farm real estate taxes, 1981
TRANSCRIPT
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United States oprtment of Farm Real EstateAgriculture
Economic Research Service Taxes 1981 Statistical Bulletin Number 701 James M Hrubovcak
Frances A Burke
Farm Real Estate Taxes 1981 by James M Hrubovcak and Frances A Burke National Economics Division Economic Research Service US ~~partment of Agriculture Statistical Bulletin No 701
ABSTRACT Us farm real estate tax levies rose to an estimated $369 billion 1n 19B1 up from $345 billion in 1980 The average tax per acre rose 7 percent from $385 to $412 However a 9-percent increase in farmland market values dropped the average tax per $100 of full market value from 50 cents to 48 cents over the same period Although differential assessment laws and cirshycuit breaker tax credits have limited the growth of farm real estate taxes these measures may be doing little to prevent the conversion of farmland to nonfa-l uses near the urban-rural fringe
KeY10rds Farm real es tate tax differential assessment circuit breaker tax ~redit effective tax rate
SALES INFORMATION Additional cOJ)ies of this report may be ordered from
National Technical Information Service Identification Section 5285 Port Royal Road Springfield VA 22161
Ask for Farm Real Estate Taxes 1981 (S8-70l) and indicate whether you want paper copies or microfiche Cost per paper copy is $850 cost per microfiche copy is $450 (prices subject to change) Enclose check or money order payable to NTIS Or call (703) 487-4780
Washington DC 20250 November 1983
ii
PREFACE
TERMS
According to the 1937 Amendments to the Agricultural Act of 1933 the tax series in this publication is required by law The prices-paid pad ty index is required to reflect taxes per acre on farm real estate
The cooperation of more than 3400 local tax officials who assisted in the collectlon of data for this report is grateshyfully acknowledged
Ad valorem tax - A tax based on value such as the real estate or personal property tax
Circuit breaker tax credit - A credit toward eligible property owners State income tax liability for that portion of property taxes which exceeds a certain percentage of income
Differential assessment - Farmland assessments on the basis of its use-value as measured by farm income or productivity rather than on the lands current market value
Homestead exemption - An exemption from all or part of the property taxes which are levied on the value of the house and adjoining land where the head of the family lives
Millage rate - The actual tax rate imposed by the State or local government on the assessed value of the property
iii
CONTENTS
LIST OF TABLES
Introduction bull - bullbull bullbullbullbullbullbullbullbullbull bullbull 0 bullbullbullbullbull ~ 1
Tre Property Tax bullbull (It 0 bullbullbullbullbullbullbullbullbullbullbullbullbull 0 bullbullbullbullbull f bull bull bull bull bullbullbullbull 0 bull ~ bullbull 1
Farm Real Estate Taxes bullbullbullbull Omiddotmiddot bullbullbullbullbullbullbullbullbullbullbull 9 bullbullbull)~~I tO bullbull 4
Effective Tax Rateso r bullbullbullbullbull cent bullbullbull em bullbullbullbullbullbullbullbullbull IIlf bullbullbullbullbull eo 11
Taxes as a Percentage of Farm Expenses and Net Farm Income lttD bullbullbullbullbullbull (j bullbullbullbullbullbullbullbullbullbull O bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Q bull bullbullbullbullbull ~ 11
Property Tax Relief 13IImiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot ~ CW Conclusions II II II II II II bull II II II II II II II II II II II II II II II II ~ II II II II bull II II fl II II II II II II II bull II II II II II II 18
References II amp II II II II II II II II II II II II II II II II U II II a II II e- II II bull II 8 II II II II II II bull II ~ r - II II II jj 3 19
Table
1 Indirect business properly tax receipts relative to total receipts of State and local governmtats bullbullbullbullbullbullbullbullbullbullbull 2
2 Property sales and personal income tax receipts relative to total receipts of State and local government S II II II II II bull II II II II II II II bull II II II II - II II II II II II II II II II II II bull II II II ff II II II I) II bullbull II bull 4
3 State and local govenruent expenditures relatiVe to gross national product v bullbullbullbullbullbullbullbullbullbull 0 _ 5
4 Taxes levied on farm real estate Total amourlt per acre and amount per $100 of full market value bullbullbullbullbullbullbullbullbull _ bull bull 6
5 Taxes levied on farm real estate Amount per acre by State selected years bullbullbullbullbullbullbull ~ bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull ~ bullbullbull 8
6 Taxes levied on farm real estate Index numbers of amount pel acre by Stata selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 9
7 Total taxes levied on farm rea] estate by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 10
8 Taxes levied on farm real estate Amount per $100 of full market value by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbull 12
9 Taxes levied on US farm real estate as a percentage of total fam production expenses and net farm incorne bull ) bullbullbullbullbullbull 0 a bullbullbullbullbullbullbullbullbullbullbull fI bullbullbullbullbullbull e _ bullbullbullbullbullbullbullbullbullbullbull 0 bull bull bull bull bull bull bullbull 14
iv
Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
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United States oprtment of Farm Real EstateAgriculture
Economic Research Service Taxes 1981 Statistical Bulletin Number 701 James M Hrubovcak
Frances A Burke
Farm Real Estate Taxes 1981 by James M Hrubovcak and Frances A Burke National Economics Division Economic Research Service US ~~partment of Agriculture Statistical Bulletin No 701
ABSTRACT Us farm real estate tax levies rose to an estimated $369 billion 1n 19B1 up from $345 billion in 1980 The average tax per acre rose 7 percent from $385 to $412 However a 9-percent increase in farmland market values dropped the average tax per $100 of full market value from 50 cents to 48 cents over the same period Although differential assessment laws and cirshycuit breaker tax credits have limited the growth of farm real estate taxes these measures may be doing little to prevent the conversion of farmland to nonfa-l uses near the urban-rural fringe
KeY10rds Farm real es tate tax differential assessment circuit breaker tax ~redit effective tax rate
SALES INFORMATION Additional cOJ)ies of this report may be ordered from
National Technical Information Service Identification Section 5285 Port Royal Road Springfield VA 22161
Ask for Farm Real Estate Taxes 1981 (S8-70l) and indicate whether you want paper copies or microfiche Cost per paper copy is $850 cost per microfiche copy is $450 (prices subject to change) Enclose check or money order payable to NTIS Or call (703) 487-4780
Washington DC 20250 November 1983
ii
PREFACE
TERMS
According to the 1937 Amendments to the Agricultural Act of 1933 the tax series in this publication is required by law The prices-paid pad ty index is required to reflect taxes per acre on farm real estate
The cooperation of more than 3400 local tax officials who assisted in the collectlon of data for this report is grateshyfully acknowledged
Ad valorem tax - A tax based on value such as the real estate or personal property tax
Circuit breaker tax credit - A credit toward eligible property owners State income tax liability for that portion of property taxes which exceeds a certain percentage of income
Differential assessment - Farmland assessments on the basis of its use-value as measured by farm income or productivity rather than on the lands current market value
Homestead exemption - An exemption from all or part of the property taxes which are levied on the value of the house and adjoining land where the head of the family lives
Millage rate - The actual tax rate imposed by the State or local government on the assessed value of the property
iii
CONTENTS
LIST OF TABLES
Introduction bull - bullbull bullbullbullbullbullbullbullbullbull bullbull 0 bullbullbullbullbull ~ 1
Tre Property Tax bullbull (It 0 bullbullbullbullbullbullbullbullbullbullbullbullbull 0 bullbullbullbullbull f bull bull bull bull bullbullbullbull 0 bull ~ bullbull 1
Farm Real Estate Taxes bullbullbullbull Omiddotmiddot bullbullbullbullbullbullbullbullbullbullbull 9 bullbullbull)~~I tO bullbull 4
Effective Tax Rateso r bullbullbullbullbull cent bullbullbull em bullbullbullbullbullbullbullbullbull IIlf bullbullbullbullbull eo 11
