Indiana’s farmland owners will pay higher property taxes in 2014 on the heels of an increase in the base rate for assessed land value, Purdue Extension agricultural economist Larry DeBoer says. The base rate, which is the starting point for calculating taxes on farmland, jumped from $1,630 per acre in 2012 to $1,760 for 2013. Taxes assessed on this year’s base rate will be paid in 2014. The base rate has exactly doubled in just seven years, from $880 per acre in 2007.
The value of Indiana farmland is assessed based on use value rather than market value. So, even if a parcel of farmland borders commercial or residential development, it is assessed based on the income it can generate from farming, not the selling price. When determining property taxes, Indiana’s Department of Local Government Finance takes into account the base rate, a productivity factor and an influence factor. Productivity factors are based on the soil’s productivity for growing corn. They are scheduled to rise for taxes in 2014, but according to DeBoer, bills have been proposed in the General Assembly to cancel that change.
The influence factor is a percentage reduction in the dollar amount of the productivity factor to account for conditions, such as frequent flooding, grade or forest cover.
The assessed farmland value has been rising because the base rate is calculated annually based on a number of factors, such as commodity prices, land rents, input costs and interest rates. “The base rate is calculated using a capitalization formula,” DeBoer said. “The rent or net income earned from an acre is divided by a rate of return. The department calculates capitalized values for six years, drops the highest value and then averages the remaining five years to get the base rate. “Each year, a value from an earlier year leaves the calculation and a value from a recent year is averaged in. The base rate goes up when the value coming in is higher than value dropping out.”
Compared with six years ago, farmland rents are higher, commodity prices are up and interest rates are down – a combination that increases the base rate. But there’s a four-year lag between the numbers in the calculation and the tax year, so the numbers to be used for 2014 taxes are from 2005 to 2010. For example, for 2012 assessments, which will be taxed in 2013, the capitalized value for 2003 was erased and the capitalized value from 2009 included, DeBoer said. The 2003 value was $1,407 per acre, and the 2009 value was $2,066. That means the base rate rose from $1,500 per acre for taxes in 2012 to $1,630 for taxes in 2013.
DeBoer said the trend of increasing property taxes will continue.
“Rents and commodity prices were higher and interest rates lower in 2011 than they were in 2005, so the base rate for taxes paid in 2015 should be about $2,050 – a 16.5 percent rise from those paid in 2014,” he said.
The drought’s reduction of corn yields to a 20-year low will affect property tax bills, but not until those payable in 2016, when the 2012 numbers enter the calculation. “Rising rents and prices and falling interest rates should raise the pay-2016 rate to about $2,430,” DeBoer said. “The 2012 drought will have a small effect. If yields had been normal, the base rate probably would have been $100 to $200 higher.”
DeBoer’s full report and accompanying podcast can be found in his column Capital Comments at https://ag.purdue.edu/agcomm/pages/Newscolumns.aspx