State Government and Banking & Finance and Government & Economic Development and Real Estate & Retail

Farmers seek rescue from unexpected property tax hit

January 12, 2013

Indiana farmers hope to avoid significant property-tax hikes by changing the way the state values their soil.

That could mean a major policy change. In the meantime, state lawmakers have filed bills that would indefinitely delay any soil-related tax increase. A temporary delay already has saved farmers an estimated $57.4 million that would have been payable this year.

Deboer DeBoer

The uproar centers on soil-productivity factors that are a key component of tax bills on farmland. New factors, issued last year by the Department of Local Government Finance, would have raised tax collections an average 18.5 percent this year, according to a Legislative Services Agency survey of 69 counties.

“Boy, when that memo came out, people noticed right away,” said Larry DeBoer, professor of agriculture economics and a property-tax expert at Purdue University.

The reaction from the farm lobby was especially sharp because the base tax rate on agricultural land has nearly doubled since 2007, from $880 per acre to $1,630 per acre. That’s because interest rates are low, and commodity prices have been at historic levels.

At the urging of Indiana Farm Bureau, the Legislature in 2012 pushed through a one-year delay. This session, Sen. Jean Leising, R-Oldenburg, and Rep. Don Lehe, R-Brookston, have filed companion bills that would make the delay indefinite.

The Department of Local Government Finance would have to get legislative approval before using a new soil factor.

“I think it needs a lot more study,” Leising said. “None of us really know where this came from.”

Gov.-elect Mike Pence thought the soil-factor issue was important enough to mention in campaign policy platform on agriculture. Spokeswoman Christy Denault said the incoming administration set up a working group to find a “permanent solution.”

Although DLGF issued the new soil factors, which are based on U.S. Department of Agriculture data, its officials aren’t pressing to put them into use.

“We’re sort of the middle man, so to speak,” said J. Barry Wood, assessment division director.

The farm bureau isn’t fighting the new soil factors just to avoid a tax hit. It also questions the USDA’s methodology and the validity of its data, said Katrina Hall, tax and local government specialist.

“If there are changes, we just want to make sure they’re based on sound science and sound math,” Hall said. She spent the summer researching the statistical origins of the soil-productivity index and how it’s changed over time.

Indiana added soil factors to its farmland tax system 30 years ago to make assessments fairer, based on the quality of the ground. The factors, which ranged from 0.5 to 1.28 before 2012, are applied to the base rate before producing the bottom-line assessment.

Soil factors are generally highest in counties northwest of Lafayette and lowest in southern Indiana. Ag real estate values follow the same general trend. (The soil factor assumes that a farm produces corn, which is typically the most valuable crop.)

The farm bureau contends that the USDA’s Natural Resources Conservation Service has changed its model from considering only the physical and chemical properties of soil to encompassing crop yields, which are also the result of new technology and management practices.

While yields have risen over the years, that trend is already reflected in the base property-tax rate, DeBoer said. With the new data, he said, “You’re essentially double-counting the increase in yields.”

The USDA updates its data periodically, and last year wasn’t the first time the state issued new soil factors. There was no controversy around the DLGF’s last update in 2007, Wood said, though he’s not sure why.

Hall said there wasn’t a noticeable change at that time.

The farm bureau wants to throw out the USDA’s model and develop a new one that’s narrowly focused on soil characteristics.

DeBoer thinks that would be fair because the point of using the soil index in the first place was to factor out farmers’ skills.

“You don’t want to penalize people with higher property taxes simply because they are good managers,” he said.

From a private-sector perspective, the updated soil data actually undervalues land, said Chad Metzger, director of auctions for Halderman Real Estate Services in Wabash.

“It’s the best of a bad situation. Farmers aren’t willing to divulge their yields,” he said.

DeBoer thinks Indiana could fix the soil-factor problem by tweaking the arithmetic.

The new soil factors, which range from 0.5 to 1.66, include one final calculation, which is to divide the USDA data by the statewide average crop yield.

It just so happens that 30 years ago, that number was 100 bushels per acre, which made the math simple, he said. Today it’s about 160 bushels per acre.

DeBoer thinks someone failed to apply the current average to the soil data, driving up the average soil factor.

“It looks like they just moved the decimal point over,” he said.•

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