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~ICOCOPY prs~VIN 1pound51 ART

~1tJN~ hJPL~~ or ShJR~ A

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

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bullt

t f f

bull

bull

bull

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

bullt

t f f

bull

bull

bull

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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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

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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

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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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bullt

t f f

bull

bull

bull

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

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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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

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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

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Postage and Fees Paid U S Department of Agnculture _- ~ 3637 IP Sclar H UPDATA Publications 1746 Westwood Blvd

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t f f

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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

bullt

t f f

bull

bull

bull

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