Farmland prices are surging just as residential property values continue to slide. These opposing trends in real estate prices may cause significant shifts in the burden of the property tax that supports local units of government such as cities, counties and school districts.
This is not yet a public policy issue in Minnesota the way it is in Iowa and some other states, but don’t count on it lying dormant forever.
Let’s start with the basics of real estate taxes. Local units of government draft budgets and determine the amount of money that must come from the property tax. Then that sum is allocated to specific properties. If all property was taxed exactly alike, that process would be simple – just divide the amount of money to be raised by the total value of property in the jurisdiction. That would give a percentage to apply to the value of each tract of property to calculate the dollars owed.
In real life, we don’t tax all property the same. Owner-occupied houses pay a lower rate than those rented out. Business buildings have paid higher rates than residences, and so on. Agricultural land gets preferential treatment. Moreover, the mix of residential, commercial and agricultural property varies from one unit of government to another, even within the same county.
There is much misunderstanding of the whole process. One’s taxes do not automatically go up because the value of your property went up, and they won’t automatically go down if your property’s value declines. What matters is the total amount of money local government decides to raise and how much your property is worth relative to all other property.
If the tax levy stayed the same and everyone’s property increased in value to the same degree, the dollars owed on any given tract would stay the same, but would represent a smaller fraction of the value of the property than before. Similarly, if a levy stayed constant and all property declined in price by the same factor, the tax bills would be unchanged but would be a higher percentage of the properties’ values.
If, however, the value of one class of property – say, farmland – increases while that of another class – say, houses – decreases, then farmland will make up a larger fraction of the total taxable property in the jurisdiction. Farmland owners will pay a higher fraction of the total taxes paid, regardless of whether the overall levy is going up or down or staying the same.
Farmland prices continue to boom, regardless of who is measuring. County assessors are starting to report value changes for 2011. In Dodge County, for example, farmland is up 19.7 percent while commercial and industrial values are down 3 percent. Residential values, including farm dwellings, are down about 2 percent.
These numbers are consistent with the observations of other assessors and of ag economists. The increase in farmland values continues a several-year trend. The assessed value of our farm in Murray County is up 71 percent in five years and the true market value probably has doubled.
If farmland prices increase and those of residential and commercial property stagnate or decrease, then farmland will inevitably constitute a higher total fraction of the total taxable property in any taxing jurisdiction that has a mix of types.
Not all jurisdictions have such a mix. Agricultural land makes up the vast bulk of the total value of property in Moulton Township, where our farm is, and virtually none for St. Paul, where our house is.
In my home county, the village of Chandler, with a population of 276 people and surrounded by Moulton Township itself, is mostly residences and some businesses. But there is little farmland within the city limits. The same would be true for other little villages in the county. But Murray County itself has all types, as does the Murray County Central school district. The same would be true for metro-area counties like Dakota or Wright that still have many farms.
Thus, the share of the tax burden paid by residences to the incorporated municipalities won’t change much, nor will the share paid by farmland to the rural townships. But farmland will pay a higher proportion of the cost of the county and the school districts. Residences and commercial property will pay a smaller share.
Farmers are humans and hence want to have it both ways. They are glad to see their net worth burgeon each year but don’t like to pay a larger share of local government taxes. Political power is such in farm states that farmland generally long has been taxed at a lower fraction of market value than residential or business property. But current price trends incite calls for even more preferential treatment. In several other states, especially Iowa, legislation has already been introduced to reduce the burden shift that would occur under existing law. Don’t be surprised if the same thing happens here.
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