By Larry DeBoer | Purdue University
Farmland property taxes have been falling. Total property taxes paid by agricultural property owners fell 2.3% per year from 2017 to 2021, mostly because of lower farmland assessed values.
But farmland prices are rising. A Purdue Agricultural Economics survey showed that average farmland selling prices increased 12.5% from 2020 to 2021. Eventually, farmland assessed values will rise too.
Assessments of houses are based on their selling prices, but that’s not true for farmland. Farmland assessed values are based on a statewide base rate per acre, times a soil productivity factor, and for some acreage, minus an influence factor for characteristics such as frequent flooding.
Changes in the assessed value of farmland depend mostly on changes in the base rate. That’s the dollar amount per acre established each year by the state’s Department of Local Government Finance. It’s calculated with a formula that divides rents and net farm income by an interest rate. The formula uses the calculations from six years and drops the highest, then averages the remaining five. For taxes in 2022, the six years were 2015 through 2020.
You can see the DLGF’s calculations and all the data at www.in.gov/dlgf. Click on Assessments in the menu to the left, then on Agricultural Land Assessments.
The base rate increased a lot between 2008 and 2015, rising from $880 to $2,050 per acre, because of the increase in corn and soybean prices. They enter the numerator of formula as part of the net income calculation. Commodity prices peaked in 2013 and began to fall. Eventually that reduced the base rate. It fell each year from 2015 to 2021. The base rate for taxes in 2022 will be $1,290 per acre.
But commodity prices increased in 2021. The base rate formula will reflect that increase for taxes in 2023. That year the prices from 2015 will be dropped, and the prices for 2021 will be added. The DLGF’s data shows the average price of corn in 2015 as $3.86 per bushel. The average price in 2021 was $4.93, 28 percent higher. Soybean prices were higher too.
Drop the old lower prices, add the new higher prices, run the formula, and the base rate of farmland rises from $1,290 this year, to $1,500 for taxes in 2023. That’s a 16% increase.
The assessed value of farmland may not depend directly on farmland selling prices, but the same factors that influence the selling price also influence the base rate. Roughly speaking, selling prices and assessed values rise and fall together, with the base rate about two years behind.
The higher base rate means that tax bills for farmland owners will go up. If farmland assessments rise faster than other assessed values, farmers will pay a bigger share of total property tax revenue. There are complications, though. Indiana home values have been rising fast too, so the assessed values of homes will go up. That should offset part of the tax shift to farmers.
Taxable assessed values will rise faster than usual for 2022 taxes and likely keep increasing. A bigger tax base would increase the total revenues that local governments collect – except that Indiana imposes a maximum levy and restricts the increase of the maximum each year. The “maximum levy growth quotient” is based on how fast incomes rise, and it will be 4.3% in 2022. About three-quarters of all Indiana local governments set their property tax levies at or near the maximum. Those governments can’t increase their levies more than 4.3%, no matter what happens with assessment growth.
That means, if taxable assessed values grow faster than the maximum levy growth quotient, tax rates will fall. They won’t fall enough to reduce the tax bills of farmland owners (or homeowners), but most farmland tax bills won’t rise by the full 16% increase in the base rate.
Most owners of business land, buildings and equipment will see their assessments rise less than farmland and homes. Their tax bills will increase less and could even fall.
Farmland values are increasing, and that means the era of falling farmland taxes is over. Come 2023, farmland property taxes are likely to rise.
Larry DeBoer is a professor and extension specialist in agricultural economics at Purdue University.