Taxes as a Percentage of Farm Expenses and Net Farm Income lttD bullbullbullbullbullbull (j bullbullbullbullbullbullbullbullbullbull O bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Q bull bullbullbullbullbull ~ 11
Property Tax Relief 13IImiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot ~ CW Conclusions II II II II II II bull II II II II II II II II II II II II II II II II ~ II II II II bull II II fl II II II II II II II bull II II II II II II 18
References II amp II II II II II II II II II II II II II II II II U II II a II II e- II II bull II 8 II II II II II II bull II ~ r - II II II jj 3 19
Table
1 Indirect business properly tax receipts relative to total receipts of State and local governmtats bullbullbullbullbullbullbullbullbullbullbull 2
2 Property sales and personal income tax receipts relative to total receipts of State and local government S II II II II II bull II II II II II II II bull II II II II - II II II II II II II II II II II II bull II II II ff II II II I) II bullbull II bull 4
3 State and local govenruent expenditures relatiVe to gross national product v bullbullbullbullbullbullbullbullbullbull 0 _ 5
4 Taxes levied on farm real estate Total amourlt per acre and amount per $100 of full market value bullbullbullbullbullbullbullbullbull _ bull bull 6
5 Taxes levied on farm real estate Amount per acre by State selected years bullbullbullbullbullbullbull ~ bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull ~ bullbullbull 8
6 Taxes levied on farm real estate Index numbers of amount pel acre by Stata selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 9
7 Total taxes levied on farm rea] estate by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 10
8 Taxes levied on farm real estate Amount per $100 of full market value by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbull 12
9 Taxes levied on US farm real estate as a percentage of total fam production expenses and net farm incorne bull ) bullbullbullbullbullbull 0 a bullbullbullbullbullbullbullbullbullbullbull fI bullbullbullbullbullbull e _ bullbullbullbullbullbullbullbullbullbullbull 0 bull bull bull bull bull bull bullbull 14
iv
Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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Farm Real Estate Taxes 1981 by James M Hrubovcak and Frances A Burke National Economics Division Economic Research Service US ~~partment of Agriculture Statistical Bulletin No 701
ABSTRACT Us farm real estate tax levies rose to an estimated $369 billion 1n 19B1 up from $345 billion in 1980 The average tax per acre rose 7 percent from $385 to $412 However a 9-percent increase in farmland market values dropped the average tax per $100 of full market value from 50 cents to 48 cents over the same period Although differential assessment laws and cirshycuit breaker tax credits have limited the growth of farm real estate taxes these measures may be doing little to prevent the conversion of farmland to nonfa-l uses near the urban-rural fringe
KeY10rds Farm real es tate tax differential assessment circuit breaker tax ~redit effective tax rate
SALES INFORMATION Additional cOJ)ies of this report may be ordered from
National Technical Information Service Identification Section 5285 Port Royal Road Springfield VA 22161
Ask for Farm Real Estate Taxes 1981 (S8-70l) and indicate whether you want paper copies or microfiche Cost per paper copy is $850 cost per microfiche copy is $450 (prices subject to change) Enclose check or money order payable to NTIS Or call (703) 487-4780
Washington DC 20250 November 1983
ii
PREFACE
TERMS
According to the 1937 Amendments to the Agricultural Act of 1933 the tax series in this publication is required by law The prices-paid pad ty index is required to reflect taxes per acre on farm real estate
The cooperation of more than 3400 local tax officials who assisted in the collectlon of data for this report is grateshyfully acknowledged
Ad valorem tax - A tax based on value such as the real estate or personal property tax
Circuit breaker tax credit - A credit toward eligible property owners State income tax liability for that portion of property taxes which exceeds a certain percentage of income
Differential assessment - Farmland assessments on the basis of its use-value as measured by farm income or productivity rather than on the lands current market value
Homestead exemption - An exemption from all or part of the property taxes which are levied on the value of the house and adjoining land where the head of the family lives
Millage rate - The actual tax rate imposed by the State or local government on the assessed value of the property
iii
CONTENTS
LIST OF TABLES
Introduction bull - bullbull bullbullbullbullbullbullbullbullbull bullbull 0 bullbullbullbullbull ~ 1
Tre Property Tax bullbull (It 0 bullbullbullbullbullbullbullbullbullbullbullbullbull 0 bullbullbullbullbull f bull bull bull bull bullbullbullbull 0 bull ~ bullbull 1
Farm Real Estate Taxes bullbullbullbull Omiddotmiddot bullbullbullbullbullbullbullbullbullbullbull 9 bullbullbull)~~I tO bullbull 4
Effective Tax Rateso r bullbullbullbullbull cent bullbullbull em bullbullbullbullbullbullbullbullbull IIlf bullbullbullbullbull eo 11
Taxes as a Percentage of Farm Expenses and Net Farm Income lttD bullbullbullbullbullbull (j bullbullbullbullbullbullbullbullbullbull O bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Q bull bullbullbullbullbull ~ 11
Property Tax Relief 13IImiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot ~ CW Conclusions II II II II II II bull II II II II II II II II II II II II II II II II ~ II II II II bull II II fl II II II II II II II bull II II II II II II 18
References II amp II II II II II II II II II II II II II II II II U II II a II II e- II II bull II 8 II II II II II II bull II ~ r - II II II jj 3 19
Table
1 Indirect business properly tax receipts relative to total receipts of State and local governmtats bullbullbullbullbullbullbullbullbullbullbull 2
2 Property sales and personal income tax receipts relative to total receipts of State and local government S II II II II II bull II II II II II II II bull II II II II - II II II II II II II II II II II II bull II II II ff II II II I) II bullbull II bull 4
3 State and local govenruent expenditures relatiVe to gross national product v bullbullbullbullbullbullbullbullbullbull 0 _ 5
4 Taxes levied on farm real estate Total amourlt per acre and amount per $100 of full market value bullbullbullbullbullbullbullbullbull _ bull bull 6
5 Taxes levied on farm real estate Amount per acre by State selected years bullbullbullbullbullbullbull ~ bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull ~ bullbullbull 8
6 Taxes levied on farm real estate Index numbers of amount pel acre by Stata selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 9
7 Total taxes levied on farm rea] estate by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 10
8 Taxes levied on farm real estate Amount per $100 of full market value by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbull 12
9 Taxes levied on US farm real estate as a percentage of total fam production expenses and net farm incorne bull ) bullbullbullbullbullbull 0 a bullbullbullbullbullbullbullbullbullbullbull fI bullbullbullbullbullbull e _ bullbullbullbullbullbullbullbullbullbullbull 0 bull bull bull bull bull bull bullbull 14
iv
Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
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PREFACE
TERMS
According to the 1937 Amendments to the Agricultural Act of 1933 the tax series in this publication is required by law The prices-paid pad ty index is required to reflect taxes per acre on farm real estate
The cooperation of more than 3400 local tax officials who assisted in the collectlon of data for this report is grateshyfully acknowledged
Ad valorem tax - A tax based on value such as the real estate or personal property tax
Circuit breaker tax credit - A credit toward eligible property owners State income tax liability for that portion of property taxes which exceeds a certain percentage of income
Differential assessment - Farmland assessments on the basis of its use-value as measured by farm income or productivity rather than on the lands current market value
Homestead exemption - An exemption from all or part of the property taxes which are levied on the value of the house and adjoining land where the head of the family lives
Millage rate - The actual tax rate imposed by the State or local government on the assessed value of the property
iii
CONTENTS
LIST OF TABLES
Introduction bull - bullbull bullbullbullbullbullbullbullbullbull bullbull 0 bullbullbullbullbull ~ 1
