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Most farm land owners in Indiana are seeing property tax increases this year.  Here’s the story.

Farm land is assessed based on its use value. Each acre starts with a base rate.  This dollar figure is multiplied by a productivity factor, which ranges from 0.5 to 1.28. Soil that’s better for growing corn gets a higher factor.  Some assessments are then adjusted by an influence factor.  Land that floods every other year has its assessment reduced by 50%, for example. 

This is “use value” because the only thing that counts is productivity.  Farm land in rural Warren County or downtown Indianapolis is valued the same way, even if it could be sold for tens of thousands of dollars for development.  This is a tax break for farmers whose land borders residential or business development.

In the last two reassessments, for taxes paid in 1990 and 1996, the base rate of a farm acre was set at $495.  Why $495?  No reason, that was just the number negotiated between farm representatives and the state. 

On December 4, 1998, the Indiana Supreme Court found the state’s rules for assessing property unconstitutional.  They required that new rules be based on “objectively verifiable data” with “meaningful reference to property wealth.”  For most property that means assessing based on market value, the predicted selling price.

But the court also said that “assessment based upon value in use is a reasonable measure of property wealth.”  That means that farm land can still be valued at its productivity in agriculture, not its development potential. 

Pretty clearly, the method used to derive the $495 base rate wasn’t based on objectively verifiable data.  The state’s Department of Local Government Finance (DLGF) had to come up with a new way to set the base rate for 2003.

They used “income capitalization.”  They averaged cash rent and operating income for a typical acre.  For 1998 they got $96.50.  They divided this figure by a 9.1% rate of return.  The result was $1,060, which is what buyers will pay for an asset yielding $96.50 each year, if they expect to earn 9.1%.  DLGF did this calculation for 1995 to 1998, averaged the four results together, and got the new base rate, $1,050 

That’s way less than the average market value of farm land, which is more than $2,000 an acre, but probably it’s constitutional.  Use value is okay, says the court, and the method uses objectively verifiable data.  Still, $1,050 is a 112% increase in the assessed value of farm land.

Here’s what that means for a farm land owner in a typical place in Indiana, say, Jefferson Township in Newton County.  Suppose a farm acre has a productivity factor of one, with no influence factor, so it was valued at $495 for 2002 taxes and $1,050 for 2003.  In 2002 the tax rate was $2.94 per $100 assessed value.  Multiply by $495, and the gross tax was $14.55.  The state provided a property tax replacement credit (PTRC) of 15.15%, subtracted from the gross tax.  That leaves a tax bill of $12.35.

Now, for 2003, the tax rate is down to $2.14 per $100 assessed value.  Tax revenues have increased, but not as much as assessed value, so tax rates have fallen.  The rate times $1,050 gives a gross tax of $22.47.  PTRC is now 31.17%.  That’s higher than in 2002, because the General Assembly passed added tax relief in June 2002.  Subtracting PTRC gives a net tax bill of $15.47.  That’s a 25% tax hike, $3.12 for the acre.

We’ve got tax rates for more than a thousand taxing districts so far, and in half of them farm land tax bills go up by 25% or more.

Of course, farm land is not all of farm property.  In many places farm buildings, equipment and inventories should see tax reductions that will at least partially offset the land tax hikes. 

First there was good news.  The court let use value assessment stand.  Then came bad news.  Farm land taxes are up.  The news on the rest of farm property may not be good, but it probably won’t be as bad.