Kansas homeowners pick up larger share of tax burden; commercial, industrial and ag taxes stay flat
As school districts and other local governments in Kansas are starting to put together their budgets for next year, they’ll be thinking a lot about how much property tax it will take to fund those budgets.
But no matter what they do, it’s a certainty that homeowners will have to carry a bigger share of the overall burden than they used to, continuing a trend that has been going on for years, brought on by rising home prices, changes in property tax laws and declining commodity prices in the agricultural sector.
“Looking back to 1996 or so, 38 percent of the tax base in Kansas was residential property. Now it’s almost 50 percent,” said Roger Hamm, deputy director of the state’s Property Valuation Division.
Commercial and industrial property, at $7.8 billion, makes up 24 percent of all the assessed valuation. And agricultural land, at just under $2 billion, accounts for 6.1 percent of assessed valuation.
According to the most recent information from the Kansas Department of Revenue, the total taxable value of all the residential real estate in Kansas added up to $15.8 billion, or 49 percent of all assessed valuation.
That’s a 30 percent increase in total value compared to 2005, and an 8 percent increase in residential property’s overall share of the pie.
Over that same period, though, there has been remarkably little change in the taxable value of agricultural and commercial property, and their overall share of the tax burden has either declined or stayed flat.
There are reasons for the shifting burdens. Part of it has to do with home prices, which have largely recovered from the Great Recession, growing an average 4.5 percent last year, and are expected to surpass pre-recession prices over the next year, according to the real estate website Zillow.com.
“We’re continuing to see new construction, both in residential and commercial property,” Hamm said. “We’re seeing the combination of the two things. Appreciation of value and new construction are driving those two sub-classes of property.”
But there are other factors of the state’s own making at work having to do with how different classes of property are valued and taxed, and actions taken by the Kansas Legislature aimed at spurring business investment and development.
Under the Kansas Constitution, agricultural land is treated differently from all other classes of real estate. Instead of being appraised based on its fair market value like residential and commercial property, agricultural land is appraised based on its production and income, what tax officials call its “use value.”
Hamm said that to measure use value, the state looks at the average rental rates farm owners charge when they lease their land to other farm operators. Those rates differ by soil types, such as dry cropland, irrigated cropland and pasture.
The state then uses an eight-year rolling average of those rental rates to set the appraised value on that land for any given year, and the eight-year number lags about two years behind the tax year in which it applies. Farm owners are then assessed, or taxed, based on 30 percent of that use value.
That results in what some people have called a massive tax break for farmers, at least compared to other owners of other kinds of property, because the use value is substantially lower than the market value.
Sen. Jeff Melcher, R-Leawood, who serves on both the Senate tax and budget committees, has been a frequent critic of the use-value system, arguing it shifts too much of the tax burden onto suburban residential communities like his, especially when looking at the statewide 20-mill levy that provides a significant portion of the state’s K-12 education budget.
For example, in 2014, the most recent year with complete data available, the total assessed value of all agricultural land in Kansas was just under $2 billion, or only 6.1 percent of all the taxable property value in Kansas.
But if farmland were taxed like any other commercial or industrial land, that number would be much higher.
According to a report by Kansas State University, the average market value of farmland in Kansas was $2,050 per acre, and the Department of Revenue says there are roughly 49 million acres of land in Kansas classified as agricultural.
That would put the total market value of all the agricultural land in Kansas in the neighborhood of $100 billion. And if farmland were assessed like other commercial and industrial property, at 25 percent of its market value, that would put the total assessed valuation of Kansas farmland at about $25 billion.
That would be more than 14 times more valuation than what is counted under the use value system, and it would make up 49 percent of the new, higher combined total of all assessed valuation in Kansas. If all of that value were added to the tax base, the state and many local governments, especially those in rural areas, could lower their property tax mill levies substantially and still raise the same amount of money. That would be a big tax cut for homeowners and businesses, but it certainly would come at the expense of the agriculture industry.
Warren Parker, policy communications director for Kansas Farm Bureau, said there is a rational reason for treating agricultural land differently.
“It is simply a more fair way to tax the property because there are only so many things that could be done with the property: grow crops,” he said. “We can’t build huge skyscrapers or strip malls, those kind of things you may be able to do in an urban area. On farm ground, legitimate farm ground, you can grow crops, so the use value of that land simply makes sense.”
Hamm said that over time, the use-value method actually does reflect the economic swings in the agriculture economy because as commodity prices rise and fall, so too does the income off that land and the lease rates farmers can charge.
From 2010 through 2014, commodity prices were actually growing, and that was reflected in the total assessed use value, which rose from less than $1.2 billion to an even $1.7 billion over that time.
But Parker said over the last two years, commodity prices have virtually crashed, and that will soon start showing up in lower use values for agricultural land.
“We’ll see what happens in another couple of years,” he said.
Industrial machinery and equipment
Another significant change that has happened in recent years was the Kansas Legislature’s decision in 2006, during Democratic Gov. Kathleen Sebelius’ administration, to phase out the property tax on machinery and equipment used in manufacturing, which falls under the category of “personal property.”
Under the Kansas Constitution, that equipment is supposed to be taxed at 25 percent of its retail price, less its depreciation over as much as seven years. At a minimum, the value is set at 20 percent of its original price.
But the 2006 law exempts any new machinery and equipment purchased after the effective date of that bill, and so that property has been falling off the tax rolls ever since as businesses are constantly updating and replacing that equipment.
According to Hamm, in 2005, the year before the legislative change, business machinery and equipment made up nearly 6.9 percent of all the taxable property value in Kansas. But today, it accounts for less than 2.2 percent, and it will continue to fall as older machinery and equipment are eventually replaced.
“There’s another reason (tax burden shifts) have gone the way they have,” he said. “Commercial and residential real estate has filled that gap.”
Douglas County trends
In some ways, Douglas County has been bucking the statewide trend, according to data from County Appraiser Steven Miles.
The 2016 valuations, which were just certified in mid-June, show total residential property assessed valuations have grown 4.2 percent, to nearly $754 million since 2008. But the residential sector’s share of the overall pie has shrunk, to 60 percent of the total, down from 63 percent eight years ago, which is still a significantly higher proportion than the statewide average.
Meanwhile, the taxable value of Douglas County farmland has more than doubled, even using the use-value method of appraisal, to $19.3 million, which is now just over 1.5 percent of the total pie.
The value of commercial and industrial real estate has grown 14 percent since 2008, to $290 million, but its share of the total valuation has only risen slightly, to 23 percent.
Commercial machinery and equipment, which used to make up 3.5 percent of the tax base, has disappeared from the county’s total assessed valuation.
Overall, the total property tax base of the county has grown 10 percent since 2008, to $1.26 billion.