Farm Land Assessment for Property Taxes

Revised February 2011

Contents
Introduction
Use Value Assessment
The 1998 Supreme Court Decision
The Farm Land Assessment Calculation
The Base Rate
A History of the Base Rate
The Base Rate, Present and Future

Agricultural Assessments and Tax Payments
Property Tax Relief

 

Introduction
Farm land taxes have been rising in recent years, because of increases in farm land assessments. Farm land assessments have been going up, because the "base rate" of farm acreage has been rising. The base rate is the starting point for assessing farm land. It is recalculated each year as a part of the assessment "trending" process. The calculation includes data on land rents, corn and soybean yields, corn and soybean prices, variable and overhead costs, and interest rates. Increases in rents, yields, and especially commodity prices, and decreases in interest rates, account for the increase in the base rate.

The base rate per acre was $880 for taxes as recently as 2007. The base rate was $1,250 for taxes in 2010, is $1,290 for taxes in 2011. The state’s Department of Local Government Finance has announced that the base rate will be $1,500 for taxes in 2012.  If the base rate formula is not changed, data that are already available indicate that the base rate will be about $1,650 for 2013 taxes, and $1,770 for 2014 taxes. The base rate will have doubled in seven years. Farm tax bills have increased, and will continue to increase, as a result.

Links to More Information

To Find: Go To:
An archive of "Capital Comments" columns. Check November 2003, March 2005 and the January columns since 2007 for updates on farm land assessed values. The March 2010 column reports on a legislative reform of the base rate formula. Purdue Ag Communications website: Capital Comments archive
A handout including the tables and graphs from this webpage This website: Farm land assessment handout

 

Use Value Assessment
Most taxable property in Indiana is assessed at its “market value,” which means that assessments are meant to be predictions of the selling price of the property.  Like almost every state, however, Indiana assesses farm land based on its use-value in agriculture. Use-value assessment means that property is assessed based on its current use rather than its "highest and best use". Assessors define a property’s highest and best use as that which would provide the greatest return or most profits. In most cases agriculture is the highest and best use for land that is currently in agriculture. But sometimes, mostly where agricultural property is near developing areas, residential or business uses may be the highest and best use. Using the land for housing or business development instead of farming would bring a higher return to the land owner.

Farm land with development potential will sell for a higher price than if its highest and best use is agriculture. If this land were assessed based on market value, so that assessments were predictions of sales prices, the farmer would pay taxes on the land's development potential, not just its value in agriculture. Assessing based only on use in agriculture ignores the value of potential development. When the land has development potential, farm property taxes are lower with use-value assessment than market value assessment. Farm land is the only major category of property not assessed at market value.

Opponents of use value assessment might argue that market value assessment at highest and best use is appropriate for farm land. Wealth, they might say, can only be measured by a property’s potential selling price. A farmer owning land with development potential is wealthier than if agriculture was the land’s highest and best use. It is fair for a wealthier farmer to pay more in taxes. Supporters of highest and best use assessment also would argue that changing assessments with a property's use will influence the business decisions made by owners. Resources are used more efficiently when business decisions are made for business reasons, not to avoid taxes.

Supporters of use value assessment would argue that it is not fair for farmers to pay taxes on wealth that could only be realized if they left farming and developed the land. Further, they would argue that market value-based taxes on land with development potential could be so high as to force the farmer to sell the land for development. This could push land to “premature” development, accelerating the expansion of urbanization at the urban-rural boundary. Use value assessment has sometimes been supported by "open space" advocates, as a tool against “suburban sprawl.”




The 1998 Supreme Court Decision
On December 4, 1998, in the Town of St. Johns case, the Indiana Supreme Court found the state’s rules for assessing property unconstitutional. They required that new rules be based on “objectively verifiable data” (p. 13 and throughout the decision) with “meaningful reference to property wealth (p. 21).” For most property that means assessing based on market value, the predicted selling price. This was the ruling that made the 2002-03 property reassessment so wrenching for taxpayers Assessed values were changed a lot with the shift to market value, so tax payments changed a lot too..  The General Assembly and Governors struggled through the 2000’s to respond to this ruling.  Eventually it led to the big tax reform of 2008 and the Constitutional amendment on property tax caps in 2010.

