Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Another Increase in Farmland Property Taxes

The annual announcement is now routine. In December, Indiana's Department of Local Government Finance announced the base rate of farmland would rise from $1,630 to $1,760 per acre for 2013/pay 2014. Back in 2007, taxes were paid on a base rate of $880 per acre. The base rate has exactly doubled in seven years.

The base rate is the starting point for calculating property taxes on farmland. It's a statewide dollar amount per acre, which is set annually by the DLGF. Farmland is assessed at the new base rate in one year and then taxes are paid on that assessment the next. The assessment for 2013 determines tax payments in 2014.

The base rate is multiplied by a soil productivity factor, which varies from 0.5 to 1.28 based on how well the soil type grows corn. There's a controversy about these factors, which is being debated in the Indiana General Assembly. The factors are scheduled to rise, but legislative bills have been proposed to cancel this change.

Some farmland is adjusted by an influence factor, which is a percentage subtracted for features that reduce yields, such as forest cover or frequent flooding. The base rate times the productivity factor, less the influence factor, is the assessed value of an acre of farmland.

That assessed value is multiplied by the tax rate set for where the land is located. In some counties, local credits are subtracted. The result is the property tax bill. Increases in the base rate increase assessed value, which, in turn, increases farm taxes.

The base rate is calculated using a capitalization formula. The rent, or net income, earned from an acre is divided by a rate of return. The DLGF calculates capitalized values for six years, drops the highest value, and then averages the remaining five years to get the base rate. Each year, a value from an earlier year leaves the calculation and a value from a recent year is averaged in. The base rate goes up when the value coming in is higher than value dropping out.

Farmland rents are higher now than they were six years ago. Commodity prices are up. Interest rates have fallen. Capitalized values have been rising, because the rents and commodity prices used in the formula's numerator have been increasing while interest rates that determine the rate of return in the denominator have been decreasing.

For taxes in 2012/pay 2013, the capitalized value for 2003 was erased, and the capitalized value for 2009 was included. The 2003 value was $1,407, and the 2009 value was $2,066. The base rate rose from $1,500 for taxes in 2012 to $1,630 for taxes in 2013.

For taxes in 2014, the 2004 value of $1,882 was erased, and the 2010 value of $2,630 was included. The 2010 value turns out to be the highest of the six years, so it's dropped from the average. But that means the previous high value - $2,508 from 2008 - now gets averaged in. The base rate will rise to $1,760.

There's a four-year lag between the numbers in the calculation and the tax year. The numbers to be used for taxes in 2014 are from 2005 through 2010. Since we know the numbers for 2011 and 2012, we can make good predictions about future base rates. In January 2012, I predicted $1,760 for pay 2014 - nailed it! But it's no great trick. Running known numbers through a known formula should give an accurate prediction.

Rents and commodity prices were higher and interest rates lower in 2011 than they were in 2005, so the base rate for pay 2015 should be about $2,050 - a 16.5 percent rise from 2014.

The 2012 drought reduced the average corn yield to a 20-year low. The first time that will affect property taxes is in pay 2016, when 2012 numbers enter the tax bill calculation. Still, rising rents and prices and falling interest rates should raise the pay-2016 base rate to about $2,430. The 2012 drought will have a small effect. If yields had been normal, the base rate probably would have been $100 to $200 higher.

There's a lot of uncertainty in the farming business. But with rising rents, high prices and low interest rates, one thing is certain: Farmland property taxes are going up.



Writer: Larry DeBoer
Editor: Cindie Gosnell