Tre Property Tax bullbull (It 0 bullbullbullbullbullbullbullbullbullbullbullbullbull 0 bullbullbullbullbull f bull bull bull bull bullbullbullbull 0 bull ~ bullbull 1
Farm Real Estate Taxes bullbullbullbull Omiddotmiddot bullbullbullbullbullbullbullbullbullbullbull 9 bullbullbull)~~I tO bullbull 4
Effective Tax Rateso r bullbullbullbullbull cent bullbullbull em bullbullbullbullbullbullbullbullbull IIlf bullbullbullbullbull eo 11
Taxes as a Percentage of Farm Expenses and Net Farm Income lttD bullbullbullbullbullbull (j bullbullbullbullbullbullbullbullbullbull O bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Q bull bullbullbullbullbull ~ 11
Property Tax Relief 13IImiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot ~ CW Conclusions II II II II II II bull II II II II II II II II II II II II II II II II ~ II II II II bull II II fl II II II II II II II bull II II II II II II 18
References II amp II II II II II II II II II II II II II II II II U II II a II II e- II II bull II 8 II II II II II II bull II ~ r - II II II jj 3 19
Table
1 Indirect business properly tax receipts relative to total receipts of State and local governmtats bullbullbullbullbullbullbullbullbullbullbull 2
2 Property sales and personal income tax receipts relative to total receipts of State and local government S II II II II II bull II II II II II II II bull II II II II - II II II II II II II II II II II II bull II II II ff II II II I) II bullbull II bull 4
3 State and local govenruent expenditures relatiVe to gross national product v bullbullbullbullbullbullbullbullbullbull 0 _ 5
4 Taxes levied on farm real estate Total amourlt per acre and amount per $100 of full market value bullbullbullbullbullbullbullbullbull _ bull bull 6
5 Taxes levied on farm real estate Amount per acre by State selected years bullbullbullbullbullbullbull ~ bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull ~ bullbullbull 8
6 Taxes levied on farm real estate Index numbers of amount pel acre by Stata selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 9
7 Total taxes levied on farm rea] estate by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 10
8 Taxes levied on farm real estate Amount per $100 of full market value by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbull 12
9 Taxes levied on US farm real estate as a percentage of total fam production expenses and net farm incorne bull ) bullbullbullbullbullbull 0 a bullbullbullbullbullbullbullbullbullbullbull fI bullbullbullbullbullbull e _ bullbullbullbullbullbullbullbullbullbullbull 0 bull bull bull bull bull bull bullbull 14
iv
Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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CONTENTS
LIST OF TABLES
Introduction bull - bullbull bullbullbullbullbullbullbullbullbull bullbull 0 bullbullbullbullbull ~ 1
Tre Property Tax bullbull (It 0 bullbullbullbullbullbullbullbullbullbullbullbullbull 0 bullbullbullbullbull f bull bull bull bull bullbullbullbull 0 bull ~ bullbull 1
Farm Real Estate Taxes bullbullbullbull Omiddotmiddot bullbullbullbullbullbullbullbullbullbullbull 9 bullbullbull)~~I tO bullbull 4
Effective Tax Rateso r bullbullbullbullbull cent bullbullbull em bullbullbullbullbullbullbullbullbull IIlf bullbullbullbullbull eo 11
Taxes as a Percentage of Farm Expenses and Net Farm Income lttD bullbullbullbullbullbull (j bullbullbullbullbullbullbullbullbullbull O bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull Q bull bullbullbullbullbull ~ 11
Property Tax Relief 13IImiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot~middotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddotmiddot ~ CW Conclusions II II II II II II bull II II II II II II II II II II II II II II II II ~ II II II II bull II II fl II II II II II II II bull II II II II II II 18
References II amp II II II II II II II II II II II II II II II II U II II a II II e- II II bull II 8 II II II II II II bull II ~ r - II II II jj 3 19
Table
1 Indirect business properly tax receipts relative to total receipts of State and local governmtats bullbullbullbullbullbullbullbullbullbullbull 2
2 Property sales and personal income tax receipts relative to total receipts of State and local government S II II II II II bull II II II II II II II bull II II II II - II II II II II II II II II II II II bull II II II ff II II II I) II bullbull II bull 4
3 State and local govenruent expenditures relatiVe to gross national product v bullbullbullbullbullbullbullbullbullbull 0 _ 5
4 Taxes levied on farm real estate Total amourlt per acre and amount per $100 of full market value bullbullbullbullbullbullbullbullbull _ bull bull 6
5 Taxes levied on farm real estate Amount per acre by State selected years bullbullbullbullbullbullbull ~ bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull ~ bullbullbull 8
6 Taxes levied on farm real estate Index numbers of amount pel acre by Stata selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 9
7 Total taxes levied on farm rea] estate by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbullbull 10
8 Taxes levied on farm real estate Amount per $100 of full market value by State selected years bullbullbullbullbullbullbullbullbullbullbullbullbull 12
9 Taxes levied on US farm real estate as a percentage of total fam production expenses and net farm incorne bull ) bullbullbullbullbullbull 0 a bullbullbullbullbullbullbullbullbullbullbull fI bullbullbullbullbullbull e _ bullbullbullbullbullbullbullbullbullbullbull 0 bull bull bull bull bull bull bullbull 14
iv
Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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Farm Real Estate Taxes 1981 James M Hrubovcak Frances A Burke
INTRODU CTION
THE PROPERTY TAX
The major property tax reforms of the 1970s and the increased use of differential assessment laws and circuit breaker tax credits have affected the revenue-generating capacity of State and local governments the growth of taxes levied on farm real es tate and the preservation of farmland near the urban-rural fringe This reptJt looks clt the impact of these and other developments on re31 es tate taxes levied in 1981
Total U~S farm real estate tax levies rose to an estimated $369 billion or $412 per acre in 1981 HowevH the 7-percent rise in the tax per acre was more than offset by a 9--percent increase in farmland narket values resulting in a decli~e in the ratio of taxes to $100 of full market value from 50 cents in 1980 to 48 cents in 1981
The farm real estate taxes described in this report include all ad valorem taxes levied by State and local governments Special assessments on improvements such as drainage irrigashytion and weed control areuro excluded insofar as possible The estimates were derived from a nationwide survey of more than 30000 sample farms conducted by the Economic Research Service and the Statistical Reporting Service in 1982
During the 1970s the property tax underwent significant reshystructuring in almost every State Legislative limits on the growth of property taxes such as Californias Proposition 13 and the increased use of homestead exemptions circuit breaker tax credits and differential asseSSUlent laws have forced State and local governments to rely less on the property tax as a source of revenue The level of State and local property tax receipts increased from $367 billion in 1970 to $751 billion in 1981 but property tax receipts as a percentage of the total receipts of State and local governments declined steadily from 361 percent in 1970 to 254 percent in 1981 (table 1 and fig 1)
The legislative limits on the growth of property taxes and the decreased reliance on the property tax as a source of revenue may be a result of a generally unfavorable perception of the property tax on the part of voters The property tax has been
1
Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
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ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
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Table l--Indirect business property tax receipts relative to total receipts of State and local governments
Year
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
1 Excludes j Includes
Total recaipts of
State and local governmentsl
----- Million
11 302 13005 14878 16291
17833 19601 21235 22866 24182 26465 29350 31685 33521 36512
39919 43085 46653 49870 54415 59000 64733 71031 81483 91598
101719 113799 129325 141481 152820 166298 187147 208118 225678 244042 267326
295256
contribu tions for all real estate taxes and business personal
Indirect business property tax receipts li
dollars
4836 5346 5938 6642
7H3 7696 8385 9096 9673