However, the court also said that “focusing upon the taxpayer’s actual use of land and improvements, rather than the possible uses which potential purchasers may choose, is an altogether appropriate way to evaluate property wealth for the purpose of assessment and taxation. . . ” (p. 19 of the decision). This means that use-value assessment is constitutional.

Sometimes residential property has a "highest and best use" more valuable than its use for housing. Residential neighborhoods near expanding commercial developments are an example. Sometimes commercial or industrial property might be more valuable in some other use, for example when old lakefront factories are converted to recreational use. The court found that in these cases, the residential, commercial or industrial property could be assessed based on its current use rather than its potentially more valuable use.

Such cases are rare. Development most frequently occurs where farm land is put to new uses. The court's approval of use value assessment was most significant for farm land assessment.

It’s hard to anticipate how the Court will rule on any particular issue, and the author of this essay is not an attorney.  Still, the fact that use value assessment is constitutional probably should not be taken to mean that “anything goes” for farm land assessment.  The use value calculation that Indiana uses is based on a method for measuring property wealth, and it is based on objectively verifiable data.  Changes in the calculation that place arbitrary limits on the data or calculations might be vulnerable to challenge.

Links to More Information

To Find: Go To:
The text of the Indiana Supreme Court decision in the St. Johns case, December 4, 1998. This website: St Johns Court decision

 

The Farm Land Assessment Calculation
Use value assessment of farm land in Indiana works like this. Each acre starts with a base rate, which is the same everywhere in the state. For a decade prior to 2003, the base rate was $495 per acre. For taxes in 2003 through 2005, it was $1,050. In 2006 and 2007, it was $880. The base rate increased to $1,140 for 2008 taxes, to $1,200 for 2009 taxes, and to $1,250 for taxes in 2010.  It will be $1,290 for taxes in 2011, and $1,500 for taxes in 2012.

The base rate is multiplied by a soil productivity factor, which was developed by soil scientists (agronomists) to reflect the typical crop yield of the soil type. Soil types have been mapped by the U.S. Department of Agriculture for every county. These soil types have been divided further by agronomists to identify surface texture, slope and erosion. Boundaries between these detailed soil types have been drawn on aerial photographs. As a result, each acre of farm land in Indiana has been assigned a soil type. About 30 years ago agronomists estimated the typical corn yields of the various soil types, and these were turned into productivity indexes. The most productive soil has the highest index, about 1.28, and the least productive soil has the lowest index, about 0.50.

To calculate the assessed value of a farm acre, the base rate of $1,290 (for 2011 taxes) is multiplied by the productivity factor assigned by the acre’s soil type. The result is called the “adjusted rate,” which is then adjusted further by an “influence factor.” Influence factors are percentage deductions that account for features of the land that reduce productivity. For example, tillable land subject to damaging floods five or more years in every ten receives a 50% influence factor deduction. Non-tillable land covered with brush, scattered trees or other natural impediments receives a 60% influence factor deduction.

The result of this calculation, base rate times productivity index less influence factor, is the assessed value of farm land. For taxes in 2011, with the $1,290 base rate, the maximum possible assessed value for 2011 taxes is about $1,650, using the maximum productivity index with no influence factor. The minimum is about $130, using the minimum productivity index and the maximum 80% influence factor.

Special programs exist for other lands. Classified forest land, wildlife habitats and windbreaks may be assessed at one dollar per acre.

This assessment method is “use value” because, in any year, the main thing that makes the assessed value of one acre differ from another is productivity. Farm land in rural Warren County or downtown Indianapolis is valued the same way, even if the city land could be sold for tens of thousands of dollars for development.

Links to More Information

To Find: Go To:
The Indiana Department of Local Government Finance Guidelines for assessing agricultural land. DLGF website: Assessment Guidelines, Valuing Agricultural Land (see Book 1, Chapter 2, pp.98-120)

 

The Base Rate
The assessment of a farm land acre starts with the base rate. Each year the base rate value is recalculated using an income capitalization method. This recalculation is known as "trending."

The income capitalization method divides the net rent or income earned on an asset by a rate of return or interest rate, called the capitalization rate. The result is an estimated sales price, the price an investor would pay to achieve a rate of return comparable to rates earned on other assets. If, for example, a property earns $100 per year in rent, and an investor expects a rate of return of 5%, he or she would offer up to $2,000 for the property. A 5% return on a $2,000 investment is $100. This approach is one of the three recognized methods of market value assessment, along with sales comparison and cost less depreciation.  This is why the use value calculation may be considered to have “meaningful reference to property wealth,” as the Indiana Supreme Court requires.

