This map displays the estimated increase in county average tax rates following the projected reduction in the farmland base rate. Jay and other rural counties will be among the hardest hit. (Graphic provided by Purdue University)
This map displays the estimated increase in county average tax rates following the projected reduction in the farmland base rate. Jay and other rural counties will be among the hardest hit. (Graphic provided by Purdue University)
• •
Indiana’s farmers are getting a tax cut, a result of a new way that base tax rates for agricultural land are calculated.

But Purdue University agricultural economist Larry DeBoer said the lower taxes for farmers will mean higher taxes for businesses, homeowners and rental property owners. Combined with the state’s constitutionally mandated tax caps, the shifted tax burden may also see more individuals and businesses reach their caps, creating a loss of tax revenue for local governments and schools.

“Property tax is the largest revenue source for most Indiana local governments,” DeBoer said. “When taxes shift from agriculture to everyone else, having other taxpayers meet the tax caps means there will be less property tax available for county, municipalities and school corporations.”

DeBoer presented data to attendees of the Purdue Extension Ag Week event Wednesday at Jay County Fairgrounds that showed the changes to base property tax rate calculations for agricultural business and land. In the past, the base rate was calculated using a capitalization formula that took data from a six-year period that was four years behind the current year.

For example, 2015 base rate calculations used cash rent and operating values from 2005 to 2011. But the four-year lag meant a market downturn wouldn’t be reflected in base rates until multiple years after it began.

Despite a down market since 2014, base rates statewide for agricultural land and businesses were increasing by 6.9 percent a year from 2007 to 2016. In Jay County during that same time period, net assessed rates were increasing by 9.9 percent a year. That meant farmers were paying high tax rates even during times that the market for agricultural commodities was in a moderating period.

In 2015, the Indiana legislature passed Senate Bill 436, creating a new formula for calculating the base property tax rate for agricultural business and land, while reducing the lag period from four years to two. The new formula incorporates aspects of the old calculations, but includes a clause that would trigger the use of a different formula in the case that agricultural base rates would increase more than 10 percent in a given year. The new rate calculations, in short, will result in significantly lower taxes for farmers and agricultural businesses, according to DeBoer’s projections.

“Instead of several more years of increase, the new formula brings a decrease, starting now,” DeBoer said. “So your (agricultural) property taxes may edge down a little bit this year and for the foreseeable future.”

But DeBoer explained the new reduction in agricultural rates could cause issues for tax revenue in heavily agricultural counties. As tax rates for agricultural businesses and land drop, the other property tax categories (business, rental properties and homesteads) will increase to maintain a consistent tax revenue stream for local governments and school districts.

In urban and suburban areas with small percentages of agricultural land, the change will be easily absorbed by the other sectors. But in the case of Jay County, where 43 percent of net assessed value is in agriculture, other taxpayers will see significant rate increases.

DeBoer’s data showed that a 48-percent reduction in the farmland base rate would yield an increase of 20 percent or more for the other three sectors.

At the same time, the rate increases would be limited by tax caps that were added the the state constitution in 2010. The new caps, also called “circuit breakers,” prevent homestead property taxes from exceeding 1 percent of assessed valuation, rental property taxes from exceeding 2 percent assessed valuation business property taxes from exceeding 3 percent of assessed valuation.

DeBoer predicted for rural counties like Jay, the increase could result in many more homeowners, rental property owners and businesses hit their circuit breakers.

That would mean any revenue earned above those caps would be lost, requiring local governments and the school corporation to offset the losses with budget cuts.

DeBoer estimates rural counties, including Jay, will see the biggest change from the tax changes in beginning in two years.

“I would guess 2019, 2020 and 2021 would probably be when the local governments would see the biggest change,” DeBoer said.

DeBoer said Dunkirk, Redkey and Portland will face the brunt of the potential lost revenue from circuit breakers, as each municipality already has property tax rates above $3 per $100 of assessed value.
-30-