10448 11453 12609 13764 14812
16238 17580 18958 20245 21687 23187 24535 26964 29896 32763
36674 40445 43227 46355 48980 53384 58247 63200 63748 64403 68388
75091
Social Security Insurance
Indirect business property tax receipts relative to total
recelpts State and local governments
Percent
428 ld 1 399 408
401 393 395 398 400 395 390 398 411 406
407 408 406 406 399 393 379 380 367 358
361 355 334 328 321 321 311 304 282 264 256
254
and Federal grants-in-aid property
Source ()
2
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
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OFFiCIAL BUSINESS Penalty lor Private Use S300
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ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Figure 1
~--------------------------------~-~~---~-----------------------Total and Indirect Business Property Taxmiddot Receipts of State and Local Governments $ bil
250
200 Total receipts of State and local governments150
100 Indirect business property tax receipts bullbullbull bullbullbullbullbullbullbull -
50 __-----~~~ bullbullbullbullbullbullbullLo
19751946 1955 1965
Includes all real estate taxes and business personal property Excludes contributions for Social Security Insurance and Fpderal grants-Inmiddotald
Source US Department of Commerce
criticized for being poorly administer2d producing large assessment inequalities and being highly regressive with reshyspect to taxpayers ability to pay the tax Forty-five percent of the individuals polled in a 1972 survey by the Advisory Comshymission on Intergovernmental Relations (ACIR) selected the property tax as the worst or least fair of all taxes This figure had dropped to 30 percent by 1982 perhaps because of the sweeping changes that occurred during the 1970 s lt~) J
In contrast to the property tax State and local governments have increased or maintained their reliance on revenue from State income and sales taxes which according to the 1982 ACIR survey the public views more favorably Total sales tax receipts as a percentage of the total receipts of State and local governments have remained fairly constant since 1970 providing approximately 31 percent of total receipts while personal income tax receipts have increased from 109 percent of total receipts in 1970 to 161 percent in 1981 (table 0
In addition to limiting the growth of property taxes grass roots movements in many States have also attempted to reduce the growth of State and local government spending Until 1975 State and local govarnment expenditures increased more rapidly than the US gross national product (GNP) However
1 Underscored numbers in parentheses refer to references 1igted at the end of this report
3
FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
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t f f
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FARM REAL ESTATE TAXES
after 1975 State and local government expenditures as a pershycentage of GNP fell from 150 to 131 in 1981 (table 3) as 19 States either enacted statutory changes or adopted conshystitutional amendments limiting the growth of either expendishytures or taxes (~)
US farm real estate taxes levied in 1981 totaled $36955 million up fLom $34509 million in 1980 (table 4) The average tax levy per acre of privately owned farmland increased by approximately 7 percent for the third consecutive year rising from $385 in 1980 to $412 in 1981 Land values continued to grow at a faster rate than real estate tax levies for 1981 reSUlting in a decline in taxes per $100 of full market value from 50 cents in 1980 to 48 cents in 1981 The ratio of real estate taxes to the full market value of farmland has declined each year since 1971 (fig 2)
The 1980-81 changes in real estate tax levies per acre of farmland varied greatly by State~ with 10 States recording declines and the remainder showing increases Of the 40 States that r~corded increases 16 were up less than 5 percent 14 showed increases of between 5 and 10 percent and 10 were upby more thanlO percent
Table 2--Property sales and personal income tax receipts relative to total receipts of State and local governments
Total Property Sales Personal income taxYear State tax and Receipts Peurorcentshy Receipts
tax Percentshy Receipts Percentshylocal 2 age age agegovt lL~~________~__________~________~________~________~__________
-- Million dollars-shy
1970 1971 1972 1973 1974 1975
101719 113799 129325 141481 152820 166298
36674 40445 43227 46355 48980 53384
1976 1977 1978 1979
187147 208118 225678 244042
58247 63200 63748 64403
1980 267326 68388
1981 295256 75091
1 Excludes contributions for
Percent Million dollars Percent
Million dollars Percent
361 355 334 328 321 321
31645 35364 39801 44080 48160 51703
311 311 308 312 315 311
11114 12669 17460 19138 20637 22828
109 111 135 135 135 137
311 304 282 264 256
57760 64018 71000 77281 82843
309 308 315 317 310
26751 30771 35345 38529 42775
143 148 157 158 160
254 90422 306 48280 164
Social Security Insurance and Federal grants-in-aid 2 Includes all real estate taxes and business personal property
Source (1l)
4
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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bullt
t f f
bull
bull
bull
to gross nationalTable 3--State and local government expenditures rela tive product
State and localState and Year Gross national local government
product eltpendi tures
--- Billion dollars--shy
1946 1947 1948 1949
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
1981
Source
2098 2331 2595 2583
2865 3308 3480 3668 3668 4000 4217 4400 4497 4879
5065 5246 5650 596 if 6377 6911 7560 7996 8134 9440
9927 1077 6 11859 13264 14342 15492 17180 19183 21639 24178 26331
29377
(11) bull
111 144 176 202
225 239 255 273 302 329 359 398 443 469
498 544 580 628 685 751 843 947
1072 1187
1335 1504 1648 1816 2046 2322 2512 2697 2973 3215 3578
3850
government expenditures relative to GNP
Percent
53 62 68 78
79 72 73 74 82 82 85 90 99 96
98 104 103 105 107 109 112 118 123 126
134 140 139 137 143 150 146 141 137 133 136
131
5
Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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Table 4--Taxes levied on fa rrn real estate Total amount per acre and amount per 1100 of full market value
middot Year Total
Taxes per
Tax per $100 of
middot middot Year Total
Taxes per
Tax per $100 of
taxes acre value middot taxes acre value middot middot
Million middot NUllon dollars ---Dolla rs--shy middot dollars ---Dolla rs--shy
1890 819 o t 3 middot middot 1937 4048 039 1 15
1891 842 13 middot 1938 4004 38 1 17 1892 1893 1894
871 915 933
13
13
13
middot 1939 middot middot 1940
4068
4011
39
39
1 21
1 18 1895 1896
976 969
14 bull 13
middot 1941 middot 1942
4067 3995
39
38 112
97 1897 1010 13 middot 1943 4002 38 84 1898 1899
1015 1051
13
13 middot 1944 middot 1945
4189 46 +8
40
1+4 79 77
1900 1901
1056 1105
13
13
middot IS l 6 middot 1947 middot 1948
5187 6054 6560
49
57
62
77
83
87 1902 1131 14 middot 1949 7062 66 95 1903 1904 1905 19C5 1907
1230 1254 1303 1320 1407
15
15
15
16
16
middot middot 1950 middot 1951 middot 1952 middot 1953
7424 7767 8104 8469
69
73
76
79
100 91 86 89
1908 15QO 17 middot 1954 8784 82 93 1909 1632 19 048 middot 1955 931 2 88 96
middot 1956 9742 92 96 1910 1657 19 47 middot 1957 10321 99 94 1911 1827 bull21 50 middot 1958 10807 105 95 1912 191 2 21 49 middot 1959 11547 113 94 1913 2180 bull14 55 bull 1914 1915
2222 2430
24
26 56 57
middot 1960 Y middot 1961
12431 13110
1 21 1 28
97 1 01
1916 1917 1918
2600 291 7 3113
bull 28 31 33
57
58
57
middot 1962 middot 1963 middot 1964
13722 14172 1 ~6 7
1 35 140 1 45
1 01 100 98
1919 3931 41 59 middot 1965 15357 153 98 middot 1966 16338 1 65 98
1920 4830 51 79 middot 1967 17305 176 98 1921 5097 bull 54 94 middot 1968 1881 8 1 93 1 01 1922 5091 bull 54 96 middot 1969 20388 211 105 1923 5164 55 1 01 middot 1924 5114 55 103 middot 1970 21691 227 108 1925 5168 56 107 middot 1971 22941 240 110 1926 1927 1928 1929
5256 5447 5556 5675
bull 56 57 58 58
112 1 16 117 1 20
middot 1972 middot 1973 middot 1974 middot 1975 2 middot 1976
23905 24501 25849 26348 28492
250 256 270 290 315
106 96 93 81 74
1930 5668 57 131 middot 1977 30164 334 66 1931 1932
5261 4612
53 bull45
143 152
middot 1978 middot 1979
30047 32150
334 358
59
53 1933 3984 39 1 25 middot 1934 3838 37 117 middot 1980 34509 385 50 1935 1936
3923 3944
37
38 114 111
middot 1981 middot
36955 412 48
middot
-- ~ta not availab Ie 1 Starting with 1960 includes Alaska and Hawa IiIi Acreage revisions based on the 1974 Census of Agriculture definition of a
farm Tax per $100 oE full value revised because of land value revisions based on tlte 1978 Census of Agriculture