The income capitalization method is used in most states to estimate farm land values. The general form of the use-value method is:

Use-Value = Net Income from Agriculture / Capitalization Rate.

This is a calculation of use value in agriculture because it considers only the income that can be earned from growing and selling crops. Potential income from other uses is excluded. If potential income from the highest and best use was estimated and included in net income, the equation would produce an estimate of market value.

Table 1 shows the calculation of the $1,290 base rate done for 2010 pay 2011 (which means the assessed value in 2010, on which taxes in 2011 are based), and the $1,500 base rate done for 2011-12. The method capitalizes cash rent net incomes and operating net incomes for each of six years, then averages the two results to get an average market value in use.  The highest value of the six is dropped, and the remaining five are averaged.  The result is the base rate. 

Table 1

Cash rent is taken from the Purdue Agricultural Economics Report on land values and rents, less an estimate of average property tax payments per acre by the Department of Local Government Finance. Net operating income requires an elaborate calculation based on prices, yields and costs (see below). The capitalization rate is an average of the real estate loan and operating loan interest rates, tabulated by the Chicago Federal Reserve Board. The net income from land is divided by the capitalization rate to give the market value in use. The cash rent and operating results are averaged, the highest value is dropped, and the average of the remaining five years, rounded to the nearest ten, is the base rate.

The calculations use data for six years. This is done to smooth out wide fluctuations in the base rate (consider the jump from $1,407 to $1,882 and back to $1,170 from 2003 to 2005, for example). This means that farm income and capitalization rates from long ago still influence the base rate today. Data for the year 2002 will affect taxes paid in 2011, for example, and the high value for 2008 will influence the base rate through 2017. This also means that the change in the base rate depends on a comparison of the year that is dropped (2002 for taxes in 2012) and the year that is added (2008 for taxes in 2012). The base rate increases from $1,290 to $1,500 in 2012 because both cash rents and net operating income were higher in 2008 than they were in 2002, and the capitalization rate was lower in 2008 than in 2002.  The 2008 average was so high that it became the new result to be dropped, but that meant that the previous high value from 2007 entered the calculation.   

Net operating income is calculated from data on yields, prices and costs. Tables 2 through 4 show an approximation of these calculations, organized for clarity. Differences in rounding make these calculations slightly different from the actual results obtained by the Department of Local Government Finance.

Table 2

Yield per acre for corn and soybeans is taken from the National Agricultural Statistical Service (NASS), Indiana section data. Average price per bushel of corn and beans is the average of the November price, the average annual price, and the average market price. These data are also obtained from the NASS

The product of yield and price is average gross income (errors are due to rounding). Variable costs come from the Purdue University Crop Guide. The Average contribution margin is sales less variable costs.

Table 3 shows the calculation of overhead costs

Table 3

Overhead includes machinery costs, drying and handling, family and hired labor and property taxes. The data for all but property taxes come from the Crop Guide. The Department of Local Government Finance uses its own data to calculate the average property tax per acre of farm land. The figure for 2010 is an estimate made by the author.

Table 4 brings this operating data together with government payments and the capitalization rate, to calculate the use value of land.

Table 4

Government payments per acre are calculated using total direct government payments, less milk payments, divided by total crop land acres. Again, data are from the IASS. The total contribution margin takes the sum of the corn and beans contribution margins and government payments, and divides by 2. The net return to land is the total contribution margin less overhead costs. The capitalization rate is from the Chicago Federal Reserve Board. The net return to land is divided by the capitalization rate to give the value in use.

The results of these calculations track closely the market value in use, operating figure in Table 1, but they are not exact. The DLGF uses a different ordering of these calculations, which produces small differences due to rounding. An example of the DLGF's exact calculations are available on their website, under agricultural land reference materials.

