Tax Relief for Farmland Owners
Farmers are worried about property taxes on farmland. So is the governor and members of the General Assembly. They did something about it on April 29 in the closing hours of the 2015 legislative session.
Senate Bill 436 includes significant property tax relief for farmland owners. The bill passed unanimously in both houses and was signed by the governor on May 6 as Public Law 249. You can see the details of the law on the General Assembly’s website, https://iga.in.gov. Click on “Legislation,” then “Bills,’ then scroll down to “SB436.” Farmland taxes are addressed in Section 7. I recommend the fiscal note for the clearest explanation of the tax changes.
The problem is this: Rising commodity prices and low interest rates made for rapid increases in the base rate of farmland, which is the starting point for the assessment of farm acreage for property taxes. The base rate is recalculated each year by the Department of Local Government Finance, using a capitalization formula. The base rate was $880 per acre for taxes in 2007 and is $2,050 this year. It was to be $2,420 in 2016 and expected to hit $3,050 by 2018. As a result, agriculture’s property taxes have increased by 47 percent since 2007 while total property taxes have fallen by 6 percent.
S.B. 436 freezes the base rate at $2,050 per acre for taxes in 2016. That’s 15 percent less than the $2,420 rate that the DLGF announced last December. The freeze lasts for one year. After that, the calculation will multiply the previous year’s base rate by the assessed value growth quotient.
And what, do tell, is that?
The AVGQ is the percentage that local governments can increase their maximum property tax levies each year. Some version of the AVGQ has been in use at least since 1979, but the current formula was invented in 2002. It’s the six-year average of the percentage increase in Indiana nonfarm personal income, which is estimated by the federal Bureau of Economic Analysis. The calculation ensures that property taxes won’t rise faster than people’s incomes over any six-year period. The AVGQ calculation excludes farm income because it can be so variable.
The DLGF updates the quotient in June each year to set the limit on levies in the following year. The June 2014 calculation resulted in a 2.7 percent limit for levies in 2015. The calculation for 2016 will be released soon, and it looks like the result will be 2.5 percent.
The quotients have been pretty low in recent years because of the income figure from 2009. That was the worst year of the Great Recession, when Indiana personal income fell 2.9 percent. The negative number first entered the calculation for levies and taxes in 2011. In 2017 it will drop out of the calculation, and the AVGQ will be closer to 3.5 percent.
Under S.B. 436, the $2,050 farmland base rate will rise 2.5 percent for taxes in 2017, to $2,101. That’s 24 percent lower than the estimated $2,770 base rate from the capitalization formula. For taxes in 2018, an AVGQ of 3.5 percent would put the base rate at $2,175. That’s 29 percent less than the estimated $3,050 under the old formula.
It’s significant tax relief for farmland owners. The Legislative Services Agency’s fiscal note estimates that farmland property taxes will be about $52 million lower in 2016, $87 million lower in 2017 and $111 million lower in 2018, compared with what would have happened under the capitalization formula. Farmland property taxes still may go up but by much less than they would have. Of course, this means that other taxpayers will pay more taxes, and local governments will receive less revenue, than they would have.
S.B. 436 also asks a legislative study committee to take up the issue of farmland assessment this summer. The law changes the base rate calculation permanently, but it’s probably not intended as permanent solution. The Supreme Court requires assessments to be based on “objective measures of property wealth,” and the new formula is not a recognized method for calculating value.
So there’s more debate to come. But the law means that, while the Legislature is grappling with the issue, farm property tax increases will be much, much smaller.