A fix for a flaw: Mistake in valuations costs Nebraska landowners
for Tri-State Livestock News
LINCOLN, Neb. — It’s no secret that Nebraska’s farmers and ranchers have been beaten up by property taxes for decades.
The state’s agricultural property taxes are among the highest in the country, according to a Cornhusker Economics report released this spring by the University of Nebraska-Lincoln Agricultural Economics Department.
In his paper [https://digitalcommons.unl.edu/agecon_cornhusker/991/], UNL Ag Economics Professor David Aiken wrote that over the last three years, Nebraska farmers and ranchers have paid nearly one third (roughly 31 percent) of their net farm income in property taxes (47 percent in 2017). When state and federal taxes are factored in, this represents an effective tax rate of more than 50 percent (over 60 percent in 2017).
Fingers are pointed to the state’s over-reliance on property taxes to fund K-12 education and local school districts. Rather than the tax burden being more equitably distributed across sales and income taxes, ag landowners have borne the bulk of the load to fund the state’s schools.
But what’s worse — a flaw in how the Nebraska Department of Revenue’s Property Assessment Division conducted valuations means some producers have paid far higher than 31 percent of their income toward their tax bill.
That’s according to research by Dr. Jerry Green, a retired engineer with 34 years of experience in conducting statistical analysis for a major U.S. machinery company. Green said that over the last decade, he has identified what he call’s “a massive blunder” made by the Nebraska Department of Revenue’s Property Assessment Division (PAD).
And that mistake, Green argues, was ignored for far too long.
Nobody’s business but the TERC’s
Green first began his research into PAD’s valuation flaw in 2010, after he appeared before Nebraska’s Tax Equalization and Review Committee (TERC, pronounced “Turk”), to protest the valuation of his family’s fifth-generation homestead in Morrill County.
“My dad had been protesting (the valuation of) some of his worst grassland for years and years,” Green told TSLN. “He had open heart surgery and had a hearing coming up with the TERC, and he was in no condition to get involved in it so I jumped in.”
Green initially expressed skepticism at his father’s protest.
“My dad was almost 90 years old at the time, and I half expecting to find that he was just out of touch with sale prices,” he said.
As he began digging into the weeds, Green discovered that Morrill County had placed the same value on his property as a piece of land that produced twice as much grass. While Green lost the first of several hearings before the TERC, (which he credits to his inexperience and taking up the protest late in the process), he was not convinced to lie down and accept it.
His fight would go to the halls of the legislature and wind up before the Nebraska Supreme Court.
The fundamental flaw
Unlike some of its neighboring states, where ag land valuations are based on income potential with fixed capitalization rates, Nebraska uses a mass appraisal method to determine a property’s value, factoring in the market value of property sold in a given county.
County assessors are supposed to use land classifications as part of their model to ensure that highly productive land, which generally sells for high prices, is valued and taxed at a higher rate than poorer producing ground.
It’s in that method where the flaw lies, Green said.
Utilizing his background in statistical analysis, Green obtained soil data from the Natural Resources Conservation Service (NRCS) for Morrill County, as well as the classification data that the Morrill County Assessors Office used to determine its valuations in order to compare the data sets.
When he plotted the data, Green expected to see a correlation between the two sources, hoping that it would show a stair-step effect for valuations when going from the low-quality land to the high-quality land. [See attached graph]
In reality, Green’s graph showed something far different.
“That plot ended up looking like a shotgun blast,” he said. “There was absolutely no correlation between the two.”
Green said his research uncovered a mistake in how PAD assigned land classes for grassland and irrigation. By basing land capability groups on the dryland capability classification, PAD made the incorrect assumption that it could then take dryland farming classifications and apply those same classifications to grassland and irrigation categories as well.
“They didn’t do anything different,” Green said.
Take the Nebraska Sandhills, for example.
Green said that a close examination of most of the Sandhills soils shows that grasslands there are rated in the bottom-two grassland classification ratings — primarily because PAD based its grassland classifications on the dryland farming classifications.
It’s common knowledge to most that the Sandhills are a terrible place to dryland farm. When you break the sod, the soil will erode and the crop itself blows away. However, when left undisturbed, the Sandhills grows grass in abundance, and when classified based on the forage production capability, those soils quickly move to the upper half of the classification scale, versus the bottom one-fourth as dryland.
The same could be said for the Northwest Panhandle. While often too rocky and steep for dryland farming, the hills of Nebraska’s Pine Ridge can produce quality forage in spades.
Green presented his evidence [https://terc.nebraska.gov/sites/terc.nebraska.gov/files/doc/Update%20-%20Grassland%20LCG%20Classificaiton%20Issue.pdf] before the TERC in at least five different formal settings starting in 2013, showing that pastures with a factor of 11 times difference in income generation potential (1,100 percent) were all being set at the same dollar per-acre value. Green’s analysis showed that certain unlucky landowners with the poorest pastures wound up paying more in property taxes than the land itself could ever produce in income.
However, despite these presentations, Green said his protests seemed to land on TERC’s deaf ears.
