July 22, 2019

Farm Property Taxes, Part I

By David Widmar

By Brent Gloy and David Widmar

 

A topic producers frequently mention to us is property taxes. After the farm economy boom pushed farmland values higher, property taxes for most went higher. The burden of higher property taxes has become more painful now that farm income has been persistently low over the last 4 years. This week’s post is the first of a two-part look at farm property tax expense. This week we evaluate property taxes trends at the sector-level.

Property Taxes & Fees

The USDA ERS publishes data on ‘property taxes & fees’ in its annual net farm income projections. We’ll refer to this expense category as property taxes throughout the posts.

Figure 1 shows farm property taxes since 2000. These data are in real – or inflation-adjusted- terms (2019 =100). This chart captures the financial burden that producers have been talking about. Since the early 2000s, property taxes across the sectors have increased from roughly $10 billion to nearly $15 billion. More specifically, from 2000 to 2019, the change in property taxes was a 29% increase; or a 1.8% average annual increase. Keep in mind, these data are inflation-adjusted. These changes are in addition to regular, inflationary changes throughout the economy.

 

farm property tax expense. aei.ag. ag trends.
Figure 1. Real Farm Property Taxes & Fees, 2000 – 2019F. 2019 = 100. Data Source: USDA ERS.

 

Figure 2 shows trends in farm property tax expense since 1933, a longer time horizon. This provides some helpful insights. Historically speaking, real property taxes in the last few years have been at the highest levels – in terms of a dollar expense- since these data have been tracked. Previously, property taxes approached $14 billion around 1970, before falling in throughout the 1970s and early 1980s to moderate around $10 billion.

 

farm property tax expenses. ag econonic insights. aei.ag. ag trends.
Figure 2. Real Farm Property Taxes & Fees, 1933 – 2019F. 2019 = 100. Data Source: USDA ERS.

Relative to Income

What makes the increase in property tax expense, especially over the last few years, so painful has been the fall in farm income during the same time period. In fact, property taxes have remained historically high even as farm incomes have fallen. Figure 3 shows the relationship between property taxes and farm income. Specifically, figure 3 shows farm property tax expense as a share of total net farm income.

Prior to the farm economy boom, property taxes were roughly equal to 12.5% of net farm income. This bounced around 10 to 15% during the 1990s and early 2000s. As net farm income peaked around 2013, property taxes fell to 10% of farm income. Since then, however, property taxes have accounted for a much larger share of farm income. Most recently, this measure exceeded 20%; levels not seen since the farm income reached its lows during the early 1980s.

Thinking about that 20% level a bit more, farm property tax expense exceeding 20% of farm income has been a high-water mark over the last 83 years of data. In fact, this measure has an annual average of 14% over time. Levels above 20% have only been exceeded 5 times in the past. Soberingly, three of those five years have been since 2016.

farm property tax expense. aei.ag. ag trends. ag economic insights
Figure 3. Farm Property Taxes & Fees as a Share of Net Farm Income, 1933 to 2019. Data Source: USDA ERS.

Relative to Property Taxes

A second measure for sizing-up farm property taxes is relative to farmland values. Figure 4 shows farm property taxes as a share of U.S. farm real estate values. These data, which are available since 1960, show that annual property tax expense has accounted for a declining share of farmland values over time. In 2018 and 2019, farm property tax expense is expected to account for 0.6% of the value of farm real estate.

As the 2020 Presidential debates and election get underway, it will be interesting to see how the idea of a wealth tax resonates with voters. In a way, property taxes were probably the original wealth tax[1].

 

farm property tax expense. ag trends. aei.ag. ag economic insights
Figure 4. Farm Property Taxes & Fees Relative to Total Farm Real Estate Values, 1960 to 2019. Data Source: USDA ERS.

Net Government Transfers

A few weeks ago we considered how direct government payments have trended over time. Figure 5 shows how direct government payments to farmers compare to property taxes[2].  Since 2011, net transfers have been generally negative, meaning that producer paid more in property taxes than they received from direct government payments. Keep in mind this was even during the years of large ARC payments. In 2019, the expectation of a large MFP 2019 payment has pushed the net transfer to positive levels.

One could conclude that direct payments – at least a share of direct payments – is a mechanism of offsetting the local and state-level property taxes that producers face.

farm property tax expense. aei.ag. ag trends. ag economic insights
Figure 5. Real Net Government Transfers; Direct Government Payments (in blue) and Property Taxes & Fees (in orange) (2019=100). 1933 to 2019F. Data Source: USDA ERS and aei.ag Calculations.

Wrapping it Up

Over the last few years, we’ve heard from a lot of producers about the increasing burden of farm property taxes. At the national level, the data show the realities of this pain. Currently, property taxes – adjustment for inflation- are at the highest dollar expense seen in 80+ years of data. The trend of an upward expense with falling income has made for a difficult squeeze. Property tax expense in recent years has frequently exceeded 20% of total farm income – something that has only been done 5 times in history.

When one thinks about property taxes paid relative to direct government payments received, the net transfer has been negative in recent years. In 2019, this will likely turn positive as MFP 2019 payments will push direct payments sharply higher.

Property taxes in 2019 are expected to reach nearly $15 billion; well above the $10 billion levels observed throughout much of the 1980s, 1990s, and early 2000s. One could easily argue that property taxes at the sector level are about $5 billion “too high” compared to historical levels. Keep in mind the farm economy generated total farm income of $64 billion in 2018. Property taxes in line with previous levels would certainly have a significant, positive impact given the current farm economy downturn. This is to say that while higher farm property taxes isn’t the big farm economy headwind – oversupply, trade uncertainty, global acres, etc. – it does create additional drag on an already bad situation.

Next week’s post will follow-up on farm property tax expense by considering some of these trends at the state level.

 

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[1] Admittedly, property taxes would technically be an asset tax. A wealth tax – in theory – would consider assets less liabilities, but as you can imagine the legislative process could really get messy here.

[2] For regular readers, the estimate for direct government payments in 2019 includes an AEI estimate for MFP 2019 payments, hence the large uptick. Read more here.