MARCH
2010

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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3-25-10

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The Legislature Changes Farmland Assessments


The Indiana General Assembly has passed a bill to change the formula used to assess farmland for property taxes. Farm assessments -- and tax bills -- will still go up in coming years. Just not as much.

Senate Bill 396 changes the way the Department of Local Government Finance (DLGF) calculates the base rate of a farm acre. The base rate is a dollar amount per acre and the starting point for calculating assessed value. It's adjusted each year for changes in land rents, commodity prices, yields, costs and interest rates.

The base rate formula calculates the net income from an acre based on land rents and on a calculation of corn and bean prices, times corn and bean yields, less costs. It divides these results by an average farm loan interest rate from the Chicago Federal Reserve. The result is a capitalized value, which is what a prudent investor would be willing to pay to receive that net income, if he or she wanted a rate of return equal to the interest rate. The rent and net income results are then averaged together.

The base rate had been calculated as a six-year rolling average of these capitalized values. For 2011 taxes, the six years are 2002 through 2007. The values in each year are (respectively) $890, $1,407, $1,882, $1,170, $1,125 and $1,914. The average of these six is $1,400, which was the base rate for 2011 taxes announced by the DLGF at the end of December 2009.

Here's the problem for farmland owners. The 2007 and 2008 capitalized values were especially high because corn prices were especially high in those years. A spike in oil prices increased the demand for ethanol, which increased the demand for corn. The 2007 value is $1,914 per acre; the 2008 value is $2,729. For taxes in 2012, the 2002 value would be dropped from the six-year average, and the 2008 value would be added. That means $890 would be dropped, and $2,729 would be added. The base rate would jump from $1,400 to $1,700, a 21 percent increase. For taxes in 2013, the base rate would rise to $1,810.

This calculation will be revised by SB396. We've got the data and the formula, so we can make a good guess about what will happen to the base rates. But none of these numbers are official.

The new formula drops the highest value of the six and averages the remaining five. For taxes in 2011, the highest value is $1,914 from 2007. Drop that from the average, and the base rate falls from $1,400 to $1,290. That's 3 percent higher than in 2010, but 8 percent lower than it would have been without SB396.

Starting in 2012 the extraordinarily high 2008 value will be dropped from the average. The base rate for taxes in 2012 will be $1,500 instead of $1,700, and in 2013 it will be $1,620 instead of $1,810. Again, the base rate will rise, but not as much as it would have.

This formula change has some consequences for other taxpayers, especially in rural areas where farmland is a big part of the tax base. As farmland assessments rise, total assessed value increases. That means tax rates can be lower and still raise the revenues that local governments need. Lower tax rates mean lower tax bills for non-farm taxpayers. The new formula means that total assessed value won't increase quite as much, so rural non-farm taxes won't fall quite as much. The shift of the tax burden to farmland will be smaller.

When tax rates are low, tax bills are less likely to exceed the new tax caps, so local governments lose less revenue to the tax cap credits. Under the new formula, tax rates won't fall quite as much in rural areas, so more taxpayers will receive credits. Rural local governments will lose a bit more in property tax revenue.

Farm property taxes will still go up. The base rate will be 30 percent higher for 2013 taxes than it is this year. But under the old formula the base rate would have been 45 percent higher. So, is SB396 a tax cut for farmland owners? No, and yes -- you decide.

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,