6
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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OFFiCIAL BUSINESS Penalty lor Private Use S300
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bullt
t f f
bull
bull
bull
4
Figure 2
Farm Real Estate Taxes
Dollars
3
2 Tax per $100middot
o omiddot bull 1 bullo _---
o~__~___L ~____~__~___L ~____~__~___L ~~__~___~__~II__ __ __
1910 1920 1930 1940 1950 1960 1970 1980
bull Based on market value
The declines or only moderate increases in taxes levied in many States were more attributable to legislative changes than to declining assessed values The Nevada State legislature significantly reduced property tax rates and increased sales tax rates in an attempt to shift a large portion of ~he source of revenues away from the property tax and toward the sales tax The result of this change on farm real estate taxes was a 33-percent decline in the average tax per acre from 63 cents in 1980 to 42 cents in J98l (tables 5 and 6) Total 3xes levied on Nevada farm real estate declined from $38 million to $25 million over the same period (table 7)
The 2-percent decline in the average tax per acre in Massachusetts from $2144 in 1980 to $2101 in 1981 was matnly a result of the enactment of proposition 2-12 Under Proposition 2-12 real estate taxes are to be reduced 15 percent per year until they read a maximum level equal to 2-12 percent of the fair market value of the property
In Ohio approval of a cons titutional amendment that grouped residential and agricultural property in a single class for tax credit purposes contributed to a sl~ght decline in farm real estate tax levels Under Ohio statutes after a reassessshyment takes place a tax credit is applied against the millage
7
Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
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ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
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Tapte 5--Taxes levied on farm real estate Amount pe r ae re by State selected years
State 1940 1950 1960 1970 1975 1977 1978 J979 1980 1981
~ Northeallt Malne New Hal1pshire VerlDOnt MassachuJetts Rhode sland (~nnect [cut iew York New Jersey Pennsy tva nia De lawa re Maryland
084 all 54
270 17u 186 110 231
98
33
81
129 I 39 V6
341 246 320 169 378 1 38
58 118
1 94 213 142 638 610 591 313 923 239 107 232
344 495 404
1283 1487 1399 491
1556 451 223 512
393 639 559
1G110 20l3 1621 843
1853 594 I 71 618
452 731 630
1976 2412 1801 1078 1805 792 186 655
499 806 661
1985 2585 1833 1119 1822 813 226 633
550 848 711
1976 2810 1854 1256 1857 825 221 653
616 951 783
2144 3078 1951 1373 2035 886 211 679
655 1018 871
2101 3376 2006 1530 21 77
9138 205 7 5
Lake States ~tcl-)(gan
Wisconsin MlnneSclta
46
78
66
80 1 57 1 30
236 250 209
467 472 381
851 698 379
1124 866 372
1292 954 415
1bullbull 71 1098 456
1755 1258 466
2054 1443 525
Corn )jelt Ohio Indiana IlUncI(s Iowa Misllouri
69
76
98 100 n
108 I 30 208 192
5
221 242 403 306 109
4 ll 543 707 587 184
579 503 934 640 234
731 517
1096 802 269
778 534
11 75 839 280
827 666
1261 896 289
835 743
1302 985 292
833 80
1408 1032 295
Northern PL~ins North Il1kota SOllC h Dakota Nebraska Kans~lI
22
28
3D
3b
43
46
64
n
65
69 111 t16
118 127 204 198
1 50 165 288 236
1 74 1 94 324 264
178 212 392 267
185 237 444 262
200 254 503 269
200 259 551 282
App11Ilchlan Virginia West Virginia North Carollna iCentucky Tennessee
27
16
37
32
38
46
23
51
63
46
83
31 100 74 66
1 56 55
I 76 140 157
245 63
243 192 212
301 73
284 205 246
333 75
295 214 258
348 77
343 216 290
383 78
383 2 10 325
415 87
415 215 342
Southeast South Carolina Georgia Flo [Ida AL1bama
10
14
32
20
38
32
54
25
71
43 142
30
119 136 291
49
170 250 478
51
184 296 517
57
1 93 312 525
67
200 3 IS 5l5
92
212 346 621
90
232 380 696
90 Delta States Mlss1ls[ppl Arkansas touisianJ
34
28
31
37
32
40
42
73
67
10) 1 35 125
115 t63 125
1 31 180 1 )4
1 31 201 167
134 208 1 79
1 61 2 t4 1 79
166 218 183
Southern PL1ins Oklahoma Texls
24
14 36 26
51
47 94 89
127 112
1 34 134
141 1 38
1 52 145
1 58 1 47
160 153
Mountain States Hontana Idaho Wyoming Colorado New Medco Arizona Utah Nevuda
11
4
06
20
04
13
10
i5
21
85
14
35
1)9
36
47
17
n 121 19 59 15 59 59 26
64 160 37 95 25
150 1 to
52
82 232
45 118
25 217 144 74
88 286
52 126 26
234 l 58 78
93 2a1
50 125 25
219 l 59 80
107 256
59 1 34 25
240 163 52
120 280
63 140
22 213 171 63
1 16 265
66 145 21
203 180 42
Pactflc States Washlnampton Oregon CaUfZlrnla ILwal1 Alaska
32
n
83
62
80 187
lIS 154 j95 122 131
226 198 887 I 7t 356
3t5 284
1099 267 408
372 304
117 241 522
405 287 635 21gt9 542
415 219 632 293 517
357 324 7l6 346 545
364 359 728 4Z1 430
50 States (alrernle) )9 69 121 217 290 314 -34 358 385 412
tlta not avallab Ie
8
of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
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of amount per acre by State selectedTable 6--Taxes levied on farm real estate Index numbe rs years
State 1940 1950 1960 1970 1975 1977 1978 1979 1980 1981
1977=100
Northeast Maine New llampshire Vermont Massachl~tts Rhode isla nd Connect icut New York New Jersey Pennsylvania Delaware Maryland
19 12 9
14 7
10 10 12 12 17 13
29 [9 14 17 10 18 16 21 17 31 18
43 29 23 32 25 33 29 51 30 58 35
76 68 64 65 62 77 46 86 57
120 78
87 87 89 85 84 90 78
102 75 91 95
100 100 100 100 100 100 100 100 100 100 100
lID 110 105 100 107 101 104 101 103 121 97
122 116 113 100 116 103 IL7 103 104 119 100
136 130 124 108 128 108 127 113 112 113 104
145 139 138 106 140 111 142 121 125 110 109
Lake Sta tes Michigan Wiscons in Minnesota
4 9
18
7 18 35
21 29 56
40 55
102
76 81
101
100 100 100
115 110 III
131 127 123
156 145 125
183 167 141
Corn flelt OhLo indiana ll11nois Iowa Missouri
9 15 9
12 12
15 26 19 24 19
30 47 37 38 41
59 105 64 73 68
79 97 85 BJ d7
100 100 100 100 100
106 103 107 105 104
113 129 115 112 108
114 144 119 123 109
114 151 129 129 110
Northern Plains North Oakota South Dakota Nebraska Kansas
12 14 9
13
25 23 20 28
37 36 34 44
67 65 63 75
87 85 89 10
100 100 100 100
102 109 121 101
106 122 137 99
115 131 155 102
114 133 170 107
Appa lachian VJrgLnia WESt Virginia North Carolina Kentucky TenncGsee
9 22 13 16 15
15 32 18 30 19
28 43 35 36 27
52 76 62 68 64
81 86 85 94 86
100 100 100 100 100
III 103 104 104 105
116 106 121 105 118
127 108 135 102 132
138 120 146 105 139
Southeast South Cnrolina Georgia Florida Alabama
16 5 6
35
20 11 11 43
38 14 27 53
65 46 58 86
93 84 92 88
100 100 tOO 100
105 105 102 116
109 106 104 160
115 117 120 157
126 128 135 157
Delta States Mississippi Arkansas Louisiana
26 15 23
28 18 29
32 40 50
79 74 93
I) 90 93
100 100 100
100 112 125
102 115 133
123 119 134
126 121 137
Southern Plains Oklahoml Texas
18 11
27 14
38 35
70 66
95 83
100 100
105 103
113 108
118 110
119 114
Mountain State t-lontana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada
12 15 12 16 15 6
19 19
24 29 27 2B 35 16 29 22
35 42 37 47 57 25 37 33
72 56 71 75 98 64 69 67
93 81 87 93 9il ~3 91 95
100 InU 100 100 100 100 100 100
106 100 97 99 99 93
101 103
122 89
113 106 98
103 103 67
137 98
121 III 88 91
108 81
131 93
127 115
80 87
114 54
Pacific States Washington Oeegon CHfornia Hawaii Alaska
9 11
7
17 26 15
31 50 32 51 34
61 65 72 71 68
8~
94 90
III 78
100 100 100 100 100
109 94 52
112 104
112 92 53
122 99
96 106 58
143 104
98 118
59 175 82
50 States (average) 12 II 36 68 87 100 100 107 115 123
-shy 3 lla ta not avaUable
9
Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
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OFFiCIAL BUSINESS Penalty lor Private Use S300
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ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
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Table 7--Tatai taxes levied on farm r2al eltate by State seleocted years
Stare 1940 1950 19bO 1970 1975 1977 1978 1979 1980 1981
No rtheas t Million dollars
Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New (ark New Jersey Pennsylvania Delaware Haryland
35 16 21)
52 4
28 188 43
144 3
34
54 24 30 56
5 40
270 65
193 5
48
57 23 40 68
8 50
41 3 121 276
8 79
bG 30 77 87 10 74
495 158 398
15 142
60 32 93 99 12 70
790 175 482
11 161
69 38
102 115
14 73
962 169 E-09
11 169
77 42
107 113
15 74
999 170 618
13 163
85 44
1l4 113
16 74
UO 0 174 627
13 1(7
95 50
126 122
18 77
1177 189 673
12 177
100 53
144 1l6 21 81
1353 204 743
12 190
Lake States MichIgan Wisconsin Minnesota
83 178 216
137 365 427
341 21 643
554 852
1097
919 1227 1044
1182 1490 1026
13C9 1634 1L43
1463 1871 1257
1746 213 1 1283
2062 2445 1464
Corn Belt Ohio Indiane Illinois Iowa Missouri
150 151 304 340 110
226 266 642 uS 7 182
403 447
