Land Use Value Appraisal

Property tax on Kansas farmland has been a hot topic recently. Perhaps it is time to review why use-value appraisal is appropriate. There are some very legitimate reasons why the Kansas constitution was changed in 1986 to value agricultural land for property tax purposes based on its income-producing ability rather than its market value.

Land has traditionally been regarded as a store of value and a safe haven for capital in uncertain economic times. The reason for that is relatively simple: God isn’t making any more land. That characteristic sets ag land apart from all other classes of property. If market forces indicate a demand for more office buildings, strip malls, or apartment complexes, then someone will build more of them. And when those developments occur, additional land is frequently taken out of agricultural production and converted to those alternative uses… once again diminishing the supply of ag land.

So whenever a parcel of ag land comes up for sale there are plenty of eager bidders. Neighboring farmers frequently bid because it presents a rare opportunity to expand their operation. Farmers farther away may bid because there are no expansion opportunities close to them. Investors frequently bid because they view ag land as a safe place to “park” some cash as they wait for better investment opportunities elsewhere. The market price of agricultural land is so disconnected from its income-producing ability that the buyer is forced to subsidize the income from the land in order to make the mortgage payments.

Because of those inflationary pressures on ag land, market prices and income-producing ability of the property are not as strongly linked as they are with other classes of property. Consider the following chart, which was constructed with data provided by KS Department of Revenue’s Property Valuation Division.

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For the years 1993-2013 it displays average market price for dryland and irrigated land in Kansas (divided by 100 to scale it for display purposes) and average price for wheat and corn in Kansas. Land prices have steadily increased over that time without any decline.  But grain prices have varied considerably, both rising and falling.  Data for productivity (yield per acre) also show wild fluctuations from year to year, because productivity is highly dependent on weather.

If we were to develop similar charts for other classes of property, we would see much closer correlation between market price and income-producing ability of the property.  The obvious reason is that the supply of such properties is elastic, and is constantly being adjusted to meet market forces of supply and demand.
http://www.ksrevenue.org/pdf/finalreport.pdf contains a report from the International Association of Assessing Officers regarding use-value appraisal in Kansas.  Here is a pertinent excerpt:

“Property tax is an ad valorem tax, or a tax based upon value of the property, not on the ability of a property owner to pay, but rather a wealth tax. There are two commonly used valuation standards in ad valorem tax systems—market value and use value.  Appraisers commonly use market value, whether determining a value for a mortgage, estimating the net worth of a company, or even trying to sell real estate.  Use value, when applied in the valuation of agricultural land, attempts to determine a value based upon the actual production of the land and removes other influences that affect the market value of real estate. A survey of all fifty states revealed that forty-three employ some version of use value, rather than a market value standard, for determining agricultural land values for property tax purposes.”

Here is another excerpt: “Based on the goals articulated for use value in Kansas and the thirty states included in the review, the current Kansas system is the best system in the United States.

Certainly there is an advantage to the farmer or rancher to valuing ag land based on its productive capability, but there is also value to the taxing entity, as it produces a more consistent valuation from year to year and greater certainty for the budgeting process.

An additional advantage of use-value appraisal is as a tool to prevent urban sprawl.  If agricultural land was valued on its market value, then farmers on the edges of cities would see their valuations (and taxes) skyrocket as developers bid up the price of neighboring land.  That would then force the farmer to sell to developers when he can no longer to afford pay the taxes.  Thus use-value can function to halt the tendency of urban areas to spread out into the adjoining countryside, and it can serve to preserve urban green space.

Senate Bill178 proposes to raise the assessed valuation of ag land by an average of 473% statewide.  The impact on taxes paid by ag land owners would vary widely from county to county, depending on how large ag land’s share is of total assessed valuation.  Statewide, SB 178 would increase the property taxes on ag land by an astounding $716 million per year!  And that assumes that all local elected officials don’t take advantage of that new-found “wealth” to increase their budgets, but instead reduce the local mill levy accordingly.  That assumption is probably not valid.

For many farmers and ranchers, their investment in land represents their retirement account, and they are required to pay property tax annually on that investment.  Our urban counterparts, who typically have their retirement accounts invested in stocks or bonds, avoid that tax at the present time.  Are we to believe that stocks and bonds don’t represent wealth?  Property tax is in essence a tax on wealth, and somehow that doesn’t seem equitable.

In the past two weeks I have heard from many of my constituents as well as other farmers and ranchers from all over the state.  I have received a very consistent message: “Please leave our property taxes alone, and instead put us back on the income tax rolls.” Farmers and ranchers did not ask for the pass-through exemption in 2012 and were surprised when they learned that they no longer owed income tax to the state.  Many have told me they feel guilty for no longer being asked to shoulder their fair share of the income tax burden.

A report in the Wichita Eagle on February 21 revealed that the original projections from Kansas Department of Revenue for the number of entities which would qualify for the business pass-through income exemption in the 2012 tax cut missed the mark quite significantly. They estimated that 191,000 business entities would qualify for the exemption but in 2013 there were 333,000 Kansas tax returns filed which took advantage of the exemption.
http://www.kansas.com/news/politics-government/article10802204.html

I find that very troubling, and it is strong evidence that the entire concept of the business pass-through income tax exemption was poorly understood and too hastily adopted in 2012.  It is truly too broad and not nearly targeted enough to have the intended stimulative effect on the Kansas economy.  If our objective is to find additional revenue for the state, rather than punishing one segment of the Kansas economy, then it is time for legislators to work together to correct the over-reach of the pass-through exemption.


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