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Farmland Taxes Under Discussion in the Midwest Again

Senator Jean Leising knows it’s going to be another tough year for beef and hog producers, and 2016’s record national yields for corn and soybeans indicate that farm profitability will decline for the third straight year.  She is convinced that “the drop in net farm income again this year makes the changes Indiana made to the farmland taxation calculation in 2016 even more important.”  

In Illinois, Indiana, Iowa, Kansas, Ohio, North Dakota, South Dakota and Wisconsin, property tax valuations are based on a base rate which is determined by the income potential from the land using a calculation that includes commodity prices, yields, land rents and costs in the numerator and the interest rate in the denominator. Most of the states also then use multi-year rolling averages for the income potential from production agriculture in an attempt to prevent dramatic increases based on an isolated economic event. 

This means that if commodity prices and rents rise rapidly for a couple years, and then level out or fall, the annually assessed valuation may still increase for several years until the highest values are removed from the average. (The reverse is true as well, decreasing commodity prices eventually drop farm taxes). Increasing commodity prices through 2013 and historically low interest rates have pushed the base rate for farmland taxes up dramatically, even when compared to other classes of land.  Some states, specifically Illinois and South Dakota (10 percent), and Iowa (4 percent) have statutory caps in place to control year to year changes in assessed values and therefore, taxes. 

But in Ohio, farmers have seen three fold increases in taxes in the last 5 years. The state is also under pressure from a lawsuit filed by Ohio landowners that say that Ohio’s tax valuation law requires rates to be determined according to different land use patterns, which include livestock, timberland and pastureland, not just cropland.  In November, the state’s motion to have the case dismissed was denied, and a trial date was set for February, 2018. 

In 2015, the Ohio Department of Taxation reduced a 3 year lag in tax valuations to 1 year, which slowed the increases, but last year the clock ran out on legislation introduced by Representative Brian Hill that would have addressed the capitalization rate (slowing the increase) as well as reduce the tax burden for land used for conservation purposes.  Hill says he “wants to see fair ag land taxing before the taxes start shutting down Ohio’s farm operations,” therefore he will again introduce legislation this year. The Ohio legislation in 2016 was stymied by complaints from county auditors that the legislative change would cause a revenue shortfall, the same complaint that Indiana legislators heard in consideration of SB 308.

In Indiana, SB 308 for 2016 created a new system for setting the base rate for farm land for property tax purposes. The first change was to reduce the lag time for the data used in the formula from four years to two years (Ohio reduced theirs to one year), this change will hurry along the impact of large increases or decreases in commodity prices.  It also froze soil productivity factors at 2011 levels, but the big change came in the requirement for the assessing officials to take the calculated assessed values for each year and compare it to the existing rate, if the change was more than 10 percent, then the capitalization rate for each year in the formula would be changed to 8 percent, with this increase in the denominator of the formula, the final assessed value will be smaller. As a result, the base rate value for 2017 will be reduced to $1960 from $2987.  This works in a similar way to the statutory caps seen in Illinois and South Dakota.

 

Indiana Base Rate Value of Farmland

 Year

Old Formula

SB 308 Formula Adjustment

2007…

$  880

 

2016

$2420

$2050

2017

$2987

$1960

2018

$3060

$1770

2019

$2990

$1460

2020

$2820

$1290

2021

$2390

$1070

For both Ohio and Indiana, local officials expressed concerned that formula changes would cause a tax shift and tax burden to residential property owners, but Leising, chair of the Indiana Senate Agriculture Committee stresses that farmers have been hit disproportionally by tax increases since 2007, while homeowners saw a 30 percent decreases in taxes.  Another issue arises if local officials were counting on the dramatic increases in farmland tax income stream to continue, which wouldn’t have occurred even without the changes of SB 308. In practicality, the legislation only removed the 5 year lag in decreased assessed value that farmland would have seen in 2023 due to today’s low commodity prices.

In Nebraska, a 176 percent increase in the last decade in farmland tax rates and a shift in tax focus that reduces income taxes while increasing the reliance on property taxes is forcing the Governor and legislature to again look at farmland taxation.   Farmland in Nebraska is assessed for taxes at a percentage of market value, but Governor Pete Ricketts, through LB 338 sponsored by Senator Lydia Brasch, is proposing to assess it on income potential, and use the capitalization rate (interest rate) to modify any dramatic annual changes.  In 2015, the Nebraska legislature provided $408 million in direct dollar-for-dollar property tax relief over two years through the Property Tax Credit Relief Fund and in 2016 provided an additional $20 million annual in targeted property tax relief for agriculture producers.  

Minnesota uses the Green Acres program which calculates taxes on both the estimated market value and the agricultural value and then defers the difference until the property no longer qualifies for the Green Acres program. When the property is sold or no longer qualifies, the deferred tax (the difference between the agricultural tax and the tax based on highest use) for the current tax payable year and the two prior years must be paid to the county. Minnesota farmers have seen a 114 percent increase in taxes over the last decade, and Governor Mark Dayton has introduced a bill to include a 40 percent property tax credit for school capital project levy taxes for the 2018-19 fiscal years.