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Legislative Action

Farmland property taxes:
Fair or not?


Property taxes are controversial; farm property taxes are especially controversial. Farmers have long argued that they carry a heavier burden than other property owners. Then House Speaker Michael J. Madigan opened a new front in the ongoing controversy last year. He suggested that the 1981 switch from market value to productivity as a basis for assessing farmland had undermined the downstate tax base and shifted state general school aid, which is tied partly to local property tax efforts, from Chicago and other cities to rural downstate.

First, return to the issues that caused the change in farmland assessment, which used to be based on the land's fair market value (its selling price). In the 1970s, Illinois farmland was disappearing at an unprecedented rate. New airports, shopping centers, condominiums and industrial parks were eating up Illinois farmland at a rate of 100,000 acres a year. This "urban sprawl" coupled with the double-digit inflation rate drove up the market price of farmland. Higher prices made farmland more expensive to buy and more profitable to sell; they also made farmland more expensive to own because of the potential for substantial property tax increases. Between 1974 and 1980, the per acre value of farmland almost tripled, from $720 to $2,041, building pressure on state lawmakers for farmland tax relief.

In 1977, the General Assembly passed the Farmland Assessment Act, which required farmland to be assessed under a formula that included both the value of crops produced on the land and the price of the farmland if sold (market value). The Farmland Assessment Act was modified several times with market value playing a smaller and smaller role in the assessment formula. Finally, in 1981, an amendment eliminated market value, substituting capitalized income as the new approach to calculating farmland value. Capitalization determines the value of the land from the value of products that it can produce.

Here is how the equalized assessed value is figured for farmland under the capitalization approach. First, the value per acre is calculated for various types of soil based on their capacity to produce crops. Specifically, the average crop yields per acre multiplied by the most recent five-year average prices for the farm products generates a gross income per acre. Then production costs per acre (estimates established by the College of Agriculture of the University of Illinois) are substracted to get the estimated net income per acre. That amount is then "capitalized," using the most recent five-year average Federal Land Bank farmland mortgage interest rate, and finally, the capitalized value is divided by three, or "equalized" (farmland property in Illinois is assessed at 33.3 percent of value).

But in 1981, with that farmland assessment change in place, the agricultural economy headed into hard times. Farm prices fell; farm costs rose; reduced farm income lowered assessed values. To prevent future fluctuations in farmland assessment and to protect local government property tax bases, the law was amended in 1984: countywide increases or decreases in farmland equalized assessed values were limited to 10 percent of the prior year's values.

Back to the present issues on farmland assessment. Is it fair to farmers? Is it fair to other taxpayers? Has the system produced a flow of money via the state school aid formula from urban school districts into rural districts with farmland tax bases?

Dick McKain, director of government finance for the Illinois Farm Bureau, says the current assessment system represents the real worth of the land for agricultural purposes. McKain says true equity and uniformity are achieved because net income is calculated under the same formula on every type of soil.

According to data from the Department of Revenue, farmland values decreased 27.6 percent in the nine-year period, 1979 to 1988. McKain says that values would have dropped 52.5 percent if market value had stayed in the formula. (The law's 10 percent limit prevented a sharper decline.)

Despite the 27.6 percent decrease in farmland value, McKain says the actual dollars that farmers paid in property taxes only went down 3.7 percent over the same period. McKain says that local governments and special districts offset their farmland assessment losses by raising their property tax rates. He says the aggregate tax rate on farm property (total farmland property taxes divided by total farmland assessment) was pushed upward by more than 28 percent in that nine-year period.

At the same time, recession and other factors caused residential, commercial and industrial property to drop in value, McKain says. According to the Economic and Fiscal Commission's 1990 report on property taxes, the residential property tax base declined in 50 counties in Illinois between 1981 and 1987, and the business property tax base decreased in 32 counties. McKain contends that local governments and school districts lost $637 million in revenues under the Illinois General Homestead Exemption Act, allowing a property owner a reduction of as much as $3,500 in the assessed value of his house.

When measured against current income, property taxes are disproportionately burdensome on farmers compared to owners of other types of property, McKain says. From 1984 to 1988, for agriculture, property tax receipts per $1,000 of personal income were $217.70; for all sectors, property taxes were $35.75 per $1,000 of personal income.

He also raises questions on farmland annexation by special districts. By 1988, Illinois had 2,053 nonschool special districts, such as park, hospital and library districts, which tax property within their borders. When farmland is annexed into the districts, farmers must pay the new taxes but may not receive any benefits; their farmland is in the new district but not necessarily their home.

More than 52 percent of all revenue collected from property taxes is spent on schools in Illinois. In some downstate rural school districts, McKain says that farmers pay 50 to 60 percent of the total property taxes, but their children are less than 1 percent of the student population. "So when it comes to education, who subsidizes

28/May 1991/Illinois Issues

whom?" McKain asks.

On state aid for local schools, McKain maintains that decreasing farmland values is not diverting state school aid from Chicago and Cook County. "It doesn't make any difference," he says. Gary Ey, assistant superintendent for the school finance department of the Illinois State Board of Education, confirms McKain's statement. Ey says farms only account for 7.43 percent of the total state property assessment, and the decline hardly devastates the tax base. He says that the increased value of property in Chicago and its suburban areas has already caused the redistribution of school aid money to downstate areas.

