COVID Recession Makes Farmland Tax Predictions Harder

Predictions are hard, especially about the future. Yogi Berra said that. (Unless he didn’t. Yogi also said, “I never said most of the things I said,” so we really don’t know.)

Though some predictions are harder than others, we are confident about this one: Property tax bills for farmland owners will go down next year.

We can predict this because we know the base rate for farmland for tax bills in 2021. The base rate is the starting point for the assessment of farmland. The state’s Department of Local Government Finance applied its formula to six years of data on corn and soybean prices, land rents, interest rates and costs, and came up with $1,280 per acre. That’s 18 percent less than this year’s base rate of $1,560. This value is adjusted for soil productivity and other factors to come up with the assessed value for each acre.

That assessment is multiplied by the tax rate to calculate the tax bill. The tax rate is the sum of the rates of the county, township and school district, plus the city or town rate, library rate and special district rates, if there are any  Those rates depend on the parts of the governments’ budgets that are paid for with property taxes—that’s the property tax levy—and on the assessed value of property within the government’s boundaries. Each year the property tax levy is divided by the assessed value to recalculate the tax rates.

Tax bills rise or fall depending on the change in assessed value and the change in the tax rate. If assessments fall by more than tax rates rise, tax bills go down. In most places tax rates change by small amounts from one year to the next. Property owners are paying 2,070 different property tax rates in Indiana this year. Of those, 1,627 changed up or down by less than 5 percent from 2019. That’s almost 80 percent. Only 17 tax rates increased by more than 18 percent. If 2021 is similar, the 18 percent drop in farmland assessments will mean that almost all farmland owners will see their tax bills decrease.

But Yogi is right—most predictions are hard. What about farmland tax bills in 2022? The base rate of farmland will almost certainly fall again, but by a much smaller amount. Corn and soybean prices are down this year. That data will enter the base rate calculation for 2021, to be used for tax bills in 2022. My colleague Tamara Ogle and I used projected figures for 2020 in the formula, and came up with $1,230 as the base rate for 2022. You can see our forecast in the October Purdue Agricultural Economics Report.

That’s a 4 percent drop in the base rate. This year 327 tax rates went up by more than 4 percent, about 15 percent of the total. If 2022 is similar, most farmland owners will see tax bill decreases, but it won’t be uncommon for tax bills to rise, either.

But maybe tax rates won’t change in 2022 like they did this year. The reason is the COVID recession. Property prices tend to fall in recessions, new construction tails off and new equipment purchases are put on hold.  All those things would reduce the growth of assessed value for taxes in 2022.

If assessed values grow slowly or decline, tax rates are likely to rise more than usual. After the Great Recession of 2007-2009, assessed values fell in two-thirds of the counties, in at least one year. Assessments in the state as a whole fell in both 2011 and 2013.

The Great Recession began in the housing market, and both home construction and home prices fell a lot. That reduced home assessments. This time, though, home building permits and home prices are up from a year ago. Construction employment dropped in April but has almost recovered since then.

Maybe home assessments won’t fall this time. Maybe commercial assessments will. Business at restaurants is down, and the demand for office space is reduced. That could depress commercial property prices and construction, and assessed value.

What will happen in 2022? We’ll see. Predictions are hard, but as Yogi said, “You can observe a lot just by watching.”