Property taxes on farmland are increasing. The base rate for the assessment of an acre of farmland was $1,290 for taxes in 2011. It will be $1,500 per acre for taxes in 2012. And the state's Department of Local Government Finance has announced the base rate will be $1,630 for taxes in 2013.

Farmland is assessed starting with this base rate. It is multiplied by a soil productivity factor, which varies from about 0.5 to 1.3, based on soil type. Some acreage is adjusted by an influence factor, a percentage reduction that accounts for factors such as frequent flooding. The result is the assessed value of farmland. That assessment times the property tax rate, less any credits, is the tax bill.

The base rate is adjusted each year with a formula. The DLGF offers the details on its website. It's complicated, but three of its features tell the story.

First, it's a capitalization formula. It divides the estimated net income earned from a farm acre by an interest rate to get the amount that a "rational" investor would pay for that acre. For example, in 2008 the DLGF estimated that a landowner renting the acre, or an operator growing corn or beans, could earn an average of $165. The Chicago Federal Reserve reported several farm-related interest rates that averaged 6.56 percent. Divide the earnings by the interest rate, and (after some rounding) the result is $2,508.

Now imagine an auction for an acre that earns $165. The first bid is $1,000. Earnings of $165 on an investment of $1,000 give a rate of return of 16.50 percent. That's a really great deal, because our rational investors get a rate of return of only 6.56 percent on other investments. They bid more, say $2,000. That's a rate of return of 8.25 percent, still a good deal. At a bid of $2,508, the rate of return is no better or worse than other investments. A rational investor would not bid more.

The second important feature of the base rate formula is that it's a six-year rolling average. For taxes in 2011, capitalization results from 2002-2007 were averaged together. For 2012, the years are 2003-2008. The base rate changed because the results for 2002 were dropped, and the results for 2008 were entered.

Back in 2002, corn and bean prices were pretty low, and the net income estimate was only $63. The interest rate was higher - 7.02 percent - so the capitalization result was only $890. That low number was dropped from the average for 2012 taxes.

Here's where a new quirk in the formula comes in. The DLGF drops the highest value of the six from the average. The General Assembly changed the formula for 2011 taxes, to make the increases in the base rate a little smaller. For 2011 taxes, they dropped the highest value of $1,927 from 2007 data. The 2008 value is higher, so now it is dropped, and the 2007 figure enters the average. For 2012 taxes, the base rate average dropped the value $890 and added the value $1,927. The base rate increased from $1,290 to $1,500.

Without dropping the highest value, the base rate for 2012 taxes would have been $1,670. The calculation change reduced the base rate by about 10 percent.

The third important feature of the formula is the four-year lag. The DLGF used data from 2004-2009 for the 2013 calculation of $1,630. We know the data for 2010 and most of the numbers for 2011. That means we can project what will happen to the base rate for 2014 and 2015. Commodity prices have remained high and interest rates have remained low. So for taxes in 2014, the base rate will be about $1,760. For taxes in 2015, the base rate will be about $2,030.

The six-year average and the four-year lag have another implication. The expected high prices and low interest rates in 2012 will first enter the formula for taxes in 2016 and will remain in the formula for six years, dropping out in 2022. The base rate is likely to increase and remain high for a long, long time.

Larry DeBoer is an agricultural economist for Purdue University Extension.