1218 1034 357
734 952
2108 1967 594
903 841
2709 2035 695
1126 860
3167 2549 795
1191 888
3386 2659 830
1258 1I07 3633 2e42
857
1271 1229 3750 3122
865
1267 1297 4056 3398
874
Northern Plains North Dakota South Dakota Nebraska laquoansas
84 96
143 176
170 179 296 348
257 2gt9 516 578
476 490 906 973
603 638
1286 1126
701 752
1448 125S
717 819
1752 1262
743 917
1977 1239
804 983
2240 1269
802 996
2457 1339
Appalachian Virginia West Virginia North Carolina Kentucky Tennessee
44 14 69 65 71
72 19 99
122 87
10 7 18
156 125 104
165 24
223 223 235
236 22
272 276 276
279 25
316 291 318
3DS 26
327 304 331
315 26
377 304 368
348 27
421 294 411
376 31
445 301 429
Southeas t South Carolina Gltorgia Florida Alabama
34 34 26 39
45 83 87 53
63 83
214 49
83 214 409 67
104 345 616 60
111 414 661 66
115 445 667 75
1L 7 454 675 103
122 505 783 101
132 555 865 99
Delta States Mississippi Arkansas Louisiana
66 51 31
76 60 44
77 t 19 69
163 209 121
161 235 113
179 259 ll9
176 287 150
179 296 158
214 306 159
219 307 163
Southern Plains Oklahoma Texas
84 190
126 ~7 2
176 664
327 1238
403 1469
420 1750
440 1796
46 1881
495 1911
497 1976
Mountain States Montana rdaho Wyoming Colorado New Mexico Arizona Utah Nevada
52 47 16 62 13 17 22
6
10 6 99 37
121 28 45 4bull 3 10
166 158 48
214 45 61 61 19
332 189 94
307 79
159 92 31
415 273 112 375 79
225 10 9 45
443 335 129 399 81
241 119 47
469 336 124 392 80
225 120 49
538 301 146 417 79
246 122 32
606 329 156 433
71 219 128 38
582 306 164 449
66 209 133 25
Pacif ic States Washington Oregon California Hawaii Haska
49 59
252
99 154 652
203 309
i366 29
1
323 325
2772 35
3
420 470
3167 56
4
493 500
3432 51
5
541 472
1750 56
5
554 456
1770 62
5
476 527
1942 73
5
492 588
1981 88
4
50 States ( total) 4011 7422 l2431 21691 26348 30164 30047 32150 34509 36955
-shy 0 Data not available
10
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
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t f f
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bull
bull
EFFECTIVE TAX RATES
TAXES AS A PERshyCE NTAGE OF FARM EXPENSES AID NET FARM INCOME
rate to compensate for any inflationary pressures on assessed values Since the value of residential property is likely to increase at a faster rate than the value of agricultural property the single class credit will shift the burden of property taxes away from farm real estate owners and toward residential property owners
In addition under the Ohio use value system the agricultural value of land is based on c~pitalized net returns over as-year period Since net returns have been decreasing a decline in the assessed value of enrolled farmland would be expected to limit the growth of farm real estate taxes The average tax per acre declined from $835 in 1980 to $833 in 1981 and total farm real estate tax levies declined from $1271 million to $1267 million
The average tax pet acre of farmland in Idaho declined from $280 in 1980 to $265 in 1981 and total taxes levied on farm real estate declined from $329 million to $306 milshylion over the sme period The major reasons behind the 5-percent decline in the average tax per acre were a limit on government expenditures and a $7l-million appropriation from the State1s general fund toward the school system as part of a l-year tax relief program
The ratio of per acre farm real estate taxes to the average full market value of farmgtand or the effective tax rate continued to decline in 1981 falling to 48 cents per $100 of full market value from 50 cents in 1980 This 4-percent drop was the smallest decline since 1974 and reflects the beginning of the downturn in the land market
The weakening demand for farmland was also reflected in the effective tax rates for various States Sixteen States recorded increases in their effective tax rates in 1981 compared with only 10 States in 1980 Th~rty States showed larger percentage increases or smaller percentage declines from 1980 to 1981 relative to their respective 1979 to 1980 changes (table 8)
For the most part the major factors affecting 1981 land values were the same as those which have prevented land values from increasing Uncertainty with respect to commodity prices and farm income prospects relatively high real interest rates and high debt servicing costs prevented many farmers from aggressively entering the farmland market Since land values have continued to decline in most States it would be expected that the 1982 US average effective property tax rate will increase the first increase in the US average since 1971
Increases in farm real estate taxes have been modest in comparison to the growth rate of other farm production expenses For example from 1971 to 1981 total US farm real estate taxes increased at an annual compound rate of approximately 5 percent while interest charges on nonreal estate debt real estate debt and expenditures for petroleum fuel and oils rose by about 21 17 and 18 percent per year
11
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Table S--Taxes levied On farm real estate Amount ~r $100 of full ma~ket value by State selected years
State 1940 1950 1960 1910 1975 1977 1978 1919 1981J 1981
Dollars
Northeast Maine 2S7 238 230 214 115 109 108 102 lUb IU7 New Hampshire 241 190 204 207 113 IU5 102 92 96 97 Vermont 176 155 176 181 121 LIS 113 108 1 bull Itl 116 Massachusetts 241 180 2()) 227 175 174 157 137 138 128 Rhode Island 138 106 1amp1 un 114 132 126 119 121 125 Connecticut 1 )11 129 133 152 106 101 94 83 81 79 New York L99 184 21amp 180 165 184 186 188 194 204 New Jerse) 1]1) 129 175 142 103 82 76 69 70 73 Pennsylvania 165 12a 127 1ll 81 80 73 65 63 68 Delaware 51 51 44 45 18 15 17 15 12 11 Maryland 120 95 80 80 58 48 40 36 30 28
lake States Michigan 90 81 121 143 154 145 147 151 1amp2 167 1I1sconsln 154 178 188 203 lbl 145 I)) 128 128 131 Minnesota 149 154 135 109 88 55 55 51 44 43
Corn Belt I)hio l01 79 89 108 8l 67 b4 56 50 48 tndiana 118 99 92 134 7l) 44 39 42 41 0 llUnois 118 119 128 144 11) 75 72 611 65 66 Iowa 126 120 l19 10 09 64 63 58 54 53 ~issolrl 98 82 95 82 S9 49 44 40 33 31
Northern Plainsl Norch Dakota 171) 145 118 121 74 62 58 51 48 46 South Dakota 198 132 122 138 104 91 84 83 84 80 Nebraska 135 109 122 1 J 1 101 76 94 83 82 82 Kl os as 123 IU9 123 125 80 b6 64 52 47 48
Appalachian VirgInia 65 56 60 54 44 43 43 37 38 38 lIest Virginia 50 38 41 4 t 21 17 16 13 11 12 North Carolina 95 52 54 53 41 37 3b 33 32 31 Kentucky 84 78 54 55 45 33 30 25 22 22 Tennessee 103 61 50 59 45 40 35 34 34 33
SoutheilS t South CarolLna 94 55 52 46 36 31 30 26 24 25 Ceorgia 66 75 43 511 53 51 46 40 40 41 florida 82 94 66 84 70 60 53 47 46 46 Alabama 93 52 33 25 14 12 13 14 11 10
Delta States Hlss(ssippl 1)2 67 40 44 30 29 23 20 20 16 Arkansas 107 53 64 52 39 33 33 27 23 21 LouisIana 86 48 39 39 24 20 20 18 14 12
Southern Plains Oklahom 98 69 58 54 42 34 31 29 26 24 Texas 71 56 55 59 46 45 41 37 33 31
Mountain States Montana 142 114 82 103 71 54 51 52 51 46 Idaho 134 109 96 81 62 56 50 39 bull 37 32 lIyoming 94 91 72 80 50 41 35 35 35 33 Colorado 153 102 L06 96 61 48 44 40 36 34 New Mexico 70 44 48 53 30 23 20 16 10 09 Arizona 111 94 55 100 95 74 60 50 31 29 Utah 1 31 93 86 100 61 46 40 31 24 24 Nevada 114 88 66 79 81 56 41 20 18 11
Plclfic States lIashngton 80 68 84 91 81 62 59 53 43 37 Otegon 115 127 168 124 107 83 65 51 54 55 CalLforna 115 116 104 176 163 156 67 53 48 40 IIl1wa11 72 58 52 34 34 31 32 35 Alaska 102 183 121 111 L03 83 76 54
50 States (average) 1 Ii 100 97 108 81 66 59 53 50 48
-- - Data not available
12
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
PROPERTY TAX RELIEF
Pure Preferential Assessment
respectively Total farm production expenditures increased by nearly 12 percent per year over the same 10-year period As a result the ratio of farm real estate taxes to total farm production expenses steadily declined from 51 pershycent in 1971 to 27 percent in 1981 (table 9)
While the relative importance of real estate taxes with respect to total production expenses has declined the level of fa~m real estate taxes may still be an important determinant of farm financial conditions From 1960 to 1981 total us farmeal estate taxes as a percentage of net farm income ranged from 59 in 1973 to 120 in 1971 without exhibiting any trend over time (table 9) This lack of any trend is mainly a result of fluctuations in net farm income rather than in the level of real estate taxes and is indicative of the fact that assessed ~lues and real es tate tax liabili ties are in general detershymined independently from current farm financial conditions Therefore if a farmer experiences tWD relatively poor income years the level of real estate taxes may have a significant impact by decreasing cash flow and forcing the owner to posshysibly delay investment or reduce the purchase of other inputs
