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Capital Comments: Farmland Property Tax Misery Has Company

Farmland assessments for property taxes are going up.  So are home, rental housing and business assessments. Property tax misery has a lot of company.

Farmland assessments start with a base rate per acre. The base rate is a statewide number calculated each year by the Department of Local Government Finance. The base rate for taxes this year is $1,500 per acre, up 16 percent from $1,290 last year. The DLGF just announced that the base rate for taxes next year will be $1,900, a 27 percent increase. The base rate is adjusted for soil productivity and sometimes factors that reduce yields, to set the assessed value for each acre.

The base rate calculation is a capitalization formula. It effectively puts a fixed 8 percent in the denominator. That’s the capitalization rate. The numerator averages two measures of income, cash rent adjusted for property tax payments, and operating income, which is corn and soybean prices, times yields, minus costs. The base rate calculation averages data from the most recent six years, with the highest value not counted. The base rate for this year’s tax bill uses data from 2016 through 2021. Next year’s base rate uses data from 2017 to 2022. 

The big variations in this formula come from corn and soybean prices. The price of corn used in the calculation was under $4 per bushel from 2015 to 2020. Soybean prices were near $10 per bushel during those years. The six years of data used to calculate the 2022 base rate of $1,290 used those prices.

Commodity prices jumped with the pandemic. The corn price used by the DLGF topped $5 in 2021 and rose above $6 in 2022. The soybean price increased above $12 in 2021 and approached $14 in 2023.  The base rate calculation for 2023 tax bills dropped the lower 2015 corn and bean prices and added the higher 2021 prices. For 2024, the lower 2016 prices are dropped in favor of the higher 2022 prices. Including higher prices in the average causes the base rate to increase.

This means that the base rate most likely will continue to increase for tax bills in 2025. All that’s required is that commodity prices in 2023 be greater than prices were in 2017. The corn price was under $4 in 2017 and the soybean price was in the mid-$9 range. Needless to say, prices are higher now, so the base rate will rise for 2025. If prices don’t fall back to pre-pandemic levels, the base rate will continue to rise through 2028.

Property tax bills will rise for most farmland owners. But they may not rise as much as the increase in the base rate. That’s because other assessments are increasing too. The average taxable assessed value of homesteads—owner-occupied primary residences—has increased by 21 percent for taxes in 2023. Rental housing has an 18 percent increase, and business land and buildings are rising 10 percent. Only business equipment is rising slowly, at 2 percent.   

Property tax rates are recalculated each year by dividing local government levies by the assessed value of taxable property within their boundaries. The levy is the revenue that local governments intend to collect from the property tax, and most of it is limited by a state maximum. That limit increased by 5 percent this year. If taxable assessed value rises by more than that, tax rates will go down. Assessed values are rising a lot more than 5 percent almost everywhere. Tax rates won’t fall enough to erase the tax bill increase for most taxpayers. But tax bills won’t rise quite as much as assessed values.

Think of it this way: Local governments set an amount to collect from property taxes, then divvy it up among local property owners, based on the value of their property. Your share increases if the value of your property rises more than your neighbors’. If everyone’s property values increase at the same rate, shares won’t change. Tax bills would increase no more than the increase in the levy.

Farmland tax bills will increase, but so will tax bills of homeowners and landlords. Farmland owners will have a lot of company to share the tax bill misery.

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