Indiana among Midwestern states seeking fairer property-tax formula for farm producers
Indiana Sen. 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. But she says a statutory revision made by the state legislature last year might at least help ease the pain for agricultural producers when it comes to paying their property taxes.
“The drop in net farm income again this year makes the changes Indiana made to the farmland-taxation calculation in 2016 even more important,” Leising adds.
In Indiana and seven other Midwestern states (Illinois, Iowa, Kansas, Ohio, North Dakota, South Dakota and Wisconsin), property tax valuations of farmland are built off a “base rate,” which, in turn, is determined by the land’s income potential. Most of these states also then use multi-year rolling averages to calculate the income potential. This framework for assessing agricultural land can prevent dramatic increases based on an isolated economic event, but it also has a potential downside for agricultural producers: While their net incomes may have fallen due to declining commodity prices or rents, for example, the valuation of their property is still including more-prosperous years when commodity prices were high and interest rates low. That is occurring right now in many of the region’s states, and has led to calls for tax relief of some kind.
The response in Indiana was last year’s passage of SB 308, which established a new system for setting the base rate. First, data from more-recent calendar years are being used to calculate the multi-year average, with the lag time having been reduced from four years to two. Second, Indiana lawmakers froze soil-productivity factors (a measure of the value of the land based on its soil type) at their levels for the year 2011. Third, and perhaps most important, assessing officials will be required to compare the calculated value to the existing rate, and if the annual change is greater than 10 percent, they will recalculate the value using an 8 percent capitalization rate.
“What the legislature did was stop the dramatic increase in farmland taxes that we would have seen for the next five years,” Leising says, “and make it better match current commodity prices.”
The Indiana law is expected to work in similar ways to laws in other states that restrict yearly changes in farmland assessments — 10 percent caps in Illinois and South Dakota, for example, and 4 percent in Iowa.
In Ohio, farmers have seen threefold increases in taxes over the last five years. Two years ago, the Ohio Department of Taxation reduced its three-year lag in tax valuations to one year. That has slowed the increase in property taxes, but last year, the clock ran out on legislation introduced by Rep. Brian Hill (HB 398) to provide additional relief. That measure would have replaced the state’s current formula for assessing agricultural land with an alternative model designed to reduce tax burdens and lower the assessed value of land being used for conservation purposes.
“[We] want to see fair ag-land taxing before the taxes start shutting down Ohio’s farm operations,” says Hill, who will introduce the legislation again this year. In Ohio and Indiana, local officials have expressed concern that changes in the assessment formulas would shift tax burdens to residential property owners.