In an effort to ease this type of potential burden many States as part of their differential assessment programs are beginning to assess farmland on the basis of the capitalized value of some measure of net farm income over a specified time period Therefore a period of low farm income will likely be reflected in the tax liability of the owner faster than previously
State and local governments have developed a wide array of integrated programs in an effort to slow the rate of convershysion of farmland to nonfarm uses and to reduce the burden of real estate taxes on the owners of farmland 1 An integral part of all these programs is the use of differential assessment laws and circuit breaker tax credits
As applied to farmland differential assessment laws are based on the principle that eligible farmland should be assessed on the basis of its use value as measured by farm income or producshytivity rather than ~)n lands current market value Dif ferential assessment laws can generally be divided into three major categories pure preferential assessment deferred taxation and restrictive agreements
Pure preferential assessment laws typically allow farmland to be assessed on the basis of its current agricultural use value without imposing stringent eligibility requirements or penalties if the land is converted to a nonagricultural use Because of this flexibility landowner participation would be expected to be large in relation to the other more restrictive types of dif ferential assessment programs However the lack of res tricshytions regarding conversions to nonagricultural uses would also
J Most States have also developed programs to protect forests or other open space uses
13
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Table 9--Taxes levied on US farm real estate as a percentage of total farm
Year
1960 1961 1962 1963 1964
1965 1966 1967 1968 1969
1970 1971 1972 1973 1974
1975 1976 1977 1978 1979
1980 1981
production expenses and net
Farm real estate taxes relative to total
farm production expenses l
Percent
47 48 48 47 49
48 47 50 50 51
51 51 49 41 39
37 3 6 35 31 28
27 27
farm income
Farm real estate taxes relative to
net farm income 2
90 90 92 96
108
94 93
109 116 111
117 120
97 59 77
81 111 116 87 79
116 107
1 Total farm produc~ion expenses including operator dwellings and excluding net rent paid to nonoperating landlords
2 Total operators net farm income after inventory adjustment and including operator dwellings plus net rent to nonoperating landlords and total farm real estate taxes
Source (10) bull
14
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Defer~ed Taxation
Restrictive Agreements
be expected to diminish the effectiveness of pure preferential assessment laws in reducing the 10s~1 of farmland to other uses
Under deferred taxation eligible farmland is assessed on the basis of its current agricultural use value but if the land is converted to a nonagricultural use the owner is req uired to pa~ the additional taxes that would have been levied if the land had been assessed on the basis of its full market value The number of years or rollback period for which the deferred tax is colll~cted varies by State but it generally ranges from 2 to 10 years In addition some States charge interest pennlties on the deferred tax
Even with these restrictions a deferred tax program may still do little to prevent the conversion of farmland to nonagriculshytural uses Tighter restrictions are generally associated with lower potential owner enrollment thereby reducing the effectiveness of the program Other arguments state that the penalties associated with most of the current deferred tax programs are not sufficient deterrents to conversion If no interest penalty is charged by the State the deferred taxes amount to an interest-free loan over the rollback period In those States in which an interest penalty is included in the program the penalty is rarely in excess of the interest rate charged by banks and other lending institutions In addition both the deferred t~x and interest charges are deductible for Federal income tax purposes further r~ducing the cost of the penalty or conversion C)
Under restrictive agreements the landowner enters into an enforceable contract with the State or local government and is required to keep the land in farming over a specified length of time in return for use value assessment For example the Williamson Act in California provides for use value assessment of open space land that has been enforceably restricted to recreation conservation or food production In exchange for use value assessment the landowner is required to keep the land in an eligible use for at least 10 years If the landowner wishes to break the contract before the end of the contract period a petition for release must be submitted to the local board of council In order to approve the release the board must find that (1) cancellation is not inconsistent with the purposes of the Williamson Act and (2) cancellation is in the public interest (1) In addition the council may impose a cancellation penalty of 125 percent of the fair market value of the land 3 From fiscal 197273 until fiscal 197879 33781 acres under contract were canceled with penalties totaling approximately $26 million i
2 The actual penalty is 50 percent of the fair market asshysessed value Since all property is assessed at 25 percent of fair market value the effective penalty cannot exceed 125 percent (050 x 025) i Includes more than just agricultural lands
15
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Circuit Breaker tax Credits
J-mpacts of Property Tax Relief on the Conversion of Farmland to Nonshyfarm Uses
As with deferred contracts landowners wishing to participate in restrictive agreements must weigh the benefits of lower real estate taxes against the costs of keeping their land in an eligible use for an extended period of time In the California case as assessed values and tax liabilities have increased the total acres under contract have increased steashydily From fiscal 196970 to fiscal 197879 total acres under contract increased from 43 million to 161 million However the enactment of Proposition 13 in June 1978 estabshylished a maximum combined tax rate of 1 percent of the 1975 full cash value of property and limited the growth of property taxes to 2 percent per year Therefore after Proposition 13 the savings from use value assessment were cut dramatically As a result the growth rate of acres under contract would be expected to slow considerably if no further legislation is enacted to maintain a significant use valuefair market value dif ferent ial
With circuit breaker credits eligible land is not given preferential assessment when real estate taxes are levied However a tax credit toward the eligible landowners State income tax liability is granted for that portion of real estate taxes which exceeds a certain percentage of income In Michigan for example individuals owning farmland and structures placed under developments rights agreements which limit improvements only to those consistent with the farm operation are allowed a refundable State income tax credit for property taxes paid in excess of 7 percent of household income (~)
A significant aspect of circuit breaker programs is that they are a form of revenue sharing between State and local governshyments Under differential assessment laws local governments may be forced to absorb a large percentage of the reduced property tax revenue by cutting services or increasing other taxes In predominantly agricultural communities use value assessment without increases in State funding may simply shift taxes from one source to another without improving farm financial conditions In addition since State income tax burdens are generally believed to be at least proportional with respect to a taxpayers ability to pay a circuit breaker program may reduce the alleged regressivity of the property tax
There has been considerable research on the impact of differential assessment laws and circuit breaker tax credits on the preservation of farmland and other open space land (~ ~ 7 ~) It can generally be concluded that each of these programs by itself does little to prevent the conversion of farmland to nonfarm uses especially near the urhan-rlral fringe Differential assessment laws and circuit breaker tax credits can only be effective if high property taxes are the principal force behind the land sale Coughlin Berry and Plaut (i) point out that demographic and personal factors such as increased taxes to provide additional urban services crop damage by suburban neighbors added restricshy
