Property Tax Breaks for Farmers: Is Use Value the Right Answer?

In a famous book a couple of years back, James Surowiecki argued for the "wisdom of crowds" as a way of making correct policy decisions in the long run. But sometimes everyone agrees on a thing that later turns out to be wrong. Judging from recent events in several states, a special property tax break for farmers called "use value" may be the latest example of incorrect tax policy groupthink.

Virtually all states have enacted use value, which typically says that agricultural property will be valued, for property tax purposes, according to its use as farmland-- not according to its potential market value to developers. The idea is that as suburban development encroaches on farmland, farmers shouldn't be pressured by growing property taxes into selling their land.

The problem that is now cropping up in Florida, South Carolina and Idaho is that a tax break designed for family farms is being claimed by speculators, wealthy vacationers, and even governors.

In South Carolina, the problem appears to be that it's pretty easy to get property taxed according to use value. All you need is five acres of trees or ten acres of crops and bingo-- in the eyes of South Carolina tax assessors, you're a farmer in need of property tax relief. Editorial boards around the state are hitting this on all cylinders. While legislation has been introduced that would require agriculture to be the primary intended use of a property in order to get the tax break, but it doesn't appear to be going anywhere fast.

In Florida, a great series by the Miami Herald last summer detailed abuses of the agricultural tax break by speculators. The problem here appears to be that lawmakers defined eligibility for the tax break too vaguely as "good faith commercial agriculture" activity. Despite this, reform now appears to be dead for this year.

The problem in Idaho stems from a well-intentioned bill passed in 2002, designed to ensure that farmers selling their land for development wouldn't be taxed based on market value until they actually sold it. A last minute amendment changed the bill so that the developers purchasing the land could claim the tax break too-- right up until houses were actually built on it. Read more about this sordid tale here. Idaho lawmakers passed legislation in March to fix this problem.

What's interesting about the way this story is developing in these states is that no one is questioning whether use value is a smart idea to begin with--people are just getting mad because a tax break that should be given to every family farmer in the state is being given to folks who aren't family farmers.

If use value is a good thing, then the reforms being discussed in these states are absolutely correct: tighten up eligibility requirements so that only real family farms get the tax break. But the more you look at the way use value works, the more it seems that the sort of modifications being discussed right now amount to rearranging deck chairs on the Titanic.

So what's wrong with use value? Three basic things.
1) It's over-inclusive. Any farmer, however rich or poor, is eligible for this tax break. Plenty of farmers are in truly dire straits-- but use value basically asserts that no farmer can afford to pay their property taxes. And because use value shifts property tax burdens away from agriculture as a class and toward residential property as a class, it basically asserts that homeowners can afford to subsidize agriculture.
2) It's under-inclusive. To get the use value tax break, your farm has to be in an area where it would be worth more as a residential development than as a farm, and has to be in an area with a healthy mix of agricultural and non-agricultural property. That's true in rapidly developing suburban areas, but is usually not true in truly rural areas dominated by agriculture. To see this, imagine a dirt-poor rural county where virtually all of the land is agricultural. If the whole tax base is made up of farms, giving a preferential assessment to farms doesn't benefit anybody, since the loss to the tax base has to be made up by increasing the tax rate on the remaining base--and the remaining base is made up of exactly the same farms who are getting the use value break. The more completely rural a taxing district is, the more completely useless use value is as an agricultural tax relief mechanism.
3) It short-circuits the already-tenuous linkage between the property tax and a landowner's ability to pay it. There are two steps that should be taken to rationalize property tax bills for any property owner: making sure that the measure of "property wealth" used for tax purposes is accurate, and relating this measure of property wealth to the landowner's income. Use value ignores the second goal, and takes states further away from achieving the first.

This is a battle that is already being fought in the residential property tax arena. Income-poor families who own homes in rapidly-appreciating areas get nothing from their skyrocketing home values unless they sell. They're not "rich" in any meaningful sense as long as they stay put. More and more states are introducing "circuit-breaker" tax credits to ensure that income-poor homeowners and renters don't get socked with huge tax bills.

So why aren't states asking the same questions about agricultural property tax relief? Why not eliminate use value and rely entirely on an agricultural "circuit breaker" tax credit that makes property tax relief available only to the low-income family farms for whom these taxes are most oppressive?