Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Changes in Farmland Property Tax Assessment

How should Indiana assess farmland for property taxes? Good question. There’s the way we used to do it, the way we do it now and, if new legislation passes, the way we’ll do it in the future.

We used to assess farmland based on a capitalization formula. Imagine an investor taking money out of a bank to buy some farmland. Suppose the investor earns 5 percent interest at the bank, and the land can earn $100 a year from growing crops. The investor bids $1,000 for the acre. If that’s the winning bid, the investor earns 10 percent on that $1,000. That’s better than the bank rate. Suppose the bidding continues to $2,000. At that price the land yields a 5 percent return, the same as at the bank. But if the bidding continues above $2,000, that $100 income from the land represents a return less than the bank’s 5 percent. A rational investor would stop bidding at $2,000.

Until this year, Indiana’s capitalization formula took measures of farm income, divided by a rate of return, and called that the “base rate” of an acre of farmland. The base rate was then adjusted for land quality and other factors, and that became the assessed value of the acre. To iron out fluctuations, six years of capitalization results were averaged together, with the highest value dropped.

But two problems emerged. First, corn and bean prices went way up between 2006 and 2013.  That increased the income number in the formula’s numerator. Interest rates went way down during those years. That decreased the formula’s denominator. The base rate increased from $880 per acre for taxes in 2006 to $1,630 in 2013. 

Second, the numbers entered the formula with a four-year lag. This was an accident of history, but it meant that the base rate for taxes in 2013 used numbers from 2004 through 2009. Crop prices stayed high through 2014, and interest rates are still low. The 2014 numbers would first enter the formula for taxes in 2018. In that year the base rate would be $3,100 per acre. That’s a 250 percent increase over 2007. Farmland taxes would keep increasing – by a lot.

When crop prices were high those ever-higher property taxes could be paid out of higher farm incomes. But since 2014 crop prices have fallen. For the rest of the decade Indiana farmers would be squeezed between rising taxes and falling incomes.

In response, last year the General Assembly changed the base rate formula. It’s frozen for 2016 taxes, at $2,050, and after that it increases by the six-year average increase in Indiana non-farm income. That’s projected to be about 4 percent per year in 2017 and after. By 2019 the base rate would be about $2,310 instead of $3,100. Taxes would still rise, but not nearly as much.

But again, there are two problems. First, we’re not sure this formula is constitutional.  Assessments are supposed to be based on “objective measures of property wealth.” The new income-based formula means that changes in farm yields, prices or incomes can’t affect farmland assessments. We can’t know whether the formula is constitutional until someone sues and the Indiana Supreme Court decides. But still.

Second, the new income-based assessment can never decline. Only another Great Depression could make the six-year average of Indiana income fall. But once the lower crop prices enter the capitalization formula, it produces lower base rates. By 2022 the capitalization formula would produce a lower base rate than the income-based formula. The new formula probably is not the permanent solution to the farmland assessment problem.

Some members of the Indiana General Assembly don’t think so, either. Senate Bill 308 changes the base rate formula again. It returns to the capitalization formula and shrinks the four-year lag to two years. The lower crop prices enter the formula sooner. And it puts an 8 percent floor on the rate of return in the denominator. That acre earning $100 would be assessed at $1,250, not $2,000. That would be a big cut in farmland taxes.

Of course, lower taxes for farmers could mean higher taxes for everyone else, and less revenue for local governments. That might create opposition to the proposed formula. Nobody says tax policy is easy.       




Writer: Larry DeBoer
Editor: Keith Robinson