Changing valuation of farmland to income-producing capability is the wrong approach, prof says

Changing valuation of farmland to income-producing capability is the wrong approach, prof says
A dusty soybean field north of Ashland in October 2023. (Paul Hammel/Nebraska Examiner)
October 25th, 2023 | Paul Hammel, Nebraska Examiner

LINCOLN — Adopting a new system of valuing agricultural land in Nebraska based on its income-producing capability was panned Tuesday as a possible solution to the state’s traditionally high property taxes.

John Anderson, an economics professor at the University of Nebraska-Lincoln, said that adopting a “use/value” approach in valuing ag land — as advocated by Gov. Jim Pillen in the 2023 legislative session — doesn’t result in a significant change compared to the current market-value approach except near big cities.

John Anderson
 John Anderson, University of Nebraska-Lincoln economic professor (Courtesy of University of Nebraska-Lincoln)

“That difference shrinks as you move away from the perimeter of a city,” Anderson said. “By the time you’re 20 miles away, there’s virtually no difference between use value and market value.”

“So, if you think this is a silver bullet in agricultural areas … you’re dreaming,” he said.

His comments came during a panel discussion on property tax “opportunities and solutions” during the fall symposium of the OpenSky Policy Institute, a Lincoln-based think tank that analyzes state tax and spending policies.

Tuesday’s discussion comes as a “working group” formed by Pillen has held three meetings already in exploring ways to “reduce the burden of insurmountable valuation growth in recent years.”

Nebraska farmland is projected to increase 14% this year, while the Nebraska Department of Revenue recently reported a 16% increase in the valuation of residential property over the past year.

‘No rock unturned’

The working group, which includes state senators and representatives of local government, business and farm groups, is expected to meet at least two more times in hopes to crafting a proposal for the 2024 legislative session.

 State Sen. Joni Albrecht of Thurston (Courtesy of Unicameral Information Office)

One member of that group, State Sen. Joni Albrecht of Thurston, said working group members were sworn to secrecy about what’s being proposed at this point. But she said Pillen is leaving “no rock unturned” in seeking a solution to recent steep increases in valuations of residential and ag property that have homeowners and farm owners howling.

“I’m very surprised at the angles he’s exploring,” Albrecht said of Pillen. “But he says we’ll walk out with a plan after five meetings.”

State lawmakers and governors have grappled for years with the state’s high property taxes, including adopting and increasing state credits to offset the local payments and, this year, increasing state aid to K-12 schools.

Pillen plan failed

During the 2023 session, Pillen proposed to switch from a system of valuing ag land on its market value to one based on its production capability — as is done in Iowa, South Dakota and Kansas. But it failed to get out of the starting gate, even with farm groups.

The failure was one of the few Pillen had in his first year as governor.

Anderson, who has studied tax policies across the country, said Nebraska is a “reasonably high” property tax state, in the “second tier” behind states like New Jersey and Connecticut.

While it’s difficult to rank states on property taxes since they are levied locally and can vary across a state, Forbes magazine recently ranked Nebraska as having the eighth highest “median” property tax. Meanwhile, the business-oriented Tax Foundation placed the Cornhusker state No. 11 in the property tax component of its annual “Business Tax Climate” report.

Seward Sen. Jana Hughes, who moderated the property tax discussion, joked that no solutions were reached Tuesday.

Capping increases ‘problematic’

But there were some interesting observations:

— Capping increases in property valuation, as is done in several states, is problematic, according to one panelist, Cathy Lang, a former state property tax administrator and currently head of the Nebraska Business Development Center at the University of Nebraska at Omaha.

Cathy Lang
 Cathy Lang, director of the Nebraska Business Development Center at the University of Nebraska (Courtesy of Nebraska Business Development Center)

Lang said that, for example, a cap of 3% would help one property owner who saw their land valuation increase by 8% but wouldn’t help a neighbor whose property valuation went up only 2.5%. Over time, Lang added, those disparities in valuation would widen, resulting in an unfair tax burden.

—Anderson said one problem with trying to determine the income-producing capability of a plot of farm or ranch land is that there are so many variables. It’s not simple, he said, and several “games” can be played with such a formula.

— A simpler way to reduce taxes on ag land in the face of steep increases in valuation, the professor said, would be to reduce the percentage of valuation that is considered for tax purposes. Ag land was once valued based on 80% of its market value, but that was reduced,and now stands at 75%.

That percentage could be reduced to 70% or lower, Anderson said, adding that it would be a “political” decision.

—  In Iowa, several approaches have been tried to reduce property taxes, including a 3% cap on valuation growth, said Mike Owen, of Common Good Iowa, which was described as an OpenSky-like watchdog in the Hawkeye State. “We’re a giant petri dish,” Owen said.

— Lang said an important goal in tax policy should be to “keep it simple” and to assure that landowners have the opportunity to protest their valuation if they feel it’s unfair.

A bigger issue confronting state government, she said, is to decide which taxes — state or local — finance certain governmental services.

For instance, Lang said, there was discussion about having the state pay all teacher salaries as a way to finance that portion of K-12 education via state sales and income taxes rather than with local property taxes.


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