Links to More Information

To Find: Go To:
The Indiana Department of Local Government Finance reference materials for valuing agricultural land. DLGF website: Reference Materials for Valuing Agricultural Land
Indiana agricultural statistics, in the Annual Statistical Bulletin from the USDA, the source of much of the annual price and yield data used in the operating income and base rate calculations. USDA website: Indiana Annual Statistical Bulletin
Indiana agricultural statistics, monthly updates of price and yield data. USDA website: Indiana Ag Reports
Annual surveys of farmland values, in the Purdue Agricultural Economics Report, including the data on cash rents used in the capitalization calculations. Purdue Department of Agricultural Economics website
Purdue Crop Guide, a source of additional data used in the operating income calculations. Purdue Department of Agricultural Economics website
The farm real estate and operating loan interest rates used in the capitalization rate calculation. Chicago Federal Reserve Bank website: Agricultural Conditions (click on "Latest Edition" then "Download Entire Publication" at lower left)

 

A History of the Base Rate
Prior to the 2002-03 reassessment, the base rate was set by the State Tax Board (the predecessor to the Department of Local Government Finance), in consultation with an agricultural advisory council, composed of agricultural leaders, state and local officials, and others. Essentially, the base rate was a number negotiated by the interests involved, the assessors and the farmers. The base rate was set at $450 per acre during the 1979-80 reassessment, raised 10% to $495 with the 1989-90 reassessment, and left at $495 with the 1995-96 reassessment.

Though it was never explicitly tested in court, it seems unlikely that this method would pass the court's tests of “meaningful reference to property wealth” using “objectively verifiable data.” The Department of Local Government Finance abandoned the "negotiated" method for the 2002-03 reassessment, and began using the capitalization method.

The capitalization method was a modification of a method developed by two Purdue agricultural economists (their memo to the old Tax Board is available in the DLGF documentation.) The capitalization calculation used a four year average with data for 1996-99, which gave a base rate of $1,050.

This rate was more than double the then existing base rate of $495, and caused a large jump in farm land property taxes in 2003. An analysis of that reassessment showed that the base rate increase caused tax payments on agricultural business real property (farm land and structures) statewide to rise by 15.5%. Increases in some counties were much greater, in others it was less. Reassessment increased assessed values, but decreased tax rates, which is why the increase in farm land taxes was so much smaller than the increase in farm land assessments.

In 2001 the General Assembly passed a law (P.L. 198-2001) to require assessors to update property assessments every year. Indiana Code 6-1.1-4-4.5 reads (in part), "the department of local government finance shall adopt rules establishing a system for annually adjusting the assessed value of real property to account for changes in value in those years since a general reassessment of property last took effect." The idea is to update real property assessments each year, to meet the court's requirement that assessments bear "meaningful reference to property wealth." These annual updates are known as "trending" when applied to residential and business land and structures. Trending is not a reassessment, with inspections of every parcel of property in the state. It's just a tweaking of the assessment formulas so that assessed values keep up with changing market values.

Trending means that farm land assessments are updated every year along with assessments of other land and buildings. The adjustment of farm land values is easily done. The Department of Local Government Finance merely recalculates the base rate using updated yields, prices, costs and interest rates.  It announces the recalculated value each year, usually at the end of December, for the following assessment year.  A memo from December 2010 announced the $1,500 base rate for trending in 2011, which will be used for taxes in 2012.

Annual updates were scheduled to take effect for the March 1, 2005 assessment date, affecting tax bills in 2006. The DLGF issued a memo on January 7, 2005, certifying a new base rate of $880. This was a 16% decline in the farm land base rate, from the old value of $1,050. The new base rate would be used in the base rate times productivity factor less influence factor formula for each farm acre in the state. This would update farm land values. Unless (somehow) an acre's productivity or influence factor changed, the acre's assessed value would drop, and so would farm land tax bills in 2006.

However, it became clear that Indiana assessors were not ready to do annual updates for all real property. Updates had never been done before, the regulations governing updates had been finalized only in December 2004, and some counties were still trying to catch up with the assessment calendar after the difficulties of the first market value reassessment of 2002-03. The possibility of another delay in assessments loomed, with local governments again scrambling to fund their services without property tax collections.

The General Assembly addressed this problem by postponing the starting date for annual updates to March 1, 2006, for taxes payable in 2007. This was accomplished during the 2005 legislative session, in Senate Bill 327, which became Public Law 228 when it was signed by the Governor.

