Farmland owners are in for more property tax increases at least into 2015, Purdue Extension agricultural economist Larry DeBoer says. In the Jan. 27 issue of his column "Capital Comments," DeBoer said the base rate for the assessment of an acre of farmland will jump from $1,290 in 2011 to $1,500 in 2012. He estimates the base rate will be about $2,030/acre by 2015. The 2007 base rate was $880.
Indiana farmland is assessed based on its use value rather than its market value – a practice not uncommon among other states. For example, farmland that borders commercial or residential development is not assessed based on selling price but rather only on the income it can earn from farming, DeBoer said.
When determining property taxes, the government uses a formula that takes into account the base rate, productivity factor and influence factor.
The productivity factor is based on soil productivity for growing corn. Subtracted from that for some acreage is an influence factor, which is a percentage reduction in the dollar amount based on conditions such as frequent flooding, grade or forest cover.
Changes in the assessed value come into play because of the way the base rate is calculated each year. Indiana's assessed values change each year based on several factors, including land rents, commodity prices, costs and interest rates. Increasing land rents, high commodity prices and low interest rates have combined to create a trend of increase.
"The base rate is a six-year rolling average," DeBoer said.
That means the base rate for 2011 was based on figures from 2002 to 2007. The base rate for 2012 was calculated from 2003 to 2008.
Because corn and soybean prices in 2002 were relatively low and interest rates were high, those numbers combined to help keep the average lower in 2011's assessments. Now the numbers from 2002 have been replaced with the high commodity prices and lower interest rates of 2008, resulting in an increase in assessed value.
"Here's where a new quirk in the formula comes in. The Department of Local Government Finance drops the highest value of the six from the average," DeBoer said. "The General Assembly changed the formula for 2011 taxes to make the increases in the base rate a little smaller."
For 2011 taxes, lawmakers dropped the highest value derived from the 2007 data. But because the 2008 data is higher, it will be dropped, leaving the still-high values of 2007 to factor into the 2012 tax assessments.
"Without dropping the highest value, the base rate for 2012 taxes would have been $1,670," DeBoer said. "The calculation change reduced the base rate by about 10%."
Because there is a four-year lag in the formula and all of the data from 2009 and 2010 and most from 2011 are available, DeBoer said it is possible to project what will happen to the base rate for the next few years.
The Department of Local Government Finance used data from 2004 to 2009 for the 2013 calculation of $1,630, DeBoer said. Because commodity prices have remained high and interest rates low, the base rate for taxes in 2014 will be about $1,760. For taxes in 2015, it will be about $2,030.
The six-year average and four-year lag also mean the high commodity prices and low interest rates in 2012 will first enter the tax formula in 2016 and will not drop out until 2022. "The base rate is likely to increase and remain high for a long, long time," DeBoer said.
DeBoer's full column, along with the podcast version, are available online.