Complex formula distorts ag land values and taxes, audit shows
Topeka ? Kansas lawmakers may seek changes next year in the way agricultural land is valued and taxed in light of a new audit report that shows the current, complicated formula is distorting those values, resulting in higher property tax bills for many farmers, despite plummeting farm commodity prices.
The Legislature’s interim Committee on Assessments and Taxation agreed Friday to seek more information about how simplifying the formula would affect agricultural property tax bills and the revenues from them that flow into state and local government coffers.
But the committee chairman, Rep. Steven Johnson, R-Assaria, said changing that formula may not be easy.
“First is: Might there be a better system? I don’t know that there is,” he said after the meeting. “And then the second thing is, how do we actually get there?”
Unlike residential and commercial property, which is valued for tax purposes based on its fair market value, agricultural land is valued according to its “use value.” That essentially refers to the amount of money farmers make off their land, or could make if they rented it out to someone else.
That’s the result of an amendment to the Kansas Constitution that voters approved in 1986 that changed the way all real estate is valued and assessed.
Simply put, the state divides agricultural land into three categories — dry crop land; irrigated crop land; pasture and woodland — and determines the average per-acre production value in each county.
However, because the agriculture industry can be highly volatile, the Department of Revenue uses a rolling eight-year average valuation, or what Johnson referred to as “an eight-year average of eight-year averages.”
That was intended to smooth out year-to-year fluctuations, giving both the landowners and the governments that receive property taxes more certainty about what future tax bills and revenues will look like.
According to a recent Legislative Post Audit report, however, that practice has also made the task of valuing agricultural land extremely complicated, requiring appraisers to use more than 1,000 different data points to place a value on any given piece of property.
It has also caused distortions in the valuations themselves, resulting in declining values during years when the farm industry is doing well, or, as is the case currently, rising values in times of a depressed farm economy.
“I think both of those concerns are there,” Johnson said. “I’m concerned about not paying the tax when the income may have been there to pay the tax, and then requiring the tax when the income may not be there.”
Politically speaking, however, any effort to change the way use value is determined could ignite an even broader debate in the Legislature, which has grown considerably more urban and suburban in nature than it was in the 1980s when the constitutional amendment was written.
In more recent years, some Johnson County lawmakers have begun criticizing the entire concept of use value appraisals as a large tax break for the agricultural industry and something that is fundamentally unfair to other industries that have to pay taxes on the fair market value of their property, regardless of how much income they generate in a given year.
Johnson, who chairs the House Taxation Committee during the regular session, said he’s interested in looking at what would happen if lawmakers simplify the system, either by going to a simple multiyear average, or even going to a three-year or five-year average instead of eight years.
But he gave no indication that he wants to take on the broader issue of whether the use-value appraisal system for farm land should be abolished.
“The challenge is, who is ready to go out and value every piece of ag property every year, and do it accurately?” he said. “That was exceedingly difficult to come up with and do as you get a value every several years when something sells, but our cost of assessing in that way is more challenging.”