Naturally, the prospect of postponing the update distressed farm land owners. Farm land assessments were scheduled to drop by 16%, which would reduce the tax bills for most owners. Senate Bill 327 recognized this problem, too. Section 34 of that bill read, "for the property tax assessment of agricultural land for the assessment date in 2005 and 2006, the statewide agricultural land base rate value of eight hundred eighty dollars ($880) per acre is substituted for the statewide agricultural land base rate value of one thousand fifty dollars ($1,050) per acre. . . ." In other words, the annual update was postponed for all property except farm land. Farm land's first annual update would take place in 2005, for 2006 taxes. And, for good measure, the base rate was frozen at $880 in assessment year 2006, for 2007 taxes. The bill also required the DLGF to use a six-year rolling average of yields, prices, costs and interest rates, instead of the four years that had been used in past calculations.

Freezing the base rate at $880 for 2007 taxes turned out to be a tax break for farmers. Had DLGF recalculated the base rate for that year, it would have been about $1,040, an 18% increase over $880. Farm taxes were lower in 2007 than they would have been had the base rate been recalculated. However, this made for an even bigger jump the next year, when updates of the base rate resumed. In 2007 the DLGF set the base rate at $1,140, for taxes payable in 2008, a 30% increase over $880 (and a 10% increase over $1,040).

The base rate rose to $1,200 for taxes in 2009, to $1,250 for taxes in 2010, and to $1,290 for taxes in 2011. But much bigger increases loomed. Corn prices were especially high in 2007 and 2008. A spike in oil prices increased the demand for ethanol, which increased the demand for corn. At the same time, the Federal Reserve responded to the 2007-09 recession by reducing interest rates. Farm loan rates fell with most other rates. The higher net incomes, and the lower interest rates, produced very high capitalized values for 2007 and 2008. The 2008 value was particularly high at $2,508 per acre.

The 2007 value was to be added into the six-year rolling average for the first time for 2011 taxes. The base rate would have increased to $1,400. The DLGF issued a memo with this figure in December 2009. The base rate for taxes for 2012 would include the very high 2008 capitalized value. The base rate was projected to increase to $1,700. The base rate for 2013 taxes was projected at $1,810. The base rate had been $880 for 2007 taxes, $1,250 for 2010 taxes. The 2013 value would have been a 106% increase over six years, and a 45% increase over three years.

The General Assembly responded with Senate Bill 396-2010, which proposed a change in the base rate formula. The original version of the bill dropped the highest and lowest capitalized values and averaged the remaining four, so it was called the “Olympic average.” It would not have changed the base rate for 2011, since the high and low values to be dropped were equally distant from the average of $1,400. But it would have reduced the 2012 value to $1,590 (from $1,700), and the 2013 value to $1,750 (from $1,810). The bill passed the Senate unanimously.

Perhaps because the bill had so much support, it became a vehicle for anti-recession jobs legislation in the House. It was amended eight times. What had been a bill with two sections was now a bill with 53. It passed the House unanimously.

The two versions of the bill went to a House-Senate conference committee, where all of the jobs sections were stripped from the bill. What was left, however, was a bit different. Now the new base rate formula eliminated just the highest capitalized value, and averaged the remaining five. The Senate held the bill until negotiations on unemployment insurance taxes reached a compromise. It passed on the last day of the session, and the Governor signed it on March 25 (as Public Law 112). It amended Indiana Code 6-1.1-4-4.5. The DLGF immediately issued a memo revising the base rate for 2011 taxes to $1,290, just 3% higher than in 2010 (instead of 12%).

The figure shows the how the new formula established in SB396 changed the projected base rates, compared to the old six-year average.  It includes projections through 2014.

Of course, even with this new formula the base rate had to increase for taxes in 2012.  The very high 2008 capitalization result entered the calculation for 2012 taxes.  It became the dropped value, which mean the previous dropped high value from 2007 was now included in the average.  In addition, the very low 2002 capitalization result was dropped from the six years.  The base rate will increase 16% from $1,290 to $1,500 for taxes in 2012.  This is lower than it would have been without the 2010 reform, but higher than it was for taxes in 2011.

 

Links to More Information

To Find: Go To:
The original 1999 memo describing the capitalization method, included with DLGF's ag land assessment materials (see pp. 10-14). DLGF website: Reference Materials for Valuing Agricultural Land, March 1, 2011 (caution--large file)
The Legislative Services Agency's analysis of tax shifts caused by reassessment and restructuring since 2002, including the effects of the base rate increase on agricultural taxes.

