxes down. Farmland taxes are capped at 2 percent of assessed value. As assessed value goes up, so do the caps.

A bill that's passed the Indiana House (HB 1004) changes the base-rate calculation, dropping the high and low value and averaging the remaining four years (so it's called the "Olympic average"). Such a revision would reduce the $1,700 base rate to $1,590 for 2012. The bill would also limit the year-to-year increase in property tax bills on land and buildings (but not business equipment) to the rate of inflation. That would cut farm tax increases a lot--and reduce revenue for rural local governments.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,