An Update on Indiana Farmland Assessments
April 13, 2015
Larry DeBoer, Professor of Agricultural Economics
Agriculture’s farmland assessment problem has caught t?he attention of the Indiana General Assembly. Senate Bill 436 passed the Senate and the House by wide margins. At this writing it is in conference committee. The bill postpones use of new soil productivity factors, and more significantly limits increases in the base rate for farmland assessment for taxes in 2016 and 2017. The bill asks that a legislative committee study the methods for assessing farmland.
The Rising Base Rate
The base rate is the starting point for farmland property tax assessment. It’s a statewide dollar amount per acre. It’s adjusted by each acre’s productivity factor, so that the acre’s value reflects how much corn it can grow. Some values are adjusted downward for factors like forest cover or frequent flooding. The resulting assessment is multiplied by the sum of the tax rates for the local governments where the land is located. That’s the tax bill.
The base rate is calculated with a capitalization formula that includes commodity prices, yields, rents and costs in the numerator, and an interest rate in the denominator. Until recently prices have increased and the interest rate has decreased. That has pushed the base rate up, a lot.
As recently as pay-2008 (for taxes paid in 2008) the base rate of farmland was $880 per acre. By 2014 the base rate had exactly doubled to $1,760. This year it’s up another 16.5% to $2,050, and the Department of Local Government Finance has announced a base rate of $2,420 for pay-2016. That’s another 18% increase. Since the data enter the base rate formula with a four-year lag, we can project the base rate through 2018 with confidence under the current formula. Given the price, yield, rent, interest rate and cost numbers we already know, the existing base rate formula calculates to $2,770 for 2017, and $3,050 for 2018, increases of 14.5% and 10.1%, respectively.
Property taxes on agriculture have increased substantially as a result of these base rate increases. From 2007 through 2014, overall agricultural taxes increased 47%, while total property taxes decreased by 6%, led by a 33% drop in homestead taxes. Farm property tax increases are now coming at a time when expected operating returns have moved down sharply, contributing to even tighter farming margins.
Corn and bean prices peaked in 2013, and have fallen since then. Because of the lags in the formula, the lower 2014 prices cannot start to affect the base rate until 2018. The base rate is unlikely to fall before 2019 at the earliest. Until then farm property taxes will rise, even if farm incomes fall.
Senate Bill 436
This past summer a legislative study committee recommended a base rate freeze and further study of the problem. In his State of the State address the Governor pledged to prevent further rapid increases in the base rate.
Senate Bill 436 is the result. It passed the Senate with 49 votes and the House with 91. The two bills differ, however, so a compromise must be negotiated in conference committee. The bill contains many property tax provisions. The most controversial deals with assessment of special purpose business properties. There also are provisions for exempting small businesses from personal property taxes and to better define “agricultural use” for assessment purposes.
Most important for agriculture, though, is a provision that limits increases of the base rate per acre. The bill uses the “assessed value growth quotient”, which is a 6-year average of Indiana personal income growth rates currently used to set increases in the maximum property tax levy. The quotient is 2.7% for 2015. The Indiana Legislative Services Agency estimates that the quotient will be 2.5% for 2016 and 3.8% for 2017. Under SB 436, for property taxes in 2016 and 2017, the base rate is limited to the previous year’s base rate increased by the growth quotient. The base rates for 2016 and 2017 would be about $2,100 and $2,180, respectively, instead of $2,420 and $2,770. The limit expires after 2017. The bill requests that an appropriate study committee take up the issue of alternative means of agricultural land assessment.
The limit has consequences for taxpayers and local governments. The Legislative Services Agency’s fiscal note estimates that the freeze would reduce farmland taxes by $45 million in 2016 and $80 million in 2017, while increasing the taxes of other taxpayers by $36 million and $65 million. Local governments would lose $9 million in property tax revenue in 2016 and $15 million in 2017.
The limit would reduce taxable assessed value below what would exist, if the base rate were allowed to rise. Higher tax rates would then be needed to raise the same revenue for local governments. The higher tax rates would increase tax bills on other taxable property, so taxes would shift from farmland owners to other taxpayers. The higher tax rates would also push more taxpayers above their Constitutional tax caps. That part of the property tax would have been paid by land owners, but would not be paid by taxpayers at their caps. Local governments would lose that revenue.
SB 436 may be a temporary fix to make time to study farmland assessment procedures. Providing farmland property tax relief won’t be easy. Any reduction in property taxes for farmland will necessarily mean higher taxes for other taxpayers, lost revenue for local governments, or both, compared to what would happen with a rising base rate. Other interests can be expected to take a hard look at any proposals.
We could change the farmland base rate capitalization formula. This is tricky, because the Indiana Supreme Court says that assessments must be based on “objective measures of property wealth.” Capitalization is a recognized method for valuing property wealth. All the numbers that go into the formula are objective, measured and published by outside agencies. The base rate formula looks like it satisfies the court’s definition, and the definition could limit changes. The Court’s objective measures requirement may also work against a simple continuation of the growth quotient limits.
We could eliminate the four-year lag. Taxes in 2016 could be based on assessments in 2015 which would be based on data through 2014. That’s a two-year lag. But the formula’s result using data through 2014 was $3,050 per acre. The base rate would drop sooner—but before then it would rise faster.
One thing the Indiana Constitution does allow is a tighter tax cap. The Constitution says farmland taxes may not exceed 2% of assessed value. The General Assembly could pass a law to set a lower cap. That could provide a lot of tax relief for farmers. It could also cause a lot of revenue losses for rural local governments, especially those with relatively high tax rates.
Senate Bill 436 is not yet passed and signed. If it does pass and the limits are put in place, there’s no guarantee that a new method for farmland assessment could be found, given the consequences for other taxpayers and local governments, and the restrictions in the Constitution.
One thing is sure, the powers-that-be are paying attention. At the least, this means that there is opportunity to seek changes that could slow down the rate of farm property tax increases.