Q: "Has something changed on the Agricultural Land Tax formula? The formula is very difficult to follow and understand.
"It is supposed to be an eight-year moving average – a tax on the income from the land and not on the value of the land. My taxes have increased more than 15 percent each of the last two years. I and several of my friends have considered paying our taxes in protest. But we have to prove that the tax is incorrect.
"Could you publish a readable and understandable analysis of the tax rate, how it is assembled and applied? It would be great to have it explained and published annually. (Ag taxes) are a massive expense, especially in very low income years. ... They have to be moving the cap rate."
A: The farmer added he is a landowner in Clay County. He figured his land taxes are now about 22 percent of his income.
His question came to my inbox just days after talking to a couple of farmers who said the ag tax increases are the talk of the neighborhood – especially as farmers are tabulating the lowest net farm incomes since the 1980s.
One farmer said his tax bill has increased more than 20 percent this year.
However, nothing has changed – except that those record income years of 2012 and 2013 are impacting the tax formula. And it could take a while for the higher years to cycle out.
“There isn’t anything changing with regard to the formula. The increase in the taxes is because the high profitability years of 2011 through 2013 are entering the weighted index with higher weights than they did a year or two ago,” said Mykel Taylor, an extension agricultural economist with Kansas State University.
Moreover, she said, the formula is actually based on an eight-year average of an eight-year average – and that means there are 15 years that enter into the average. However, not all the years have the same weight.
“The earliest years and the most recent years make the smallest contribution to the average, due to the math,” she said. “But as the window of years shifts, the 2011-2013 period starts to move into the portion of the averages with the highest weights. This effect will last for several years, until the more recent years of poor profitability move from the tails of the average to middle of that average and compose a greater portion of the calculated average.
“This is likely to be frustrating to landowners because it seems very uncorrelated with the current situation and the average moves very slowly,” Taylor said.
How did this formula come about?
In 1985, along with statewide reappraisal, Kansas lawmakers passed legislation with the valuation of agricultural land based on income or production rather than market value, said Zoe Gehr, agriculture use value coordinator with the Kansas Department of Revenue.
The idea was to protect farmers, giving them the ability to continue to produce food without being driven out of business by taxes based on high market values.
The legislation was implemented in 1989. Kansas’ system is considered a model throughout the country: Forty-two other states have adopted a similar model of appropriate taxation of productive agricultural lands.
The use value system does not reflect the market for ag land. Under the current formula, agricultural land is appraised at less than 3 percent of its market value, compared to 93 percent for commercial property and about 97 percent for residential, said Gehr.
So, using the state’s formula, agricultural land is then assessed at 30 percent of the ag use value.
Commercial property is assessed at 25 percent and residential is 11.5 percent of the market value.
How do they get their formula?
I’ll try to explain this in my own simple understanding of it.
Under the current law, the state uses a complex formula that figures in soil types, as well as a landlord’s net income. That includes figuring in for fluctuating fertilizer prices, commodity prices and a season’s yields.
Regarding soil types, each soil is rated from 5 to 100, with 5 being the poorest. So, if you have a silt loam soil, your ground is figured at a higher productivity rating than those with flooded soil or a clay soil.
Also, the value of agricultural land is based on management reflecting median production levels. Eight-year averages of yields and prices are used to develop the eight-year average of normal landlord net income for crops and use net rental income for pasture as well as allowing for expenses.
The five-year average of CoBank land loan rates determines the capitalization rate – the rate of return on a real estate investment property based on the income that the property is expected to generate.
Property taxes using the rural mill levy are also factored in as expenses.
The cap rate can’t be below 11 percent or above 12 percent. Because it is below 11 percent, it is not fluctuating with the market, Gehr said.
Landlord net income by the cap rat determines the ag use appraised value.
So why are taxes going up?
It’s because of the higher commodity prices in 2008, 2012 and 2013. “It makes the net incomes higher, and we look at an eight-year average,” said Gehr.
Moreover, as Taylor said, those high-income years are moving into higher-weighted averages.
For 2016 taxes, which were due Dec. 20, the formula drops off 2006 information and brings in 2014. Zoe said 2006 was a much lower income year than 2014.
Gehr said agricultural values across the state have been going up since 2010. Last year, they increased about 14 percent.
“But there are some areas of the state that saw larger increases than others,” she said.
She added she just issued the 2017 values to the counties, and property owners can again expect to see an increase in agriculture use values.
Gehr knows landowners are talking about the situation – especially in the current economy. In fact, she met with farmers in Bourbon County to talk to them about the formula and why taxes are increasing.
She added property taxes do aid local governments, including for schools, roads and other expenses.
The formula is supported by all Kansas farm organizations.
“Use value is much lower than the market value,” Gehr said. “It is designed to mitigate the dramatic swings from year to year. But because there is a two-year lag, it takes awhile to reflect what is going on with the current farm economy.”