16
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
Impacts of Property Tax Relief on Farm Financial Conditions
tions on typical farming practices the age of the owner and high of fering prices may be more important than the level of real estate taxes on owners decisions to sell Conklin and Lesher (~) concluded that property taxes could not be reduced enough to insure that farmland near the urbanshyrural fringe would not be converted to nonagricultural uses Gustafson and Wallace (2) concluded that in addition to the inadequacy of private incentives unsystematic implementation by loeal governments has limited the ef fectiveness of the California use value program In fiscal 197879 161 million acres were enrolled under Williamson Act contracts and the open space subvention program However less than 06 million acres fell in the urban prime category while approximately 11 million acres fell in the nonprime category (l) 5 This data also indicates that the savings associated with use value assessment do not provide sufficient incentives for owners of farm real estate near the urban-rural fringe to restrict the use of their land for 10 years
While differential assessment la~s and circuit breaker tax credits may have little impact on land use patterns near the urban-rural fringe these programs are having a positive influence on the retention of farmland in rural areas where market values are being influenced by speculation but where development may not take place in the near future (i ~) As Conklin and Lesher point out investment in agriculture is generally long term By reducing the burden of rising real es tate taxes differential assessment laws and circui t breaker tax credits may allow farmers to maintain the desired or necessary level of imrestment thereby preventing the premature sale and development of agricultural land
Whil~ there has been considerable research on the potential impacts of differential assessment laws and circuit breaker tax credits on the conversion of farmland to nonfarm uses little has been done to compare the tax savings associated with each type of program and their impacts on farm financial conditions Chicoine Sonka and Doty (~) have examined these impacts through the use of a simulation model for an Illinois grain farm over a 10-year period They comshypared results under a use value assessment program based on the Ohio system where use value is determined by a 5-year average of capitalized residual net crop income the Michigan circuit breaker tax credit program and a tax system where farm property was given no preferential treatment and was assessed at one-third of its fair market value
J Urban prime land is defined as land loea ted within 3 miles of the boundaries of an incorporated city of 15000 or more population and is classified as prime agricultural land Other prime land is prime agricultural land located beyond the 3-mile limit and nonprime land is all land other than prime agricultural land devoted to an agricultural use bull
~
17
CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
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CONCLUSIONS
The impacts of each plan were examined for a farm operator owning 300 acres and leasing 300 acres on a 50-50 crop share agreement with no off-farm income a landlord with no income other than from a rental agreement and a landlord with varying amounts of off-farm income
The circuit breaker was not effective for the farm operator since property taxes never exceeded 7 percent of income Use value assessment reduced property taxes to $21 per acre down from $3422 per acre under the market value approach The reduced level of property taxes under the use value assessment also resulted in an increase in after-tax income savings ending equity and net worth However the authors also concluded that the initial operator equity had a greater inshyfluence on potential firm survivability than did property tax relief bullbullbull and reduced property taxes may contribute only marginally to bullbullbull financial success lt~)
In contrast to the farm operator the circuit breaker tax credit was effective and resulted in the greatest tax savings for the landlord with no nonfarm income The average annual tax per acre was reduced from $3422 under the market value assessment to $2118 with use value assessment compared with $1684 with the circuit breaker tax credit As nonfarm income increased the amount of property taxes in excess of 7 percent of income began to decline resulting in a lower amount of tax saving Since the saving associated with use value assessment was constant with respect to income the use value assessment eventually produced a larger reduction in property taxes than did the circuit breaker tax credit
The differential assessment programs enacted during the 1970s were passed in an effort to reduce the burden of farm real estate taxes and to reduce the conversion of farmland to nonshyfarm uses While the level of taxes levied per acre of farmland has continued to rise in most States these increases have not kept pace with the rise in the market value of farmland From 1950 to 1971 the average effective farm real estate tax rate ranged from a low of 86 cents in 1952 to a high of $110 in 1971 By 1981 the effective tax rate had declined to 48 cents )bile other factors such as limits on State and local government taxes and expenditures have helped to reduce the effective tax rate it appears that differential assessment programs have had a significant impact on limiting the growth of farm real estate taxes
Researchers have concluded however that differential assessshyment programs have been less effective in reducing the conversion of farmland to nonfarm uses especially at the urban-rural fringe It appears that factors other than the level of real es tate taxes may be more important determinant s in owners decisions to sell However in areas where the speculative value of farmland is not as great as at the urban-rural fringe differential assessment programs may prevent the premature conversion of farmland and allow farmowners to carryon normal farming practices
18
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
REFERENCES (1) California State Board of Equalization Department of Property Taxes Assessment llractices Slrvey A Special Study of Agricultural Pr~rtlgts Under California Land Conservation Act Contracts Spring 1980
(2) Chicoine David L Steven T Sonka and Robert D Doty The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions Land Economics Vol 58 No4 Nov 1982 pp 516-523
(3) Commerce Clearing House Inc State Tax Guide 2nd ed Chicago 11 19~0
(4) State Tax Review Vol 44 No3 Jan 19 1983
(5) Conklin Howard E and William G Lesher Farm Value Assessment as a Means for Reducing Premature and Excessive Agricultural Disinvestment in Urban Fringes American Journal of Agricultural Economics Vol 59 No4 Nov 1977 pp 755-759
(6) Coughlin Robert E David Berry and Thomas Plaut Differential Assessment of Real Property as an Incentive to Open Space Preservation and Farmland Retention National Tax Journal Vol XXXI No2 June 1978 pp 165-179
(7) John C Keene et al The Protection of Farmland A Reference Guidebook for State and Local Governments National Agricultural Lands Study Washington DC 1981
(8) bold Steven D Recent Developments in State Finance National Tax Journal Vol XXXVI No1 March 1983 pp 1-29
(9) Gustafson Gregory C and L T Wallace Differential Assessment as Land Use Policy Reprinted by the Economic Research Service US Department of Agriculture from the Journal of the American Institute of Planners Vol 41 No6 Nov 1975
(10) US Department of Agriculture Economic Research Service Economic Indicators of the Farm Sector Income and Balance Sheet Statistics ECIFS 1-1 1982
(11) US Department of Commerce Bureau of Economic Analysis Survey of Current Business Vol 62 No7 July 1982
19
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
United States l~rtnMnt of Agriculture
Washington DC 2D250
OFFiCIAL BUSINESS Penalty lor Private Use S300
Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd
Los Angeles CA 90024
ERS Abstracts ERS Abstracts is a free service listing reports issued by USDAs Economic Research Service which are for sale by the National Technical Information Service or the US Government Printing Office To receive this newsletter send your name and address to
ERS Abstracts US Department of Agriculture Room 4305-South Washington DC 2(250
bullt
t f f
bull
bull
bull
bullt
t f f
bull
bull
bull