Larry DeBoer, Purdue University agricultural economist. His column appears in Indiana newspapers.
The base rate of farmland will fall 3 percent from $1,610 per acre for taxes this year to $1,560 in for taxes in 2020. Indiana’s Department of Local Government Finance made the announcement on December 28.
What does this mean? The base rate is the starting point for the assessed value of farmland, used to calculate property tax bills. It’s revised every year by the DLGF, which is the state oversight agency for property tax administration. The base rate is multiplied by a measure of soil productivity, to account for the variation in land quality. In some cases it’s reduced to account for other features that influence value, like frequent flooding. The end result is the assessed value of each acre of farmland, which is then multiplied by the local property tax rate to set the tax bill.
Between 2007 and 2015 the base rate of farmland increased from $880 per acre for taxes in 2007 to $2,050 for taxes in 2015. Farmland tax bills increased. Then corn and soybean prices dropped, and the General Assembly changed the base rate formula so that it would respond to lower prices more quickly. The base rate began falling for taxes in 2017, and this will continue through 2020.
The base rate formula combines measures like land rents, commodity prices, yields, and costs to measure the net income earned per acre of land. This is divided by an interest rate, which the formula sets at 8 percent, to get a capitalized value for each year. The most recent six years of data are included in the calculation, with the highest capitalized value dropped. The remaining five are averaged to get the base rate.
The base rate for 2019 used data from the six years 2012 through 2017. The base rate for 2020 eliminated the 2012 value and added the value for 2018. The 2012 value was $1,881; the 2018 value was $1,625. That $256 reduction, divided over five years, produced the $50 drop in the base rate. You can see the DLGF’s calculation, and all the data used, on their website at www.in.gov/dlgf/7016.htm.
I thought the base rate would fall more in 2020. The average capitalized value for the years 2015, 2016 and 2017 was about $1,250. The base rate would have dropped to $1,480 if that had been the 2018 value, a $130 decrease from 2019. Instead, the actual capitalized value was $1,625. The value was high because of an increase in the yields of corn and soybeans from 2017, up 8% for corn and 11% for beans.
So forecasting the base rate is hazardous, but here goes. For taxes in 2021, the capitalized value for 2013 will be eliminated. It happens to be the highest value of the six years, at $3,406, so it’s not actually included in the base rate average for 2020. With that high value gone, the next highest value—$2,350 from 2014—will be dropped from the average.
A value calculation using the rent, yield, price, and cost data from 2019 will be added. We don’t know those numbers yet. But if the value calculation is less than $2,350, then the base rate will fall again. That’s almost surely what will happen. If the 2019 value is the same as in 2018—that is, $1,650—the base rate will fall 9 percent from $1,560 to $1,420. If the 2019 value is like the average of the last four years, the base rate will fall to $1,360, a 13 percent drop. Either way, the direction of change is down.
Farmland property tax bills may fall a little in 2019. That depends on what happens to tax rates. The statewide average tax rate has been edging upward over the past several years, which could offset the small base rate decrease. In 2021, though, the base rate decrease looks to be larger, so farmland tax bills will probably fall.
Let’s not forget, though, that lower farmland assessments mean higher property tax rates. A higher rate is needed to raise the property tax revenues that local governments use to provide services. When farmland property taxes go down, the tax bills on other property go up, at least a little.