Optimism abounds in Hoosier farming community following farmland tax reduction

It’s a plight defined largely by a 63 percent increase in farmland taxes since 2007, a previously ballooning rate many attributed to an inequitable farmland tax formula.

Following the passage of Senate Enrolled Act 308 in this year’s Indiana General Assembly session, however, farmers like Bryan Kirkpatrick are now expressing optimism about a new “fairness” in tax distribution, largely due to a modernization of the oft-criticized formula.

“When the market goes down, the yield goes down and the income isn’t very good, the income is much less than it has been, [taxes] take a lot out of the pocket of the landowner, the farmer,” said Kirkpatrick, the author of, “Faith of a Farmer,” a book about his experiences here and abroad.

“There has to be a balance somewhere,” he said. “This bill will help with that balance, I hope. [The Legislature] realized what they put in [previously] didn’t work like they thought it would, so this corrects some oversights.”

Specifically, the new formula provides stability to the base value by adding capitalization rates that range between 6 and 8 percent, depending on certain factors, according to the Indiana Farm Bureau. SEA 308 also freezes soil productivity at the 2011 levels.

In addition, the bill reduces the four-year lag in net income data to a two-year lag, which will more accurately reflect market trends, noted Tamara Ogle, Purdue Extension community development regional educator. 

Basically, this will make declining prices more prominent in calculations, allowing rates to be more accurate. 

In a column for the Daily Journal, Larry DeBoer, a professor and extension specialist in agricultural economics at Purdue University, explained the role interest rates will also play in determining rates.

"More important, though, are the changes made to the denominator of the capitalization formula. The interest rate will be limited to 6 percent, 7 percent or 8 percent," he wrote of the complex formula, which takes into account the land's market value. 

"Deciding which interest rate to use is complicated. A preliminary base rate is calculated using actual farm interest rates. If the preliminary rate is at least 10 percent more than the previous year’s base rate, the 8 percent interest rate is used for all six years in the final base rate calculation."

Overall, farmland owners were initially expected to collectively see taxes go down $16.5 million in 2017, $48.7 million in 2018 and $106.4 million in 2019. That estimate has risen to $25.7 million in 2017.

Kirkpatrick also spoke about the effect property taxes have on farmers who rent their land, sometimes on a cash rent or "50-50" basis, saying the option of renting has become much less attractive with current tax rates.

Cash rent involves a tenant paying a fixed dollar amount in rent, while "50-50," or crop-share involves a landlord and farmer sharing input costs and proceeds. 

It’s that issue, and others, Kirkpatrick hopes will be remedied by the updated formula.

“It’s going to ease the burden some,” he said. “How much it will ease the burden remains to be seen until we get our next tax statement, but it will be more fair in the long run.

“In the farm community, we have people that have homes, that have other businesses, and we all pay property taxes. We all get along together and we have to work together. If we see that there are inequities in the property taxes, we all work together to make it fair and balanced for all.”

Potential and actual effects of revised formula

As Kirkpatrick noted and the statistics display, the bill will undoubtedly provide relief to farmers who many say have carried a heavy, and in some instances, unfair, burden of property taxes.

However, concerns have surfaced about the effect SEA 308 could have on local governments, which have already seen their revenues squeezed by property tax caps. Estimates provided by the Legislative Services Agency in Indianapolis show a statewide revenue reduction of $5.4 million in 2017, as opposed to a former estimate of $3.4 million.

The new estimates also show a $25.7 million reduction in farmland taxes as opposed to the former estimate of $16.5 million, according to an LSA memo. The estimates were updates to reflect the DLGF-certified rate of $1,960 per acre, down from the previous $2,020 per acre estimate.

In Howard County, the reduction in farmland taxes is estimated to total roughly $450,000. In Tipton and Miami counties those figures are $84,000 and $88,000, respectively.

“Some of that will be a decrease to local government units, some of that will be shifted to other types of property,” said Ogle. “That’s something that happens in property taxes when the assessment of one property type goes down, oftentimes some of that burden is shifted to other property owners because the property tax rate increases because of that decrease in assessed value.

“Unless you’re at your tax cap for those other property types, some of that is shifted to them. When you are at your tax cap that is when you see local governments losing funds.”

