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Farmland Property Taxes Would Skyrocket Under Proposed Kansas Law

When you see that something is going to change by an amount in excess of 600%, it's something of an eye-opener.

When a lawmaker from an urban part of Kansas proposed a bill that would ratchet up that state's property taxes on farmland, which comprises the vast majority of the state's geography, it was even more eye-opening. Will other farm states -- cash-strapped or not -- follow suit? 

The potential law, Senate Bill (SB) 178, is working its way through the Kansas Legislature -- some say without much chance of passage -- and would use cash-rental rates to assign value to farm and ranchland. This would ultimately mandate all lands to be appraised anew, and state officials say this will likely lead to an increase in property taxes on that land to the tune of 169%. 

The '30,000-foot view'

  • Kansas bill proposal seeks to change land’s taxable value.
  • Farmers worry about bill’s intent to match land market volatility
  • Critics call the proposal a way to make up for tax revenue losses.
  • Bill to be challenged for its constitutionality.

The 169% figure was actually included in a previous bill brought forward by the same lawmaker -- Republican State Senator Jeff Melcher of Leawood, a suburb of Kansas City, Kansas -- last year. This version of Melcher's bill removes the capitalization rate, and the resulting potential increase in assessed valuations ranges from 408% for dryland crop ground to 672% for grassland, sources say, according to the Kansas Department of Revenue. This is not the projected increase in property taxes, rather the basis on which those taxes would be increased, one Kansas farmland appraiser says.

Some farmers fear the worst from Melcher's bill. Despite a somewhat gloomy
outlook for the bill's future, the fact that it's come forward at all has
raised anxieties among farmers who are already facing a profitability
squeeze.

"A fairly intelligent farmer in western Kansas used the proposed method . . . he pays $60,000 in property tax," says Agriculture.com Farm Business Talk adviser elcheapo. "Under the new scheme, his tax bill will be $305,000."

Adds Farm Business Talk adviser nwobcw: "Our farm taxes are only doubling."

Behind the numbers

Those higher numbers pertain to the valuation of land that will now take into account cash rental rates instead of traditional "Use Value" and a calculated capitalization rate that includes county tax levies. Yet "the Kansas Constitution requires agricultural land to be valued based on its income or productivity. The use value appraisal methodology was implemented in Kansas in 1989. These values are updated annually," according to the Kansas Department of Revenue.

So, the assignment of land's taxable value is what is subject to the most change under the proposed law, not the specific tax rates. The latter will ultimately climb based on the former, however, and though officials expect a tax hike of less than 200%, there's no official ceiling. Some farmers say that could mean massive increases that, in extreme cases, could put some farms too deep into the red to continue operating.

"It is the intent of the legislature that appraisal judgment and appraisal standards be followed and incorporated throughout the process of data collection and analysis and establishment of values pursuant to this section," according to the bill. "For the purpose of the foregoing provisions of this section the phrase 'land devoted to agricultural use' shall mean and include land, regardless of whether it is located in the unincorporated area of the county or within the corporate limits of a city, which is devoted to the production of plants, animals or horticultural products, including, but not limited to: Forages; grains and feed crops; dairy animals and dairy products; poultry and poultry products; beef cattle, sheep, swine and horses; bees and apiary products; trees and forest products; fruits, nuts and berries; vegetables; nursery, floral, ornamental and greenhouse products."

What about other states?

In a broader context, other states do have similar systems for assessing value to farmland, though cash rent trends typically make up just part of the equation. In Indiana, for example, a "base rate" takes into account market value that includes potential value for its "best use," be it agricultural or for development. A Purdue University report outlining that state's policy says this leaves a lot of room for argument on how the land is used and whether that use is taking advantage of the land's full value in the eyes of the state government applying tax laws to it.

"Opponents of use value assessment might argue that market value assessment at highest and best use is appropriate for farmland. Wealth, they might say, can only be measured by a property’s potential selling price. A farmer owning land with development potential is wealthier than if agriculture was the land’s highest and best use," according to a Purdue report. "It is fair for a wealthier farmer to pay more in taxes. Supporters of highest and best use assessment also would argue that changing assessments with a property's use will influence the business decisions made by owners. Resources are used more efficiently when business decisions are made for business reasons, not to avoid taxes."

Other states use a similar classified-use rule for assessing farmland, also reassessed regularly to reflect market changes, though cash rent as a basis for market value is typically not included.

"Under a classified-use system, different tax rates and exemptions are applied to different kinds of property. Nebraska is one of 25 U.S. states that employ this type of system. In the Cornhusker State, agricultural land is assessed at market value, but only 75% of that value is taxed. In comparison, residential and commercial property is taxed at 100%. Most states in the Midwest, though, employ some version of use-value assessment -- assess the property based on the income a farmer can be expected to earn, rather than the land’s market value," according to a report from Carolyn Orr of the Council of State Governments. "Generally, the income of a farm field is calculated by the land-grant university in a state, with factors such as commodity prices, soil productivity, rental rates, and production expenses all taken into account. There is another part of this formula, too, that can make a potentially huge difference in land values and, as a result, agricultural property taxes: The interest rate for farm mortgage loans. The lower the rate, the higher the value of the land because the cost of owning it is reduced."

Hurdles facing the bill

Critics say Melcher's approach in the bill underlies a misunderstanding of market factors that can send land prices and cash rent levels -- the basis for the new proposed land valuation rules -- sharply higher or lower based on the overall ag marketplace, and assumes farmers have kept up, income-wise, with the continued climb in overall farmland market value. And, according to the Kansas Department of Revenue, using cash rent rates would fall outside of current constitutional mandates.