LSA website: Indiana County Property Tax Reassessment Studies

The Indiana Code citation that requires annual updates of assessed values, IC 6-1.1-4-4.5.

Indiana General Assembly website: Indiana Code, IC 6-1.1-4

Information about Senate Bill 327-2005, which delayed annual updates but set the farm land base rate at $880 for taxes in 2006 and 2007. Indiana General Assembly website, 2005 Archives
Information about Senate Bill 396-2010, which revised the base rate formla, dropping the highest value from the six-year average. Indiana General Assembly website, 2010 Archives


The Base Rate, Present and Future
The base rate has increased from $880 for taxes in 2007 to $1,500 for taxes in 2012, a 70% increase in five years. What's going on?

The figures in Tables 1 through 4 tell the story. Cash rents are rising. So is the net operating income calculation. The capitalization rate is falling. The numerator of the capitalization formula is increasing; the denominator is decreasing, and that means the result--the base rate--must rise. The increase is less now that the highest value is dropped from the average (starting with 2011 taxes). But it's still a sizable increase.

Recall that for the base rate used for taxes in 2012, the data for 2002 left the calculation and the data for 2008 were added.  The 2008 result became the high value to be dropped, so the 2007 value entered the calculation.  The base rate change results from a comparison of the 2002, 2007 and 2008 values.  Because the 2007 and 2008 results were so much higher than the 2002 result, the base rate increased.

Rising net incomes are putting upward pressure on the base rate. Table 1 shows that cash rent in 2002 was $105 per acre, in 2007 it was $122, and in 2008, $140. The capitalization rate was 7.02% in 2002; up to 7.94% in 2007, but down to 6.56%. Net operating income was $20 per acre in 2002; $184 in 2007 and $189 in 2008. This increase in net operating income will have the biggest effect on the base rate.

The difference in net operating income can be analyzed in detail using tables 2 through 4. The yield for corn was particularly low in 2002, and higher in 2007 and 2008. The yield for beans was lower in 2002 than in 2007 and 2008 as well.  Rising yields contributed some to the increase in net operating income.  The prices of corn and beans were much higher in 2007 and 2008 than in 2002. Variable costs also were much higher in 2008, but this cost increase was not enough to offset the price increases, so the contribution margins for corn and beans almost doubled.

Overhead costs were higher in 2007 and 2008, mostly due to the costs of machinery and labor. Government payments were about the same in 2007 and 2008 as 2002. Overall, the net return to land increased more than nine-fold from $20 an acre in 2002 to $189 an acre in 2008. This figure is divided by the capitalization rate, which was higher in 2007 but lower in 2008, compared to 2002. The base rate will increase for taxes in 2012 mainly because the very large increase in corn and bean prices was not offset by the increase in variable and overhead costs. 

The data used to calculate the base rate for taxes in 2012 were from 2003 through 2008. We know most of these numbers through 2010. This means we should be able to predict changes in the base rate for taxes in 2013 and 2014. Table 5 shows these calculations.

Table 5

The base rate calculation for 2012 pay 2013 will drop numbers from 2003 and add numbers from 2009. Cash rent was higher in 2009 compared to 2003.  Operating net income was much higher in 2009, mostly due to low yields that year, and was $221 in 2008, due both to higher yields and prices (see Table 2). The capitalization rate was only slightly lower in 2009 than it was in 2003. The 2003 capitalized value eliminated from the calculation will be $1,407; the capitalized value to be added will be $2,131. The base rate will rise from $1,500 for 2012 taxes, to $1,650 for 2013 taxes, a 10% increase.

For the pay-2014 base rate, numbers from 2004 will be dropped and numbers from 2010 will be added. Operating net income for 2010 is very high, due to high prices and yields, and the capitalization rate is low. The 2010 value will be highest of the six, so it will be dropped.  But that means the previous high, $2,508 for 2008, enters the average.  The value eliminated from the five-year average is a high one, $1,882 from 2004, but the number that enters, $2,508 from 2008, is higher still.  The base rate will rise to about $1,770 for 2014 taxes, up 7.3% from 2013.  This will mean that the base rate for taxes will have just about doubled between 2007 and 2014, and increased 37% from 2011 to 2014.

