Farmland Assessments: Is this the End of the Downward Trend?

Just after the new year Indiana’s Department of Local Government Finance announced the new base rate for farmland assessment. It was $1,280 per acre. The base rate is the starting point for setting the taxable value of farmland for the property tax, to be used for tax bills next year. The number was down considerably, from $1,560 for taxes this year. That should make for a sizable drop in property tax bills for farmland owners in 2021.

It’s the fifth straight year that the base rate has dropped. It was $2,050 for taxes in 2016. That’s a 38% decline in five years. But this rate probably marks the end of the downward trend. The base rate is likely to stabilize in the neighborhood of $1,300 during the next few years. Here’s why.

That $2,050 base rate in 2016 was the peak of a long upward trend. The base rate was $880 per acre for taxes in 2007 and 2008. Then the DLGF began trending, which means adjusting property assessments for changes in property values, year after year. Farmland assessments are based on a formula which takes account of commodity prices, rents, yields, costs and interest rates. As trending began, corn and bean prices went up and interest rates went down. Since prices are in the numerator of the formula, and interest rates are in the denominator, both changes caused increases in the base rate.

The base rate rose 133% from 2007 to 2016. Agricultural property taxes increased by about 68% during that period, at a time when total property taxes declined as a result of tax reforms and the new constitutional tax caps.

Of course, actual farmland selling prices were rising, and farm income was high during most of those years. The property tax is a tax on the value of property, after all, and property is valuable in part because of the income it generates. Taxes were up, but farm incomes were up too.  According to the U.S. Department of Agriculture, net farm income nationwide increased 116% from 2006 to 2013.

But there was a quirk in the base rate formula—a four-year lag between the latest data used in the calculation and the year taxes were collected. Commodity prices dropped in 2014, farm incomes were cut in half, but the base rate kept rising. It was expected to rise to about $3,000 per acre for taxes in 2018.

So the General Assembly froze the base rate in 2015 and 2016, then revised the formula. It reduced the four-year lag to two years (the shortest lag that the data allow), and limited the effect of low interest rates. The base rate stopped rising, and began to fall.

The base rate calculation uses the most recent six years of data, dropping the highest valued year and averaging the remaining five. Each year the latest available data on prices, rents, costs, yields and interest rates are added to the calculation, and the oldest year’s numbers are dropped. Since 2016, that means old years with high corn and bean prices were dropped, and years with lower prices were added. Drop a high value and add a low value, and the resulting average will decrease. The base rate has trended downward.

The base rate for taxes this year uses data from 2013 through 2018. The just-announced base rate for taxes next year drops the numbers from 2013, and adds the numbers for 2019. For 2021, the oldest prices in the calculation are from 2014. In addition, the 2014 value is the highest of six, so it’s not included in the average.

Prices fell in 2014. They were low in 2015. For the first time, all the data in the formula are from low price years.

Unless commodity prices rise, the base rate should remain near $1,300 per acre. The years of data we drop and the years we add will have similar low prices for corn and beans. Of course, variations in yields, rents, costs and interest rates will cause variations in the base rate. But those changes are just as likely to be increases as decreases, and they should be comparatively small.  Most likely, the downward trend in farmland assessments is over.

Author: Larry Deboer
Category: ,