Taxing Situation | TSLN.com

Taxing Situation

Property taxes on ag land vary widely by state

by Ruth Nicolaus for Tri-State Livestock News
Ranch in Montana

Property taxes began before the U.S.A. was born; in fact, they, along with other taxes, helped fund the Revolutionary War. And now, more than two centuries later, farmers and ranchers are still paying them.

Assessed at the county level, the formula for how they are figured varies widely.

Property taxes are usually divided into four categories: agricultural use land, residential, commercial, and centrally assessed (including railroads, pipelines, cell phone towers, and telephone lines).

For agricultural use land, concessions are given, meaning ag land is assessed at a lower value per dollar. Depending on the state, it is assessed either at a lower rate of market value than other non-ag assets, or it is assigned a lower-than-market appraised value.

For those who have never understood how property taxes are figured, each state has its own formula for assessing the value of that land. After the value has been figured, that value is multiplied by the tax concession value, which varies from state to state. The tax concession value in South Dakota is in the upper 80 percent range (it varies by county); for Nebraska, it is 75 percent, Wyoming is 10 percent, Montana is 2.16 percent, Colorado is 29 percent, and Kansas is 30 percent.

Then after the value is multiplied by the concession value, it is multiplied by the mill levy. Mill levies are set by each municipality or district, and vary annually, depending on budgets for public education, townships, community colleges, fire districts, hospitals, airports, and more. A mill is 1/10 of a penny, or 1/1000 of a dollar, equal to $0.001 or $1 per $1000.

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For example, a piece of cropland in Kansas whose assessed value is $10,000 (for easy computing), would be multiplied by 30 percent (the state's concession value), which equals $3,000. Then that amount is multiplied by the mill levy in that district, (for example in Phillips County the mill levy is .198654 x $3,000.) The taxes in this example would be $596.

The biggest differences in ag property taxes from state to state are how the land is assessed.

Several states assess their agricultural property tax based on productivity of the land.

For crop ground, South Dakota uses a productivity formula based on soil ratings. If the soil is capable of growing a crop, that soil is valued on the productivity formula. If it is range-rated soil, value is figured using data for cash rent from the National Agricultural Statistics Service (NASS). Formulas used are based on an eight-year Olympic average, meaning the highest data and the lowest data are kicked out, and the remaining six years are used to figure the average.

South Dakota switched from a market value to productivity formula in 2009. When the switch was made, the state legislature's goal the first year was to remain revenue neutral, to keep ag value in the state at the same level when the new assessment took place. Legislation was put in place to allow counties to raise values by ten percent a year, so cropland owners weren't hit with the full productivity value right away, said Deb Kahl, county assessor for Walworth County, South Dakota.

But then commodity prices raised productivity values rapidly, and "10 percent didn't keep us even," Kahl said, "and we were falling behind. The ten percent (increase) would have gained us a little each year, till we got up to full productivity."

So the S.D. Legislature passed laws that required cropland property tax values to increase, depending on where the taxable value was. For counties who were less than thirty percent from their full agricultural income, they were required to not increase or decrease more than fifteen percent. If the county was fifty percent or more from its full ag income value, it was required to not increase or decrease more than twenty-five percent.

This creates a discrepancy between cropland, valued at productivity, and range land, assessed on cash rent values, said Kahl. "Now I'm sitting here where my grass guys are paying taxes on virtually one-hundred percent of their value, and crop guys might be up to seventy percent. We have nothing very well equalized because my crop guys aren't paying on productivity, but my grass guys are."

The S.D. Legislature has set a sunset rule for 2018; if counties are not up to the full productivity value by then, they must increase values to reach it. There's only one more legislative session between now and then, Kahl points out, "so they may make more changes. We've had some kind of change to that legislation (every year) ever since it went into effect."

Colorado and Kansas value their agricultural land much like South Dakota does on its crop land. In Colorado, ag land is valued based upon what it's capable of producing, per acre, on an income approach, said Yuma County, Colo. assessor Cindy Taylor. A ten year Olympic average is taken of what the commodities sold for, less expenses (chemicals, fertilizer, seed, water, and others). Appraisal values are figured every other year, in the odd years.

In Kansas, ag land values are set by the state for every soil type, with each having a different value. An eight-year average is used. Formulas used in Kansas are figured by Kansas State University.

For Colorado, assessment rates are set by state statute and are 29 percent for ag and commercial property. The residential rate is set at 7.96 percent of value, and oil and gas is set at 87.5 percent which has helped Yuma County, which is fifth in the state in natural gas production.

Unlike any other state in the Union, Colorado is not able to raise taxes without the consent of the people. In 1992, voters approved the Taxpayer's Bill of Rights, a constitutional amendment nicknamed TABOR. It satisfies people's frustration with higher taxes, says Taylor, but it hamstrings local government when values go up but tax rates do not. "Our assessment rate for houses is at 7.96 percent, and it should go up to 8 percent or higher."

If any Great Plains state is a quagmire for property taxes, it's Nebraska.

Unlike its neighbors, ag land taxes in the Cornhusker state are set by market value of the land, not its productivity.

As land values have skyrocketed, so have property taxes. Statewide, ag land taxes have averaged an increase of 10 percent annually, on a ten year average.