The base rates for taxes in 2013 and 2014 are not official. But they must be pretty good predictions because the data on which they are based are (mostly) already known. All of the data for 2009 are known. For 2010, the Government Payments figure is estimated based on past trends.  The actual figure may differ from that in Table 2, once it is known.  The 2010 property tax figure is also an estimate, based on Legislative Services Agency data on farm land tax payments in 2009.  Data for 2010 on prices and yields may be revised. Still, we know enough about 2010 to be sure that the formula will produce another increase in the base rate for taxes in 2014.

 

Agricultural Assessments and Tax Payments
Changes in assessed values change tax payments. In Indiana, the local tax levies for the most part are controlled by state rules. Assessment increases, then, tend to reduce tax rates. Whether taxpayers see increases or decreases in property taxes depend on how much the assessed value of their property rose, compared to how much the tax rate fell. When the assessment increase is bigger the tax bill is more likely to increase.

This means that when the base rate goes up, tax bills on farm land are likely to rise more in urban counties than in rural counties. The reason why in shown in the example in Table 6. Farm land is a large share of total assessed value (A.V.) in rural counties--in some, like Benton County, around 40% of the total. Farm land is a tiny share of total assessed value in urban counties. It's only about 3% of A.V. in Tippecanoe County, for example. So, when the base rate rises, total assessed value increases substantially in rural counties. The base rate increase has little effect on A.V. in urban counties.

Table 6

 

In Table 6, if assessments of farm land rise 30% (as happened in 2008), but assessments of other property rise just 2%, total assessed value in the rural county rises 13%, but only 3% in the urban county. If the tax levy rises 5% in both, then tax rates will fall about 8% in the rural county (the 5% levy increase minus the 13% A.V. increase), while rates will rise 2% in the urban county. The 30% farm land assessment increase in the rural county produces "only" a 22% increase in taxes per acre in the rural county, because the tax rate fell. In the urban county, the tax rate rose, so the farm land tax increase is 32%.

The 2007-2009 recession may affect farm land taxes in 2011 and 2012. The recession has caused reductions in the market values of houses and businesses in many communities. With correct trending, lower home values in 2009 will mean lower assessments in 2010, which will affect tax bills in 2011. Farm land assessments will be rising while other property assessments may be falling.

In Table 6, "Other A.V." would decrease, rather than increasing 2%. The increase in total A.V. would be smaller, and the tax rate would decrease less or increase more. This would mean bigger tax bill increases for farm land owners.

 

Property Tax Relief
The big tax reform of 2008 created new property tax caps, which were voted into the Constitution in the November 2010 referendum. Tax bills on farm land are limited to 2% of gross assessed value in 2010 and after. Gross assessed value is the assessed value before deductions. Since farm land rarely gets deductions, it's the result of the base rate times productivity factor less influence factor calculation. An acre with a productivity factor of one and no influence factor would be assessed at the base rate. In 2011 the base rate of $1,290 means the tax bill on such an acre would be capped at $25.80 (2% of $1,290).

Few farm land owners will benefit from the tax caps. This is because most farm land is in unincorporated areas (outside cities or towns), and so tends to have lower tax rates. Almost all tax rates outside of cities or towns are less than $2 per $100 assessed value.  Almost all farmland tax bills are less than 2% of gross assessed value. 

The tax caps will not reduce the coming increase in property tax bills on farmland, because they result from increases in the base rate.  This raises the gross assessed value of farm land, and since the caps are calculated as a percentage of gross assessed value, the caps rise with the base rate.  If the base rate is $1,770 for taxes in 2014, the 2% limit will cap the tax bill at $35.40. And, in rural areas, the rising assessed values of farm land will reduce tax rates (or slow tax rate increases). Farm land owners in counties with particularly high rates may see their taxes limited by the tax caps. Most farm land owners will have tax bills too low to be affected by the caps, even as their tax bills rise with the rising base rate.

 

When tax bills exceed the tax caps, taxpayers receive tax cap credits. The volume of credits is a measure of the degree to which taxpayers have tax bills limited by the tax caps. Data for 2010 showed that only 0.5% of all tax cap credits went to owners of farm land (see the pie chart above).

 

Links to More Information

To Find: Go To:
Legislative Services Agency's analysis of the effect of the tax caps on taxpayers by property type, including agriculture

LSA website: Indiana County Property Tax Reassessment Studies (see "Property Tax Impact Reports")