Now to the counterpoint from non-farmers. Rep. Barbara Flynn Currie (D-26, Chicago) chairs the House Revenue Committee, and she does not believe farmers are paying overburdened property taxes. Currie says that when farmland is assessed at "an artificially lower value," the property tax burden shifts to other taxpayers in the local community. For example, she cites Pike County, where farmland accounted for more than 70 percent of all assessed property, and the total tax base dropped 29.6 percent between 1981 and 1987. Other rural counties, such as Stark and Greene, experienced the same thing, she says.

During the past decade, Currie says total farmland property tax billings declined while those for other properties have increased very substantially. Based on property tax data from the Department of Revenue, between 1978 and 1987, farmland tax extensions (the amount of property taxes billed) dropped from $426 million to $420 million, while extensions for other properties increased from $4 billion to almost $7 billion.

Most importantly, Currie says, with the current structure of the school aid formula, a decrease in equalized assessed valuation results in more state aid. "The amount of money available for school aid is finite, and if the farmland sale value is deflated, it would give more dollars to rural areas than to urban areas," she says.

Jerry Glaub of the Illinois Association of School Boards agrees with Currie. Glaub says that many rural school districts cannot compete with those in the urban areas without state dollars to shore up local property taxes: "Organizations like the Illinois Farm Bureau should ask themselves whether they can logically demand more money for rural schools from other taxpayers and at the same time seek tax relief for farmland owners."

Glaub counters McKain on another point: that farmers spend a greater portion of their income on property tax. Glaub says that the farm owner's personal income is more akin to a business profit and his property taxes represent a business expense: "Saying that a farm owner pays more property taxes than a home owner makes as much sense as saying he spends more on fertilizer or on seed corn."

Kenneth Oldfield, associate professor of public administration at Sangamon State University, points out that the 1977 Farmland Assessment Act only codified the preferential treatment farmers had received in the late 1970s. According to data from the now-defunct Illinois Department of Local Government Affairs, asssessment-sales ratios in 1976 were lower in 90 counties compared to 1973 ratios. The application of countywide multipliers reduced assessment levels to far below the statutory 33 1/3 percent equalized value. Over this period, farmland property taxes as a percentage of all property taxes collected statewide declined from 12 percent to 9 percent.

University of Illinois agricultural economist David L. Chicoine found in his research that pre-1977 tax preferences for agriculture caused a substantial increase in state school aid for rural areas. He researched Coles County, a typical cash grain agricultural county. According to Chicoine, the de facto assessment level on farms under the market value system was only 11 percent, and the lower property tax wealth triggered $2,806,000 in additonal school aid for Coles County. The change to use-value assessment in 1980 further lowered the assessed value, resulting in another $115,000 in school aid. Assuming school expenditures remained constant, Chicoine says the additional aid under the use-value assessment law would reduce property tax liability of the county's non-farmers by $50,000, therefore offsetting the shift in tax burdens from farm to non-farm property.

Current research is underway on farmland assessments across the state. Oldfield and others are attempting to determine whether the use-value assessment of farmland has shifted the property tax burden from rural to urban property owners and if Speaker Madigan is right: that a further effect is a shift in state school aid dollars, especially to downstate from Cook County and the city of Chicago. The project is partly funded by the Taxpayers' Federation of Illinois and directed by the Institute for Public Affairs at Sangamon State University.

Douglas L. Whitley, director of the Department of Revenue and former president of the Taxpayers' Federation of Illinois, agrees with the farm bureau that the farmland assessment law is improving uniformity and equity. Whitley says farming is a capital-intensive business, identical to capital-intensive manufacturing, and "there is not a whole lot of difference" between them as bases for the property tax. But he says farmers perceive themselves as home owners rather than business owners because they have no control over their market: "If a manufacturer's property goes up, it is presumed that he can raise the price of commodities or products, and the farmers consistently argue they have little control there."

At the same time, Whitley says there is no denying that farmers received special treatment in the past decade.

According to Whitley, the change in farmland assessment has decreased farmers' tax liabilities in real dollars. Whitley says the industrial and commercial sectors are picking up a big share of the property tax burden. "If the property value goes down for whatever reasons and the demand from the tax district does not go down, tax rates will be raised to compensate and tax burden will be shifted from one segment of [taxpayers] to another."

The Illinois Farm Bureau advocates shifting school financing from property to income, says Whitley, but he says that reform will take a great deal of political will and public acceptance. Illinois is over-reliant on property taxes, he says, and the governor is committed to looking at property taxation in the big picture. Whitley does not think the farm community should be singled out over any others in reviewing the property tax system.

Rep. Currie does not anticipate any legislative changes this year because of what she calls "the powerful lobbying of the Illinois Farm Bureau." Meanwhile, the debate over the fairness of farmland assessment will continue. As the Chinese saying goes, the benevolent sees benevolence and the wise sees wisdom.

May 1991/Illinois Issues/29

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