MARCH
2016

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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03-24-16

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The General Assembly Changed Farmland Assessments Again


For the second year in a row, the Indiana General Assembly made major changes to the farmland assessment formula. This time it probably will deliver actual property tax cuts for farmland owners - and tax increases for everyone else.

Farmland assessments start with a base rate, which is a dollar amount per acre calculated by the state. Six years of data were used in a capitalization formula, with farm income in the numerator and an average of farm-related interest rates in the denominator. The highest value was dropped, and the remaining five years were averaged. There was a 4-year data lag, meaning the base rate for 2015 taxes used data from 2006 through 2011.

Starting around 2007 corn and soybean prices rose and interest rates fell. The numerator increased and the denominator decreased, so the base rate rose from $880 per acre for taxes in 2007 to $2,050 per acre in 2015. Agricultural property taxes rose by 63 percent while other property taxes fell by 7 percent.

Prices peaked in mid-2012 then began to fall. Farm incomes fell too. But the 4-year data lag meant that higher prices from past years continued to enter the formula, pushing the base rate to an estimated $3,090 by 2019. Farmers faced a half-decade of falling incomes and rising property taxes. The General Assembly noticed.

Last year's legislation froze the base rate for 2016 at $2,050. It scrapped the capitalization formula for a new method that used changes in Indiana nonfarm income to set changes in the base rate. The base rate would rise by about 4 percent per year, and in 2019 it would be about $2,310. Farmland taxes wouldn't fall, but they wouldn't rise nearly as much.

The new formula is included in Senate Enrolled Act 308, which passed both houses of the General Assembly on March 10. The governor is expected to sign it into law. The new formula returns to the old capitalization method, with two major changes. The 4-year lag is reduced to two. The base rate for taxes in 2017 will use data from 2010 to 2015. This will bring the declining corn and soybean prices into the calculation sooner.

More important, though, are the changes made to the denominator of the capitalization formula. The interest rate will be limited to 6 percent, 7 percent or 8 percent. Deciding which interest rate to use is complicated. A preliminary base rate is calculated using actual farm interest rates. If the preliminary rate is at least 10 percent more than the previous year's base rate, the 8 percent interest rate is used for all six years in the final base rate calculation. If the preliminary base rate is at least 10 percent less than the previous year's base rate, the 6 percent interest rate is used in the final calculation. Otherwise the 7 percent interest rate is used.

Actual farm interest rates are around 5 percent now, so the preliminary base rate calculation is much higher than $2,050. The final base rate will use the 8 percent interest rate for the near future. The projected base rates are $2,020 in 2017, $1,900 in 2018 and $1,630 in 2019. That 2019 base rate is 47 percent below the old capitalization formula projection, 22 percent below the projection from the 2015 reform, and 20 percent below the current base rate of $2,050. Farmland owners will see a tax cut.

Farmland assessed value will be lower. To collect the same property tax levy, local governments will have to charge higher property tax rates. That means other taxpayers will see higher property tax bills. More taxpayers will be eligible for tax cap credits, so local governments will lose revenue.

In 2019 projected farmland property taxes will be $106 million lower than they would have been under the 2015 reform. Other taxpayers' bills will be $83 million higher and local governments will lose $23 million in revenue. Since total property tax payments were $6.4 billion in 2015, urban taxpayers and local governments will hardly notice. Rural taxpayers and local governments may feel the difference.

The new base rate formula is pretty complicated. Woe to those who must explain it to taxpayers. That includes me!

 

 

Writer: Larry DeBoer
Editor: Keith Robinson