December 1, 2009

High commodity prices cause tax increase on Indiana farmland

WEST LAFAYETTE, Ind. - Indiana farmers could see a substantial increase in property taxes over the next few years if the state's farmland taxation formulas remain unchanged, said one Purdue University expert.

"Indiana assesses farmland based on its use value rather than its market value," said Purdue agricultural economist Larry DeBoer. "Almost all states do this. It is a value based on how much income a farm acre can earn if it is used in agriculture. This means that farmland that borders on commercial or residential development is not assessed based on selling price, but rather only on the income it can earn from farming."

The government calculates farm property taxes with a formula that takes into account three separate factors.

"The formula starts with the base rate, which is a dollar amount per acre that is set by the state's oversight agency on property taxes," DeBoer said. "The base rate is multiplied by a productivity factor, which is based on soil productivity for growing corn. Those factors range from about 0.5 to 1.3. For some acreage an influence factor is subtracted. That factor is a percentage reduction in the dollar amount based on things like frequent flooding, grade or forest cover. So, base rate, times productivity factor, minus influence factor, gives you the dollar amount per acre that's actually taxed."

Where the problem comes into the formula is that commodity prices are accounted for when the base rate is determined.

"Since 2006 Indiana has been trending its assessed values, meaning changing every year based on changes in a whole host of factors like land rents, commodity prices, costs and interest rates," DeBoer said.

Land rents have been going up some, but commodity prices were high in 2007-2008. Since the base rate formula is a six-year rolling average with a four-year lag, taxes payable in 2011 will include the 2007 commodity prices, and 2012 taxes will include both 2007 and 2008 commodity prices.

The problem with this, DeBoer said, is that over a five-year period the farmland base rate per acre will have nearly doubled from $880 for taxes in 2007 to more than $1,600 in 2012. But there are potential solutions the Legislature can consider to offer some relief.

"They could reduce it from a six-year lag to four and that would make the two big years drop out two years sooner," he said. "They could also move it up from a four-year lag to a two-year lag. So, if they did both those things, they'd get those two big numbers out in about two years instead of about six."

In addition, DeBoer said some farm interest groups have suggested an Olympic-style average system in which the high and the low numbers are dropped and the rest are averaged.

Indiana recently passed a 2 percent farmland property tax cap that will be implemented in 2010. However, DeBoer said the cap won't be of much assistance to farmers because of their rural locations.

"The tax cap for farmland is 2 percent," he said. "What that means is that you take the initial assessed value per acre, apart from any deductions, multiply that by 2 percent and that is the maximum amount a farmer would have to pay in property taxes on that acre.

"That's terrific if you happen to be in a place where your tax rate is higher than $2 per $100 assessed value, or higher than 2 percent. However, most of the time, out in rural areas where farmland is found, tax rates are lower than the $2 limit."

Limiting farmland assessments is likely to shift taxes to other taxpayers, DeBoer said. That means that legislators representing primarily non-farming areas will want to have a say in the farmland assessment formula.

"The way homeowners and industry, urban and suburban counties respond to these measures is going to be important politically," he said. "If you reduce the assessed value of farmland in order to reduce taxes for farmers, and you raise the same amount of revenue from the property tax, that means somebody else has to pay more."

Writer: Jennifer Stewart, 765-494-6682, jsstewar@purdue.edu

Source: Larry DeBoer, 765-494-4314, ldeboer@purdue.edu

Ag Communications: (765) 494-8415;
Steve Leer, sleer@purdue.edu
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