Property taxes bite into net income

Property taxes as a share of land value continue to increase.

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

Property taxes, fees increase

The U.S. Department of Agriculture’s Economic Research Service publishes data on property taxes and fees in its annual net-farm-income projections. We’ll refer to that expense category as “property taxes” throughout the posts.

Figure 1 shows farm property taxes since 2000. Those data are in real – or inflation-adjusted – terms where 2019 equals 100. The chart captures the financial burden that producers have been talking about. Since the early 2000s property taxes across the sectors have increased from about $10 billion to almost $15 billion. More specifically from 2000 to 2019 the change in property taxes was a 29 percent increase, or a 1.8-percent average annual increase. Keep in mind the data are inflation-adjusted. Those changes are in addition to regular inflationary changes throughout the economy.

Figure 2 shows trends in farm property-tax expense since 1933, a longer time horizon. That provides some helpful insights. Historically speaking real property taxes in the past few years have been at the greatest levels – in terms of a dollar expense – since the data have been tracked., Property taxes previously approached $14 billion at about 1970 before decreasing throughout the 1970s and early 1980s, to moderate at about $10 billion.

Taxes increase relative to income What makes the increase in property-tax expense so painful, especially during the past few years, has been the decrease in farm income during the same time period. Property taxes have remained historically inflated even as farm incomes have decreased. Figure 3 shows the relationship between property taxes and farm income. It shows farm property-tax expense as a share of total net farm income.

Prior to the farm-economy boom, property taxes were about equal to 12.5 percent of net farm income. That bounced between 10 percent and 15 percent during the 1990s and early 2000s. As net farm income peaked about 2013, property taxes decreased to 10 percent of farm income. But since then property taxes have accounted for a much-larger share of farm income. Most recently that measure exceeded 20 percent – levels not seen since farm income reached its most depressed during the early 1980s.

Thinking about that 20 percent level a bit more, farm property-tax expense exceeding 20 percent of farm income has been a high-water mark during the past 83 years of data. The measure has an annual average of 14 percent through time. Levels at more than 20 percent have only been exceeded five times in the past. Soberingly three of those five years have been since 2016.

Land value considered relative to taxes

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

As the 2020 presidential debates and election begin 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. Admittedly property taxes would technically be an asset tax. A wealth tax – in theory – would consider assets less liabilities, but as one can imagine the legislative process could really become messy.

Taxes more than government payments

A few weeks ago we considered how direct government payments have trended through time. Figure 5 shows how direct government payments to farmers compare to property taxes. Since 2011 net transfers have been generally negative, meaning that producers paid more in property taxes than they received from direct government payments. Keep in mind that was even during the years of large Agricultural Risk Coverage payments. In 2019 the expectation of a large 2019 Market Facilitation Program 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.

Wrapping it up

During the past 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 that pain. Property taxes – adjusted for inflation – are currently at the most dollar expense seen in 80-plus years of data. The trend of an increasing expense with decreasing income has made for a difficult squeeze. Property-tax expense in recent years has frequently exceeded 20 percent of total farm income – something that has only been done five 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. That will likely turn positive in 2019 because Market Facilitation Program payments will sharply increase direct payments.

Property taxes in 2019 are expected to reach almost $15 billion, at well more than 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 much” 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. That’s to say that while greater farm property taxes isn’t the big farm economy headwind – oversupply, trade uncertainty, global acres and others are – it does create additional drag on an already bad situation.

Next week’s post will also consider farm property-tax expense by considering trends at the state level.

Visit aei.ag for more information.

Brent Gloy and David Widmar are agricultural economists with Agricultural Economic Insights.