As Ogle explained, most homesteads in Kokomo won’t see an increase in their property taxes as the majority are already at the tax cap, meaning local government will see revenue loss, even if the extent to which that loss will affect government is still to be determined.

In contrast, homeowners and other taxpayers in unincorporated parts of Howard County – including farmers with ag-business taxes - will likely be left to pick up a greater share of the burden, according to Ogle.

“It’s going to be a concern for local governments specifically in a few areas, those that have a lot of farmland that is already at that property tax cap,” said Ogle, explaining local government will likely lose revenue in townships with a large amount of farmland and homes at or above the tax cap.

In those areas, businesses may be the only taxable entity left to pick up a portion of the burden, she noted.

Overall, 78 percent of land in Howard County is ag-class properties, but their net assessed value only amounts to 11 percent of the total property value, according to Howard County Assessor Mindy Heady, citing the 2015, pay 2016 figures. Those figures include mixed-use properties.

“The thing to keep in mind is that, granted Kokomo as a district doesn’t have a lot of farmland in it, it overlaps with units that do have farmland in them, which is going to affect their unit tax rate, which enters into the district tax rate, with local government losses for all of those overlapping units,” said Ogle.

“Kokomo is still going to realize some losses because they overlap with Howard County and Howard County does have farmland in it. But when you look at homeowners, who is going to bear the burden of the shift toward homeowners? It is not going to be people already above their tax rate.

“But if you are in Howard County and you pay less than your [tax cap], then yes, you are probably going to see an increase in your taxes.”

In comparison to Ogle’s remarks, both Heady and Howard County Auditor Martha Lake expressed their belief that the tax relief for farmers won’t have a significant impact on county taxpayers.

Looking ahead, the reduction is likely to be small enough to not impact anyone too heavily, noted Lake.

“That’s the way it looks, especially with other monies coming in to pay for services,” she said, citing recent road funding measures approved by the Legislature. “And it looks like our taxpayers won’t be hurt that much, that’s the main thing.”

At the same time, however, they both encouraged patience when predicting the future effects of farmland tax reductions.

“Only time will tell,” said Lake. “We will have to kind of see what happens.”

Needed relief for Indiana farmers

Even with the potential for local government revenue loss and a small burden shift to homeowners or local businesses, Hoosiers tend to recognize the weight farmers have carried in recent years and the relief they require.

“Now that the net operating income has dropped, or farm incomes have dropped significantly, taxes do play a much bigger role in what farmers are able to glean off of their land,” said Ogle.

The need for relief was evident at the Statehouse this session, according to Katrina Hall, director of public policy for Indiana Farm Bureau and the main lobbyist working on the farmland tax reform. Hall said the IFB represents roughly 70,000 “farming families” across the state.

“This has been occurring ever since 2007, when a bunch of major tax reforms came in,” she said, noting that counties with large amounts of farmland may also see a reduction in rate-controlled funds, like cumulative capital development funds, which are funded with taxpayer dollars. “There was a big shift to [agriculture], and it has only gotten worse.

“To be really honest, yes there were groups that voiced some concerns, but as far as heavy lobbying against our farmland relief, I did not notice that. I think most other groups, including the governmental groups, realized our taxes went up too much. What was going on with farmland was atypical.”

Most notably, the continued increase of farm taxes corresponded with a recent reduction in income for farmers.

“No matter how robust the farm economy may have been, the one thing our farmers have been facing for over two years now is a decline in crop prices that would bring their income down dramatically,” said Hall, noting homestead taxes have dropped by 30 percent since 2007, a sharp contrast to the increase of farmland taxes.

“There is an intersection of rapidly escalating property taxes and declining farm income.”

Another statistic cited by Hall was the fact that from 2007 to 2015 farmers paid $190 million more than other comparable tax classes, with $90 million of that increase coming between 2014 and 2015.

It’s those statistics that have had Indiana farmers like Kirkpatrick, who said he’s seen increases from $19 to $42 an acre, in an uproar for nearly a decade, and such inequities that have made farming in the state a much less profitable business.

“When a farmer takes on these costs, [remember] they also have land costs,” he said. “I want to make clear that I applaud these legislators for looking at it and doing the best they can to adjust the bill that was written a few years ago.

“They saw some inequities in the bill they passed, they studied it and they’ve tried to put together a formula that will give balance to farmers and everyone else in the county that pays property taxes,” he said.