South Dakota changing how it taxes farmland; Wisconsin re-examining its 15-year-old law

Use value property assessments help preserve family farms, but they also raise continual questions for state lawmakers

Stateline Midwest, Volume 19, No. 11- December 2010

In most Midwestern states, taxes on farmland have been on the rise in recent years, partly because of increases in the assessed value of farmland.

This trend has posed an ongoing policy challenge for state legislators: to strike the right policy balance between trying to preserve family farms — by taxing agricultural land differently — and raising enough revenue so that other property owners are not unfairly burdened and local governments receive the resources they need.

In South Dakota, next year will mark a new chapter in that state’s ongoing efforts to find a fairer way of taxing agricultural land. As the result of a law enacted in 2009, tax bills on agricultural property will now reflect the fact that they are being assessed on “productivity value,” which is based on the gross revenue of typical agricultural land in a given county.

“Tax assessments for agricultural property in South Dakota will no longer be based on market sale prices,” Republican Sen. Larry Rhoden notes.

The idea behind the switch to use-value assessment is to create a more equitable, predictable tax system for the state’s farmers.

Most other U.S. states already use some form of use-value assessment as a way to keep land in agricultural production.

Under this system, property is assessed based on its current use, rather than its “highest and best use.” (When agricultural property is near developing areas, or is in demand for recreational home sites, residential development would make the land more valuable and, as a result, be considered the “highest and best use.”)

When states decide to lower the value of agricultural property relative to fair market value, they are, in essence, shifting tax burdens to other classes of property.

A July 2010 study of the Wisconsin Legislative Audit Bureau examined the impact of the state’s use-value-assessment law in 14 different municipalities. If agricultural land zoned for other purposes had been assessed at fair market prices, the bureau found, taxes on the farmland would have increased by an average of $3,516. Taxes on all other parcels of property would have decreased, on average, by $38.

But what might appear on the surface as an unfair shift in tax burdens has been found constitutional by state supreme courts, and numerous Cost of Community Studies have reinforced the economic basis for differential taxation.

A 2009 review of 125 different COCS studies found that residential development imposes more costs than it pays in revenue, while the agriculture and business sectors entail fewer costs than they pay in taxes. (Costs include local services such as schools, roads, and police and fire protection.)

Adding to the complexity of farmland taxation is concern that some developers are exploiting existing laws: They purchase the land for development purposes but can continue to receive reduced taxes until the property is fully developed.

According to Wisconsin Democratic Rep. Peter Barca, the Audit Bureau report exposed some problems with the state’s system of use-value assessment. Wisconsin could learn from other states, he says, on how to tighten up its 15-year-old law.