"Valuation of agricultural land in Kansas is governed by Kansas law. The appraised value of agricultural land is based on the productive potential directly attributed to the natural capabilities of the land, not fair market value. Cultivated land is valued using an eight-year average of the landlord share of net income, with soil types used to recognize land productivity potential. For grassland, an eight-year average of the landlord share of the net rental income is used. In the case of grassland, productivity is established by use of the grazing index assigned to each soil type. In either case, the resulting eight-year average landlord net income is divided by a capitalization rate to arrive at the appraised value," according to a Kansas Revenue Department document.

Underlying the whole situation is an environment in which the state of Kansas has fallen way behind on tax revenue in the last three years. In January of this year alone, the state fell just over $47 million short in tax receipts than earlier expectations, according to the state's Department of Revenue. Critics of the proposed tax increase on farmland say it's a shot by lawmakers to shore up the state's tax revenue gap, while those in favor or on the fence say the increase is justified in the broader context of farm incomes and taxes paid over the last few years.

"In 2012 when a massive income tax cut was proposed, assurances were made that cutting income tax would not result in higher property taxes," Kansas State Republican Representative Don Hineman of Dighton, Kansas, says in a blog post at hayspost.com. "Many of us were not buying the story then, and we now have solid evidence that the ploy was a smokescreen to gain enough votes to pass the tax cut."

Kansas Farm Bureau, the state's largest ag group, is strongly opposed to the bill. “Kansas farmers and ranchers oppose SB 178. This bill impairs a stable, nationally-recognized system to calculate and tax the income potential of land. Instead, it proposes the use of volatile, artificial cash rental rates, which would upend the predictable revenue stream upon which Kansas counties, school districts, and state government depend to fund operations," Kansas Farm Bureau (KFB) and Montgomery County, Kansas, farmer Rich Felts says in a KFB statement. "SB 178 is a tax increase, is not equitable, and would be detrimental to Kansas agriculture and small businesses. Agriculture is the number-one driver of this state’s economy and provides a solid foundation that has softened many of the impacts of a weak national economy over the last several years. KFB opposes the bill and will work to defeat attempts to erode agriculture’s vital role in the Kansas economy."

Future outcomes

So, what are the potential outcomes if the bill becomes law? On one hand, property taxes on farmland may ultimately ride true land values higher, keeping the additional tax burden on the lower end of the potential increase range. On the other hand, there's room for a lot of downside for farmers, with the additional taxes -- and the farm sector itself -- being the tip of the iceberg. Ultimately, it becomes an issue of introducing volatility into a system that currently functions with more stability.

"Let's talk about a year or two in of poor crops, depressed commodity prices, and increased tax burden. Those three things could create a bit of a perfect storm. Part of what's driving the market is that ag land is seen as a haven for capital in difficult economic times. All of a sudden, if you make the tax burden higher, it almost becomes a self-fulfilling prophecy and pushes land values lower. If farmers have a tough year, they'll restructure based on solid equity, land. All of that adds up, and it pushes land values down, and we could have people in difficult situations. That's the worst-case scenario," says Steve McCloud, Kansas Farm Bureau Resolutions Committee member, farmer, and farm appraiser with McCloud Appraisals in Harvey County, Kansas. "In reality, land prices go up and go down, oftentimes based on influences outside of agriculture like higher interest rates and a strong stock market. Then, say you get into a series of years of bad production, sooner or later, cash rents will follow those down as well. You introduce some volatility in the tax base, and I'm not sure school boards and county boards of supervisors will like that either. All of a sudden, the tax base has a problem."

The bill's future hinges mostly on whether or not it's officially deemed in violation of the Kansas Constitution. Some say that may be what ultimately kills the bill before it reaches the governor's desk for signage into law.

"In 1986 the Kansas constitution was changed to allow ag land to be valued for property taxes based on its productive capability rather than its market value," Hineman says. "It is a complicated formula, but works well to estimate the producing capability of the land. Now, however, that formula is under attack."

Adds McCloud: "I haven't talked to anybody who thinks it has legs yet. You get down to the end of the session, it could get tacked on to an appropriations bill of some kind. We need to be very aware of and on guard for that too."

More on the proposed law from around the Web

Senate Bill 178, introduced yesterday in the Kansas legislature, seeks to amend the long-standing law for appraisal of agricultural land. Kansas, like 43 other states, has a time-tested, constitutionally-mandated method of taxing agricultural land based upon the income a landowner can expect to produce. KFB President Rich Felts made the following statement on the bill's introduction.

Kansas farmers worry new legislation could drive them out of business. A bill introduced in the state Senate last week aims to increase property taxes for agricultural land. Under the Kansas Constitution, agricultural property is valued and taxed based on the productivity/income of the land.

The seeds sown two years ago to fundamentally alter Kansas' time-tested three-legged stool of taxation seemingly have matured, and now the state is reaping a sour crop of shifting tax burden to landowners.

Back in the 1980s, the method of appraising agricultural land for property tax purposes was changed. At that time ag land, like all other classes of property, was valued on its market value. But inflationary pressures were making it difficult for farmers and ranchers to pay their property tax bill.

A bill in the Kansas Senate that would cause property taxes on agriculture land to mushroom has farmers concerned about the wallop to their operations. If Senate Bill 178 had been passed and implemented in 2014, it would have increased agriculture land values by an average of 473 percent, according to Kansas Department of Revenue estimates, and it would have provided an estimated $173 million for the state's general fund.

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