OCTOBER
2016

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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10-27-16

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Coming Reductions in Farmland Assessments for Property Taxes


The Indiana General Assembly revised the farmland assessment formula during its 2016 session. Let's figure out what that might do to farmland assessments and property taxes.

The assessment of farmland starts with a "base rate," calculated with a capitalization formula. Measures of farm income per acre are divided by a capitalization rate to get the land's capitalized value.

Corn and soybean prices rose and interest rates fell from 2007 through 2012. When commodity prices rise, income goes up. When interest rates fall, the capitalization rate goes down. A rising numerator and a falling denominator caused the base rate of farmland to jump from $880 per acre in 2007 to $2,050 in 2015. As a result, agricultural property taxes increased by more than 60 percent, while property taxes overall fell 4 percent.

Rising taxes could be paid out of rising farm incomes, but starting in 2012, corn and bean prices began to fall. So did farm incomes. But the base rate formula used six years of data with a four-year lag. The base rate for taxes in 2015 used data through 2011. Falling prices wouldn't even enter the formula until 2016. Projections showed the base rate topping $3,000 for taxes in 2018. Farmland owners were looking at half-a-decade of lower incomes and higher property taxes.

The legislature took action. First, it reduced the four-year lag to two years. Now the base rate for 2017 would be calculated with data from 2010 to 2015. The $2,990 base rate projected for 2019 with a four-year lag would now be set in 2017 with a two-year lag. That's a 46 percent hike from the $2,050 base rate this year not the solution that agriculture was looking for.

That leads to the second reform of the base rate formula. The base rate calculated with six years of actual data and a two-year lag is now the "preliminary" base rate. If the preliminary rate is a lot different from the existing base rate, then the formula takes steps to stabilize the change. If the increase is more than 10 percent, then the actual capitalization rates in the formula are replaced with 8 percent. If the decrease is more than 10 percent, the capitalization rate is 6 percent. If the preliminary base rate is within 10 percent of the existing base rate, then 7 percent is used.

The big increase in the preliminary base rate for 2017 means that the formula used a capitalization rate of 8 percent. The actual capitalization rates ranged from 4.7 to 6 percent, so using 8 percent reduced the final base rate to $1,960, a 4 percent decline from 2016. Farmland property taxes may not drop in 2017 (if local tax rates increase) but they'll stop their spectacular rise.

We acquired some 10-year forecasts of farm data from the Food and Agricultural Policy Research Institute at the University of Missouri. The forecasts settle at $4 per bushel for corn, $10 per bushel for beans, with trend increases in yields and costs. We projected the capitalization rate using the Congressional Budget Office's long-term interest rate forecast, and came up with a gradual increase from the current 4.7 to 6.5 percent.

Run these numbers through the new formula, and for taxes in 2018 we get a preliminary base rate of $2,820, way higher than the $1,960 in 2017. The 8 percent capitalization rate will be used for the final calculation, which projects at $1,770. That would be 10 percent drop in the base rate. Farmland tax bills would decrease in most places.

Projected interest rates remain unusually low throughout the 10-year forecast, which means the preliminary base rate remains high. The 8 percent capitalization rates continue to be used in the final calculation. In our projections, the final base rate bottoms out at $1,070 in 2021, then rises gradually to around $1,300 in the mid-2020s. Property taxes for farmland owners would fall a lot from what they are now.

Lower total assessed values mean higher property tax rates, especially in rural areas, where farmland is so important. Rural homeowners and businesses would see their taxes rise with the base rate reduction. Some rural local governments would lose revenue to the property tax caps.

But after years of rapid tax bill increases, farmland owners should begin to see relief, starting soon.

 

 

Writer: Larry DeBoer
Editor: Cindie Gosnell