To figure ag land tax values, the county assessor takes three years of sales data and figures an average for the value of the land, based on its selling price. Assessors theoretically try to get data for ground that is similar, but they've sometimes had to "borrow" sales data from other counties to figure an average, with the data not always representative of the land being assessed.

The ag land tax valuation is a three year average; commercial and residential values are a five-year average.

Nebraska has a lower income and sales tax, putting a lot more pressure on property taxes.

Mark Haynes, a farmer who lives in Dawes County, Nebraska, in the northern Panhandle, has done research on Nebraska's property tax and is well-versed on his state's system as well as other states.

"You could add up property taxes for the states of Montana, South Dakota, North Dakota, Colorado, Kansas, and Oklahoma, and all those states combined have less in ag taxes than we do," he said. "We pay two and a half times more for ag taxes than the surrounding states."

Added to the issue is the reliance of public education on property taxes. State funding for K-12 schools is distributed on a needs-based system; if property taxes can pay for the education in a county, the state will kick in very little funding for the school. Thus, counties with a huge amount of agricultural land often get very little in terms of state funding.

Sioux County, Neb. (in the west) and Bennington, Neb. (a community on the north outskirts of Omaha, in Douglas County) are the perfect example. In Bennington, it costs about $10,000 to educate a student annually. Student-teacher ratio is 15:1. In Sioux County, Neb., with 1,300 people in the county (compared to 537,000 in Douglas Co.) student-teacher ratio is 3:1 yet the cost of education is $28,000 per student, due to fixed costs like utilities, teacher salaries, and others. Sioux County Public School in Harrison, Neb., receives $1,200 in state funding. All other school funding must come from property taxes from the county.

And the problem won't get any better, says Haynes. In the 1930s, seventy-six percent of the population lived outside city limits. Now it's reversed. "It would make sense that the tax code keeps up with the demographics of the state. Why would you tax somebody on all of their property, and (lessen taxes on) somebody else's property, to fund education, when you have 76 percent of the population living within city limits? Cities represent thirty-six percent of the taxable property value. It's too much of a burden for ag."

The public, mostly ag folks, are not happy with their property taxes in Nebraska, said Senator Al Davis, Hyannis, Nebraska. "Since we are a commodity-based industry, the prices are beyond our control and we are at the mercy of the market. When the market collapses like it has this year, and the valuation of cattle is down fifty percent from a year ago, property taxes as a percentage of your whole income double." And the problem will only worsen. "We haven't come to the peak on ag valuation yet." Davis said.

The fall in commodity prices hasn't been reflected yet in the average. Deb Kahl, Walworth County (South Dakota) assessor, sees the same problem. "Corn goes down by half and I raise your ag land (values) by twenty-five percent. Why? Because I have one year of $4 corn and seven years of $7 corn. This year, the high and the low drop off so the $4 corn never happened in our formula." Next year, there is some relief. "And next year, finally the $4 corn kicks in and I get to use the five high (years) and the one low (year.)"

Not only have commodity prices dropped, but oil prices have as well. For areas with oil production, that's a double whammy. Terry Kastens, a farmer in northwest Kansas and a retired K-State professor, notes that taxes can go up for a variety of reasons. "When oil prices collapse, counties don't get as much taxes in. You can't cut your expenses that quickly in a county, so consequently, the mill levy goes up."

Oil production in eastern Montana has had an unforeseen consequence in McCone County. The county saw very few oil wells, but property taxes have increased because of a demand for housing. "Even though we don't have a lot of oil in this county, we got caught up in it because we were adjacent to counties who received a lot of the revenue," said Janet Berry, with the McCone County Treasurer's Office.  Houses were selling for "way more than what they should have been, because of the lack of housing. Then we put out the new tax bills and property tax doubled. People were not happy."

There's a feeling of frustration among older people as well. "They see the value of their homes go up, even as their homes get older," said Julie Tweedy, oil and gas clerk with the Phillips Co., Kansas assessor's office. "People are willing to pay more for homes." Tweedy, who grew up on a farm and whose mother and brother still derive income from ag land, says it's tough. "It's on an eight-year average, and several years ago, our land and crops were worth a lot more. Now the bottom has dropped. It breaks our hearts when (farmers and ranchers) come in and say, 'how can you do this to me?' We get it. My mom's in that boat, and so is my brother. We all understand and feel it."

In South Dakota, county assessors are called directors of equalization, and the name is appropriate, Kahl said. "The main thing we strive for, is to try to make sure that no matter how much (taxes) they need to get, you're only paying your fair share, that your property is assessed equally to any other property that's just like yours, or that a better property is assessed higher or a lesser property is assessed lower."

And taxpayers have an obligation, too, Kahl thinks. "I always say to people: the school and the county and the city are spending your money. When was the last time you attended a budget hearing? Because that's where they're spending your money. If you want to control how your money is being spent, you need to go to a budget hearing and make them accountable for what they're spending. As a tax payer, you have a job, and your job is to make sure they're only spending what they need, and they're spending it wisely. It's your money."

People in Walworth County, South Dakota, like everywhere else, think their taxes are too high. But there is some sense of consolation for Kahl. "If I have to pay money to the government, I don't want to pay it to any higher level of government than necessary. As long as I can pay that property tax directly to my county, that's the most control I will ever have over that tax money."