Issue Position: Agricultural Property Tax Calculation
Issue Position
The DLGF sets the Base Rate for all Agriculture property. This Base rate changes every year as part of the trending of assessed values which we call: Annual trending with the capitalization formula. The calculations use a six-year rolling average. 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 2001 will affect taxes paid in 2010, for example. This also means that the change in the base rate depends on a comparison of the year that is dropped (2001 for taxes in 2011) and the year that is added (2007 for taxes in 2011). The base rate increases from $1,250 to $1,400 in 2011 because both cash rents and net operating income were higher in 2007 than they were in 2001, and the capitalization rate was slightly lower in 2007 than in 2001. The data used to calculate the base rate for taxes in 2011 were from 2002 through 2007. We know most of these numbers through 2009. This means we should be able to predict changes in the base rate for taxes in 2012 and 2013.
Currently there is a house bill being proposed in 2010 to change this trending. The proposed formula is sometimes called the "Olympic average," because it drops the highest and lowest values from the six-year average, and uses the remaining four years. Had this method been used for taxes in 2010, the base rate would have been $1,180 instead of $1,250, a 6% reduction. The base rate would have been the same for 2011 taxes under either formula. The low use value dropped would have been $890 from 2002, and the high would have been $1,914 from 2007. These two figures are above and below $1,400 by almost the same amount, so they wouldn't change the base rate average.
The base rate for taxes in 2012 would be $1,590 under the Olympic average, instead of $1,700. That's 6% lower. It's lower because the use value for 2008 is dropped, and that was the year of the very high commodity prices. The Olympic average base rate in 2013 would be $1,750 instead of $1,810, 3% lower. This recalculation of the base rate would reduce farm land tax bills a little bit, but would shift taxes to other taxpayers, mostly homeowners.
HB-1004 also limits year-to-year property tax bill increases for all taxpayers to the inflation rate as calculated by the consumer price index. Though it depends on fluctuations in oil prices, this inflation rate is likely to be less than 3% in the near future. This would have a sizable effect limiting farm land tax bills. It would also reduce property tax revenues for rural local governments by more than the existing tax caps.
How the base rate is calculated involves the following variables:
Land Rents
Yields
Commodity Prices
Interest Rates
If the 1st three are rising and the last variable is falling then you can expect an increased base rate. The capitalization rate used in the formula is an average of
the Chicago Federal Reserve Board's real estate loan and operating loan interest rates. Since Commodity Prices were high in 2007 and 2008 we can forecast a significant spike in the base rate.
Net Income for Cash Rented Land Net Income for Owner Operated Land
Land Rents Yield * Commodity Prices -- Input Costs
Capitalization Rate Capitalization Rate
50% 50%
=
Base Value for One Year
The individual farm is then assessed using:
Base Rate multiplied by the soil productivity factor (.5 to 1.28) and then the result can be adjusted by an influence factor (some acreage may experience flooding or forest coverage).
The Base Rate, Present and Future
The base rate has increased from $880 for taxes in 2007 to $1,400 for taxes in 2011, a 59% increase in four years. What's going on?
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.
We can be much more specific. Each recalculation of the base rate drops an earlier year and adds a later year. The change from pay-2010 to pay-2011, from $1,250 to $1,400, dropped data for 2001 and added data for 2007. The six year average includes numbers for 2002 through 2006 in both years. So, any change in the base rate results from differences in the numbers between the year that was dropped, 2001, and the year that was added, 2007.
Cash rent in 2001 was $102 per acre, and in 2007 it was $122. The capitalization rate was 8.00% in 2001; 7.94% in 2007. Net operating income was $61 per acre in 2001; $182 in 2007. The differences in each number helped increase the base rate--though the increase in net operating income had the biggest effect.
Yields for corn were nearly the same in 2001 and 2007, and yield for beans actually was less in 2007. Yields were not a cause of the increase in net operating income. The prices of corn and beans were much higher in 2007 than 2001. Variable costs also were higher in 2007, but this cost increase was not nearly enough to offset the price increases, so the contribution margins for corn and beans almost doubled.
Overhead costs were slightly lower in 2007. Government payments were down in 2007 compared to 2001. Overall, the net return to land almost tripled from $61 an acre in 2001 to $182 an acre in 2007. This figure is divided by the capitalization rate, which was almost the same in both years. The value in use for net operating income that was dropped from the 6-year average was $762 per acre. The value that was added to the 6-year average was $2,292. The base rate will increase for taxes in 2011 because between 2001 and 2007, mainly because the very large increase in corn and bean prices was not offset by the increase in variable costs.
The data used to calculate the base rate for taxes in 2011 were from 2002 through 2007. We know most of these numbers through 2009. This means we should be able to predict changes in the base rate for taxes in 2012 and 2013.
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