The Senate and Assembly Agriculture Committees this week allowed the Department of Revenues changes to TAX 18, the use value assessment of farmland law, to move forward. The DOR has sent the final version of the rule to be published in the Wisconsin Administrative Code on October 1, 2005, to have the new changes become effective November 1, 2005. 

The new formula more accurately reflects the taxable value of land used for farming by using rental rates. Under the new formula, DOR has indicated that assessment will increase 6.6% in 2006.  The average assessment in 2005 is $195 per acre.  This will go to $208 per acre in 2006.

The Wisconsin Farm Bureau said the Department of Revenue’s change to the use value formula will continue to be an accurate reflection of the economics of farming in Wisconsin, and will provide more consistent and stable assessment changes from year to year.

The new formula will assess farmland on the income that can be generated by farmers producing crops on land that is rented, and limits annual adjustments in assessment relative to the changes in statewide equalized values so farmland values won’t go negative.

Previously, the formula was based solely on the income farmers could get from land that they owned. The formula will not change the way land used for growing specialty crops, such as cranberries and ginseng, is assessed.

Farm Bureau Position

 WFBF supports DOR’s intention to modify the use value formula.  WFBF pointed out that the current formula is not flawed.  But rather it is an excellent indicator of how recent farm economics have been difficult.  To illustrate this, the formula used by the State of Illinois has been negative for a couple of years.  However, this has not caused a problem because Illinois caps the amount farmland values can change from year to year at plus of minus 10%

For More Information

Wisconsin Department of Revenue Agricultural Assessment Guide for Wisconsin Property Owners: http://www.dor.state.wi.us/pubs/slf/pb061.pdf

Property Assessment Appeal publication: http://www.dor.state.wi.us/pubs/slf/pb055.pdf

Contact the Department of Revenue’s Bureau of Assessment Practices at (608) 266-7750.

Background

Use value assessment of farmland is not a tax break for farmers.  It is tax equity for farmers because their farmland is taxed on its value for farming, and not on its potential “market value” for development or recreational use. This market value system actually resulted in property taxes being shifted to farmland because of the skewed and inflated system of taxing farmland. This was especially more dramatic on farmland near or within city borders and near development.

Since use value assessment of farmland was enacted, farmers have saved $1.2 billion in taxes than if the old distorted market value system was still in place as illustrated in the two charts.

The use value assessment of farmland law has also slowed the loss of farmland because it changed the economics in favor of farmers being able to cash flow on land with the reduced property taxes. In the last seven years since use value started, the average annual loss of farmland diverted to non-ag uses is 22,476 acres less than compared to a period before use value assessment. The average annual loss of farmland from 1992-1996 was 79,284. The average annual loss of farmland from 1997-2003 was 56,808.

Use value taxation of farmland seeks to accurately reflect the value of land for its current use—agriculture.  Over 40 states have laws providing for preferential assessment of agricultural land for property tax purposes.  Wisconsin is one of the last agricultural states to adopt such a policy and, as in most other states, the policy will require some modification over the next few years before it functions smoothly.   

Wisconsin’s constitution was changed in 1974 to allow for the preferential assessment of agricultural land for property tax purposes. 

The state’s 1995 Budget Act changed the standard for assessing agricultural land from market value to use value.  Under use value assessment, farmland is assessed on its ability to produce farm income instead of its potential value for development.

Property assessments on farmland for 1996 and 1997 were frozen at the 1995 value.  In 1998, 10% of the assessed value was derived from the use value guidelines, and 90% from the frozen assessed value.  In 1999, 20% was from use value, and 80% was from the 1995 frozen value.  In October of 1999, the state’s Farmland Advisory Council directed the Wisconsin Department of Revenue (DOR) to forego the remainder of the phase-in period and fully implement use value assessment of agricultural land for the January 1, 2000 assessments.

Use values for most farmland are grouped into four categories based on relative soil productivity within the county.  Actual values assigned to farmland in these categories are determined by the Department of Revenue each year for every municipality in the state.  The DOR uses a complex formula to calculate average values for each municipality.  To simplify, use value assessments are calculated according to this equation:

Use Value = Adjusted net farm income potential from growing corn (per acre) ÷ (Farm

         mortgage interest rate + municipal property tax rate)

From this equation, we can see that as farm income potential goes up, so does use value.  As farm mortgage interest rates and/or municipal property tax rates to up, use value goes down. 

Agricultural Land Classification

Only land that is actually used for agricultural use is eligible for use value assessment.  Agricultural land includes land that produces a crop (including Christmas trees or ginseng), supports livestock, or is eligible for enrollment in specific federal agricultural programs.

Land associated with the farmstead, road rights-of-way, ungrazed woodland and swampland, etc. is excluded from use value assessment. Land and buildings in the farmstead area are assessed at full market value, as are woodlands, swamp, and any fields or pasture areas not actually used for cropland or pasture.  In many counties, town roads are owned to the center of the road by adjacent landowners. This land is currently assessed at the market value for swamp or waste land.

Most agricultural land falls into four categories: Grade 1, 2, or 3 tillable, or non-tillable pasture  (land used for cranberry beds or aquaculture ponds is in a separate category called “specialty land”). Land grades are based on the NRCS Soil Survey and reflect the relative productivity of land within the county.  Soil survey information for your county is available from your local Natural Resources Conservation Service office or county land conservation department. 

Public Support for Use Value

The Wisconsin Farm Bureau Federation conducted two public opinion surveys that indicated the public strongly support use value assessment of farmland, even if there is a slight shift of property taxes to their real estate.

1. “Farmland in Wisconsin should be assessed and taxed based on what it is worth for farming and not what it is worth for developing?”

                        2003     1999     Change

Agree                88%      83%      +5

Disagree             8%     15%      -7

2.  “Would you still agree with that statement if they knew property taxes would increase $65 for each one hundred thousand dollars in property value?”

                        2003     1999     Change

Agree                59%      73%      -14

Disagree           32%     23%      +9

Checking Your Assessment

As use value assessment is implemented, farmers should check their property assessments carefully to make sure agricultural land is being classified and assessed correctly.  To determine how your land is classified, you can consult your assessor or go to an ‘open book’ session in your municipality.  If you find a discrepancy, talk with your municipality’s assessor first.  If this doesn’t solve the problem, the next step is to attend the annual Board of Review meeting and present your case.  The last option is to appeal your assessment directly to Circuit Court or the Department of Revenue. 

For specific information on appealing your property assessment, the DOR publishes the Property Assessment Appeal Guide For Wisconsin Real Property Owners. Remember that the burden to prove your case rests with you, the landowner, and waiting until you get your property tax bill is too late to fix the problem.

Penalty for Converting Farmland to Nonfarm Uses

If agricultural land is converted to another use, the county where the land is located will administer a penalty on the property tax.  The DOR will determine the penalty within each county based on the difference between the average per-acre fair market value of agricultural land sold in the county in the previous year and the average per-acre equalized value of agricultural land in the county in the previous year.  The base penalty value is multiplied by 5% if the conversion is of more than 30 acres, 7.5% for 10 to 30 acres, and 10% for less than 10 acres.  If the penalty is less than $25 per acre, it will be waived.

Acknowledgement:  Laura Paine is Crops and Soils Agent for Columbia County and Assistant Professor, Department of Agriculture and Agribusiness, University of Wisconsin-Cooperative Extension. Mark Kopecky is Agriculture and Natural Resources Agent in Price County and Professor, Department of Agriculture and Agribusiness, University of Wisconsin-Cooperative Extension.

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