Bob Wickersham, a former state senator and former TERC Commissioner, said he sat on the unicameral Revenue Committee when TERC was founded in 1996. He left the Legislature in 2002 to become a TERC commissioner and later heard (and denied) one of Green’s appeals.
Wickersham said the major objective of the TERC was to hear appeals from the county boards of equalization. Prior to the TERC being established, when a property owner appealed the decisions made by the county boards of equalization, the case would be sent to the district courts, where they’d often be added to the already saturated docket of felony cases and divorce proceedings.
“There was a wide perception that those cases were taken to the back of the docket by the district courts,” Wickersham said.
Beyond the lengthy process of getting an appeal heard in district court, Wickersham said that individuals would often be mired down in the procedures of the venue. Rules of evidence applied, and property owners almost always had to hire an attorney in order to get their appeal heard.
“We wanted to have a forum where, in-fact, your appeal could be heard without the necessity of a lawyer, and it would be heard in a more timely fashion than it would be heard in the district court,” he said. Wickersham said filing fees for the TERC were also substantially less of a financial burden compared to the filing fees for District Court.
Wickersham said that the belief was that a group of people focused specifically on tax equalization issues could provide a more consistent and knowledgeable decision.
“We weren’t saying that the district courts didn’t know what they were doing,” Wickersham said. “But, when you only get one of these (appeals) every five years, you’re not as knowledgeable as someone who hears hundreds of these cases in a given year.”
The appeals process
Wickersham said there are two prongs to making your case before the TERC. The first is to show that the county did something wrong in valuating your property. The second is that you have to show what the value ought to be.
It was at several hearings before the TERC that Green made his case about PAD’s grassland classification error. On his final hearing, Green appealed his case to the appellate court, which was then heard before the Nebraska Supreme Court, where he ultimately wound up losing.
Green said that in the court’s opinion, it glossed over the grassland classification flaw. He said that the TERC argued that the valuation Green presented, which was valued at a dollar per pound of forage the land could produce, rather than the dollar per-acre the county assessor had figured, was an invalid method because it only looked at one factor for its valuation.
“(The TERC) were really critical of that,” Green said.
Wickersham, who had since left the TERC, had a number of prior discussions with Green. He had urged Green to hire an attorney and take his appeal to the courts.
“I was disappointed in the Supreme Court’s ruling,” Wickersham said. “Based on what I knew about of the facts and the proceedings in the (TERC), I would have not ruled as the commission ruled.
“But, that’s personal,” Wickersham added.
“Dr. Green has presented evidence, and there is a fundamental flaw in the way the properties are classified and valued,” Wickersham said. “The flaw he’s pointed out has been generally acknowledged and is still unaddressed, and I think that’s not good.”
Wickersham said that he didn’t know whether correcting this error would cause a valuation to be higher or lower, but that is not the issue.
“It’s an error, and it ought to be fixed, so that whatever the resulting values wind up being are supportable,” he said. “That flaw does have ramifications, and if anybody looks at it objectively, they would say that’s not the way we’re supposed to do it.
“But (PAD) was still doing it that way, and then you expect people to have confidence in your result? I don’t think so.”
The potential fix
Green said beyond the TERC, he’d made his presentation before numerous legislators, and generated interested from several individuals, including former Sen. Al Davis, and current Sen. Steve Erdman.
Erdman introduced LB372, a one-sentence amendment to existing legislation, during the 2019 Legislative Session. It passed the Unicameral and was signed into law by Nebraska Gov. Pete Ricketts.
“When valuing agricultural land or horticultural land for property tax purposes, the appropriate primary source for land capability groupings should be the Natural Resources Conservation Service, not all based on a dryland farming criterion,” the text of the bill reads.
Wickersham said that one of TERC’s lawyers has said that the classification flaw was indeed a problem, and he agreed that it needed to be fixed. However, Wickersham was unsure if LB372 would move the needle as far as valuations went.
Nebraska’s Property Tax Administrator Ruth Sorensen said that with the LB372 passage, PAD can now take action to change its land capability groups. Because the bill goes into effect after March 19, values have been set for 2019. Sorensen said it will therefore become effective in January 2020.
Sorensen said that NRCS productivity data is being analyzed by a soil scientist and new conversion tables will be sent out to the county assessors as soon as possible. Since the current land classification structure is based on dryland, she expects there to be some changes to irrigated and grassland valuations, but nothing completely earth-shattering.
“The assessed value should not change based solely on (the land classification) changes,” she said.
Sorensen foresees minimal impact from the classification change because of the state’s market-based approach to appraisal. She said ag land property valuations have started to decline from the peak set in 2014.
“The market for agricultural land across the state is flat to slightly declining,” she said. “The valuation changes will reflect those trends in 2020.”
As for the classification error, Sorensen contends that it was only one of the characteristics that assessors looked at when assessing a property’s value. Other factors, she said, include rainfall, the property sold in a given county, and that valuations will soon factor in provisions contained in a destroyed-real property law that passed the Nebraska legislature this year.
Green was not sure if LB372 would be the change he’d hoped to see, but it will be a change.
“I feel like (PAD) are going to be forced to make a change,” he said. “Hopefully, it will be a change for the better.”