Tax board offers land valuation leeway
FARGO, N.D. -- The North Dakota State Board of Equalization is giving county governments a bigger tolerance for figuring property valuations from their full values for 2012, allowing them "tolerances" to effectively cut tax values of farm and oth...
FARGO, N.D. -- The North Dakota State Board of Equalization is giving county governments a bigger tolerance for figuring property valuations from their full values for 2012, allowing them "tolerances" to effectively cut tax values of farm and other property for tax purposes.
The increased "variance" applies to all kinds of property, but some officials say it's partly the result of an unexpectedly high 29 percent average increase in the formula for ag land tax values across the state, Agriculture Commissioner Doug Goehring says.
The new leeway was established during a board meeting on Feb. 2, when the board allowed a tolerance rate to 90 percent, which is greater than the previous 95 to 100 percent range. The legislature doesn't let counties value property at more than 100 percent of its guidelines, but allows tolerances below 100 percent.
On Jan. 25, Goehring and North Dakota Tax Commissioner Cory Fong met in Bismarck, N.D., with about 50 people, including representatives of commodity organizations, to talk about the formula's renewed impact on land tax values.
Goehring, a member of the state tax equalization board, says this is a partial response to a sudden lurch in farmland valuations, brought on in part by the legislative removal of a "floor" in part of a productivity formula to calculate ag land values. The floor had been in place for several years but was allowed to "sunset" in the 2011 Legislative session.
Fong says the change in the tolerance is the "right approach" because it coincides with international assessing standards, and not necessarily to give tax relief to any sector. Other members of the board are Gov. Jack Dalrymple, R-N.D., and Goehring, both farmers themselves, Fong, State Auditor Bob Peterson and State Treasurer Kelly Schmidt, all Republicans.
Goehring specifically talked about the board action in connection with the farmland question.
A 'right approach?'
"It puts it in local entities' hands to determine how they are going to address this," Goehring says. "They would have the ability to use more flexibility and more latitude in valuation of all three classes of property they deal with." Goehring says even with the extra variance, the taxable value of ag land might increase, but perhaps by an average of 13 to 14 percent.
"We're not advocating that agriculture gets the best deal, but that agriculture gets a fair deal," Goehring says.
He says that while farm productivity and returns have increased, so have costs.
Goehring says that while ag land productivity has increased, it isn't as clear that the land itself is as much the reason for it as it used to be. In the 1970s, he says, land quality could account for 35 to 40 percent of the productivity. That figure declined to 25 to 30 percent in the 1990s and today accounts for 15 to 20 percent.
"The land hasn't changed but cropping practices have -- hybrids, pesticide applications, precision agriculture, seed placing, variable-rate technology" and on and on, Goehring says.
The farmland valuation formula is controlled by the Legislature and will stay that way, and they may not change it at all, Goehring says. But the aggies might "talk about the components in the productivity formula" -- and whether it "properly reflects the cost of production in our farming operations." He says ag leaders want to make sure that everything -- costs for seed, chemical, fertilizer, transportation -- are included in the cost side of the equation.
Market to productivity
Ag land had been taxed based on market value in the 1970s. The state shifted to the productivity formula for farmland in 1980, after a period of value deflation. The formula included a 10-year Olympic average, dropping the high and low amounts. It included a "capitalization rate" figured in part on interest rates charged for agricultural mortgage loans, obtained through the Farm Credit System.
The Legislature in 2003 established a "minimum capitalization rate" or floor that would artificially cushion farmland property taxes from significant increases -- the lower the rate, the higher the taxable value.
The 2011 Legislature let that floor expire, so the formula works as it did prior to the floor being established. This has the effect of sending tax valuation rates higher than they would be with the floor.
Dwight Aakre is an agricultural economist at North Dakota State University, who is charged with running the Legislature-set formula. Before 2011, the Legislature three times had cut the floor rate, having the effect of increasing the taxable value. The rate had been at 7.7 percent in 2010 and 7.4 percent for 2011, but, with no minimum rate forward, it will go to 5.864 for 2012 land taxes, which will be paid in 2013.
The capitalization rate was the biggest factor in the formula. But it's also influenced by recent increases in the value of production. That value in part is because of yield increases, but mostly because of price, in the past few years.
18 to 38 percent increases
The smallest increase in the state for ag land tax values was about 18 percent in McIntosh County, Aakre says. The highest was 38 percent in Divide County. Aakre speculated that this may have been partly caused by the high prices received for durum and spring wheat, as well as shifting noncropland acres into cropland.
Fong received notification of the effects of the formula in December. Counties received them in January. This becomes a part of the 2012 assessment that is paid in 2013, after county budgets are established and levies set for various taxing entities such as schools and counties.
Counties have a basket of different kinds of taxed real estate -- farm, nonfarm, residential and commercial. If the farmland tax valuations rose more in a particular county, compared to the other property categories, this could mean farmland would pay a disproportional increase.
Goehring notes that county officials are probably all aware of the increase in farmland valuations by now. Whether the farmland owners pay higher county tax rates depends on whether the county's budget increases and how much entities spend and levy. Taxes paid are a combination of the tax rate and the mill rate imposed by schools and counties, based on how much money these entities spend, he notes.
Average tax rates for farmland varies by county but averages roughly $4 an acre statewide. Using that average, if tax rate percentages were exactly the same as the increase in taxable rates (which it isn't), a 29 percent increase in taxable values would increase the taxes to $5.16 per acre.
Goehring says it is unclear whether the Legislature would be able or inclined to address it for 2012 taxes, due in 2013. He declined to speculate on who might push for such changes.
He says one of the ideas being discussed is whether it would be fairer to tie the formula to operating loan interest, rather than mortgage interest. He noted that while mortgage interest levels are relatively low, many producers were locked in at higher mortgage rates in past years.
Goehring says that while some people think ag profits are outstanding, he starts listing the number of places in the state that have suffered from weather disasters and prevented-planting situations in the past several years. He says there's a "lot of hurt and a lot of healing going on right now," and that farmers need a good year to "get everybody back on a level playing field."
Neither Goehring nor Fong would speculate on whether the farmland tax valuation would have any effect on Measure 2, a proposal to be voted on in June that would eliminate property taxes in the state starting in 2012. It proposes to replace local government property tax with state taxes.
Goehring says those who are concerned about the property tax increase may also be concerned about the elimination of property taxes and the associated loss of control by township and county officials to provide services.
"It's two separate issues, but people could be emotionally driven" by a desire to minimize increases in ag land taxes, he says.