Source: Purdue University
While high corn and soybean prices, increasing land values and growing incomes mean good economic times for grain farmers, the very factors raising farm income eventually will increase farm property taxes, according to Purdue University agricultural economist Larry DeBoer
"Farmland prices are rising, but that's not the reason property taxes will rise - at least not directly," DeBoer said. "Farmland is the one major type of property that is not assessed for tax purposes based on predicted selling prices, or market value."
Instead, farmland is assessed by a formula that starts with a base rate, or dollar value per acre, set by the Department of Local Government Finance. The base rate is then multiplied by a productivity factor that is determined by the soil's corn-growing ability. The productivity factor varies from about 0.5 to 1.3.
For some land, an influence factor is subtracted. The influence factor is a percentage reduction that accounts for conditions such as frequent flooding or forest cover.
Once the value of an acre of farmland is assessed it is then multiplied by the local property tax rate to determine the tax bill.
Where increases come into play is the base rate.
"The base rate is calculated using a capitalization formula, which takes the net income earned from an acre of farmland and divides it by a rate of return," DeBoer said. "This gives the amount a rational buyer would pay to acquire that net income at that rate of return."
Net income calculations are based half on the rent earned on an average Indiana acre and half on an estimate of operating income - determined based on corn and soybean prices and yields - and costs. The rate of return is determined using an average of real estate and operating loan interest rates.
The base rate is increasing because rents and prices are going up and interest rates have come down, DeBoer said. The base rate for this year's taxes were figured using price, yield, cost and interest rate data from the six years of 2002 to 2007. The calculation for taxes in 2012 will use data from 2003 through 2008. The base rate will change for taxes in 2012 because data from 2002 dropped from the calculation and data from 2008 were added.
"Rents, prices and yields were higher in 2008 than in 2002, so the base rate went up," DeBoer said.
The base rate for 2010 taxes was $1,250 and will be $1,290 for 2011. In 2012, the Department of Local Government Finance says the base rate will be $1,500, a 16 percent increase over 2011.
"We know the data for 2009 and have a good idea of the data for 2010, so we can project the 2013 and 2014 base rates with confidence," DeBoer said. "If the formula stays the same, the base rate for 2013 taxes will rise to $1,650 and in 2014 it will be $1,770. All together, from 2010 to 2014, that's a 42 percent increase."
Last year, the Indiana General Assembly changed the base-rate calculation so that the highest year of the six is dropped and the remaining five are averaged. Without the change, the 2014 base rate would have been $1,960.
Indiana residents in November voted property tax caps into the state constitution, but the caps limit tax bills to a fixed percentage of assessed value. If the assessed value increases, so do the caps. The rise in the base rate increases assessed values, so caps will not prevent a rising base rate from increasing farm taxes.
"Farmers may not get much sympathy from other Indiana residents," DeBoer said. "The rising tax bills result from the same factors raising farm incomes and property values. And in rural communities, if farmers pay more, homeowners pay less. Homeowners are the majority in every Indiana county.
"When times are good, perhaps the best advice for farmers is to hold some back for taxes, because taxes will go up - four years later."
DeBoer is author of a monthly podcast titled "Capital Comments" that includes commentary on public policy issues related to state and local governments in Indiana and national economic policy. The podcasts can be found in audio and print versions here
or can be downloaded for free on iTunes.